'Success story' Right Hemisphere may shed jobs

Mark Thomas, president and CTO of software company Right Hemisphere. Photo / Glenn Jeffrey

A 3D software company that has so far received more than $14 million from taxpayers says it cannot guarantee it will keep jobs in New Zealand.

Right Hemisphere was once touted by the Labour Government as a potential Kiwi success story, and has snared some key contracts with major clients in the United States since it was founded more than a decade ago.

However, it has struggled to fulfill the dreams of its founder, IT entrepreneur Mark Thomas, and its auditors have raised questions about its future.

According to its latest accounts filed with the Companies Office, the New Zealand arm of the company, which provides research and development services to its American head office, made a pre-tax profit of just under $700,000 in the year to March.

While this is an improvement on years of losses , its auditors have noted that it is still financially dependent on its American parent, which had consolidated net liabilities of US$10.7 million at the end of March.

According to the accounts, its directors are confident in the company's ability to remain solvent, and have noted that its US parent has undertaken to financially support it "for the foreseeable future".

However, they also note that "due to the dependency of continuing financial support of the parent company... there is uncertainty as to whether the company will be able to continue as a going concern and therefore whether it will be able to pay its debts as and when they become due and payable."

The company is due to repay a US$8 million interest-free loan to the Government in September next year.

Thomas said yesterday he was confident that "at this stage" the loan would be repaid. But he could not guarantee the 40 or so staff employed in New Zealand would remain here after that.

"Probably yes, but I cannot answer 100 per cent," he told the Herald in an email from the US.

The decision in 2006 by then-Economic Development Minister Trevor Mallard to give the company a five-year interest-free loan of what was then $14 million of taxpayers' money went ahead despite Treasury advice it had "a low probability of resulting in net benefit to New Zealand".

Critics questioned whether there was a market failure that warranted such an ad hoc intervention, and deplored the precedent it set.

At the time, then Prime Minister Helen Clark said the aim of the loan was to help establish and support a world-leading 3D digital content and graphics industry.

"This agreement means that New Zealand brains, talent, and market experience stay in New Zealand," she said.

As part of the deal, Right Hemisphere was supposed to develop a cluster of spinoff companies in which its American backers, US venture capital firms Sequoia and Sutter Hill, were also expected to invest. If it fails to create such "spillover" benefits it has to pay 25 per cent interest on the loan.

Thomas confirmed that neither Sequoia nor Sutter Hill had yet made any other investments in related companies in New Zealand.

However, he insisted there had been "plenty" of spillover benefits to education and industry through a business incubator known as Nextspace, which operates from Right Hemisphere's offices in Greenlane.

The Government agreed to provide an additional $7 million to set up Nextspace, although that funding has now ended.

Thomas told the Herald he would liked to have seen more engagement from the Government to ensure Right Hemisphere's software was benefitting the education sector, and other business.

"It seems the US and Australia are faster adopters of our technology than New Zealand - a shame for NZ children."

While the business had grown 15 per cent over the past year, he admitted it had been "a lot tougher than planned" over the past three years.

According to its accounts, its New Zealand operation increased its revenue from $5.3 million to $6.6 million during the year. However, its costs also increased, and its profit was largely due to foreign exchange gains.

The accounts also reveal the company applied for a tax credit of just under $600,000 for the 2009 tax year. The claim related to spending of nearly $4 million on R&D.