Tech company to return $1.9m R&D funding

Chief executive of Callaghan Innovation Mary Quin. Photo / Dean Purcell

Callaghan Innovation says technology company Endace, which has agreed to return $1.9 million of around $13.6 million in research and development funding provided in recent years, has a clean slate on applying for future grants.

The Auckland-based company, which does high-speed network monitoring and recording technology, has returned to Kiwi ownership after a management-led buyout from its American parent Emulex. The new owners - chief executive Stuart Wilson and chief financial officer Andrew Harsant - are understood to have paid only a small amount for the company which was sold to Emulex in 2013 for $156 million, though they took on the vendor's associated company debt.

The loss-making company laid off just under 100 people or about two-thirds of its staff late last year and was then asked to make the repayment under Callaghan Innovation's clawback provisions.

The settlement reached between Endace and Callaghan will see the technology company repay $1.9 million, which Callaghan's chief financial officer Richard Perry said is a sizable portion of recent grant funding from the Crown. Callaghan won't say how much was originally sought.

Endace has had three separate government grants. The first was a $4.4 million investment grant from TechNZ in July 2010 and the second was a technology development grant in December 2010 worth up to $6.7 million over three years. That was granted at the tail end of the clawback provision period which is three years from the end of the grant. It had also been paid $1.8 million under a growth grant awarded in October 2013, which has now been withdrawn.

Callaghan Innovation says the Emulex-owned company is seen as a separate entity to the new organisation which will have to meet the standard criteria of evidence of R&D capability and capacity if applying for new grants. That means it has a bit of a hill to climb in the next couple of years to meet criteria for the growth grant which provides 20 per cent of R&D spend up to $5 million a year. One of the conditions is companies have to have spent at least $300,000 a year, and 1.5 per cent of revenue on eligible R&D in each of the past two years.

Wilson, who has been with the company for more than a decade, said that Endace would continue to invest heavily in R&D and has a range of new products being launched in coming weeks.

In the most recent accounts made public for the company, Endace reported a net loss of $US22.5 million for the year ended June 29, 2014, revenue of $US23 million, and R&D expenses of $US11.5 million.

Formed in 2001 to commercialise research out of University of Waikato, Endace was sold in 2013 to Emulex, which in turn, was sold in May last year to Nasdaq-listed Avago Technologies. Avago decided last year Endace wasn't part of its core business and wrote down its value to just US$34 million, US$100 million under what Emulex had paid for it just two years before.

Company co-founder Selwyn Pellett, who was critical that R&D grants weren't repaid when the company was sold to overseas interests, said it was a fantastic opportunity to bring the New Zealand company home.

"The Endace journey is symbolic of so many tech companies that once owned offshore lose their essence and struggle for air in their new corporate owners," he said.

He thinks Endace will thrive under the management-owned team.

"In a corporate environment it's really easy to play the percentages opening and shutting businesses," he said. "But when it's yours, you fight that little bit harder and longer and that eventually makes a difference."

Former chief executive Mike Riley, who sold 593,953 of share options in the sale to Emulex, left the company in 2014 to take up the CEO role at fruit sorting manufacturer Compac which is considering an IPO.

BusinessDesk receives assistance from Callaghan Innovation to cover the commercialisation of innovation.