Wellington software company HomeOffice has extended its $7.5 million public share float to October 31.
The original closing date was July 30, but prospective investors are nervous about the way the company will be structured.
HomeOffice chief executive Andrew Ross says the company prospectus has gone to 3500 people and 37 are interested so far.
The 600 shares cost $12,500 each and will go towards a joint venture of 120 loss attributing qualifying companies (LAQCs).
These will initially make a loss because of the depreciation of Home-Office’s software products, but investors can offset the loss against other income.
Ross admits that investors have expressed a number of concerns about the venture. The first is that HomeOffice’s products have not been fully paid for. The second is the value of the products, set by HomeOffice at $70 million. The third is that the company has filed a GST return on the products (which it is buying on a deferred payment basis) for $8.6 million and that claim is being investigated by the Inland Revenue Department.
HomeOffice is mailing letters to potential investors to address concerns.
“As far as the value of the software goes, we are now getting an independent evaluation done in Australia,” says Ross. “We did the evaluation ourselves because I have been a software valuer for four years and I am one of the most experienced people in this field in New Zealand.
“To value HomeOffice’s software we looked at how many units of each product we think we can sell into our markets, which are retailers and supermarkets in New Zealand, Australia and the United Kingdom. Our other marketing vehicle is the Internet. We are currently negotiating with a supermarket in New Zealand and the parent company of a variety store has authorised it to take our product range.”
Ross says independent evaluation from Australia should arrive next week. HomeOffice is also getting an independent opinion on the tax structure of the company.
“We’ve had consultation with two tax lawyers. A lot of people saw issue that we’re claiming $8.6 million in GST refunds. We are legally required to file a GST return and we made two claims in October and November last year. The IRD is conducting an investigation and we’re waiting to hear back. We are claiming a significant amount and I would expect them to look further into it. But then again our prospectus is based on commercial reality and in four years we will be paying a huge amount of tax back to the IRD.”
Ross says the tax department promised a reply by June but the investigation is dragging on. The IRD solicitor in charge of the case was not available for comment. As for the deferred payment of the software, Ross compares the situation with the property or forestry investment markets.
“We’ve come to an arrangement with the software vendors to pay for it over time — just like a commercial building. Just as you would with a commercial building, we are claiming GST on it. Everyone thinks this is a highly structured tax-wise and it’s not. It’s the same as buying a commercial building.”
But property and forestry are fairly slow-moving markets compared to the volatile software market aren’t they? “What happens to the Coopers & Lybrand tower if in the next three years teleworking takes off — its value could halve. Look at what happened in October 1987 [the crash]. As for the forestry industry, New Zealand has a large advantage in forestry until 2003 but then countries like Chile, Canada, and Russia will have a huge output. What happens then? Meanwhile software has created more billionaires than any other industry.
“The level of financial advice in New Zealand has been an education to me and I’m pretty frustrated with the kind of reception we’ve had from the financial advisers. I think New Zealand software developers have good products but the financial advisers in New Zealand have no understanding of the industry.”
Ross says that whatever happens, the company will go ahead. “In the prospectus we have prepared projected financial statements on the basis of full subscription and on the basis of minimum subscription without the GST refund.
“Quite frankly, if investors are focused on tax returns, they’re investing for all the wrong reasons. This structure was set up to minimise the risk only. We want people to invest because they believe the company is going to make a lot of money.”