Trends Publishing, fighting Callaghan over R&D grant, had already got hefty taxpayer funds

A heavily redacted report on Trends Publishing, at the centre of a legal spat with Callaghan Innovation over a cancelled research and development grant, said the Auckland magazine publisher had previously received hefty government funding to develop a digital platform.

A Deloitte review, obtained under the Official Information Act, resulted from a dispute between Callaghan and Trends over claimed expenditure under an R&D growth grant that was cancelled a year ago. Callaghan is seeking to claw back the $383,000 paid out under the contract which had been for $1.3 million over three years.

Trends was in the print media business, producing a range of global home and design publications. With the downturn in media advertising in recent years, it morphed into the digital space, offering both online content and digital marketing solutions for clients.

The Deloitte report said Trends had already received an R&D growth grant from 2012 to 2013 under the Ministry of Science and Innovation. It allowed for a maximum $347,000 to be claimed, with 30-to-50 percent co-funding by the business.

Trends was ineligible for another project grant but was advised by Callaghan in 2013 to apply for a growth grant when it sought further R&D funds for developing a digital platform that included innovative lead generation "software as a service", a CRM (customer relationship management) engine, and project management functionality.

The grant was approved in April 2014 despite a Callaghan staff member, who had helped Trends with its R&D application, raising concerns with his counter-party colleagues at New Zealand Trade & Enterprise, about its differentiation between R&D and business-as-usual activities. Trends has said it followed Callaghan advice on what was eligible to claim.

Deloitte's April report concluded there had been potential breaches of the grant because the company had projected inaccurate or misleading information relating to staff costs associated with the R&D, had no detailed project management documentation, and had made ineligible expenditure claims such as director's life insurance premiums, bank fees and international travel insurance.

It also said Trends had generated advertising revenue on its digital platform from at least August 2014 but due to a lack of documentation the live website was "indistinguishable" from the R&D project in terms of determining where the revenue came from.

Trends denies any wrong-doing and told Deloitte the eligible R&D it claimed was for more than just developing of a piece of software, as it included operating support systems required to sell the service to clients. For commercial sensitivity reasons, not all staff had the full picture of what the company was working towards, it said.

After a follow-up interview in March, Trends maintained all staff claimed for had been working on R&D though it admitted incorrectly stating the amount of that time. Rather than those employees working full-time on the R&D project as claimed, they were only spending between half and 90 percent of their time on it and the rest on business as usual tasks. However there was no supporting evidence for the amended times, the report said.

Trends has filed a counter-claim against Callaghan accusing it of defamation and breach of contract over a press release announcing it was terminating the R&D grant and had referred the matter to the Serious Fraud Office.

On Friday, the High Court at Auckland allowed five creditors of Trends, including Callaghan, to separate that counter-claim from an application to unwind a creditors' compromise struck in April in order to resume liquidation proceedings.

During that court hearing, Trends lawyer Kalev Crossland said the redacted Deloitte report omits paragraphs critical of the terms of eligibility for the grants' R&D expenditure.

An unredacted copy of the report, submitted as evidence in the hearing, included paragraphs that indicated the terms were "ambiguous" and to a "certain extent" contradicted the grant's purpose. It recommended the funding agreement be reviewed and amended to ensure that grant recipients got the full benefit of the development stage of the asset, not just the research stage.

Callaghan Innovation won't comment on the redacted paragraphs while the matter is before the courts. Science & Innovation Minister Steven Joyce similarly refused comment on the Trends case but said he was confident Callaghan's R&D funding contracts were "robust".

Callaghan's justification for redacting large parts of the report under the OIA request included "to avoid prejudice to the maintenance of the law", "to protect the privacy of natural persons", and "to protect Trends' commercial position".

Trends owner David Johnson, a former EY Entrepreneur of the Year winner, said he's still fighting to clear his reputation and has sought litigation funding backers to help pay the estimated $1.3 million cost of pursuing his claim against Callaghan, which is backed by the taxpayers' purse.

He's also been pushing for a meeting with SFO staff in order to expedite its investigation which he said "has been going on for 14 months and it now looks like we can secure an appointment with them early next year."

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

(BusinessDesk)