UPDATE: Brainspark damaged by “buyer's strike”

With no turnover and pre-tax losses of 14.6m the incubator has had to take some drastic action, announcing a 40% cut in its staff, a restructuring of the board, and the charging of commercial rents for office space from its “more mature” incubees. Brainspark predicts that these moves will reduce its cash burn from 500,000 per month to 200,000 and with cash reserves at just under 10m at the end of December, the company believes this will be enough to enable it to last without need of further funding until sentiment improves.

Despite being candid about the depth of negative sentiment in his statement accompanying the results, CEO Stewart Dodd remains optimistic about prospects in the longer term, saying: “We remain convinced of the enormous potential for value creation presented by the emergence of new technology-enabled businesses. The penetration of internet and mobile access and usage continues to grow around the globe. It is enabling business creation, business growth, and process cost reduction at a faster rate and with lower capital expenditure then ever has been possible in the past.”

At board level, COO Alwyn Welch and CFO Mark Hartford are to leave Brianspark to be replaced by Jasper Judd form incubee company Easyart, while Cross Atlantic Capital Partners CEO and chairman, Don Caldwell, will be taking over as chairman.

Cross Atlantic is the largest shareholder in Brainspark, but director of marketing and communications David Hart denied that the move signified a more hands-on approach by the venture capital firm. “It is not the case”, said Hart. “His appointment will be important because he is very experienced in helping companies through choppy waters. They are massively supportive and that can be seen in the six month additional lock-in they have agreed to.”

Andrew Hawkins, a partner from Palamon Capital Partners, also joins as non-executive director.

The reason for the lack of turnover by the company was the lack of exits from its investments, but Brainspark has at least managed to raise further funding for four of its portfolio companies at valuations above which it had invested, resulting in 3m of valuation gains for the incubator. On the other hand, the company also had to close Hobomedia and sell Perfectday, and has had to make provisions for losses on the disposal of “certain other portfolio businesses”, resulting in a reduction of 4.7m in the value of the company's portfolio, so that the net reduction against the cost of the portfolio at the end of the year was 1.7m. One such disposal is that of Channel International, an outsourced recruitment process business, sold for a “nominal amount” last month.

Overall, Brainspark made 18 investments over the year, 16 of which were made in the first half of the year. Despite the cutbacks, Brainspark has made one new investment since the end of the review period in website interactivity and functionality consultancy The Usability Group. The general strategy, however, will be away from further investments, with Brainspark concentrating much more on developing and supporting its existing investments.

Apart from the obvious cost reductions, Brainspark also cites the lack of work towards previously anticipated IPOs and reduced opportunities for further investments as reasons for the staff cuts, which will see the incubator's headcount come down to 17.

In the short term, however, the share price of Brainspark seems to have little prospect of recovery, with the results showing net asset value (NAV) per share declining from 24.9p at IPO to 19.5p. In early morning trading, the company's share price appears to have started its descent towards the NAV per share figure, falling by 10.5% to 25.5p on a volume of 20,000.

Asked about the share price, Hart admitted that in the short term it was likely to reflect the NAV figure, but that Brainspark at the moment was more concerned about its restructuring. “We think we have done a good job in the face of a very bad climate and we continue to take responsible action through this cost cutting to protect shareholder value”. He added: “We feel there are good things in the pipeline, both for our incubees and the company, and moral is still really positive. The share price is a reflection of market sentiment and not of the situation in the company”.