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Crystal Amber Fund Limited (CRS)

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Thursday 21 November, 2019

Crystal Amber Fund Limited

Crystal Amber requisitions GM of Allied Minds plc

21 November 2019


(“Crystal Amber Fund” or the “Fund”)

Crystal Amber Fund requisitions General Meeting of Allied Minds plc:

Proposes to remove four directors and appoint two new directors

Crystal Amber Fund, the activist investment fund, announces that it has sent to the board of Allied Minds plc (“Allied Minds”) a requisition notice requiring Allied Minds to convene a general meeting at which resolutions will be proposed to remove Jeffrey Rohr, Fritz Foley, Joseph Pignato and Michael Turner from the board, and to appoint Mark Lerdal and Stephen Coe to the board as non-executive directors.  The Fund expects that the proposed board will be more effective at minimising ongoing costs and maximising distributions to shareholders from the orderly realisation of Allied Minds’ remaining investments.  The proposed removal of Allied Minds’ executive directors from the board does not preclude their continued employment as executives.

Since becoming a shareholder in Allied Minds in November 2018, the Fund has engaged extensively with its management.  Despite some necessary and long overdue changes, the Fund has concluded that the board of Allied Minds is still not acting in the best interests of its shareholders.  This is evidenced by the annual ongoing headquarter (“HQ”) cash cost guidance from Allied Minds, which has recently been increased to US$7.5 million.  The Fund estimates that US$67 million of Allied Minds’ current market capitalisation is attributable to its non-cash net assets (i.e. after deducting parent-level cash, which the Fund estimates to be approximately US$88 million).  The annual ongoing HQ cash costs represent more than 11% of this value.  In addition to this, Allied Minds this month awarded a US$4.9 million cash pay-out to current and ex-employees, despite cumulative operating losses since its 2014 IPO now exceeding $460 million.

The Fund believes that it now has no alternative but to requisition a general meeting of Allied Minds in order to address the issues identified:

  • Excessive ongoing HQ costs and misaligned incentive arrangements
  • Insufficient prioritisation of excess cash redistribution to shareholders
  • Inability to redress the longstanding significant discount of the share price compared to the Net Asset Value (“NAV”) per share, which now stands at over 40% despite the carrying value of the portfolio having been verified by substantial third-party funding

Richard Bernstein, investment adviser to Crystal Amber Fund, said: “In the 11 years since the Fund was established, this is only the third time that we have felt compelled to requisition a general meeting of an investee company to change its board composition.  The Fund hopes that, as has occurred on the previous two occasions when the Fund felt forced to requisition a general meeting of a company, the current board of Allied Minds will accept the Fund’s proposals without delay and without having to call a general meeting.  Mark Lerdal has an excellent track record of delivering for shareholders in a not dissimilar situation at Leaf Clean Energy.  We are confident that he can do the same for the shareholders of Allied Minds.”

Allied Minds’ track record:

  • Listed on the London Stock Exchange in 2014 at a valuation of £405m and raised a further £64m via a placing in 2016.  To date Allied Minds has paid zero cash to shareholders and its market capitalisation is now around £120m
  • Reported total consolidated operating losses of around US$590m from 2011 to mid-2019, of which approximately US$465m since it listed in 2014
  • Invested in over 40 companies but has achieved only a single successful exit.  Following many write-offs and closures, only six holdings are now deemed to have any value, of which three plus cash at the holding company now account for around 95% of the total NAV
  • Despite having committed not to make further investments in new businesses, Allied Minds operates with ongoing HQ cash costs of US$7.5m per annum, an increase from its guidance of US$5-6m announced in April 2019
  • Maintains misaligned management incentive schemes, including:
    • The “Phantom Plan” that pays out 10% of any gains on individual holdings, irrespective of losses incurred across the investment portfolio as a whole
    • Annual bonuses (worth up to 225% of salary) that are determined independent of shareholder returns and the performance of the portfolio, e.g. US$576,000 CEO bonus paid in respect of 2018 despite a share price fall of 57.5% that year
    • A golden parachute scheme that would pay out upon a takeover of Allied Minds
  • Redistributing to shareholders only half of the proceeds from the disposal of Allied Minds’ stake in HawkEye 360, despite the sale triggering a Phantom Plan pay-out of up to $4.9m to current and former management.  This will leave Allied Minds with a parent-level cash balance of around US$55m

Crystal Amber Fund’s engagement with Allied Minds:

  • Commenced investment in Allied Minds in November 2018, having analysed the company over the preceding year, and now owns 16.8% of Allied Minds’ total issued share capital
  • Expressed concerns regarding the urgent need to realign the excessive HQ cost base, the unprecedented and wholly unacceptable Phantom Plan, and the granting of long-term incentive shares that had cost around US$3.9m during the first half of 2018
  • Met with then-CEO, Jill Smith, along with the CEO of portfolio company Federated Wireless, in February 2019
  • The Fund subsequently conveyed its views that, despite a guided reduction of over 40% in ongoing HQ cash costs, these would still be hugely excessive at around US$13m per annum, and also that the portfolio companies SciFluor and Precision Biopsy were likely to be significantly overvalued.  Since then, both of these portfolio companies have been written to zero, taking around US$115m off Allied Minds’ NAV
  • Met with co-CEOs, Joe Pignato and Mike Turner, in August 2019 and reiterated our views that the Phantom Plan represents a major misalignment between management and shareholders
  • The Fund was disappointed that, despite being one of Allied Minds’ largest shareholders, it was excluded from Allied Minds’ consultation with shareholders regarding preferred quantum of immediate cash distribution following the HawkEye 360 disposal

Track record of Mark Lerdal and Stephen Coe:

  • Mr Lerdal and Mr Coe have both been directors of UK-listed company Leaf Clean Energy Co (“Leaf”) since 1 April 2014: Mr Lerdal as executive Chairman and Mr Coe as a non-executive director
  • Leaf was a failed investment company that had focused primarily on US-based private-market opportunities, similar to Allied Minds
  • In the financial year that ended shortly after the appointment of Mr Lerdal and Mr Coe, Leaf’s administrative expenses were US$5.4m.  These costs were halved in the following year and have been reduced in each subsequent year, down to a level of US$1.4m in FY2018
  • After formally adopting an orderly realisation and redistribution strategy, Leaf’s investments were then monetised over the subsequent five and a half years – a process that was prolonged by a very protracted legal dispute relating to its largest investment, which was finally resolved in Leaf’s favour in mid-2019
  • Prior to the appointment of Mr Lerdal and Mr Coe in 2014, Leaf’s shares traded at a substantial discount to its NAV.  Since then, Leaf has to date returned a total of US$128m cash to its shareholders, an impressive cash realisation of over 100% of the rebased $116m NAV as of 30 June 2014, after all holding company costs

Mr Lerdal is currently executive Chairman of Leaf Clean Energy Co and a non-executive director of three private companies.

Mr Coe is currently a non-executive director of Leaf Clean Energy Co, Weiss Korea Opportunity Fund Ltd and various private companies.

For further enquiries please contact:

Crystal Amber Fund Limited
Christopher Waldron (Chairman) Tel: 01481 742 742
Allenby Capital Limited - Nominated Adviser
David Worlidge/Liz Kirchner Tel: 020 3328 5656
Winterflood Investment Trusts - Broker
Joe Winkley/Neil Langford Tel: 020 3100 0160
Crystal Amber Advisers (UK) LLP - Investment Adviser
Richard Bernstein Tel: 020 7478 9080

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