Crystal Amber Fund Limited Crystal Amber requisitions GM of Allied Minds plc

 
TIDMCRS 
 
21 November 2019 
 
                          CRYSTAL AMBER FUND LIMITED 
 
                     ("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 GBP405m and 
    raised a further GBP64m via a placing in 2016.  To date Allied Minds has paid 
    zero cash to shareholders and its market capitalisation is now around GBP120m 
  * 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 
 
 
 
 
END
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