FY21 to see benefits of commercial progress

Allied Minds has a concentrated portfolio of largely pre-revenue businesses in the deep tech sector and, as with any venture capital vehicle, it is inevitable that there will be advances and setbacks with individual portfolio companies as the overall portfolio matures towards exits.

However, looking at the remaining portfolio, Allied Minds’ investee companies are working with a range of leading strategic and financial partners, including Amazon Web Services, Arm, Boeing, Microsoft Azure, Nokia and Temasek, as well as multiple branches of the US government.

Management is planning a capital markets day in April 2021, following the FY20 results in March, to help investors better understand the remaining core businesses and their prospects.

We noted that Spin Memory had been subject to foundry delays in our interim results note in October. However, the extent of these delays, though understandable, is more material than anticipated. Although Spin Memory was able to ‘tape out’ its Endurance Engine technology into a demonstration chip in partnership with ARM, COVID-19 restrictions have delayed testing of the chip by six to nine months, slowing commercialisation. Testing finally commenced in early Q420 with positive initial results. 

These delays to commercialisation, together with the unexpected loss of a government bid in late Q420, mean that Allied Minds is considering a small Series B funding round (at a significantly reduced valuation) to support commercialisation in FY21. Given the current economic climate, there is inevitable uncertainty around the valuation and timing of any round.

Federated Wireless offers a shared spectrum technology for wireless communications in the US (on the 3.5GHZ CBRS spectrum) as well as deployment of private wireless networks through its Connectivity-as-a-Service (CaaS) offering (with a roll-out through partnerships with AWS and Microsoft Azure funded by a Series C funding round in April 2020). Since Q120, Federated Wireless has been the only Federal Communications Commission (FCC) authorised company with a fully deployed Environmental Sensing Capability, providing the company with a significant first-mover advantage.

In October 2020, the US Department of Defense announced that Federated has been awarded a project at the Marine Corps Logistics Base Albany, GA to develop a 5G Smart Warehousing solution, the first CaaS-related opportunity for Federated from its previously announced new channel partners. Federated Wireless’ partners include GE Research, KPMG, Scientific Research Corporation as well equipment suppliers, AWS and Cisco.

Federated Wireless has also partnered with a value-added reseller, TESSCO Technologies, to accelerate the roll-out of CBRS private networks in industries including manufacturing, transportation and energy. Federated Wireless is starting to build its recurring revenue base, which management expects to accelerate further in FY21, with forecast y-o-y growth of over 500% in 2021. Federated has sufficient cash to fund its growth into 2022 but, if it continues to achieve milestones, it may target its Series D funding round in FY21.

BridgeComm provides optical wireless communication solutions, providing fast, secure, enterprise-grade broadband services for space, terrestrial and 5G connectivity. BridgeComm is pushing forward on two fronts: in September, it signed a partnership with Nokia to develop an ultra-high-speed throughput last mile connectivity solution for 5G networks. BridgeComm also continues to work closely with Boeing, having signed a joint development agreement with Boeing HorizonX for applications of its secure, high-speed One-to-Many (OTM) technology. BridgeComm and Boeing are bidding on several US government contracts requiring optical communications, expected to lead to initial revenues in 2021. As well as US$4.5m in convertible debt already provided by Boeing and Allied Minds, BridgeComm will need further financing in FY21 to fund its development work.

As announced with Allied Minds’ H120 results, Orbital Sidekick (satellite-based hyperspectral imaging) was awarded a multi-year contract by the US Air Force (AFVentures) as part of its strategic financing (STRATFI) program. Orbital Sidekick received US$4m in non-dilutive financing in Q420 from AFVentures, with non-dilutive matched funding of up to a further US$12m available over the next three years.

In December, subject to approval by the Committee on Foreign Investments in the United States, Orbital Sidekick secured US$16m in Series A financing (sufficient to liberate the full STRATFI funding) led by Temasek, together with other new investors, as well as existing investors Allied Minds and 11.2 Capital. Allied Minds has committed US$2.5m, including its US$1.5m simple agreement for equity (SAFE), which converts into preferred shares. Orbital Sidekick intends to use the combined funding of US$32m (US$16m Series A with matched US$16m STRATFI funding) to launch its first dedicated hyperspectral imagery satellite in 2021, allowing the company to realise revenues from its initial pilot programme for customers in the oil and gas pipeline industry. The funding will also enable it to scale, grow its sales pipeline and launch additional satellites to support its customers.

Spark is an advanced analytics company developing data products for the rapidly growing insurance analytics market. In June 2020, Spark released version 1.0 of its post-catastrophe automated damage assessment product. Spark expects to raise additional financing in 2021.

Allied Minds also holds shares in TouchBistro following the sale of its portfolio company, TableUp, to TouchBistro for US$6m in August 2020. Although OcuTerra (previously SciFluor) remains a holding, we value it at zero given the lack of commercial progress.

Allied Minds reported group net cash of US$24.6m at 31 December 2020, including cash held by its subsidiaries. We estimate FY20 parent cash of US$20.4m, taking the H120 parent cash figure of US$29.9m, adjusted by US$0.5m per month (US$3.0m over H220) for central costs and US$6.5m of investments in H220. For FY21, management projects central costs of US$5.75m, of which US$2.6m is for ongoing management costs and US$3.15m relates to Allied Minds’ public listing. Following the significant cost rationalisation that has taken place over the course of FY19–20, in line with its strategy, management believes that Allied Minds remains well placed to continue to fund its portfolio prudently and conservatively in order to maximise long-term shareholder value.

Management continues to evaluate potential options for monetisation, both at the group level and for individual portfolio companies. Underlying valuations are expected to increase as investee companies continue to achieve technical and commercial goals, with the potential to deliver venture capital-like returns on exit (ie the potential for a doubling of value every 12–18 months). On this basis, the board believes that prospects for the remaining portfolio are attractive and that the group’s best strategic option remains to support its portfolio companies towards exit over an anticipated two- to three-year time horizon. We note that capital constraints may start to limit the group’s strategic options, particularly in FY22 if there have been no prior realisations.

Exhibit 1 sets out our NAV estimate (as at 5 January 2020) based on latest portfolio fair values.

To simplify our analysis, we have chosen only to consider the more conservative, fully diluted valuations for Allied Minds’ portfolio companies. Given the uncertain valuation outcome for Spin Memory, we have considered overall NAV both with and without Spin Memory.

Based on our calculations, including Spin Memory at full holding value, our estimate of NAV per share is 61.7p, with the current share price at a 48% discount to this value. Our estimate of NAV per share (ex0Spin Memory) is 43.1p, with the current share price trading at a 25% discount.

As we have highlighted previously, Allied Minds is a deep tech holding company that offers exposure to a concentrated number of emerging technology businesses. Despite evident progress over the course of 2020, including positive newsflow, top-up funding rounds and continuing strong technology valuations, Federated Wireless and BridgeComm in particular continue to be held at the historical valuations established at the time of their last major funding rounds in 2018 and 2019.

With all five direct holdings (ex TouchBistro) anticipating or closing funding rounds in FY21, we expect material changes in NAV over the next 12 months as funding rounds complete.

We have historically stated the FY19 portfolio value including the US$40m/12.6p special dividend. This overstated the group’s NAV by US$40m or 12.6p per share. The corrected FY19 NAV should be US$200.8m, with NAV per share correspondingly 66.1p on a fully diluted basis.