Allied Minds — NAV lagging the tangible progress made

H120 revenues decreased to $0.1m (H119: $1.5m) following the deconsolidation of Federated Wireless in FY19, with a small revenue contribution from BridgeComm. SG&A expenses fell to $6.6m for the six months ended 30 June 2020 (H119: $15.2m), with the deconsolidation of Federated Wireless together with central cost reductions implemented during FY19. R&D decreased by $9.8m, to $2.5m for H120 (H119: $12.3m). The group reported a total comprehensive loss for H120 of $15.0m (H119: income of $9.0m), a fall of $24.3m.

Non-current assets increased by $3.2m, to $75.9m at 30 June 2020 (FY19: $72.7m). Current assets fell markedly by $57.3m, to $40.6m as of 30 June 2020 (FY19: $97.9m), in large part reflecting the special dividend payable to shareholders following the sale of HawkEye 360.

The net cash outflow from operating activities was $10.8m in H120 (H119: $30.3m). The group had a net cash outflow from investing activities of $7.1m in H120 (H119: net cash outflow of $5.0m), including an investment in Federated Wireless of $6.9m made in April 2020. The group had a net cash outflow from financing activities of $38.4m in H120 (H119: $8.0m) reflecting, in part, the cash special dividend of $39.7m from the sale of Allied Minds’ share in HawkEye 360 in 2019.

Net cash and investments at 30 June 2020 stood at $34.2m (FY18: $90.6m), of which $29.9m is held at parent level (FY19: $84.1m).

While COVID-19 has had some commercial impact on the portfolio, with cash reserves sufficient to cover central costs until 2023, COVID‐19 has had limited direct impact on Allied Minds. However, COVID-19 has led to minor delays in reporting both FY19 and H120 results as travel restrictions affected the audit process. Otherwise, management has noted a small delay in the tape-out process (the final step in the design process for integrated circuits before they are sent for manufacture, when the artwork for the photomask of the circuit is sent to the fabrication facility) at Spin Memory due to travel restrictions, but no other delays have been referenced.

Allied Minds’ portfolio has shrunk to seven assets, of which the top three represent c 94% of fair value. With net cash of $29.9m at 30 June 2020, management expects to have sufficient cash to allow it to continue to invest in existing assets and maximise the value of its portfolio to shareholders over a three- to four-year time horizon.

Progress across the portfolio looks promising, with BridgeComm and Orbital Sidekick now coming into focus alongside Federated Wireless and Spin Memory. Despite continuing strong technology sector valuations and newsflow, there have been no material changes of portfolio fair value in H120, with a series of top-up rounds announced at valuations unchanged from the funding round valuations established in 2018/19.

Other than the top four portfolio companies (further details below), TableUp was sold to TouchBistro, a market-leading pre-IPO candidate for $6m in shares in August 2020. Spark Insights (insurance analytics) continues to make ‘reasonable’ progress and OcuTerra (formerly SciFluor) continues its search for additional funding.

In April 2020, Federated Wireless raised $13.7m of additional Series C funding (with funding split equally between Allied Minds and Pennant Investors) to accelerate expansion of its connectivity-as-a-service (CaaS) partnerships through AWS and Microsoft Azure, allowing businesses to deploy their own 4G and 5G private networks. The CaaS use case was an addition to the plan financed in September 2019, requiring separate funding to address the opportunity. Federated Wireless continues to make strong progress with both CaaS and with its 5G shared spectrum CBRS services in the US and may well be building towards a large growth round in FY21.

BridgeComm provides patented high throughput one-to-many optical wireless communication solutions for space, aeronautics and terrestrial based opportunities. In September, BridgeComm signed a partnership with Nokia to develop ultra-high-speed throughput solutions for 5G networks. BridgeComm also continues to work closely with Boeing, having signed a joint development agreement with Boeing HorizonX for applications of its one-to-many (OTM) technology. BridgeComm secured an additional $2m of convertible debt from Allied Minds, as well as $1.5m of convertible financing from Boeing post period-end. We expect material portfolio announcements over the next 12 months.

Progress at Spin Memory (radiation-proof MRAM among other applications) has been slowed by COVID-19 (tape-outs with ARM and Applied Materials delayed by three to six months), but the company remains strategically well-placed as the only North-American based MRAM developer with fabrication facilities in the US. In July 2020, Spin Memory raised an additional $8.25m of Series B funding from existing investors, including Abies Ventures, Applied Ventures, ARM and Allied Minds (which contributed $4m to the round). We expect further newsflow in H121.

Orbital Sidekick (satellite-based hyperspectral imaging) has been awarded a multi-year contract by the US Air Force (AFVentures) as part of its strategic financing (STRATFI) program. Orbital Sidekick will receive $4m of non-dilutive financing in Q420 from AFVentures, to accelerate the launch of its pilot satellite in December 2020, with up to $12m of additional non-dilutive matched funding over the next three years. Orbital Sidekick is in the process of raising a Series A funding round.

Exhibit 1 sets out our NAV estimate (as at 15 October 2020) based on the H120 portfolio fair values.

Although our headline NAV discount is conservatively based on a fully diluted NAV estimate, our fair value estimate includes valuations on both an undiluted and fully diluted basis; the realisation value of any asset is likely to fall between these two values.

The post year-end adjustments take into account two principal factors: 1) post year-end investments of $5.5m, including investments in Spin Memory ($8.25m of additional Series B funding committed by existing investors, including Abies Ventures, Applied Ventures, ARM and Allied Minds) and Orbital Sidekick ($2m invested by Allied Minds and 11.2 Capital in July 2020); and 2) an allowance for central costs of $1.8m (at a rate of $0.5m per month).

This leads to our NAV estimate of 74.8p per share (undiluted) or 62.7p per share (fully diluted), based on portfolio company fair values, which have not been updated since their last major funding rounds.

Allied Minds is a deeptech 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, the portfolio continues to be held at the largely historical valuations established at the time of last major funding rounds in 2018 and 2019. In general, as is seen with other deeptech companies progressing to plan and delivering against core milestones, we would expect an approximate doubling in valuation between funding rounds 12 to 18 months apart, as companies grow and mature and the commercial model crystallises.

As such, we expect material changes in NAV over the next 12 months as new funding rounds are completed. In this context, we believe that a 40–50% discount to NAV materially understates the prospects for the group’s portfolio assuming the investee companies progress to plan. We estimate NAV per share of 74.8p (undiluted) or 62.7p fully diluted.

Despite a largely historical NAV, Allied Minds’ share trades at the bottom of its peer group’s NAV discounts, set out below in Exhibit 2. In our view, this leaves significant scope for share price appreciation.