Its only been a few days since I talked in this blog about the alarming share price decline of tech VC Allied Minds. I wondered whether this once highly valued London listed firm was in a death spiral, with its share price in calamitous decline. I also wondered whether much of that share price decline might be due to key shareholders such as Woodford selling down their holding.
My understanding from having talked to various people in the market is that Woodford’s firm is NOT a seller although his old shop (Invesco) might be trying to cut their losses. If this rumor is true and Woodford is not selling, that might amount to something of a vote of confidence in Allied Minds, as the asset manager has absolutely been trimming other positions.
Unfortunately, this may not be enough to stem the tidal wave of selling. The shares don’t seem to be respecting any normal technical barrier and have crashed below the 50p, although as I write there does seem to be a small rally back above 45p, which would put the market cap at roughly $155m. What worries me now is that after having looked at the various small-cap bulletin boards, the army of short sellers seems to be growing more aggressive by the day. Bears are suggesting that the current negative price momentum won’t stop until the share price hits the single digits. That may or may not be true but if enough short sellers believe it, and there are enough frightened sellers willing to offer stock, anything could happen.
So, for those of us genuinely perplexed by this state of affairs, I think the time has come to think through the worst case. At around $155m, the firm is clearly way below the slightly mysterious number of $350m which is quoted for ownership adjusted value – whatever that slightly odd measure may be. On a balance sheet level, the business has a net asset value of around $213m, which is also well above the current market cap.
But in a desperate, fight for survival situation, these ‘book values’ may have no real meaning. What really matters is hard assets and, even better, hard cash. So, for argument’s sake lets assume the extensive portfolio of tech spin-out businesses are worth a big fat zero. Really, all we have left at that point is cash of $132m at the last count (summer 2018, using interim numbers). But remember that only $66m of that is at the parent level.
In terms of cash outflow, at the interim stage, general overhead costs were running at around $23m every six months as were the R&D expenses. This implies that the business could burn through around $90m in the next 12 months. On top of that, I assume it would want to invest more in its portfolio businesses.
Theoretically, Allied Minds could run out of cash by the end of 2019 – and even earlier if it invests more precious cash in its portfolio. Alternatively, Allied Minds could tighten up spending, slash overheads and cut back on R&D and maybe make that cash last through into 2020, by which time we should have a proper Tech bear market on our hands.
Whichever way you look at, Allied Minds might be in a pickle within a very short period of time, requiring it to accept a highly dilutive rights issue and/or sell some portfolio stakes. My guess is that the decision making around this crunch could come as early as Spring/summer next year. In this worst-case scenario, the share price could indeed slump as low as the single digits the bears proclaim.
BUT this analysis also assumes that the portfolio is worth zip. Which I struggle to think is probable. I accept that the tech market may go into a deep freeze but if the technology is as good as Allied Minds says it is, there could be huge upside value. We are essentially about to enter into what I call The Show and Tell Phase. This tech investor needs to show results – that means some realizations or substantial valuation uplifts. As a VC investor, it doesn’t have enough cash available to push the runway out for its portfolio businesses beyond 2020. Investors need to see results in the next six months. If these emerge, I think the shares could rebase dramatically. If not, we maybe looking at a proper tech burnout. As an aside, what might help in the meantime is if the cost base is cut back to the bone and any remaining cash focused on helping those portfolio businesses scale as quickly as possible.