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Strategy & Performance On 31 December 2022, investments in six companies represented 100% of NAV.

During the period, the Fund exited its positions in Equals Group plc and Board Intelligence Limited realising a combined gain of £7.8 million. The Fund continued to support progress at GI Dynamics with an investment of £2.3 million during the period.

The key contributors to performance during the period were Hurricane Energy (3.8%) and Equals Group (2%). Allied Minds plc was the main detractor (-2.9%).


01. Hurricane Energy plc

Hurricane Energy ("Hurricane")
The Fund has been a shareholder in Hurricane for ten years. The investment case was based on providing capital to explore and produce oil from fractured basements in the west of Shetland region of the UK continental shelf. Exploration has proved successful and the production of more than 10 million barrels has been achieved.

Over the last decade, there has been a sea change in both attitudes and actions relating to fossil fuels, the importance of oil supplies as a national strategic asset and more recently, windfall taxes. Each has had a significant impact. The investment journey has had its good times and bad times. Prior to Covid, Crystal Amber banked profits of £43 million and retained a shareholding of just over 5%.

The Fund has previously described events since the spring of 2020, which culminated in the High Court agreeing with Crystal Amber and refusing to sanction the Hurricane board's attempt to force through a highly dilutive debt for equity swap. At the time, Hurricane claimed that without a debt for equity swap, bondholders would not be able to recover more than 56% of their investment. The board had proposed that $50 million of the $230 million repayable to bondholders be converted into 95% of Hurricane's equity, with the remaining $180 million debt earning cash interest of 9.4% per annum plus payment in kind interest of 5% per annum. Hurricane's share price weakness enabled the Fund to increase its shareholding to 28.9% and as a result, substantially reduce the average cost of its remaining holding to 6.7p per share.
Last week's announcement of a takeover offer is expected, on the basis that the acquisition is completed, to enable the Fund to receive a further cash monetisation of £34.5 million and participate in future contingent payments of up to a further £37.3 million. To date, we do not believe that Hurricane has adequately communicated the rationale for and merits of the proposed takeover offer.

The best way to achieve price discovery is to conduct an auction, advertise it and secure the best offer. The formal sale process ran for more than four months and attracted interest from several parties. Both Hurricane Energy and Crystal Amber consider the offer from Prax Exploration & Production PLC ("Prax") to be the most attractive offer submitted.

The Prax offer reduces the downside risk of the shares whilst providing visibility of upside far greater than if Hurricane was to remain as an independent single well operator with steadily declining production. Whilst the enterprise value is linked to future revenues at Hurricane, critically, it will also include revenues from future acquisitions by Hurricane, funded by Prax. Having met the Mergers and Acquisitions team at Prax, Crystal Amber believes that Prax has the firm intention of using the Hurricane vehicle to make significant acquisitions. For context, the P6 well at Hurricane currently produces 7,700 barrels a day. Were Prax to make an acquisition producing 10,000 barrels a day, based on $80 a barrel, Crystal Amber believes that Hurricane shareholders would be entitled to 2p per share per annum from this one acquisition. This would be in addition to approximately 1.5p a share from the P6 well.

Given Hurricane management's failure in September 2022 to achieve regulatory approval for its "P8" well after trumpeting its potential and fast payback to investors, Hurricane, under its present management, has no further growth potential. The Fund has lost confidence in Hurricane's management and has concluded that the North Sea Transition Authority will not sanction any further exploration or production. However, with Prax as the new owners, it will be possible for existing Hurricane shareholders to benefit from deferred consideration payments.

The Fund has estimated that, if the Prax offer fails meaning that Hurricane continues as an independent company and depending on P6 well performance, shareholders in Hurricane would only ultimately receive between 5p and 8.5p. By contrast, this takeover offer provides growth potential which the Fund believes will deliver a far more capable and commercial management that is motivated to ensure that the contingent consideration of 6.48p per share is paid to Hurricane shareholders, resulting in Hurricane shareholders receiving 12.5p per share. Crystal Amber also believes that Hurricane's tax losses will provide Prax with significant incentives to purchase production assets, all of which will deliver existing Hurricane shareholders with what is effectively royalty income through to December 2026.

This outcome should also be seen in context. Firstly, the share prices of several of Hurricane Energy's peer group have fallen by 40% over recent months, Secondly, had Crystal Amber not succeeded in blocking the proposed and unnecessary debt restructure, which would have resulted in shareholders owning just five per cent of the company, this exit results in shareholders achieving a return 19 times greater, as a result of the then proposed 95% dilution to shareholders not being approved by the Court. Thirdly, over the last 12 months, it is widely acknowledged that the fiscal regime has become much more onerous, making the North Sea a far less attractive region in which to invest. As a result, Crystal Amber is supportive of the offer from Prax and for the above reasons the Fund has agreed to provide an irrevocable undertaking to vote in favour of the Acquisition. Crystal Amber believes that Hurricane will be a very good investment for Prax. The purchase has been structured so that existing Hurricane shareholders will benefit financially from the success of Prax.

02. De La Rue plc

De La Rue plc ("De la Rue")
The past is often a reliable indicator of the future. During the period under review, De La Rue delivered its third profit warning of 2022. Since January 2022, the Fund has found it necessary to update De La Rue shareholders on the faltering turnaround plan and offer solutions, which management has repeatedly ignored. De La Rue management chose instead to blame both Crystal Amber, as a long-term significant shareholder and incredibly, in November, its auditor EY, for arriving at the same conclusions as Crystal Amber. The failure of the De La Rue executives and the board as a whole to take responsibility for mistakes and instead blame others is symptomatic of their inability to grasp the nature of De La Rue's predicament.

In September 2022, we stated that De La Rue stands out as a case study of how poor leadership is the ultimate destroyer of shareholder returns. In July 2020, De La Rue completed a £100 million fundraise which was priced at 110 pence a share. Crystal Amber provided £18 million of this funding and at the time was an 18% shareholder in De La Rue. The "honeymoon" period following the fundraise and a buoyant market within its currency division resulted in the share price increasing by 70% and Crystal Amber reduced its shareholding to just under 10%.

In early July 2022, the Fund wrote to the Chairman and Chief Executive of De La Rue to request that Crystal Amber, as a near 10% shareholder, be invited to nominate a director in a non-executive capacity. At the end of September 2022, it was disappointing to be informed by De La Rue that it had rejected this request.

On page 14 of De La Rue's interim results released in November 2022, a reference was made to a material uncertainty going concern audit qualification. This relates to potential banking covenant breaches. Coming only two years after the £100 million equity raise in July 2020, market participants were understandably alarmed, and the share price fell sharply. Immediately following the publication of the interim results, Crystal Amber wrote to the directors of De Le Rue in a personal capacity. In that letter, Crystal Amber highlighted several specific concerns, including the effect on revenues and profits of making 300 staff redundant at the Kenyan print facility and ceasing print operations. The company wrote to deny that this was the case. However, on 20 January 2023, it announced the closure of its Kenyan print facilities. Whilst it said that this was not expected to affect revenues to March 2023, it made no reference to the effect on revenues for the year commencing on 1 April 2023. Revenues from Kenya comprise around 12% of total revenues from the Currency division.

De La Rue's current market capitalisation is £103 million. Adjusting for the 2020 capital raise would bring this down to £3 million. When Kevin Loosemore became Chairman in October 2019, before the £100 million fundraise, De La Rue's market capitalisation was £205 million. Immediately prior to announcing the 2020 fundraise, De La Rue's market capitalisation was £125 million. This is a like-for-like 98% reduction in returns to shareholders.

Management has sought to blame factors outside of its control. However, the blunt reality is that it has made operational and strategic mistakes. Margins have shrunk because De La Rue has failed to secure new business in both its Currency and Authentication divisions. Despite savage cost-cutting, margins in both divisions are unacceptable. Driving down costs in an attempt to avoid a fourth profit warning is not a good strategy. It is revenue that matters: removing headcount means that when business is won, orders cannot be fulfilled. Even after significant investment funded by shareholders, the business still fails to generate cash and it is all too evident that the turnaround plan has failed.

03. GI Dynamics Inc.

GI Dynamics Inc ("GI Dynamics")
GI Dynamics is focused on the worldwide pandemic in Type 2 diabetes and obesity. Crystal Amber owns 81% of its fully diluted share capital.

In December 2022, Diabetes Care and the American Diabetes Association published a paper demonstrating the benefits of GID's 60cm impermeable fluoropolymer endoscopically implanted sleeve. Of over 3,000 patients treated, mean weight loss was 13.3kg (11.1% in body weight). There was also a considerable reduction in blood pressure and cholesterol.

The company initiated enrolment in its Indian clinical trial, with first patient recruitment achieved during the period. This is being carried out in conjunction with its local partner, Apollo Sugar. GI Dynamics also continued enrolling in the US FDA trial during the period. Having secured approval for changes to its enrolment criteria in the US, the company expects to improve the speed of enrolment.

The company continues to work towards CE Mark approval which is now expected before the end of 2023. The Fund invested an additional £2.3 million over the period and remains committed to supporting the company as GI Dynamics pursues its goal of regaining the CE Mark designation and advancing with its FDA trial.

04. Allied Minds plc

Allied Minds plc ("Allied Minds")
Allied Minds is an investor in technology and life science sectors and operates as a private equity firm of early-stage companies. The Fund first invested in November 2018 and it owns 18.4% of the company's issued share capital.

In November 2022, the company delisted from the market to reduce costs and preserve cash as it pursues its strategy to realise assets. The company guided to a $2.2 million saving and the Fund agreed to support the delisting on the condition that a member of the Investment Adviser would join its board. Delisting followed a formal sale process initiated in March 2022 that did not yield interest at a sufficiently attractive level.

Since delisting, the company has undertaken a review of internal costs and external providers. As a result, it is outsourcing its finance function to a third-party supplier. This is expected to result in annualised savings of over $1 million.

In May 2022, Federated Wireless completed its last funding round at a $302 million valuation. Allied Minds owns 24% of the company. Over the year, Federated Wireless delivered a 75% revenue growth to $19 million and finished the year with a $35 million cash position. The company delivers private wireless and shared spectrum services. While the company has attractive contract pipelines ahead, near term growth might be held back by economic uncertainty.

Orbital Sidekick raised a $10 million extension of its Series A round in which Allied Minds did not participate. The company is now funded to launch four satellites in 2023. The first two of those are due to be launched in Q2 2023. Those could result in higher margin revenues for large private and public contracts in energy, defence and climate technology. Allied Minds owns 16% of the company's equity and the post-money valuation of the last round was $57 million.

In September 2022, Bridgecomm completed a funding round at a valuation of $11.5 million. Allied Minds owns a 40% fully diluted stake. In early 2023, Bridgecomm raised an additional $1.5 million investment from a trade partner. The company's optical communications solutions enable high transmission rates of data in space, space to air and on the ground. Bridgecomm continues to progress toward a one-kilometre demonstration of this technology. Those solutions can fill in where laying fibre optic is difficult or impossible. The one-kilometre test is targeting end of June 2023 and would open multi-million-dollar contract opportunities.

OcuTerra (formerly SciFluor Life Sciences) is progressing with the patient enrolment for its clinical trial, with over 25% of the trial patients enrolled. The phase 2 trial will assess efficacy and safety of its eye drop treatment for Diabetic Retinopathy. Allied Minds owns a 14% stake in the company. Its funding round in November 2021 valued the company at $51 million.

Concirrus, the business that acquired the IP assets of Spark Insights in November 2021 has been acquired for a consideration that resulted in no payment for Allied Mind's common stock.

The Fund did not engage in hedging activity during the period.

The Fund realised total net gains of £7.1 million in the period. These relate mainly to the sales of Equals Group (£8.1 million gain), offset by realised losses in De la Rue and Board Intelligence.