Wednesday, 23 May 2018

Sugru's filed accounts reveal what their 2017 Crowdcube pitch failed to.

As we keep digging, we keep finding. 

Crowdcube investors in March to May 2017 were shown the 'projected accounts' for the company's YE Dec16 in the pitch documents - ie they were actuals. These showed a reasonably healthy current account balance of £1m credit. 

Now the filed accounts, which remember were for YE Dec16, so had already been completed 5 months before the Crowdcube pitch closed, show a very different story. These accounts were not made public until December 2017, so there is no way that anyone outside the company other than Crowdcube, would have known the real figures.

These accounts show a current account deficit as at 31 December 2016 of £337,528. 

This difference of £1,337,528 is around the amount that the company states it was due from the Clydesdale, in the second tranche of their agreed loan. The one they had breached but hadnt told people about - the one the bank withdrew which resulted in the fire sale.

That seems pretty clear to us. Crowdcube told investors the exact opposite of the truth in the 2017 raise. Maybe this was because Sugru hid it or maybe not. Either way it shows Crowdcube's due diligence is totally worthless. 

Tuesday, 22 May 2018

You simply must read this post on the Sugru Crowdcube forum

It is quite long, so I wont interrupt -

Insiders win / Outsiders lose

maximator 2 days ago
8 Replies
Indeed an astonishing exit @ 90 pct discount to equity value at last raise a good year ago. Sure we have all taken calculated risks, and this is one of the outcomes that was to be expected. HOWEVER, I find it hard to believe that the bank's withdrawal made a fire sale unavoidable, even with unforeseeable (?) challenges in DIY distribution. So the case indeed raises serious questions as to governance, and why we should pay to warm our Directors' cold feet, instead of being able to rely on them exercising their fiduciary duties to everybody's benefit, including ours.
Questions which only the Directors can answer. So I wrote to them today (see below). Let's see what they say.
Keep you posted. Any support / observations welcome.
PS: At least one question missing from my list below, i.e.: Have the Directors / founding shareholders / current top management agreed on continued employment / advisory relationship with Tesa, and on what terms ?
Dear Roger, Jane, Paraic & James,
Thank you for your letter, and congratulations to you on your successful exit.
To me, having acquired shares in the last round of crowdfunding in 2017, this is very disappointing news indeed. How disappointing the news is for the other shareholders depends, I suppose, on the timing and terms of their respective investments.
At this point, as an outsider, I cannot exclude that the incumbent shareholders / Directors may have misled the new investors in the last round of fundraising with the purpose of making a final bet for their own benefit, very largely at the expense of the new shareholders. All this based on a – from today's perspective certainly, and probably even then, taking into considerations the terms of the first crowdfunding - grossly overstated valuation (i.e. 10 x the equity valuation realised only slightly over a year later). For a relatively mature player already profitably active on a highly international scale in both production and distribution, it certainly appears to be highly unusual that the same set of insiders should have revised their views on equity valuation down by 90% within a year. In other words, the final crowdfunding round led to only minimal dilution of the incumbent shareholders' stakes at the time, at the full expense of the last entrants.
The sale to Tesa on these terms, at this time, therefore raises a number of serious questions, in particular with respect to conflicts of interest of the managing incumbent shareholders / Directors vis-à-vis the later shareholders.
May I therefore ask for your co-operation in addressing these concerns, by responding to the questions below. Given the very unfortunate short timeframe of only a few days between your announcement and scheduled completion, I am forced to hereby formally challenge and object the sale itself as well as the lawfulness of the execution of the drag-along right.
Finally I am concerned about the potential reputational aspects of this sale for the Sugru brand. Please allow me, therefore, to share this letter with the Board of Directors of Tesa S.E., and to post it on the respective crowdfunding platform you used in 2017.
Yours sincerely
Minutes of all Board meetings since 1 Jan 2016
Complete copies of any and all business plans and valuation reports on the company produced by it, its advisers, employees, Directors, consultants or similar, since 1 Jan 2016
Any pay-outs to Directors and advisors since 1 Jan 2016 (including cash salaries, stock grants, etc.)
Full copy of the Sale & Purchase agreement with Tesa, including all Annexes etc.
Detailed table of amounts of Sources and Uses of Sale proceeds, including:
Their respective timing (if not paid-out at proposed closing in May 2018)
Allocation of proceeds to each of the Directors and founding shareholders
Analysis of financial returns to equity, expressed as percentage p.a. (Internal Rate of Return), and amount (in GBP), including:
In aggregate since foundation
Broken down into classes of shares
Broken down into cohorts by timing of initial investment (i.e. For each funding round until exit)
Individual returns of the Directors and founders
How were the conflicts of interest of the founders / Directors vis-à-vis the later shareholders managed specifically over time ? (pls provide detail)
Why did the bank withdraw from further debt financing ?
Why did the company not disclose to shareholders at the time that such withdrawal had taken place ?
To preserve value, what alternative funding sources did the Board take into consideration following the bank's withdrawal ? Why did the Board instead ultimately decide to fire-sell ?
Did the Board / Directors actively consider there was a risk of insolvency ? If so, why ? If not, why not ?
Disposal process
Who prepared and negotiated the sale (including advisers, legal counsel, consultants, etc.)
How was Tesa selected as the buyer ? Was there a competitive bidding process ? Please provide details (number of parties approached, engaged, negotiated with, etc.)
Were negotiations with Tesa conducted exclusively at some stage ? Why ?
Please disclose on what basis and how (exactly, i.e. including methodologies, amounts, etc.) the Company was valued as a basis for sale negotiations ? How exactly did this valuation differ from the ultimate purchase price achieved ? Please provide a detailed and reasoned reconciliation
In particular, provide details on the Enterprise Values (i.e. Value of the firm as opposed to certain classes of capital / assets) derived for the last round of crowdfunding vs. Enterprise Value achieved in the sale to Tesa (including a reasoned deviation analysis)
Purchase price
Is the entire purchase consideration proposed to be paid entirely in cash, at closing in May 2018 ?
If so, did the Directors consider negotiating contingent / deferred purchase price elements to allow the (later) shareholders to participate in the future performance of the Company ? If not, why not ?
Did the Directors consider introducing amendments to the distribution of proceeds which would have made-whole, or at least reduced the severe losses of, the later shareholders ? If not, why not ?
Proposed use of proceeds from the sale (in GBP) (in detail, including fees, and allocation of sale proceeds to individual classes of shares)
0 days left
An impressive list of questions which I assume might by the basis of an unfair prejudice application to the court. Good luck with that. I only invested a tiny amount so I've taken it on the chin as a good lesson learnt.
Rip off in broad day light :-)
They new they are going to do it.
Let the court decide. I am in :-)
Good list of questions - doubt you will receive answers to all of those (if any). Been radio silence from Crowdcube and Sugru on deal specifics so far. They will likely hide behind 'confidentiality' so as not to reveal what really went on.
Unfair Prejudice proceedings still leave the burden of proof on us. Yet the breach of provisions of the Articles is obvious. No offer was made to the minorities, in breach of para. 7 of the Articles. Also, it is not clear that para 8 (Drag-along) should override para 7. Even if that were so, Tesa does NOT qualify as a bona fide **arm's length ** purchaser according to para 8.1. of the Articles, not the least because of the envisaged continued employment of the Selling Shareholders. Such employment agreement in fact turns the unrelated parties (arm's length) into RELATED parties (NOT arm's length).
Also, the communication of the Company is inconsistent with the Drag-Along-Notice. The latter stipulates the price per share (@ GBP 0.09 / share), as required by 8.2.3 of the Articles, whereas the former is vague on final proceeds, claiming its dependency on currency conversion of financial debt. Unacceptable / invalid.
If all that were not enough, we have to date not received proof that the Conflict-of-Interest rules of the Articles have been properly adhered-to by the Directors in the process of resolving, and effecting, the sale.
The resolution may be, and the Sale and Drag-Along ARE in breach of the Articles, and therefore invalid. As a result of all this, I specifically call on the Selling Shareholders to exit from the Share Purchase Agreement. In particular, I specifically deny any Director's right to act on my behalf in transfering my Shares to tesa SE (para 8.7. of the Articles).
It does appear to me to have been shoddily handled at best.
My reading of it is they were/are very badly advised and left at the mercy of the only game in town who realized this and cut the offer at the last moment and the current directors decided that it was still best for them (as the main shareholders) and the staff to take it and keep their jobs. It could for example have been structured as an asset rather than a company sale.
It doesn't feel that they gave much consideration to the more recent shareholders - to not even delay completion a little so that the first round crowdfunding investors who are only a month or so away from a three year EIS hold suggest they really don't care about them.
There appears to be a question mark as to whether the company was already in breach of its banking covenants in March - May 2017, and if so I cannot see that this was disclosed. It is certainly material. Does anyone have any news of this please before I write to the company asking for proof that it was not in breach at the time.
A 91% devaluation in less than 12 months is not consistent with the tone of the pitch, I am sure that if we pursue this then we will find more information about the state of the company in the last pitch.
I am certainly open to being involved in any class action. This process has been disappointing from the perspectives of both Sugru and Crowdcube; it brings all other investee companies into question and suggests this may be the wrong platform to invest through.
As far as I am aware, the company is denying that they were in breach of the covenants at the time.
One thing is clear though, based on the handling of this from Crowdcube, it is absolutely the wrong platform to invest through.
I should like to see evidence of this as well as correspondence from the bank as to the level and conditions of support on offer; the pitch makes reference to an agreed £3.5m facility agreed.

Monday, 21 May 2018

Hands Off Crowdcube approach for Sugru disaster.

We have a copy of the email sent out by Crowdcube to investors in Sugru, the day after we broke the story. Crowdcube valued Sugru at £33m in May 2017. It was sold for next to nothing last week and left shareholders with losses of 91p in the pound.

Firstly thanks to the sender.

We post this here becasue we are not convinced Crowdcube's advice is correct - maybe you would like to comment?

As usaul if you want any advice, Crowdube tell you to go away and get it somewhere else - they cant afford to pay a serious legal team to advise investors. I love the way they don't even have a considered opinion of their own - they push it all onto Smith Williamson - their in house financial advisers. As if you havent lost enough, now Crowdcube advise you to pay for independent legal advice as well - that's real service for you. Whatever you do, dont use Smith Williamson. 

Here it is - 

What impact does this have on EIS?
If you have claimed tax relief from HMRC through the EIS scheme, please note that you will not have reached the full three year period of ownership required to qualify for full relief. 

FormFormForm Ltd has been advised by financial group Smith and Williamson, that if you have claimed EIS tax relief for your investment, you should anticipate having to refund a proportion of the relief to HMRC, based pro-rata on the duration you have held the shares as a proportion of three years. In some cases, shareholders may be entitled to some relief on the loss suffered. However, you will need to seek independent tax advice relevant to your own unique circumstances.   

Mr Sherick Shakes it all up.

So here we are again. Mr Shericks takes £250k off Crowdcube investors, spends it, liquidates and the founder Andrew Jonathan Sherick reopens using a company he registered just in case - Shericks Shakes Ltd and then to make sure, changed its name to Luxury Shakes. 

We wrote about them before but took the post down as Andrew Sherick claimed he was trying to gift CC SHs free shares in the newco. That has not happened....yet anyway. 

Meanwhile the original version, in liquidation, looks to have piled up around £600k in unpaid liabilities, including trade creditors. 

We really do need to take a look at the way the law operates in this area now that EFC is around and here to stay. It's a shambles as it stands.

Was Sugru's Bank loan covenant breach declared in the 2017 Crowdcube pitch?

We find if you keep on digging, the truth will out. This maybe a new piece of it. 

Thanks first of all to our anon comment pointing this out.

Sugru filed its YE Dec2016 accounts late, in Dec2017. When they pitched for the last time on Crowdcube in March to May 2017 and took another £1.9m off Crowdcube investors, the company and one assumes Crowdcube, knew that they had been in breach of their loan covenant - as stated in those filed accounts. This loan was with The Clydesdale Bank and it was the extended portion of this loan being withdrawn and the main portion being listed as due within 12 months, that forced Sugru into the fire sale. It is impossible to think that Crowdcube, with its own due diligence, did not know this fact. If they didnt, then that has be gross negligence and if they did, it is something far worse.

As pointed out by the anon comment, a breach of a bank loan covenant is a very serious incident. We can see the consequences here. So for this information to be hidden from the March 2017 investors seems astounding. If they had known the facts my guess is Sugru would have been forced to sell last year and this would have saved investors £1.9m.

We have been saying for 3 years that the accounting system in the UK is not fit for purpose when it comes to the modern age. You can easily delay accounts, hiding important information. We need a system whereby all companies using ECF as a funding channel have to declare accounts up to the time of the pitch or close to it - not sit on them and then file them 9 months later. 

If we had this simple change - this fiasco would have been partly avoided and investors and HMRC would not be looking at another £1.9m in lost money. 

Sunday, 20 May 2018

Hilarious letter to Sugru shareholders from Jane Delahanty.

In an acutely embarrassing letter to Sugru shareholders, the Founder, Jane Delahanty, tries to dress up as a pixie bringing good news.

As with so many Crowdcube disasters, the Sugru story is rapidly taking on the elements of a farce.

The letter sent to shareholders starts of by telling SHs that the company has been sold to one of the worlds leading etc etc. Then the next paragraph starts -

''The difficult news is the low price being paid for the company.''

I know the Irish pride themselves on their sense of humour but please. There is no other way of putting this - shareholders have been royally screwed and the founders have come out of it smelling of roses. It is essentially a collapse not a sale - 91p in every pound invested has been LOST. That is not a low price; its next to zero. 

Like their grossly exaggerated sales figures and their grossly exaggerated valuations, Sugru in its last dying gasps serves up a grossly misleading statement. All with that Irish smile and pixie glint. To be sure. 

Crowdcube - what a week that was!

Despite the very recent fiasco with Sugru and yet more large losses filed by Asio Ltd (Chirp), Crowdcube has helped Adzuna raise another £8m and Freetrade another £3.1m all in the last 7 days.

Our only surprise is that along with Louis Litt and Mike, Darren was not to be seen at the Wedding.

Both of these raises were entirely or largely carried out in the private mode, with Freetrade taking in £2.5m before opening out and Adzuna, using 400 Crowdcube investors, never appearing on the public site.

Still the crowd has had chances to invest in both, through the public site and was enthusiastic in doing so - we just have to to see if the virtual value that these companies have created becomes a reality or whether more funding indicates a situation more akin to the Sugru one. A massive shortfall in revenues leading to a fire sale and the loss of investors £5.5m. There was little warning with Sugru, we had a heads up from inside Crowdcube, so we'd expect there to be little with any new disasters.

There has been an assiduous radio silence from Beauhurst on their misuse of CAGR for working out investors 'returns'  - only relying on next round valuations for their data. We would have thought the very obvious hazards in this method, so clearly shown by Sugru and few other recent collapses, after up round fundings, would have led to a statement? Maybe the FCA should look at redefining 'misleading'?

It's a crazy world out there - take care.