Tuesday, March 19, 2024

New Details About The Calders' Investment In Cloud Imperium

Cloud Imperium UK Ltd.'s financial accounts for 2022 have provided a fair bit of content this year. First, the accounts were not filed on time with UK Companies House. When the accounts finally showed up in March we discovered an audit by a new accounting firm found discrepancies dating back to 2015. As a bonus Cloud Imperium included information about the July 2023 acquisition of Turbulent Media. After further reading, the 2022 financial accounts also provide additional information about the investment of Clive and Keith Calder in Cloud Imperium Games.

  • Cloud Imperium (both the UK Ltd and the US LLC legal entities) have agreed a private investment from an external party amounting to approximately $46 million in exchange for new shares being issued (113,861 in each of the UK and US entities), amounting to approximately 10% of the overall company. This gives the various entities a combined valuation of approximately $496 million once the new money is taken into account.

  • Two new board members join the boards of both the UK and US entities, these being Dan Offner, representing the new investors (Clive and Keith Calder), as well as Eli Klein who is a long-time friend of Chris Roberts and has apparently been a sometime advisor in recent years.

  • Board and company control remains with Chris Roberts as Chairman, CEO and majority shareholder.

  • Money to be used for marketing and business development initiatives as Squadron 42 and Star Citizen head towards launch.

  • CIG will release full historical financial details from 2012 through to 2017 via a new corporate website.

  • Squadron 42 roadmap released and is expected to be feature complete by the end of 2019 with alpha/beta in 2020.

In March 2020 Cloud Imperium received a second round of investment of $17.25 million, bringing the total up to $63.25 million.

Up until now, the public knew the amount of money received by Cloud Imperium. With the release of the 2022 financial accounts, we now know the returns the investment group expects to receive.

from page 37 of the 2022 financial accounts

A contingent liability exists with respect to 1,877,400 of the 11,715,800 issued shares as at 31 December 2022. The holders of the 1,877,400 shares have the right to put their shares back to the Company for repurchase at a minimum return premium of 6% per annum on the initial purchase price. For 1,599,900 shares they also have a value formula based upon the three years' average revenue leading up to the start of the exercise period.
At this point in the explanation, I needed to look up the definition of a put option. According to Investopedia:
A put option (or “put”) is a contract giving the option buyer the right, but not the obligation, to sell—or sell short—a specified amount of an underlying security at a predetermined price within a specified time frame.
In other words, the 6% per annum figure is the floor for which the Calders can expect to receive from their investment. The higher the sales, the more their investment is worth.

I need to explain that the Calders were not the only investors. Eli Klein's Infatrade Group Corporation currently owns 277,500 shares of Cloud Imperium UK Ltd and presumably the same number of shares (or at least the same percentage) in the US portion of the business. Klein was one of the two new directors brought onto the board when the first round of investment was announced. 

With the explanation of Klein's involvement out of the way, here are the periods the various investors could exercise their put options.
  • 1 January 2024 to 31 March 2024 - Klein
  • 1 January 2025 to 31 March 2025 - Calders
  • 1 January 2028 to 31 March 2028 - All
Due to the lateness of the submission of the accounts, we already know Klein declined to exercise his 2024 option. CIG is maintaining the likelihood of the Calders exercising their option in 2025 is remote. If correct, then the first quarter of 2028 is key, as if the investors plan on cashing out according to the existing plan, they will need to do so then.

If the investors exercise their put options, the minimum amount of money they will receive is $115 million, their initial $63.25 million plus an additional $51.8 million at 6% annual interest. But CIG used a figure of 7.32% as an estimate of how much investors would receive, which would push the figure up to $130 million in 2028.

To put the $130 million figure into context, CIG spent $129.4 million in 2022. The money involved warranted the following paragraph:
Another reason for not recognising is due to the nature of the put terms, as if exercised the put proceeds would be payable out of available cash in excess of that required to effectively operate the business and thus that liability would remain undischarged until such available cash became available.
Hopefully such an eventuality never occurs as many Star Citizen content creators expect the announcement of the sale of copies of Squadron 42, even if only pre-orders, at CitizenCon this October. If priced at an expected $70 per copy, Cloud Imperium will only need to sell around 4 million copies to pay off the investors. No need to worry, right?

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