This is an unacceptable structure for any company that is serious about properly incentivizing talent to add value for the long term, and we ask Mr. Love to commit to restructuring his compensation to a more traditional long-term operating target performance-based structure consistent with corporate governance best practices. In fact, we would suggest adhering to the core principles we laid out for Mr. Mclarty in an email on 11 July 2022 regarding the retainment of Rich Poutier. We discussed the plan with Mr. Love in July when he first joined and suggested to both Mr. Mclarty and Mr. Love that this type of incentive structure should form the basis of a company-wide long-term incentive plan. It is long past time that we move away from strictly market price-based vesting.
Our incentive proposal focused on creating long-term sustainable value at SMS is based on 4 parts and we suggested it be reevaluated annually to make sure the proper incentives remain in place for executives.
1) Any direct equity or option grants have service based vesting requirements, with the first tranche vesting no sooner than 12-15 months after the original grant date
2) Annual bonuses for the CVM team may be accrued from a small percentage (initially mid-single digit) of CVM net revenue and would be paid out some time after the fiscal year is closed and audited. This percentage would scale down as CVM becomes established in the market.
3) One half of performance-based awards would be based off achieving an initial amount of new “Use Cases,” which would be defined as the number of Airworthiness Directives and/or STCs approved. Said another way, a “Use Case” would be an approval from a list of defined key aerospace OEMs, important global aerospace regulatory bodies (both civilian and military), major airlines and other potential end users that allows CVM to be used as an alternative means of inspection. Tranches of performance-base grants or options would vest as new CVM Use Cases were approved, with then-current in-process CVM programs excluded.
4) The second half of performance-based awards would be based on CVM revenue targets. Given the importance of creating a profitable CVM division, we continue to believe revenue thresholds are essential to creating long-term value for CDI holders. Then-current in-process CVM programs would be given credit at a 50% rate for each dollar they brought in, as both existing and new Use Cases are essential to establishing a healthy business. Tranches of performance-based grants or options would vest as CVM revenue thresholds are achieved.
Given Mr. Love’s contract achieves none of what we have laid out, we believe it is in the best interest of the company for CDI holders to vote against Resolution 9 and his option grant. If we intend to be taken seriously by the market, we need to start acting responsibly.
On 2 October, Andrew reached out to Mr. Love requesting Miro Miletic’s contact information so that we could make the connection to get to know him. Unfortunately, no contact information was ever provided and an attempt to reach out on LinkedIn ultimately failed when Mr. Miletic refused to provide contact information to facilitate the meeting, even after initially agreeing to a date and time for the call.
Mr. Miletic has been consulting for Structural Monitoring Systems since shortly after Mr. Love came on the Board, yet we have failed to find this disclosure anywhere in the company’s filings. This clear conflict of interest should have been disclosed to CDI holders, especially so because it is our understanding that Structural Monitoring Systems intends to continue to use MEMKO Pty Ltd, where Mr. Miletic is the Managing Director and Founder, as a paid consultant even after he may join the Board. This major issue is, among others, one of the primary reasons we wanted to speak to him and attempt to get to know him. If SMS is going to continue to pay his company for its aerospace expertise, why on earth should we also pay him to sit on the Board? This potential double dipping and the lack of disclosure is yet another example of poor governance and is a symptom of systemic breakdown in oversight and corporate culture. To be clear – this is not a judgement on Mr. Miletic’s character, nor the quality of the work his company performs as we are in no-position to judge given we cannot get an audience with him. This is, however, a major indictment on the way Structural Monitoring Systems is run as even the appearance of a conflict of interest such as this should raise major red flags. Instead, it is swept under the rug and remains seemingly undisclosed by the company. As such, we believe it is currently in the best interests of the company for CDI holders to vote against Resolution 6 appointing Mr. Miletic to the Board.
Andrew’s email did prove to be an opening for Andrew and Mr. Love to meet over coffee for two hours in New York City on 6 October, and led to a discussion about whether there was a potential compromise that could be achieved. On our end, I know Andrew left the meeting believing a compromise could be quickly reached, but cognizant that the success of it was very likely entirely in Mr. Mclarty’s hands. After conferring for about 48 hours, we proposed a solution that, among other things, would have required Mr. Mclarty to step down. We also asked for a number of CDI holder rights to be enshrined in the Company’s Articles of Association to make sure this type of situation would not happen again, certain protections for CDI holders and a strict policy regarding disclosure and recusal related to conflicts of interest for Board members. This offer was rejected when Mr. Mclarty refused to step down. What should have been a win for everyone – the Company, CDI holders and the Board – was stopped in its tracks by Mr. Mclarty’s bruised ego.
In hindsight, none of this should really surprise anyone. We have been fighting since July to get a copy of the company’s registry, and it took the legitimate threat of lawsuits against individuals to produce an electronic copy we could use (which we received the afternoon of 18 October. While the company claimed it had already complied with our request for one by sending me a USB stick in the post. However, when I finally received a package from Australia on 17 October, it turned out to be a CD-ROM that was unreadable.
At the end of the day, we continue to deal with members of the Company’s Board who believe they can play by their own set of rules. Structural Monitoring Systems is the epitome of poor corporate governance, and once Andrew is elected, we will do everything in our power to force SMS into compliance with modern Board best-practices. Now that we have a copy of the registry, we will be reaching out to CDI holders with more information and our recommendations for both the EGM and the AGM.
Drake Management & affiliates