Response Letter to Gadens' Retraction Demand Letter

27 October 2022

Fellow CDI holders of Structural Monitoring Systems PLC,

We received a letter from Structural Monitoring System’s counsel, Gadens, on 25 October. The letter, included below, demanded a retraction of our Letter to CDI Holders dated 20 October 2022 and alleges we purposefully misled investors on the nature of the very real issues that the letter highlights.

Before we comment on the ridiculous allegations made, we believe CDI holders have a right to know why the company is spending so much of its time and limited financial resources paying expensive legal counsel and a proxy solicitation firm to try and protect two directors. Mr. Mclarty and Mr. Wright lack any expertise in the aerospace industry and have very obvious conflicts of interest due to their business relationships as paid service providers to Structural Monitoring Systems. How much of the recent $1.9mm capital raise at $0.35 per CDI has gone directly into the pockets of Gadens and the company’s new proxy solicitation firm? What is next, are they going to dip into company coffers to sue the largest investor across three jurisdictions?

Drake has included our counsel’s response letter from Thomson Geer and have supplied responses (see below) that thoroughly debunk the ridiculous nature of Gadens’ claims. Gadens is either simply a mouthpiece for its client or lacks staff with even cursory knowledge of financial accounting and option valuation, and they seem not to understand how corporate governance best practices have evolved in the developed world. Either this is because they do not have the requisite experience or because they have been given strict instructions by certain members of the Board and followed those instructions to the letter. Regardless of the reason, their advice has proved to be a waste of company time and resources. They would also do well to understand that we are residents of the United States, posting to a US website and discussing issues pertaining to a UK domiciled company. We will not be intimidated by Gadens attempts to beat us into submission with frivolous claims of a defamation lawsuit. They will not silence us as we speak truth to their entrenched power, and any attempt to do so will open the door to a potential treasure trove of Director emails and communications through the discovery process. Given the tone of Gadens letter, we would advise the Board to make sure to preserve all communications related to Structural Monitoring Systems going back years.

All of this could have been avoided if Mr. Mclarty and Mr. Wright had but honored their commitments from October 2021. As recently as two weeks ago we had a workable deal on the table, only to have it scuttled by Mr. Mclarty’s ego. It was clear from the moment Mr. Love delivered the message to Andrew that Mr. Mclarty would step down only if I “bought him out” of his stake in Structural Monitoring Systems that no compromise would ever happen. Both Andrew and I were astounded at the audacity of that comment by a sitting Board member charged with long-term fiduciary responsibility to the Company. In my ~11 years as a shareholder in the Company, I have sold only a fraction of the shares Mr. Mclarty has sold despite having a much larger position. I also have not benefited from selling any services to the Company, at any point, like Mr. Mclarty and Mr. Wright. We don’t know how big a fan of Steve Miller Band Mr. Mclarty may be, but we will not facilitate a way for him to “take the money and run.” We remain in this for the upside of the long-term commercialization of CVM, which will only be achieved with proper corporate governance and a competent board.

These actions are nothing more than an exercise of self-preservation by Mr. Mclarty and Mr. Wright funded off the company’s balance sheet. We demand to know how much time and money has been spent fighting the largest shareholder and the democratic process. Should the company refuse to make the legal and solicitation tab public, we will make sure to do so when Andrew and Henrich Loechteken join the Board.


Anthony Faillace

Drake Management & affiliates

Drake Response to Gadens

Alleged Error


The company had no choice but to hold the two meetings on the same day because the ASX demanded it

Until, and unless, evidence is brought forth to prove the ASX gave the company no choice but to hold the meetings on the same day, and that the company lobbied the ASX to allow the company to hold them independently, we will not retract our statement. After discussion with legal counsel and other market participants, we are confident that it is not ASX policy to interfere in these matters. We do not believe the ASX would mandate that a company break the rules laid out in its own Articles of Association (which mandated an EGM be held by 24 October given the 5 September notice). As such, the only logical conclusion was that the company purposefully delayed filing of the notice such that both EGM and AGM went in concurrently (or at a substantially similar time) and then did not alert ASX that a 15 November date was in breach of the company's own Articles of Association.

As to my statement that there is confusion, it should be intuitively obvious that holding an EGM and an AGM on the same day at the same place would prove confusing to investors. For some external perspective, one forum member named Jazzasax at Hotcopper posted "these two GMs are confusing. AGM has a set of directors opting for re-election. EGM has Drake's request to rid the board of Wright and Mclarty, as well as Love [this is an error, we are not doing that], so we'd be left with Anthony [another error, it would be Andrew], Heinrich, Brian? and Duerloo? So the outcome, IF all resolutions carried for both GM's is what? Which is the prevailing outcome?

Not only is the cadence of meetings and the potential outcomes confusing for CDI holders, but the dual notices also sow confusion regarding what is actually on the ballot(s). Drake is NOT asking for Mr. Love to be removed as we intend to work with him to move CVM forward. Anthony is not on any ballot whatsoever!

Bryant Mclarty need not run for election in this AGM because he joined the Board last year

Our letter is clear, he is using the rules laid out in the Articles of Association to avoid running. He was elected last year in an EGM and is not compelled to run this year. At no point did we say anything to the contrary. We believe that is highly regrettable behavior on his part given the issues facing the company and the commitments he made when asking for CDI holder, and Drake's, support in 2021. There has been confusion by CDI holders as to what happens to Mr. Mclarty given he committed to being a temporary Board member last year and is not on the ballot this year

The company is upset because we do not believe that doing the absolute bare minimum for regulatory compliance is enough. Your letter is conspicuously silent on the point that State Street Global Advisors makes, which is that Australian corporate governance practices are anachronistic and would benefit from a recalibration like that instituted in the United Kingdom

Mr. Mclarty never gave a date by which he would step down, so no promise has been broken

Contrary to your assertion, Mr. Mclarty did give Drake a firm commitment to step down once the company had brought in an executive to run the business, and it was ONLY under this pretense that Drake supported his candidacy in the October 2021 EGM where he was named as a Director. In fact, Drake demanded that the Board of Directors and Mr. Mclarty prior to joining, agree to a series of commitments which included Mr. Mclarty defining his tenure as "temporary." This was passed in a Board resolution on 21 October 2021, and without which Mr. Mclarty would not be on this Board. With Mr. Love's appointment in July, any reasonable outside observer would concur that Mr. Mclarty should have stepped down to honor his commitment.

In all of our discussions with Mr. Mclarty, "temporary" was never considered to be anything close to one year. In fact, Mr. Mclarty represented he would be solely focused on expediting the transition from longtime friend Toby Chandler to a new executive who was to be based in North America. This was to have occurred by 30 April 2022 and took until the events in June and July of 2022 to actually take place, while the North American requirement was completely flouted. This has been well documented on our website, and should Mr. Mclarty contest this, we would happy to view his emails under legal discovery to prove the point. We have already made our emails publicly available and have nothing to hide.

Anyone who has been paying attention knows that Mr. Mclarty laid the seeds for trying to stay on permanently back in June when he announced the shakeup of the Board and claimed to represent Australian investors. This announcement was made BEFORE Drake reached out in an attempt to get the Board to honor the binding agreement they made in October 2021

Mr. Love's proposed option grant directly aligns with long-term shareholder value

We do not contest that the appropriate use of options, performance stock awards and restricted stock CAN be in the best interests of shareholders as it helps align executives for the long term. However, Mr. Love's proposed option award is an absolutely terrible corruption of a Long-Term Incentive Plan (LTIP).

Having chaired compensation committees and spent years working through how best to align shareholders' interests with executives, Andrew Roberto could not have been more shocked at the nature of these awards to Mr. Love given the conversations that occurred in July and August between Drake, Mr. Mclarty and Mr. Love regarding how best to structure an LTIP for executives of the company based on actually achieving performance and service thresholds.

We also find it insulting to both other employees and good corporate governance that the new incentive program instituted for Mr. Trevor Lynch-Stuanton (as well as the deal for Mr. Rich Poutier) is structured in the manner Drake recommended all the way back in July, yet Mr. Love's deal has zero vesting requirements other than he remain employed through 13 July 2023.

Vesting of options isn't like the vesting of shares, and Mr. Love is not receiving $326,969 in value for his services this year

The company's counsel is partially correct in this manner, but only so far as Options are a different type of security than shares/CDIs. The biggest difference is that options have a different payoff structure, one that can be far more lucrative, especially when you do not have to pay an upfront cost for those options (as is the case for Mr. Love). Any assertion that we should not view options as similar to stock/CDIs is laughable.

As for the assertion that Mr. Love is not receiving the $326,969 in compensation this year, that number comes DIRECTLY from their own AGM proxy form and is the grant date fair value of the options that would be freely awarded to Mr. Love should Resolution 9 pass. If you are given something of $326,969 value for working at a company, does this not count as compensation?

Given the Black-Scholes model, which relies on European Style option exercise, to calculate the value, the additional optionality that comes with being fully vested and exercisable as of 13 July 2023 (that is not taken into account in the Black Scholes model), would actually mean that the $326,929 value is understated.

This is the first time in our careers we have ever seen a company's counsel attempt to claim that documents publicly filed by the company are "misleading" when the company-supplied number are used in appropriate context.

If Gadens is adamant that Mr. Love’s is not receiving $326,969 in option premium value for his services this fiscal year, we ask them to explain, in detail, to CDI holders how his option award would be accounted for in the company’s filings under IFRS.

2022 Proxy - RL Options.pdf

The option premium shouldn't count toward Mr. Love's compensation number

See prior response above.

Mr. Love is absolutely receiving (at least) $326,969 in option premium for his service, full stop. It does not matter if it is certain or not, what matters is that he is being given 1.5mm options for FREE and I would need to spend, per the company's own disclosure, $326,969 to buy the same set of options.

If the company is so convinced it is not of any value, I would happily buy the same strike prices and duration from the company for $326,969.

We note that the use of different annualized volatilities (σ) in calculating the value of options with the same expiry is an error on the part of the company, and one that is seemingly indicative of company’s attention to detail.

This option expense, while non-cash, is a very real expense to the company and will appear as a component of Employee Expenses on the Income Statement in the company’s official filings. Mistakes in calculating this leads to mistakes in the audited financials and ultimately the official company filings.

It would be against Mr. Love's interest to exercise his options unless the strike price is below the CDI price

We suggest company counsel work on reading comprehension for the statement they quote, as our letter proposed ONE scenario of many where the stock is trading above the strike prices of all his option tranches and validly pointed out that Mr. Love would be free to exercise his options and sell if he so chose. At no point did we say this was a certainty, nor did we say he would choose to do so, but the absence of any restrictions on his ability to exercise and sell is precisely the point we wanted to highlight.

Instead of company counsel making a good point for their client, they are actually only reiterating the issues with the proposed option grant. From the perspective of EARNING the award, it is far too-short term in nature to be aligned with the LONG-TERM value that would come by creating a SUSTAINABLY PROFITABLE CVM BUSINESS.

This company has a history of aggressive promises that led to stock price spikes. Those spikes coincided with many other investors entering into their SMS positions while Mr. Chandler was liquidating his position. Structural Monitoring Systems future relies on the commercialization of CVM and the ongoing profitability at AEM, but for too long those have been used as a way to sell the stock. SMS's product needs to be CVM/AEM and NOT the stock, and creating an LTIP incentive structure that only rewards Mr. Love for the stock price going up in NOT appropriate, as it can easily collapse if the foundation of the business isn't strong.

We are flabbergasted that this is controversial. LTIPs with appropriate vesting targets are standard across the globe. The absence of these types of targets for Mr. Love is astounding because the company is finally, at Drake's behest, instituting these types of LTIP thresholds for employees not name "Love."

The statement that Mr. Love's true fiscal 2023 compensation is $651,969 is wrong.

There is no way to calculate Mr. Love's compensation for 2023 as no one will know what the share price will be

The company's own documents show he is getting $325,000 in base salary, some level of pension and $326,969 of option premium for 2023. What a wild accusation to make, as last I checked $325,000 + Pension + $326,969 of option value was equal to at least $651,969 of value.

Company counsel does bring up a great point about the fact that the end number is unknowable, but that means it can also be much higher than his company reported total for 2023. We make no prognostications on where the CDI price may be over the next few years, but if Resolution 9 is adopted, Mr. Love will be granted 1.5mm 3 year options that have no further performance-based vesting requirements, and be free to exercise and sell 100% of them as of 13 July 2023 if he sees fit.

Additionally, Gadens is somehow seemingly unaware that companies file Annual Reports that lay out the total compensation in a given year, and this very much includes the value of share-based compensation. I would refer Gadens to page 15 of the 2022 fiscal year annual report that clearly lays out the "Remuneration of Directors and Executive Officers."

We will not be badgered because the inconvenient truth of the situation has come to light.

2022 Annual Report - Compensation.pdf

It would be against Mr. Love's financial interest to exercise his right to buy 100% of shares unless the price is above the strike price for all 3 tranches

Whether it is in his financial interest or not, the scenario we laid out is not only plausible, but need only involve hitting the 52-week high.

A LTIP for the Executive Chairman that is focused SOLELY on share price appreciation and has no operating performance metric thresholds is wholly inappropriate for Structural Monitoring Systems. This company has a demonstrated record of temporary share price appreciation that, if repeated, could reward Mr. Love with extremely generous total proceeds without any underlying operating performance metric achievement.

To be clear, we do not think Mr. Love would be undeserving of compensation should he lead the company toward sustainable profitability, we just ask that he restructure his contract in a manner similar to that which he has instituted for Mr. Lynch-Staunton and Mr. Poutier. Is it not hypocritical to do anything less?

Even if investors believe that Mr. Love is the right person to lead the company at this particular moment, the structure of his compensation plan only underscores why investors are far better served with a Board that has real experience dealing with these types of alignment issues. The current Board clearly does not have that experience, and we believe Andrew Roberto and Heinrich Loechteken would do a far better job in protecting shareholders for the long-term.

Mr. Love's compensation package is commensurate with normal market practice for Chairs of similar listed companies in Australia

While it may be the case that this grant would be commensurate with "normal market practice," it is completely inappropriate for Structural Monitoring Systems given the history of the company.

For Structural Monitoring Systems to graduate beyond being a "lifestyle" company for Directors, we must hold ourselves to a much higher standard than micro-cap Australian listed entities. This is a UK company that aspires to change the aerospace and industrial structural health monitoring paradigm and falling back to "this is how we've always done it" is more of an indictment on the current board than it is an endorsement for the future. Enough is enough.

Australia, per State Street Global Advisors, tends to be a laggard in global corporate governance best practices. There is no reason we need cling to those antiquated structures.

MEMKO Pty Ltd has not received any payments from SMS

At no point in Andrew's conversation with Mr. Love did this come up. Mr. Miro Miletic and MEMKO Pty Ltd were represented as "having done consulting work for Structural Monitoring Systems" and that they may "continue to do work for Structural Monitoring Systems."

We ask the company to make public the contract under which MEMKO Pty Ltd has done work for Structural Monitoring Systems, disclose any work Mr. Miletic and/or MEMKO has done on behalf of the company since he was engaged, and disclose any other activities he may have participated in on behalf of Structural Monitoring Systems. While it may be true that SMS has not yet paid MEMKO, have there been promises to MEMKO for compensation in the future for work performed in the past? Would this be in the form of cash compensation or shares?

To be clear, we are NOT against bringing in proper consultants to help where needed, but we do tend to pay our consultants for their time and labor. A situation where a consultant has been brought in under no expectation of payment (either cash, shares or otherwise) is surprising to say the least, and CDI holders deserve clarification of this matter.

There is no conflict of interest as Mr. Miletic is not currently a director

We agree that Mr. Miletic does not have a conflict of interest in relation to his current role at MEMKO Pty Ltd, and no claim was made otherwise.

There is a CLEAR conflict of interest at Structural Monitoring Systems if MEMKO has done consulting work for SMS with Mr. Miletic and is running for Director without any disclosure from the company of prior work. Even IF MEMKO did the work for free and had no future expectation of any sort of compensation, Mr. Miletic's position at MEMKO and the free work they may (or may not have) done for Structural Monitoring Systems may well have proven to be a quid-pro-quo. The relationship SHOULD have been disclosed, especially since Mr. Love said to Andrew that MEMKO would continue to act as a consultant to SMS in the future.

We should be clear, Mr. Miletic and MEMKO Pty Ltd may well be a great choice for the consulting work, and Mr. Miletic may otherwise be a good choice for an INDEPENDENT director of Structural Monitoring Systems. The two, taken together, make it a troublesome scenario that has had zero disclosure and is rife with POTENTIAL conflicts of interest that have no place at Structural Monitoring Systems.

This is just another example of how important it is for Board member to have no conflicts of interest. There is no way for Mr. Miletic to be an independent director for SMS if Mr. Love is handing him consulting contracts.

The company only received a valid request for the share register on 30 September 2022

We have consistently requested the registry from as early as July. When the company announced the 5 September EGM requisition was valid, Andrew immediately reached out to Sam Wright and Mr. Love requesting the instruction on how to obtain the share registry. Neither responded.

You believe you have been complying with the letter of the law, but it is clear to any impartial observer you are not complying with the spirit of the law. What has gone on since July is nothing short of a corporate governance travesty, and we reiterate our assertion that we have been fighting for access to the company's registry since July.

The information provided in CSV file for the registry was the absolute bare minimum that didn't include any contact information beyond mailing address. It is the year 2022 and digital contact information should readily available.

Does the Board of Directors believe it is good corporate governance to deny the share registry to substantial shareholders?

The company provided the registry within 7 days of 30 September as per its obligations

We must have a very different version of what "providing" means. I received an unreadable CD rom disc in the post on 17 October after being told a USB drive was on its way.

In the year 2022 it is ridiculous that the company would not provide the registry in a usable electronic form in a timely manner. We finally did receive an electronic version on 18 October, but that took the threat of lawsuits to receive.

Thomson Geer Letter Dated 26 October

Thomson Geer Response.pdf

Gadens Letter Dated 25 October

Gadens Letter.pdf