Hi @riccie @JamesH
Not looked at SPSY before. I always look at possible downsides first
From the recent results:
“Our long relationship with a major world central bank continues to drive the introduction of more advanced products and an increasingly steady stream of hardware sales. We have received significant funding from this customer to develop a new generation of sensors with manufacturing anticipated to begin in 2024. In addition, we have received development funding for the detection of “exotic counterfeits” from this same customer. While the number of sensors to be ordered is not yet specified, the sale of sensors is expected to result in $34MM-$42MM of revenue, depending on whether or not the newly developed “exotic counterfeit” detection capability is requested. In addition, we will have received between $7.5MM-$8.8MM of development funding from the central bank over the period from 2019-2023.”
I get the impression SPSY’s revenue is dependent on large contracts with a handful of customers. The 2019 annual report said two customers supported 52% of revenue. Not ideal generally. But the “long relationship with a major world central bank” does suggest customers tend to stick around.
Development funding is interesting. Such funding is recognised as revenue “over time as the services are performed” and I am not clear what happens to that funding if SPSY does not have a ready product at the end of the development phase.
The 2019 annual report says one customer agreed to pay $10.5m over five years from 2018 for a technology licence that extends the right of use “into perpetuity”. So after 2023, perhaps $2m or so of revenue could be lost following this deal’s expiry. Presumably this royalty revenue has low/no associated costs, so the expiry may have an amplified impact on profit.
I am not sure whether this royalty customer is the bank-note printer mentioned in the latest results below:
“We sell covert materials directly to one major world central bank and indirectly to 19 other central banks through our supply and licensing agreements with a major banknote supplier and printer which pays a licence royalty for the exclusive rights to our technology.”
The related-party transaction is not ideal:
“On December 10, 2020, the Company increased its equity interest in Solaris BioSciences (Solaris) from 4.79% to 48.65% on an as converted basis for total consideration of $702,000 consisting of $294,058 cash, the issuance of 126,252 shares of the Company’s common stock valued at $305,942, the commitment to provide $100,000 of research and administration services at cost to Solaris over the ensuing 24 months and the conversion of a $2,000 receivable due from Solaris. In addition, the Company will provide nominal accounting support to Solaris and allow Solaris use of optical table space and facilities at Spectra”.
Shareholders could ask how the chief exec i) arrived at a fair value for this transaction, and ii) spends his time between SPSY and his side projects.
The annual report reveals SPSY buying “certain assets” from Solaris during 2015 for $213k. SPSY has been set to pay Solaris 10% of any revenue derived from the assets, and $4k was paid during 2017 but nothing was paid during 2016, 2018 and 2019. SPSY’s arrangement with Solaris was seemingly unfavourable on that occasion.
(PS I will hive off all the SPSY comments into a separate topic if they start to dominate this topic)