The next focusIR Investor Webinar takes places on 14th May with guest speakers from Blue Whale Growth Fund, Taseko Mines, Kavango Resources and CQS Natural Resources fund. Please register here.
This is a very well constructive deal - the CLN note conversion price is set at todays sp, so any drop into the raise will cost the CLN note provider too, but they will not be the only participant (or even guaranteed to participate), so it’s in their interest for the wider raise to be done on similar terms to the CLN. Clever
Tintook, how are you expecting them to do a painful placing to get the short-term finance they need by the end of Feb (which is tomorrow), when they can only issue 10% of the current issued share capital without an EGM (which would take weeks)?
10% equates to 8.75m shares, so let's assume they do that at a huge 35% discount to today's SP of 9p, that would be 5.85p and would raise about £0.5m, which would be helpful, but I suspect they will probably need a few million, not £500k, hence why loan finance looks more likely to me.
Even if you're right and they propose some kind of placing that doubles the shares in issue, diluting everyone by e.g. 50%, the raising of the capital removes all of the negatives and leaves a well financed business with a huge and growing pipeline, with market leading capabilities in a market that's red hot right now. So the finance will take the anchor off the SP and it will head north back towards where it was before, less the dilution. Maybe not all in one go, but the slightest whiff of Neuralink at that point and we're off to the races.
…. and of course another major contract win and four new orders from existing customers shows the confidence that those customers have in Sondrel - no company signs a deal of that size without doing their due diligence on the finances.
What a fantastic RNS - really positive and really clear. My reading of the update on the capital position is that most of the requirements can be met from the supplier negotiations, but they will need a small amount in the very short term to see them through.
To point out the obvious, the end of Feb is only two days away, so we will likely know about the terms of the finance within about a week.
They clearly don’t have time to do a placing requiring an EGM or a rights issue by the end of Feb, so while that may form part of a wider package, that means they can only use their existing authority to issue new shares in the immediate term - if that’s the standard 10%, then that’s only about £1m and 10% dilution. That doesn’t sound like quite enough for me, so I think that means that it’s loan finance and not a placing, perhaps with a convertible?
Going to be an interesting week.
The thing is, it will be too late to get in when the finance is sorted - because this is an established business with an already strong revenue pipeline of $170m from existing production contracts. The new US deals they are on the brink of signing will likely push that pipeline towards $250m and could quite easily go much further and double it.
SND is currently valued at a fraction of its future earnings because of the short-term finance issue. The SP was 60p not long ago, which was a fair reflection of that $170m pipeline. But then the working capital got tight and the SP collapsed. Any sniff of the short-term finance issue being sorted and the SP is going to rocket instantly, back to its previous level, less any dilution.
So, worst case, lets say they do a placing at 9.5p (a 25% discount to the current SP) - and let's say they raise £5m, which would be an additional 62.5m shares. That equates to 38% dilution - do the maths, a 38% dilution against the previous SP of 60p puts the SP back up to 37.2p, which is still three times the current SP and that's before any new contracts are factored in. And that's assuming they do a placing - what if they raise via loan finance or an advance from one of their suppliers (including from a new supplier - e.g. an up front payment for reduced long-term, production costs)? In that scenario, there's no dilution, so straight back to 60p, plus any upside from the new contract.
My point is that there could very well be no time to get in when the news lands - if the news resolves the finance position, the re-rate will be instantaneous, as soon as the market opens.
The presentation Sondrel published on Investor Meet Company on 1st Nov 2022 (first presentation following the IPO) is really informative. A couple of nuggets that I took from it:
The transition from being a pure design consultancy to also taking the chips through to prototyping and production has a massive impact on their revenue generation. The design phase is by far the most resource intensive, so that basically constrained them to having only three revenue generating projects at any point in time. The prototype and production phases require a fraction of the resources, but provide ongoing revenues for up to 10 years beyond the design phase. And they are at the point right now where their first projects are transitioning into the prototype and production phases, which means that their resources can then move onto the next opportunities.
The above change in business model has a huge impact on revenue per head - it will move them from around $80,000 per head today towards what their competitors (who already have the wider business model) achieve, which is more like $600,000 per head. That’s a huge shift in the numbers and it will drive exponential growth in revenues (which has been pretty good anyway, at 20% CAGR).
The three main competitors are GUC, Socionext and Alchip, which each have a market cap of between $2Bn and $6Bn and are all based in the far east. Sondrell now has the same core capabilities as all of them, plus some unique capabilities that the others don’t have.
Once the working capital is sorted, this is going to be huge.
Interesting background Skittish. A rights issue on that scale would be a bold move, but there would be sound logic to it. Let’s say they went for £5m at 12p a share. That would mean increasing the shares in issue by about 50%. If that were an ordinary placing, it would reduce the sp by a third, but in Sondrel’s case, it would remove the problem that had caused the drop from 60p, so the bull case would be a return to that level, less a third, so a sp of 40p.
I reckon most people would find that an attractive offer - invest half of what you already have invested and see your whole investment, including the new funds, more than treble. Looking at all of that gain as a return on just the new money, that would be a whopping 8 fold return on the additional investment.
Or, of course, they could raise loan finance, or get help from a strategic supplier in which case the problem is sorted without any dilution
Just for balance, it's worth re-reading what the company said in the RNS issued 31st August (less than six months ago), ahead of the interims in September.
"Sondrel (AIM: SND), the fabless semiconductor business providing turnkey services in the design and delivery of 'application specific integrated circuits' ("ASICs") and 'system on chips' ("SoCs") for leading global technology brands, provides a further update on trading ahead of the publication of the Company's interim results for the six months ended 30 June 2023 ("H1 2023") on 21 September 2023.
During H1 2023 and immediately post period end, the Company continued to deliver live ASIC projects in line with its expectations and, as announced by Sondrel on 3 July 2023, the Company successfully completed the second key milestone in respect of the material turnkey ASIC engagement for a Tier 1 OEM Automotive customer - with corresponding milestone payments received by the Group from the customer. As stated at the time of the Company's IPO, Sondrel expects typical production volumes for each contract to deliver revenue of £10m to £100m per annum and the contract with the Tier 1 OEM Automotive customer could deliver production revenue at the upper end of this range.
As a result, the Company now expects to report H1 2023 unaudited revenues of £9.3m, a 17% increase over the corresponding H1 2022 period (H1 2022: £8.0m) and adjusted EBITDA of £0.4m (H1 2022: £0.1m).
Since the FY22 year end, the Group has been pleased by the continued positive momentum in the US sales pipeline following the Company's ongoing investment in the region, with significant traction in the US market for Sondrel's proposition, the establishment of an office in Santa Clara, California, and the hiring of a team of experienced sales and engineering personnel in the US. The US sales pipeline now includes more than 15 potential customers, with the opportunities now under evaluation representing design and prototype revenues exceeding $100m over 2 years (excluding potential production related revenues). The Company cautions that the opportunities in the US sales pipeline remain uncontracted at this stage.
Furthermore, customer production volume forecasts for the Group's live ASIC projects in Europe have increased by an aggregate of 78%, from US$95m to US$170m. This, together with the progress made in the US, provides the Company with confidence for FY24 and beyond."
Those are big numbers - the European numbers are from LIVE projects, so that is $170m in CONTRACTED production revenues. Plus the US pipeline of opportunities which represents a further $100m over two years, just for the design and prototype phase i.e. it does not include subsequent production revenues. And we know that more than one of these is in the final stage of negotiations.
This is not a typical AIM start-up - the reason they need to raise funds for short-term working capital requirements is to pay for all the work that will gene
I have to say that I though that today's RNS was an example of a company communicating really well. So often in a situation like today the company uses bland words "we know of no reason......." that completely smother any rise in SP, but this RNS was clear, confident and bullish about the company's future. The "About Sondrel" text below the main message in the RNS should also give investors huge confidence in the capabilities of the business and the market's respect for their products.
Just look at their customer base:
"Sondrel designs have enabled products by leading technology brands including Apple (iPhone), Sony (PlayStation), Meta's (Oculus), Samsung, Google and Sony smartphones, JVC (prosumer camcorders), Tesla and Mercedes-Benz cars.
.........and their partners:
Sondrel is well-established, with a 20-year track record of successful delivery, supported by long standing ecosystem partnerships including Arm, TSMC and Samsung. Headquartered in the UK, Sondrel has a global presence with offices in UK, USA, China, India and Morocco.
The thing that people are missing with Sondrell is how just well established they are in their market. Even after today's meteoric rise, they are trading with a market cap well under 1 year's revenue and they have virtually no borrowing. The company seem very bullish about their current contract negotiations (plural), which are in the final stages of negotiation, so the next news could literally drop anytime - and who knows how the next deal will be structured?
Today really could be just the start of an exciting few weeks.
The company have NOT said that they need a placing, they have said that they will need a permanent solution to their working capital requirements. We don’t yet know what form that will take, but it could be through a variety of means, including loan finance, up front payment from new orders, sale of assets or placing new shares (including to a strategic investor).
Very importantly, any capital raising is purely needed for short-term working capital requirements (i.e. likely a few £million at most), it is not needed to provide development finance, like so many non-revenue generating AIM companies need when they raise money.
SND are very well established with highly sought after niche expertise in a huge market. They have solid revenues and a strong (growing) pipeline. Whatever route they choose, it will likely be very positive for the sp, which is heavily discounted because of the uncertainty. This was trading above 60p six months ago, so major upside once the short term finance is sorted.
The following paragraph from the year end trading update is all that really matter here:
Destiny's priority remains to realise the maximum value for our XF-73 Nasal asset, given the substantial market potential of this product for Destiny Pharma and the significant potential benefits it presents for both patients and health systems. The Company is evaluating all options to achieve this, including continuing discussions with a number of potential partners, with a view to delivering the best deal to maximise shareholder value. We will provide a further update in due course.
……and when they say substantial market opportunity, they mean $2Bn annual opportunity, just for this product. The other products will likely be just as exciting in time, but are currently rather less advanced compared to XF-73, which appears to put Destiny right at the centre of a paradigm shift in the fight against post-operative infections, including the resistant strains that have become one of the most significant threats to modern medicine.
Bacterial resistance poses an existential threat to all surgical procedures and in XF-73 Destiny appears to have something that the world has been seeking for three decades. All the rest is largely noise at this point
The wording is interesting - at face value this is simply a reassuring ‘holding’ message - nothing has changed and discussions ongoing.
However, the repeated reference to maximising shareholder value and also to evaluating all options, including ongoing discussions with potential partners, and the strong funding position suggests to me that this message is primarily directed at those interested parties i.e. we have an incredible opportunity here and we are well funded to deliver it - if you’re interested, you need to be making us a serious offer soon, or we’ll take the opportunity forward with someone else.
Agree it’s not a huge order, but the impressive thing is the acceleration in the rate of rollout. The first 10,000 took 14 months; the next 10,000 will take 4 months, so they are planning to deploy at 3 to 4 times the rate achieved to date. At that rate, thats’s 30,000 units annually (and probably more, as likely to accelerate further), which adds significantly to the recurring revenue stream.
The talk of preparations for the two week dosing regimen sparked a germ of realisation in me that I hadn't thought about previously, but which I think may explain why the next phase of the trial is so important.
I had (naively) thought that it was simply about navigating a course to finding the recommended dose for phase 2 as quickly as possible, within study parameters that would be likely to also give indications of even greater efficacy (because it is widely known that more frequent dosing leads to improved efficacy). However, I asked myself why more frequent dosing would be more efficacious and whether there might be more to it than simply being able to dose more chemo over the same timescale - and I think there is, much more to it.
Why? Because the third week in the current three week regimen must be the period when the patient is recovering the most from the toxicity of the dose they received two weeks earlier - it's effectively a week long detox period where the patient has the least Dox in them and they can build up their strength for the next round. But, of course, that must also mean that it's a period when the tumour will likely be growing, rather than shrinking. Put simply, it's literally two steps forward and then one step back.
Compare that with the two weekly dosing regimen, which is two steps forward and then two steps forward again, and again, and again. The compound effect of that on the relative mass of the tumour at the end of the 16 weeks must be huge, as it never gets a chance to grow, you just hit it again and again and again. In my simple analogy, after six three-week cycles, you would have taken twelve steps forward and six back (so six steps forward in total). With a two week cycle, you would take 16 or 18 steps forward and none back over the same timeframe.
Of course, in the real world, it's much more complicated than this, but the logic feels right - in fact, I suspect that the effects will be compound rather than simply additive, because it's all about % growth and shrinkage in tumour, so the first dose reduces the tumour size by x% and the second dose a further x% etc. Do the maths on that for two weeks of shrinkage followed by a week of growth versus continued shrinkage every two weeks (with no growth in between) and after 16 weeks the results are an order of magnitude apart. AND with AVA6000, you can keep going after the first 16 weeks for another 16 weeks, and then another and then another.
Does anyone know enough about the science to confirm or correct the above hypothesis?
Notwithstanding the somewhat muted response to the data so far (that’s often been the case with Avacta BTW - especially on days where AS is presenting later in the day), the data is incredibly exciting.
I see three distinct value drivers for Avacta that will drive value for shareholders in both the near and medium term:
1. Even with no greater efficacy than straight Dox, it’s clear that precision has the potential to completely displace all Dox (and other chemotherapy agents) where heightened FAP is a feature of the tumour. Chemo without side effects is a massive opportunity in its own right, but is being completely overlooked in the hunger for efficacy signals (which we are also seeing, but which represent a further opportunity). We don’t need greater efficacy for precision to be a game changer for chemo - this opportunity is now proven and will be huge.
2. The exquisite targeting of the prodrugs against the tumour and not healthy tissue (at ratios of 100:1 at the higher concentration levels) open up a vastly broader range of treatment regimens (dose, frequency and overall exposure) which we have every reason to now believe will lead to a huge shift in clinical efficacy, once we find the right mix for each tumour type. This is huge too and will effectively act as a multiplier of the value from 1 above.
3. The opportunity to use entirely novel super-toxins that you wouldn’t put anywhere near a human being at the moment because the systemic exposure would kill them. This has been completely overlooked by the market to date, but I suspect this is the area where we might actually see precision offering a cure for cancer - a warhead so powerful that it completely destroys all cancer cells, but it’s just been waiting for a safe mechanism of delivery. Well the wait is categorically over now and I think, amongst commercial deals for progressing 1 and 2 above, we will see an early deal looking to trial something in this category, which is hugely exciting.
Regardless of what the sp is doing, Avacta’s time is here and the world will understand what they have as soon as the deals start coming in, which I think will be very soon indeed.
Never seen an RNS like this before - reference to placing lacks clarity - it looks like an off market transfer between major holders, with no new shares issued and therefore no dilution, but the use of the word placing makes it sound like something different. Surely if new shares had been issued , they would also have to update the TVR etc.?
I can see why a major holder selling all their shares at a significant discount might spook the market, but there could be any number of technical reasons why they have done this. Will be interesting to see who has bought the shares and whether there are other pieces of the jigsaw that emerge in the coming days.
I agree that we remain open to a better offer until the formal vote goes through. In practical terms, however, if and when that comes, the earlier it happens the better. Many years ago, I held shares in Raymarine - they were in a similar position to YGEN and subject to a low takeover offer as part of a pre-pack administration deal. A better offer emerged, but the BOD then hurriedly took the business into the pre-pack administration, effectively blocking the higher offer (which from memory was about 50% higher). The explanation they gave was that there was no guarantee that the higher offer could be completed in time, therefore it was in everybody's interests to simply proceed with the original offer. The BOD's actions created a stink amongst shareholders (and the new suitor), who lost out on a significantly better deal, but there was nothing the shareholders could do, as the BODs judgement prevailed. I suspect the same would happen here if another offer surfaced late on in the proceedings - the BOD would simply say "a bird in the hand" etc.
There's also the second possibility that a group of the largest YGEN shareholders are able to demonstrate that they hold more than 25% of the company and they are open to accepting an offer, but it needs to be higher than 0.52p /share. In that scenario, if the group said they'd fully commit to a better offer at e.g. 1.5p / share (maybe making irrevocable undertakings), would NCYT want to take the risk of taking 0.52p to the vote and possibly missing out, or would they stump up the money to secure the deal, on the basis that even an extra 1p on the deal is only about a year's worth of YGEN's likely revenues?
I suspect that YGEN's revenues are now growing very nicely indeed, so I'm sure that NCYT wouldn't want anything to delay the deal past the date of the interims, when the BOD will be obliged to set that out for the whole market to see. The clock's ticking for NCYT as well as YGEN.