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Tillerman, nice post. Are the XF-73 negotiations are taking so long? When you think about it this is a major investment decision for big pharma. Blue chip companies are rigorous in their investment decisions. A big issue for Destiny is the up front payment for any deal.
For M3 Sabela committed to $20m with only $1m paid up-front. That is the problem. JV companies may be looking for a similar deal that is not up for grabs now, IMO. That’s why we have Nigel Rudd and Chris Tovey in place. The new Destiny team will want something substantial.
For the up-front payment I’d be looking for around $40m, perhaps half of what has been spent on developing M3. The trouble is M3 has set a precedent that new management will want to kick out of the ballpark.
Skid35/Brondby
I would like to think you are right about the issue being a relic from the past. But as you say more clarity would have helped to close down this risk. The fact is whatever the historical origin it would have been sensible and good business practise to have recovered these rights.
The risk is that either counterparty allows the source code to find its way into a competitors hands. ACRM claims to have the USP of their software is that its an all in one software package. Loss of this USP would be very unfortunate.
It would be very useful to know who are the counterparties. In the admission document it states:
"Were this counterparty to have the right to sell or to publish all of the STREAM® software as open source and exercise such right then the publishing of the source code of the software as open source would be likely to devalue the STREAM® software to a significant extent, which in turn would be likely to have a material adverse effect on the value of ARM."
The other risk is that if the source code is published or made available, could this benefit those who seek to engage in cyber attacks or in some way circumvent a company's IT security?
Acuity appears to have a good product STREAM in a competitive market. This offers risk management in one package and is said by management to be their USP. Good.
But why have Acuity given counterparties the ability to copy and sell the STREAM product as set out in their admission document? Now I may have missed something. I will be the first to admit that. Perhaps they have subsequently reached agreement with those counterparties to buy back these rights. But I haven't seen any announcement. This raises questions as to why these rights were sold (or given) in the first place). Who signed off these transactions? Are these people still part of management? Are any actions being taken to recover or buy back these rights? If not, why not?
The document gives reasons as to why management thinks counterparties will not use these rights. In the second counterparty case, the contract is not clear whether the right relates to software developed specifically for the project or to all of the STREAM software licensed to the counterparty. The document says "Were this counterparty to have the right to sell or to publish all of the STREAM® software as open source and exercise such right then the publishing of the source code of the software as open source would be likely to devalue the STREAM® software to a significant extent, which in turn would be likely to have a material adverse effect on the value of ARM." This is awful.
We have just had the Sunday Roast commenting on Acuity and Alan Green. Good news? Neither of the two commented on Acuity's own risk so it begs the question how thorough were they in researching the company? Not good!
Had the admission document not happened then these risks would not have surfaced. They do not appear to be published elsewhere.
Now the company may develop good sales from STREAM. But if I were a prospective customer I would be asking why have Acuity not managed their own risks more professionally? Then they would ask if STREAM has been developed up to the highest professional standards. I assume it has but the question remains.
FROM THE ADMISSION DOCUMENT - RISKS RELATING TO THE GROUP’S BUSINESS
Risks of publication of ARM’s intellectual property as open source. ARM has contractual relationships with two counterparties under which it has licensed its intellectual property, particularly the STREAM® software.
One counterparty is not prohibited from reselling or decompiling or reverse engineering the licensed software. The other counterparty has the right (but not the obligation) to publish as an open source certain licensed software (including the source code).
Agree, a share and part loan would be ideal. But I think they cannot wait 6 to 9 months. The trouble is that such loans often carry 12% or so interest and are accompanied by share warrants. That's tough. Also, the market knows funds are needed and the investors demand their pound of flesh and drive the price down at which they are prepared to invest.
I think the new CEO is good and he has a good business background. The only problem is the shortage of cash and it is hard to see how much cash they will need until cash flow breakeven. When will cash flow breakeven come? I wish I knew but I doubt it will be by 30.6.2025.
Not sure its forced sales or need for cash that's causing sales. JohnHenry says it may be large holders dumping stock. This maybe right.
The background is that the market cap is £13m, cash was $9.9m at 30.6.23 and probably now arounf $6/7m, the annual cash burn rate was $14m annually and that cash is expected to last until 30.6.2024. I expect the cash burn rate to be reduced as FDA is there and its necessary. The company knows it needs a fund raise and in the next months.
IMO the company needs at least $10m (£8m) to take it tho=rough to 30.6.25. Is that enough? If it's all equity then the dilution fir existing shareholders is big.
I am always looking for risks and downsides in shares. Having known Destiny for some time now, the main risks appear to be Phase 3 trials and normal operating risks. So I wanted to look at the other side of the coin.
The broker Finncap produced research last Feb after the Sabela deal showing a risk adjusted DCF valuation of £338m with a 10% discount factor. This gives M3 a 50% probability of success and 25% for XF-73. If XF-73 enters Phase 3 development this would improve the discount to 50% adding £107m to the valuation producing £445m.
All this translates into share prices of 354p and 466p. But a caveat; these values are based on a 10% discount rate and a rate of 15% produces 275p and 351p per share. If inflation does return the the 2% target then a 10% discount factor should be ample.
Apeirogon, I agree with you about no cash and funding won't be a problem. They say they have enough cash to last until end Q2 2024, now extended to end Q3 2024.
The issue is that they do need funds and cannot leave it until the last moment. With any company needing funds the market will screw the price down as low as possible. The longer they leave the fund raise the more they are at risk to unforeseen events and the greater pressure the market can exert on the share price for the fund raise. This is what the market always does. Also, banking with Silicon Valley Bank hasn't done their financial credibility much good in my eyes, although they appear to have come unharmed from it.
The change in CEO is significant and good I think. Otherwise I have always liked to technology and it's potential.
Noix, thanks for the link. I must look up how much Destiny have spent to date in developing XF-73 as this is likely to be a negotiating point for an upfront payment from any potential partner. I think all parties will expect the partner to reimburse, Destiny for this spending, in part or in full. Now that Destiny has a strong balance sheet, the partner will not have the leverage that Sabela had. We are in the run up to Xmas when business normally slows down. So perhaps news will now come in 2024.
Penstock, thank you for poting your BC model.