Let's see how the following goes for discussion... There were a few key clues in disclosures during the year and here is one item from the many we are looking at for SPX.
In the Limepay (LP) acquisition announcement on 16/7, there were four tranches of shares as consideration for the deal, with conditions on each. We subsequently learned (on 20/9) that T1 and T2 conditions were met and thus shares issued into escrow. T3 and T4 are subject to some pretty hefty revenue targets and have not yet been issued. In fact when they are issued, they are at a large premium to the current SP.
Here at Swap & Co, we've been on both sides of these types of deal in the past and feel reasonably confident the former LP shareholders wouldn't have entered into this agreement unless they had some confidence T1 to T4 were achievable (and worth the escrow periods) and that the SP premium when the deal was done made sense. Otherwise the company was practically worthless. LP shareholders are issued T3 shares at 1.75c per share and T4 shares at 2.25c per share. Current SP is 1c per share. In summary, T3 requires $4.8m ARR ($1.2m rev per quarter) and T4 $7.2m ARR ($1.8m rev per quarter). If T4 is achieved, it will almost double SPX revenue alone and LP SH are betting that this will be worth 2.25c per share by then.
Back to 16/7 and it's reported LP have already generated $2.8m in the last year ($700k per quarter) and had a, "strong pipeline of new customer acquisitions". LP feels to us here at Swap & Co like a business that has run out of puff (and possibly cash) just as it is ramping and needed to find a new home to finish the job. This is not uncommon in start ups. SPX were ready and could use equity instead of cash to do the deal.
Now, we don't get any details on who is in the LP pipeline or timing, except for on 19/8 an announcement about Lessn.
But first, some maths... we know from 16/7 that LP generated $644k rev on $40m of payments volume, giving a gross margin of 1.66%. A quick glance at comps shows that level of margin in payments is huge and may signal some uniqueness or competitive advantage in the LP product suite. It feels like LP aren't a pure-play payment transaction shop.
Now back to the Lessn deal, which on 19/8 we found out will grow payment volumes by 40% but also rev by 40%, hence Lessn was probably done at or around the same margin as the rest of the 200 merchants (as disclosed 16/7) in the LP business. Margin preservation for such a large deal? On annual PV of $50m, that's $830k ARR alone from a single new merchant.
Who else is in the pipeline, that the LP shareholders were prepared to take hefty consideration conditions for? Even with Lessn, they need another $4m ARR for T3 and $6.4m ARR for T4. Will the margin be preseved for these as well?
Will this impact the Q2 4C much? Maybe not this quarter as on 31/10 we were told Lessn implementation was 'imminent' so there's a max of 2 months rev in there for Q2, probably less.
Given the structure of the LP acquistion, we should expect to see more announcements re the LP pipeline in coming months. If these aren't forthcoming, it will be a red flag. But if they are, they could give a material lift to the overall SPX business.
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