RE:R & D and purchaseWith regards to creation of Photon R&D, I suspect spinning out R&D to a private company was a decent factor to this at the time since the company was doing quite poorly in terms of financial shape. Spinning out R&D expenses to a private company would mean they get a significantly higher scientific research and development (SR&ED) tax credit for each dollar of R&D spending. It also means that these SR&ED tax credits would be refundable (the company would get the cash back even if the company isn't profitable) instead of non-refundable (can only use against taxes payable at the end of the year - useless when the company is losing money and needs cash now). I'm sure there were other business reasons as well, but just based on tax reasons, it seems like it would be worth it based on the financial position the company was in at the time.
Regarding the cash balance, just remember that it has been built up fairly recently (2015 - $26 mil, 2014 - $14mil, 2013 - $4mil). I would prefer that they hold onto the cash and be very selective in any acquisitions rather than just spending money on the 1st company they can just because they have some cash. I'd much rather have cash on the balance sheet then lose money on an acquisition and have large write-offs in a couple years on the investment.
bobsnot wrote:
Hi all,
Long time share holder and follower of this blog, but I have only posted once previously.
I wanted to add my thoughts on a few issues:
Photon Control R&D Ltd:
Way back in 2nd quarter 2008 the company was losing money and was running out of cash. The share price was in the $.01 range. It looked to me like PHO would not survive. I believe it was around this time that I noticed the farming out of R & D to Photon Control R&D Ltd. This looked to me like a way to save all of pho skills in case of bankruptcy. That way a new company could be formed and start over with PHO technology if the company did go under.
Note this clause in 2015 financials. A similar clause has been in every financial statement for years:
During 2009, the Company finalized and amended the terms of its agreement to transfer its R&D workforce to Photon Control R&D Ltd. Under the finalized terms, Photon Control R&D Ltd. issued a $315,000 promissory note to the Company as consideration for the transfer. The promissory note bears a coupon rate of 3% per annum, is repayable in equal monthly instalments of $3,089 beginning April 1, 2010 and matures March 1, 2020.
The promissory note receivable is being accreted up to its face value of $315,000 by the effective interest method and as at December 31, 2015, $42,191 (2014 - $31,436) to date in accretion was recognized in interest income.
In other words a company was set up to supply services to PHO. As long as PHO survives then this new company would have guaranteed work and profit and thus could pay off the promissory note. i.e. no cost for guaranteed business. If PHO goes under then $315,000 to essentially buy-out PHO technology. Note I think that pho has trade secrets not so much patents. As such if pho is gone then there is no-one around to sue Photon Control R&D Ltd for breach of trade secrets if they use the technology.
This relationship has always bothered me but as PHO was making money and I did not see anything directly funny going on I have said nothing.
Potential sale of company:
The build-up of cash has been bothersome to me as well. Why do this? Why not put it to use or give it back to investors?
I believe that PHO is majority owned by insiders. If you did something useful with the cash then the price of PHO would go up and if the insiders wanted to buy-out the company you would not want that to happen would you. Also if you build up the cash you could go the bank and say my consortium would like to buy-out this company We need you to lend us 30 million to do so. Of course the banker would say -What is my security? To which the consortium of insiders would say The company has 30 million in cash. That is your guarantee.
I hope I am wrong on both of these accounts. I hope you folks can convince me that I am an idiot for thinking this way. Please prove me wrong.