Yeah it's not the best interest rate.

There are also some covenants that also make this debt deal poorer.

So a 7.5M limit, but they need to keep 3.75m in cash.

Curious what other posters think it says about the relative strength of the product and the pricing power of EVS that they are having to go and borrow money at 12% to arrange in effect a hire purchase. Their customers are very large, well resourced companies, it doesn't feel like they'd struggle to cop the hardware charge upfront or finance it at a lot lower rate than what EVS is paying.

As others also noticed, the first thing I noticed was that interest rate seems pretty high. Just a quick calculation:

The minimum draw down is half the loan amount (which is not precise since it depends on the "formula"). But let's say they draw down half the total 7.5M/2 and pay 11.75% on that, then there's also 2% fee on the undrawn amount. That tells me their interest bill is somewhere around the $500000 mark. This pretty much wipes out their OpCF for last year:

Then, if I read it right, they've also given away $750,000 in warrants which can be exercised for more shares. I don't understand the lingo well enough to see exactly what the dilution will be, but that's another cost.

But, if it increases revenue by a lot more than that, then of course it's worth it. (Who is it that says "if" is the biggest small word in English?)

(Disc: held, for better or worse).

@UlladullaDave big companies are worse for this kind of things that smaller companies.

As a big company you throw your weight around to get the best deal for yourself.

I work for a very, very large global company and we are not great to our suppliers. We demand long payment terms from them but sometimes still don't pay on time because we only run our payment cycle once per month and if there is any kind of issue or inconsistency with an invoice the payment won't get executed and then has to wait until the next months run.

On the other hand, we require most of our customers to pay us within 30 days of invoice date, not end of month, and we chase them if they don't pay.

However, for our big customers, they have the power to push us for more favourable terms.

Several of Envirosuite's customers are customers of my company as well and I know how difficult they are to deal with on payment terms and T&C's, and when you're a small company like Envirosuite, you don't have much clout.

In reality, the smaller the company, the worse deal you tend to get.

It really does seem to be a case of beggars can't be choosers. Also a case of damned if you do, damned if you don't (re funding options). The debt path they ended up pursuing is undeniably expensive, but at the current price the alternative was a 10%-odd dilution for the equivalent cash. And, of course, the market was very much not in an accommodating mood for that kind of thing right now.

The change in market preference and credit availability over the past year or two really has been a rude awakening for a lot of companies. More early stage, growth-focused businesses should have learned to walk before they ran; they wouldn't be facing this dilemma now if the focus had been on self-funded growth.

So the error, in my view, was to be in this situation in the first place. It's always easy to say in hindsight, but so many of these companies should have been happy to forgo some growth in exchange for better financial resilience.

I do get it though -- it would've been hard to refuse all that easy money when it was on offer. Especially when the market and investors were only interested in market share and revenue growth.

Too often CEOs worry about bending to the demands of the market. But screw the market, says I! If you have a compelling opportunity and a sensible strategy, then make your case and investors can decide whether it's for them or not.

Just because your kids whinge and nag you for something doesn't mean you should listen to them. They usually have no clue what is good for them. Same thing here!

Anyway, given where we are, I still think the debt funded route was the better choice for EVS. Even if the terms are rather onerous. At the end of the day, they have a good suite of products that are showing good traction, and the company is right at the inflection point of profitability. The company is trading at just 1.3x recurring revenue, which *should* be able to grow at at least 15%pa, on average, in the coming years. Hopefully more.

In hindsight I should have sold down more than I did when the share price was higher, but at 6c per share now is not the time to capitulate (just my opinion -- NOT advice). As I posted previously, my main concern was one of trustworthiness -- which would have been shattered if they turned around and did a cap raise right after saying to us that they wouldn't. As it turns out, Jason was true to his word, so I'll pay that.

It seems to be also that a lot of businesses didn't take the opportunity to do a large cap raise when their share price was quite inflated (ASM would be one example).

Instead they're being forced to raise at much lower levels, or accept these kind of terms.

This does seem like a better deal, however, it puts more risk on the balance sheet and trends the business towards being entirely wiped out if things don't work out.

Hi @AUROPAL

I agree with you about bigger companies pushing smaller companies around. What is interesting to me, and what prompted me to ask the question is that, unlike the airports business, the industrials business seems to be more capital intensive. This bit from the earnings call gives a hint...

Where we have seen a change in the way we interact with our customers on the industrial platform is they're wanting to bundle the instrumentation with the underlying platform. And we're seeing that present itself in our balance sheet with that line item that we've called out as monitors and sensors, which represents in large part, sensors that we've provided to our customers that we've acquired as part of inventory and transferred to our PP&E line item.We're seeing that as an increasing element within the business and something that we fund internally

And then pulling a few things out of the accounts, in the last two years ARR in the industrial segment has grown by $7m from $14.6m-$21.6m and that growth has required an upfront investment into PP&E of $2.9m or 40% of incremental ARR. Management are telegraphing here that this investment into the asset base will not only be ongoing but also increasing and of course will need to be funded either from the cash flow of the business or through things like this relatively expensive debt or dilutive equity.

No doubt been a change in what the market is willing to pay up for and anyone not self-funding have had a hard time. But it raises an interesting question, to me anyway, about why they are having to wear this upfront investment in order to win contracts when, hitherto, that wasn't required. Also to what extent that reduced "competitiveness" will show up in product pricing and whether they are able to recoup the cost of that investment over the term of the contract

Cheers

Good find @UlladullaDave and you are right, it will mean that this physical sensor spend will increase in line with growth in the industrial segment.

What I would like to understand is if this is something they need to keep in stock themselves, and therefore tie up net working capital, or if they're purchased from a sub-supplier as part of order execution?