Envirosuite has announced a binding agreement to initiate its launch into the Chinese market.
The deal is with Mr Zhigang Zhang, the GM of Beijing BHZQ Environmental Engineering Solutions, a person envirosuite described as "a prominent leader in the environmental protection sector". He'll also be offerred a board seat.
Mr Zhang will purchase 50m shares at 8c each ($4m worth). He'll also get 25m options to acquire shares at 15c each, which expire in March 2022 and vest on the condition that a minimum of A$10m in cumulative revenues are received by Envirosuits Chinese subsidiaries before the end of calendar 2021. (for context, EVS is targetting $12m in recurring revnues by the end of FY2020)
Another 15m of options will be allocated to China employees under the same terms.
Much of this is subject to shareholder approval at the upcoming AGM.
The $4m raised is before costs, which include 1.25m options (under the same terms as above) for the executing broker. As a percentage of funds raised, seems like the broker will do pretty well out of this...
Envirosuite said that the $10m revenue threshold was NOT a target or forecast -- rather just a performance hurdle.
Still, the market opportunity in China is obviously vast and the Government there has a clear focus to address air and water issues. Definitely an exciting prospect.
But is it a good deal?
Well, the issue price (8c) seems overly generous to me -- although the strategic value of this deal clearly has big potential. It's hard to do business in China without the right partner...
The deal, in its entirety, will also be reasonably dilutive to existing shareholders. Accounting for all options, there'll be a further ~24% increase in the share count.
Further, the new China subsidiary will undoubtedly extend the cost base. It's entirely possible that any additional revenue earned in the medium term is more than offset by the increased costs.
I expect the market will react favourably to the news when trade resumes, and not without some justification. It's just worth keeping in mind that execution is everything -- and far from gauranteed.
I'll likely adjust my valuation in the coming days, once more is known.
Read full ASX announcement here