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Last edited 6 months ago
#China Launch & Capital Raise

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

 
Last edited a month ago
#EMS acquisition

There's a lot of detail related to this acquisition, and others have already summarised the main points.

Key considerations for me:

  • An extremely large takeover (technically, a reverse takeover) that radically changes the business mix. EVS is now essentially a noise monitoring business that has a relatively small odour and wastewater segment. That being said, they'll be looking to provide a more holistic solution to customers going forward.
  • Very dilutive. When accounting for options, there are around 1,127m shares. That gives the company a market cap of ~$225m
  • The combined entity will still be loss making, although it is targeting a doubling in revenue over the next 3 years to ~$100m, with EBITDA margin of 15-20%.
  • With $15m in cash, post transaction, it should have enough cash to make it to profitability (if projections are indeed realised)
  • Cross sell opportunity is significant -- but this is often touted as an acquisition rationalisation, and not always realised..
  • EMS has a history of growth, and is expected to see a 9% lift in sales for the current year.
  • Macquarie will retain an 8% holding (14% if all options are exercised) and will be the largest single shareholder. It will refer potential clients.
  • Big potential, but similarly big risks in terms of integration and realsing cross sell potential.

I've updated my valuation (see my company report)

 
Added 3 months ago
#SeweX License agreement

Envirosuite has acquired the exclusive global license agreement with University of Queensland technology transfer company UniQuest. It enables them to use a mathematical modelling tool "SeweX" that provides better prediction and asset management in the waste water sector. 

It will be integrated into the Envirosuite platform and new sales are expected in the first half of 2020. The company expects this to broaden and more tightly bind the client base, while also increasing average revenue per subscription.

The 'cost' pf the license is that EVS will pay a "nominal" upfront fee and then 12% of gross sales that relate to the use of the license after 2 years. The license goes for 20 years, but to maintain the license EVS must hot at least $1.9m in gross sales within 5 years.

EVS said it "intends to well exceed" this and that the associated revenues would "materially" add to the group total.

To my mind, it looks like a smart deal with very little downside. Potentially, there is a lot of upside longer term. But the value will take years to fully realise (if at all), and so I'm not inclined to lift my valuation on this news alone.

Read the full ASX announcement here

 
Last edited 5 months ago
#Capital Raise Oct 2019

Envirosuite has raised $10m from sophisticated investors issuing a further 35m shares. 

The cash will be used to help fund the expansion in China, continue R&D, marketing and potentially acquisition opportunities.

Total number of shares is now at ~500m (includes an additional 25m to Chine Partner, to be approved at AGM, plus all outstanding options)

The company now has around $20m in net cash (also accounting for China partner buy in). As of the latest report, EVS was buring through ~5m in free cash flow last year , although company targeting to be monthly EBITDA positive by end of current financial year.

Annoying how ordinary shareholders not invited, who have been diluted by a further 8.5% or so. But it makes sense to take advantage of the elevated share price to raise more capital.

Whether or not this was a good move depends, as always, on how well they invest this capital.

There's certainly an attractive addressable market, and these guys have a great offering. But plenty of companies grow sales without any growth in profit due to poor cost control mis-allocation of resources.

We'll see.

 

 
Added a week ago
##China Update

18/02/2020

Envirosuite provided an update on its China venture since it established operations last year.

EVS China now has 10 people, including a local general manager. The previously announced strategic agreements with local partners has supposedly contributed "substantially" to the sales pipeline, the qualified portion of which represents around $12m.

EVS reported a maiden sale of $270k to a wastewater plant, and more sales are expected in the coming months. With the SaaS model still unfavoured in China, new sales are expected to involve a large upfront capital component, followed by a few years of smaller maintainance and software fees.

The recent takeover of EMS gives Envirosuite 4 existing contracts in China for the related solution, and there's potential for further expansion here.

This news is not material from a financial perspective, but at face value it seems as though the move into China has started well.

Management certainly have a lot going on -- ingesting the much larger EMS while simultaneously expanding into a new (and often challenging) geography and overseeing product integration and development is no easy task!  

You can read the full announcement here

 
Last edited 4 months ago
#Contract wins

Tata Steel -- one of the worlds largest steel producers -- has adopted the Envirosuite platform for its UK Port Talbot operations to manage air quality.

This is a big win. Not necessarily on a financial basis (no details were revealed), but strategically it represents the first step into the Steel manufacturing sector, and the first manufacturing contract win in Europe. 

Moreover, according to management, there is "significant potential for further contracts in the sector", and having such a high profile reference client will greatly facilitate further sales.

Shares have reacted very favourably, and given the strong rise the day before the announcement, it seems like there could have been a leak. Not a good look, and hopefully the board will tighten things up here.

Full announcement here

 
Added a month ago
#new shareholders

17 January 2020:  ASX Announcement by EVS of massive acquisition (of EMS Brüel & Kjaer Holdings)

Envirosuite to acquire EMS Brüel & Kjaer Holdings Pty Ltd

Key Highlights (excerpts) continued - see "#Jan 2020 EMS Acquisition" straw for the bulk of the details concerning this acquisition.

...continued...

 

New Shareholders

On completion of the Transaction, Macquarie will hold approximately 8% of EVS shares on an undiluted basis which will make Macquarie the largest single EVS shareholder.  This percentage would increase to approximately 14% if all options on issue (including those to be granted to Macquarie) are exercised.  Macquarie has a right to a nominee on the EVS board (“Board”), subject to completion of the Transaction.

On completion of the Transaction, Macquarie and EVS will enter into a two-year Referral Agreement under which Macquarie will procure certain introductions and/or referrals from the Macquarie Capital Business Group (being that part of the business carried out within Macquarie Group Limited, its holding companies and its and their subsidiary companies known as “Macquarie Capital”).  The Board believes that gaining such a strategic shareholder will help accelerate EVS’s global expansion significantly.

Spectris will hold approximately 1% of EVS shares on an undiluted basis (approximately 0.9% of EVS shares on a fully diluted basis).

 
Last edited 4 months ago
#Strategic Coop agreement

Envirosuite has today signed a "cooperation agreement" with BHZQ.

This follows on from the "binding agreement" announced in September.

Frankly, I'm not too clear on the difference, but it appears the recent announcement relates to a more formal agreement that makes EVS the preferred supplier for associated solutions. 

(EDIT: Looks like i wasnt the only one who was a bit confused -- EVS released a supplemental clarification on the relevance of the agreement on the 19th Oct. You can read here. Essentially, this agreement was an essential step, profit sharing will be determined on a project by project basis, and that projects will likely require joint input from both parties)

There were no financials or forecasts provided, other than a reiteration of the $10m aspirational target for options conversions, which require $10m in cummulative income from China by the end of calendar 2021.

Still, this appears to be an inevitable contractual step from what was already in train and the initial ~7% jump in shares seemed a bit of a knee jerk reaction.

Good to see progress being made, but I wont be raising my valuation until we see some tangible progress.

 
Last edited a month ago
#Jan 2020 EMS Acquisition

17 January 2020:  ASX Announcement by EVS of massive acquisition (of EMS Brüel & Kjaer Holdings)

Envirosuite to acquire EMS Brüel & Kjaer Holdings Pty Ltd

Key Highlights (excerpts)

  • EVS to acquire EMS - a leading global environmental noise solutions provider 
  • The combination of Air Quality, Noise and Waste and Wastewater creates a comprehensive and world class environmental technology platform
  • The acquisition provides scale and opens new industry and geographic distribution channels for the expanded solution offering
  • The Transaction is expected to complete at the end of February 2020, and is subject to shareholder approval
  • Acquisition funding secured after the successful completion of an underwritten institutional placement to new and existing investors


Envirosuite Limited (“EVS” or “the Company”)  (ASX: EVS) is pleased to announce that it has signed a binding agreement to acquire all of the share capital of EMS Bruel & Kjaer Holdings Pty Ltd (“EMS”) (“Transaction”). EMS is a leading global environmental technology group, headquartered in Melbourne, with over 400 customers in 40 countries and approximately 200 staff. EMS specialises in environmental noise and vibration monitoring and is the recognised market leader in addressing airport noise globally.

The underwritten institutional placement (“Placement”) to new and existing institutional and sophisticated investors will, on settlement, raise gross proceeds of A$70 million. Bell Potter Securities acted as sole Lead Manager and Underwriter for the Placement.

Transaction Details

EVS will purchase EMS, on a cash-free, debt free basis, from its shareholder group, comprising the majority shareholders Macquarie Corporate Holdings Pty Ltd (“Macquarie”) and Spectris Group Holdings Limited (“Spectris”), as well as the EMS founders whose nominees hold a minority shareholding.

EVS has agreed to a total consideration pursuant to a share sale agreement of:

  • $70m cash, to be paid net of EMS debt and subject to a working capital adjustment, to Macquarie as at 50% and Spectris as to 50%;
  • 80m new EVS shares, with 25m shares to be issued to Macquarie, 10m shares to be issued to Spectris, and 45m shares to be issued to the minority shareholders; and
  • 95m options over EVS shares, to be granted as follows:
    • 75,000,000 options to Macquarie with an exercise price of $0.20 per share and an exercise period of three years from the date of grant; and
    • 20,000,000 options to nominee entities of the EMS founders, with an exercise price of $0.25 per share and an exercise period of three years from the date of grant.

In addition, EVS has agreed as part of the Transaction to issue to Macquarie 55m EVS shares as consideration pursuant to a referral agreement to be entered into subject to and on completion of the Transaction as set out below.

All consideration shares are subject to a twelve-month escrow period.  Any shares issued  pursuant to the exercise of consideration options will be escrowed for the balance of the twelve months from the date of option grant.

The consideration shares and consideration options to be issued by EVS as part of the Transaction consideration are fixed in number and not subject to recalculation at completion of the Transaction.

Completion of the Transaction is subject to applicable EVS shareholder approvals, including for the issue of the consideration shares and options.

Funding arrangements, including Share Purchase Plan

The $70m cash component of the Transaction consideration will be funded via the Placement, pursuant to which 350m EVS shares will be issued to institutional and sophisticated investors at $0.20 per share and which is underwritten by Bell Potter Securities.  

The Company will seek to raise an additional amount of approximately $5.5m via a placement of approximately 27.8m EVS shares at $0.20 per share to institutional and sophisticated investors including directors Hugh Robertson and Chairman David Johnstone (subject to shareholder approval), members of the EVS management team and their networks.

This placement will be managed by EVS directly (not underwritten) and the proceeds will be used to fund costs associated with the Transaction.

The Company also today announces a Share Purchase Plan (SPP) providing each shareholder the opportunity to subscribe for up to $30,000 worth of EVS shares at a price of $0.205 per share. The price has been set as close to the Placement share price as the rules for SPPs allow, being a share price that is no less than 80% of the volume weighted average price of EVS shares in the 5 trading days leading up to the date of this announcement. The SPP funds will be provisioned for additional working capital to support the integration and growth of the combined group.

A notice convening a general meeting of EVS will also be released today seeking the approval of EVS shareholders to resolutions pertaining to the Transaction and the funding arrangements.

 

--- continues in "#new shareholders" straw (due to 5,000 character limit on individual straws) ---

 
Last edited 5 months ago
#Bull Case

How I feel about the Bull Case when Strawman closes all but one of his positions in Envirosuite - it may suddenly be a little less sensible a thing to hold, doesn't mean it is going to be any less exciting.

 
Last edited 7 months ago
#Q4 2019 Sales update
stale

Envirosuite did not meet their stated target of $6m in ARR by the end of FY19, due to greater than expected attrition in the third quarter (which was previously reported).

Nevertheless, ARR growth of 86% was achieved and now stands at $5.6m.

Importantly, the group said it had a $14m sales pipeline and reiterated guidance for $12m in ARR at the end of FY20.

Beyond the specific accuracy of aspirational targets -- which were always going to be roughly right, at best -- the general pace of growth and opportunity seems very much on track. As stated by the company, the nature of big contracts will always mean that the timing and quantum of growth within specific quarters is going to be very difficult to accurately anticipate. But so long as the general trajectory is maitained, and costs well managed, EVS very much appears to be executing well.

We'll need to see the full audited accounts to get a better sense of the financials, but the company is certainly still loss making with a fast dwindling cash balance. Increased sales and marketing costs, while necessary, will put further pressure on the business.

Nevertheless, although i have previously reduced my exposure (in large part on valuation grounds), i'm still a believer in the long term potential of the business.

See full sales update here.

 

 
Last edited 10 months ago
#Bear Case
stale

Sold my position today on the back of Claude Walker's tweet RE: EVS potentially treating project-based revenue as ARR. I'd want to see better ARR before buying back in.

Claude's tweet here

 
Last edited 7 months ago
#Bull Case
stale

Envirosuite provides environmental monitoring, management and reporting software. With data fed through a network of sensors, the platform allows clients to monitor environmental outcomes (such as odours, pollutants, emissions, noise etc) and assets (pipes, vents and other plant & equipment) in real time. This enables clients to more effectively manage operations, investigate incidents, predict outcomes, manage complaints and meet regulatory and reporting requirements. 

Clients come from a wide array of industries, including regulatory bodies, wastewater, mining, oil & gas, ports, power plants, hospitals and more. The company has around 30 FT employees and is based in Brisbane. It also has offices in San Francisco and Madrid.

The technology is genuinely world leading, and the business has a huge addressable market, a significant first mover advantage and minimal competition. 

Since divesting itself of the old consulting business, the company has managed to grow Annual Recurring revenues at a very strong pace, albeit off a low base.  Having doubled ARR last year, they are on track to more than double it again in FY19, and are targeting a further 100% growth in FY20.

Although still cash flow negative, they appear to be scaling well and should be able to fund themselves until cash flow breakeven -- provided they maintain cost discipline and achieve sales goals.

Envirosuite is an early stage business, and certainly represents a higher than average risk investment. Nevertheless, if sales growth comes in as expected, the upside is sigificant.

 
Last edited 10 months ago
#Q3 2019 Sales Update
stale

Envirosuite has updated its Annual Recurring Revenue metrics for the March quarter 2019.

In the 3 months to the end of March, EVS added $780k in ARR. That's 250% up on the prior corresponding period. On a run rate basis, that's sufficiemt to hit their stated goal of an additional $3m per year in ARR -- BUT, that rate has slowed significantly from the prior quarter (in which $1.3m was added in ARR).

Further, that $780k addition nets out at just $330k when you account for a $450k loss due to customer attrition.

What's happened?

  • Regulatory clients in California did not renew as they were seemingly not using the real-time capabilities of the product, preferring supposedly to confirm data through quality assurance prior to release. This accounted for half of the total attrition. The key thing here is that real-time data monitoring does not seem to be an important factor for regulatory bodies and EVS appears to be backing away from this sector -- certainly disappointing given all the fanfare that was originally made here.
  • Another quarter of the loss in ARR comes due to the completion or halting of three client projects. This isnt assocaited with the value of the EVS platform, and is to do with other factors relating to the clients themselves, so is less concerning. This will happen occassionally. 
  • The final quarter of client loss was not specifically explained, other than EVS saying it was a factor of rapid growth and the testing of the platform in new verticles. Read as -- some clients just didnt find the platform that useful and were not inclined to continue their subscriptions.

Due to the attrition, ARR essentialy is actualy a little below where it was in early February, at just under $5m (The charts that EVS have provided are misleading. In the February sales update they were showing ARR on a bi-monthly basis. This time they are showing it on a quarterly basis. The reason, presumably, as if they continued plotting every two months, the drop from the february high-water mark would be apparant. I've fixed this and attached image below. I made my thoughts on this known to them here).

So that is disappointing, however the company reiterated its guidance for $6m in ARR by year's end and $12m the year after. That's going to be tough in my opinion, and management have acknowledged this. Although they didnt provide the current ARR, it seems likely they will need to lock in ~$1m in ARR in the next two months. (a solid jump from their *gross* ARR growth in the March quarter).

Stepping back from this, and today's substantial share price drop, I'm actually not (yet) overly concerned.

The market tends to freak out whenever a company experiences inevitable bumps, failing to accept that business is almost never smooth and linear. The real question, as always, is whether or not this quarterly slump is indeed one of those bumps and that the longer term outlook remains on track, OR whether the pace of ARR growth is permanently dented and therefore company targets unrealistic.

One swallow does not a summer make, in my view. And, as you'll see from my Strawman valuation, shares were overvalued anyway. If EVS gets anywhere near their 2020 target, and if a solid pace of growth is mainatined, shares are reasonably priced in my view. 

As I say in my valuation (above) -- this was always going to be a very bumpy ride. Expect lots of big moves like this along the way.

A few other thoughts:

CEO Peter White spoke of additional hires in operations, support and sales, as well as new offices. No figures were provided, but these resources do not come for free and no doubt will impact the cash burn. Something to watch for a company that is still not breakeven.

The business is also producing hardware in the form of "e-noses", which has been previously disclosed. There's good reason for that, as clients are demanding a full solution service, but the economics are quite different to what you would expect from a pure software company.

The big thing to watch out for will be the current quarter's ARR growth. We need to see a solid improvement from the March pace, and a big improvement in customer attrition. If these are not forthcoming, without good explanation, it would materially impact my investment thesis.

Stay tuned...

 

 
Last edited 5 months ago
#Risks

RISKS

  • The business may not scale well, absorbing higher revenues through increased cost base. EG. Increased development spend, significant increase in sales force (without concurrent lift in sales), more expensive office space, new offices in other geographies etc)

  • Founders and insiders may extract capital through generous options/equity grants or increased remuneration packages.

  • Fail to focus on existing opportunities and instead broaden the offering -- moving too fast. 
  • Another tech company could develop a better mousetrap.
  • Technology failure leading to reputational damage. Especially if failure results in fines/penalties for a client.
  • Counterparty risks. If consultancy partners do a poor implementation, for example.
  • Liquidity risks -- shares are very thinly traded. Will be difficult to build or exit large positions. Shares will likely be especially volatile.
  • Business runs out of cash and needs to raise capital in a highly dilutive share issue