Tecnotree started issuing convertible debentures and published the final terms of the transaction

Translation: Original comment published in Finnish on 6/26/2023 at 7:20 am.

The final terms of the convertible debentures changed somewhat compared to the original plans, the biggest being to increase the total value of the CCDs to at least EUR 50 million (was 30 MEUR). However, the funds collected under the arrangement can be raised to EUR 60 million and we will include the transaction in our estimates later when the final amount of funds to be collected is confirmed. The transaction will result in significant dilution in the share capital within five years, but its success will be ultimately measured by how well the management allocates the capital collected in the transaction.

The debentures were issued on June 22, 2023, and any investors' subscriptions shall be made by 6 pm (Finnish time) on July 6, 2023. All investors can freely participate in the transaction, although we expect the subscription price (subscription price of one debenture is EUR 100,000) excludes a significant proportion of private investors from the transaction. More detailed information of the arrangement can be found in the company's stock exchange release.

The transaction was modified from the original plan

Tecnotree aims to collect EUR 50 million with Compulsorily Convertible Debentures or at most EUR 60 million if the Board of Directors decides to increase the total amount of debentures. In the initial proposal the minimum amount to be collected was EUR 30 million, so the size class of the transaction increased from the original plan. Thus, the arrangement is huge on Tecnotree’s scale, and will provide the company with significant additional means for pursuing growth (cash assets EUR 10.9 million at the end of Q1’23). Of the shareholders, CEO Padma Ravicander, Board Member Markku Wilenius and Oy Hammeren & Co Ab have given an underwriting of EUR 40 million (previously announced 25 MEUR).

An insignificant interest rate (0.01% p.a.) will be paid on the debentures in accordance with the original plan. The debentures are valid for 5 years and each debenture entitles its holder to convert it into Tecnotree shares during the conversion period. The conversion period starts on the third anniversary of the issue date, which changed from the original plan (was the first anniversary). The conversion price will be the lower of: 1) 5% less than the 10-day moving average of the Tecnotree share price from the date of request for conversion, or 2) the closing price of the Company's shares on the trading day immediately preceding the date of announcing the transaction (i.e. April 17, 2023). This creates a call option like instrument for debenture holders, because if the share price would rise significantly after the arrangement was announced, the holders of the debenture can convert their debentures into shares at a significantly lower conversion price.

The share capital will be significantly diluted

Debentures are converted to Tecnotree shares compulsorily if they have not been converted by the fifth anniversary of the issue date. Thus, it is guaranteed that the debentures will dilute the company's share capital within 3-5 years. If debentures are subscribed for EUR 50 million and the conversion price is assumed to be the share price of April 17, 2023, we estimate the dilution on the share capital to be good 20%. If the debenture holders were to also exercise their warrants (valid for 5 years, subscription price EUR 0.90), we estimate that the full dilution would be good 30%. The calculations are indicative and final dilution will depend on the conversion price.

The sensibility of the transaction is measured by where the received capital is allocated

We find the transaction conflicting for private investors. The transaction results in a rather large dilution for shareholders who are not be able to participate in the transaction. In addition, we feel the transaction has been built to favor those who subscribe to the debentures. If Tecnotree’s share price falls significantly, debenture holders can convert their debentures at a lower conversion price (causing more dilution to other owners). If the price increases, the debenture holders can convert their bonds at the share price preceding the arrangement and possibly exercise their warrants. Thus, the transaction will undoubtedly create uncertainty around the share in the coming years, depending on the timing and price of the conversion.

Some of Tecnotree's owners were critical about the transaction as a group of shareholders collected by Joensuun Kauppa ja Kone Oy whose holding exceeded 10% demanded an Extraordinary General Meeting and changes to the terms of the transaction. However, the group later canceled its demand after discussions with the company's Board of Directors. We naturally have no visibility into these discussions.

However, in the big picture, the sensibility of the arrangement for shareholders is measured in where the capital received from the debentures is allocated. The company has communicated that it will use the capital collected in the transaction for R&D investments and acquisitions where the company sees significant opportunities as the valuation of technology companies has fallen from levels seen in recent years. We consider keeping opportunistic inorganic growth in the company's toolbox sensible. However, implementing an aggressive acquisition strategy in the current situation where the company’s own capability to generate cash flow involves uncertainty is quite risky in our opinion. The company's track record of acquisitions is also lacking, as it is still relatively difficult to assess the success of the CognitiveScale transaction, for example. On the other hand, acquisitions can also mitigate risks if the business expands from areas where repatriation of receivables is challenging.