Jondetech has announced that the investment of SEK 40m from Jiuyou is being renegotiated. The Jiuyou investment was first announced back in March 12, but the money has not arrived, which we find a bit unusual for a directed share issue, although we do not see any evidence suggesting that the company has been deceived. Jiuyou cannot meet the terms that was previously communicated, due to Chinese domestic approvals (foreign direct investment), but says it is still committed to invest in Jondetech. The company does not know what conditions in the agreement that caused the refusal. We therefore have a hard time to determine how likely it is that Jiuyou eventually will follow through with its investment, but both parties are willing to proceed, according to Jondetech. We cannot tell whether a parallel track would have been eligible here. Regardless, it seems to us that the company went head over heels into the Jiuyou deal, without seemingly any solid backup plan, and as a result, we think the company is now on the brink of a crisis with regards to its financing.
Jondetech had SEK 5.7m in cash at the end of Q1 and the quarterly burn rate was SEK ~6m. Given this trend, there is most likely an imminent capital need. We are not expecting the company to go bankrupt, as we see several possible ways forward, e.g. the participants of the convertible loan, Didier Pineau-Valencienne, Novel Unicorn, or maybe even O-Film. The company has managed to solve previous tight situations when it was strapped for cash. However, the press release did not give any hints on how the company expects to deal with the situation. In conclusion, we are counting on the company being able to raise the required money, albeit on depressed levels.
Making matters worse, Johan Lodenius, the most experienced board member, resigned from the Board effective immediately, as of Monday evening, for personal reasons. His resignation came the day before the press release on Jiuyou. Lodenius does not want to comment on the matter. We can only speculate what his personal reasons were. Our best guess is that the personal reason has to do with him, for whatever reason, not wanting to be personally associated with the company following yesterday’s press release.
Jondetech stresses that one should separate the business part from the financing part. The O-Film partnership is proceeding, and relations are intact with Novel Unicorn and Jiuyou etc. We think this suggests that eventual effects on future sales or delays in production are limited at this point, provided of course that the financing is taken care of right away, which we also assume, as described above. Our view of the fundamental parts of the case is the same as before. In other words, we have not changed our investment thesis (besides our take on the financing risk).
We recently, on April 14, raised our base case to SEK 15, which turned out to be wrong. In our view, yesterday’s stock price reaction of -25% was gentle in relation to the major uncertainty, and we see no stop in the free fall until the financing is taken care of. For obvious reasons, we need to lower the financials parameter in our Redeye Rating. We also choose to take down our people rating as the company has put itself in a dire situation. These changes raise our required rate of return from 15% to 17%, which reflects the higher risk. Furthermore, we expect twice as high dilution in the next financing round (about half the price of the terminated Jiuyou deal of SEK 13.6) due to a lower bargaining power related to the company’s urgent financing need. There is an old saying that companies should raise money while they can and not when they have to. Jondetech has reached the must point, which makes negotiations significantly more challenging. The most uncertain, albeit severe question, is how the financing need could affect the business. As mentioned above, we cannot detect any major effects at this points. Our definitive estimate changes are therefore slightly smaller than the preliminary announced ones (see the table below). Based on this reasoning, our base case is set to SEK 8 (15). We do not change our bear case of SEK 3 as we think a conservative break-up value should be at least SEK 3. The new bull case is SEK 27 (50).
We will of course update our research if we come up with additional insights. Last, our belief in the technology is the same as before, but we assume there will be immense pressure on the stock until the cash situation is resolved.
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