Employees sew the finishing on pantyhose in Montreal, on Dec. 20, 2019.Christinne Muschi/The Globe and Mail
Sheertex tights maker SRTX Inc. has secured US$40-million in commitments from its investor base as it attempts to fund its near-term working capital needs and reach operating profitability this year.
SRTX chief financial officer Tim Leyne wrote investors last Friday that the manufacturer of rip-resistant textiles made from the same polymer used in bulletproof vests had reached the US$40-million commitment threshold of its proposed financing. He stated in the message, obtained by The Globe and Mail, that SRTX “is well on its way to meeting the closing conditions.”
SRTX expects to secure US$24-million of that amount by April 14 and close on the financing on July 31. Mr. Leyne declined to comment further, saying he would share details “when the pieces for the clothing are at hand.”
Meanwhile, the four lead investors – prior backers H & M Hennes & Mauritz AB, the Swedish retail giant, and Crown corporations Export Development Canada, Business Development Bank of Canada and Investissement Québec (IQ) – have launched a process to recruit a new chief executive officer and independent board chair.
Founder and CEO Katherine Homuth has agreed to sign a mutual separation and transition agreement and submit to a new company communications and social-media policy as a condition of the financing. In a note to security holders last month, Mr. Leyne said the board, the lead investors and Ms. Homuth “decided that it is in the best interests of the company” that she resign.
That followed her publication of a series of candid posts on social media about SRTX’s fundraising challenges and related frustrations.
The US$40-million round offered existing investors a choice: invest millions of dollars or risk seeing their stake in the company get diluted.
The deal, which would slash the value of SRTX to US$95-million before the funds are received (and as much as US$135-million afterward) from US$325-million, is a “pay-to-play” financing. That means investors who don’t commit their full allotted pro rata amount in the round will see their prior holdings diluted by 90 per cent.
The four leads put up US$21.5-million of the financing and had an additional combined pro rata amount allotment of US$18.7-million. That means they could have backstopped the whole offer if others did not step up. Mr. Leyne’s message doesn’t specify how many of the 145 individuals and entities that have funded SRTX participated.
But even most of those who buy their pro rata share will be diluted. SRTX sweetened the offer for investors who buy US$3.5-million or more of equity with warrants enabling them to buy additional preferred shares for one US cent each. The total warrants would be limited to 37.5 per cent of the aggregate amount of gross proceeds raised, giving those who pony up US$3.5-million or more extra equity and diluting everyone else.
Two investors told The Globe they had committed to buy their pro rata share because they invested early enough that their stakes will still be worth much more than when they invested, even after factoring in the devaluation and dilution.
One of the shareholders expressed frustration that three government agencies with representation on the board had participated in what the source characterized as an aggressive financing, like what a U.S. vulture fund would exact. The source said the same agencies were arms of government that had created programs to foster women and entrepreneurship and had failed in their governance role by allowing the company to reach such a critical state.
But the other investor said it’s a normal and expected business practice: any entity that agrees to finance a company in a tough situation gets to set the terms, particularly if nobody else steps up.
The Globe is not identifying the sources as they are not publicly authorized to discuss the matter.
Ms. Homuth embarked on the daunting and seemingly improbable mission eight years ago to replace run-prone nylon tights with a strong alternative. She convinced skeptical industry observers that she could build a viable product and business, raised US$256-million and sold US$155-million of goods. SRTX products are stocked by H&M, Costco Wholesale Corp., Walmart Inc., Holt Renfrew & Co. Ltd., Macy’s Inc. and Kim Kardashian’s SKIMS banner.
But after building a vertically integrated operation in Montreal last year as part of an effort to drive down production costs and reach operating profitability, Ms. Homuth fell US$22-million short of her goal to raise US$75-million in fresh funding she said was needed to carry the company until millions of wholesale units were shipped to retailers and paid for later this year. That led to her social-media posts and culminated in the new US$40-million financing and her imminent departure.
SRTX also faces the uncertainty of U.S. tariffs and added duties on shipments. In February, the company temporarily laid off 40 per cent of its staff.