ASX small-cap EBR Systems Inc (ASX: EBR) is making headlines this week.
Yesterday, the company released an announcement that it aims to raise A$150.0m via a fully underwritten capital raising.
According to the release, the proceeds from the Capital Raising are intended to be used to support sales and marketing expansion, manufacturing scale up, R&D and clinical, working capital and the costs of the offer.
The offer price per New CDI (Offer Price) under the Capital Raising is 38 cents. This represents a 19.1% discount to the last closing price of EBR on June 3 which was 47 cents per share.
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EBR company overview
EBR is a clinical stage company that has developed its patented Wireless Stimulation Endocardially (WiSE) technology. The technology is for the treatment of cardiac rhythm disease and to eliminate the need for cardiac pacing leads when delivering cardiac resynchronisation therapy.
It has been hotly covered over the last few months as it has repeatedly received positive outlooks from brokers.
However, this is yet to translate to realised capital gains. Its share price has fallen almost 50% year to date.
What does this mean for investors?
For investors, this capital raise is a significant dilution event for this ASX small-cap.
EBR is issuing a large number of new shares at a heavily discounted price. This means existing shareholders who do not participate in the entitlement offer will see their ownership percentage reduced.
The raise price of 38 cents per share may also put short-term pressure on the share price as the market adjusts to the new valuation.
However, the positive side is that EBR has secured more capital than expected. Management believes this funding should carry the company through to cash-flow breakeven, reducing the risk of further capital raisings in the future.
The funds will also allow the company to accelerate sales, marketing, manufacturing and clinical activities.
Overall, investors are being asked to accept substantial near-term dilution in exchange for a stronger balance sheet, a potentially lower need for future fundraising, and an improved pathway to commercial success.
The investment case now depends more heavily on whether EBR can execute its growth strategy and convert this into meaningful sales over the next few years.
What's Bell Potter's view?
Following the announcement, the team at Bell Potter also weighed in on the outlook for this ASX small-cap.
The broker appears to be cautiously positive on the business, but disappointed by the terms of the capital raise.
The A$150m raise is larger than expected. This is not necessarily a negative because it gives EBR more funding to execute its commercialisation strategy.
However, the dilution is materially worse than they anticipated.
They specifically highlighted that the share count will increase by about 87.6% and that the issue price of 38 cents is far below their assumed 63 cents. This reflects how much the share price had weakened before the raise.
Despite this, the broker has retained its buy recommendation and $2.00 price target.
This indicates an upside potential of more than 325%.
We view the raising as a significant de-risking event, enabling EBR to commercialise WiSE and reach breakeven by FY29.
This raising should serve as a cathartic event and clear the overhang from the share price. Post shareholder approval of tranche 2, we think the share price will be well supported by the market.
