SRTX investors offered equity sweetener if they commit millions to financing – or deep dilution if they don’t

As SRTX Inc. works to secure a US$40-million financing, it is offering existing investors a choice: invest millions of dollars more, or risk seeing their stake in the company get moderately or heavily diluted.

The carrot-or-stick option is contained within a term sheet sent last week to investors of the financially beleaguered Montreal textile innovator, which made its name selling rip-resistant Sheertex tights made from the same material as bulletproof vests.

Last week, existing investors H&M Hennes & Mauritz AB, the Swedish retail giant, and three Crown corporations – Export Development Canada, Business Development Bank of Canada and Investissement Québec (IQ) – pledged to co-lead a US$40-million equity financing that would solve SRTX’s near-term financial needs. The deal would slash the value of SRTX, including funds received, to up to US$135-million, from US$350-million in 2022.

The term sheet, obtained by The Globe and Mail, reveals that H&M, EDC and IQ have committed to invest US$6-million each, while BDC has pledged US$3.5-million. That adds up to US$21.5-million, just over half of the US$40-million round. The four leads committed to fund US$1.5-million in bridge financing last week. SRTX anticipates hitting a first close on US$24-million by April 7.

But a condition for the financing is that SRTX must receive a full US$40-million of contractually committed equity for the deal by next week, meaning that existing or new investors must agree to invest another US$18.5-million between them. SRTX’s last fundraising attempt in 2024 fell US$22-million short of a US$75-million goal, prompting founder and chief executive officer Katherine Homuth to warn that it wouldn’t have enough to fund 2025 working capital.

SRTX investors – 145 individuals, funds, trusts, companies and other entities – face a tough choice. It is a “pay-to-play” deal, meaning that those who don’t commit to invest 100 per cent of their allotted pro rata amount of stock will see their holdings diluted by 90 per cent, a move known as a “cramdown.” The four leads could conceivably cover the rest as their pro rata shares add up to US$18.7-million.

But even those who buy their pro rata share could be diluted. SRTX is sweetening the offer for investors who buy US$3.5-million to US$5-million of equity: They will get warrants to buy an equal, additional amount of preferred shares for 1 US cent each. If they commit to buy US$5-million they will get warrants to buy another 200 per cent of their allotment. The total warrants would be limited to 37.5 per cent of the aggregate amount of gross proceeds raised, meaning that those who pony up US$3.5-million or more would get extra equity and dilute everyone else. No one outside the four leads has a pro rata share exceeding US$3.5-million of stock.

SRTX is also promising as a condition of the deal to adopt a communications and social-media policy that Ms. Homuth and her replacement “must adhere to and comply with.” That follows her publication of a series of extraordinarily candid posts on social media from December through February about SRTX’s fundraising challenges and related frustrations. She is set to sign a “mutual separation and transition agreement” on terms agreed to by her and the four leads by next week. In a notice to security holders, chief financial officer Tim Leyne said the board, leads and Ms. Homuth “decided that it is in the best interests of the company” for her to resign. She will also leave the board.

The company must also finalize a budget and business plan for this year and 2026 acceptable to the lead investors, and hire a third-party consultant to assess whether its in-house vertical manufacturing process is capable of supporting its production targets.

Ms. Homuth has been on an unlikely, constantly challenging mission to replace run-prone nylon tights with a strong alternative since founding SRTX eight years ago. She convinced skeptical industry observers she could create a viable, sturdy alternative to nylons; survived the pandemic; raised US$256-million in equity, convertible debt and debt; and sold US$155-million of goods. SRTX products are stocked by H&M, Costco, Walmart, Holt Renfrew, Macy’s and Kim Kardashian’s SKIMS banner.

Last year it built a vertically integrated operation in Montreal that makes its own thread, part of an effort to drive down production costs per pair to less than US$10 from US$100 in 2018 and to reach operating profitability this year. Ms. Homuth has said SRTX expects to triple sales in 2025 to six million units as it focuses on serving wholesalers after starting out as a direct-to-consumer merchant. SRTX has also faced the added uncertainty of U.S. tariffs and added duties on shipments. In February, it temporarily laid off 40 per cent of staff.