Shares in employment solutions app developer Reffind Ltd (ASX: RFN) entered a trading halt prior to the market open this morning. Management requested the halt in order to provide an announcement about a pending capital raising – expected to be released today or tomorrow – with shares resuming trade on 13 April at the latest.
Reffind is just the latest tech wannabe to be raising capital, with Newzulu Ltd (ASX: NWZ) in an extended suspension pending its capital raising, and Rent.com.au Ltd (ASX: RNT) releasing its fundraising prospectus to the market last week.
While it's as yet unknown exactly what form Reffind's capital raising will take, many similar fundraisings can result in a big hit to existing shareholder's stakes. Take Rent.com.au's fundraising, which will raise around $6 million yet increase the number of shares on issue by a third. The pie gets bigger, but each individual shareholder's slice gets significantly smaller – unless they're willing to tip more money in, which may not be an attractive option given the speculative nature of Rent.com.au and similar.
At its most recent half-yearly report, the company burned $2.7 million in cash (leaving $4.4 million remaining) over the prior 6 months.
Doing the math
If the company can't start generating a significant amount of cash soon it will be back tapping shareholders in the next few years.
There are other ways to raise cash, including selling a chunk of new shares to 'sophisticated' investors (who often haven't previously held a stake in the business), and this can be even more detrimental to shareholders.
A winning prospect?
As I wrote recently here and here, tech stocks are often sold off heavily as investors look at a company's cash balance and evaluate the likelihood of a discounted capital raising. Even former market darlings like 1-Page Ltd (ASX: 1PG) are not immune to investor pessimism about cash flows, and these kinds of companies are not suitable for investors who lack a cast-iron stomach. On the plus side, patient investors can sometimes wait for a company to raise capital, and then pick up shares at a significant discount.
