Disruptive media company Newzulu Ltd (ASX: NWZ) requested that its shares be placed in a trading halt this morning 'pending the release of an announcement in relation to a fundraising'.
The trading halt will remain in effect until the announcement is released or until 18 August, whichever comes first.
Based on Newzulu's recent history I'm guessing that the company will be issuing securities to fund new acquisitions such as the recently announced Octiplex or to top up its cash balance in anticipation of making acquisitions throughout the year.
The Octiplex acquisition is expected to cost around $1.05m, which would place Newzulu's balance sheet in a precarious position given that it had $3.8 million in cash as of June 30 and has forecast cash outflows of above $3m for the current financial year.
In its most recent quarterly announcement, management reminded shareholders that Newzulu's capacity to issue 15% of its total securities as new shares would be refreshed on 31 July 2015. This leads me to believe more shares will be issued. However, the language used in this morning's release, 'fundraising' (not 'rights issue' or 'capital raising') suggests that it could be a private arrangement rather than one open to its retail shareholders.
Newzulu has in the past issued capital by tapping institutional and sophisticated investors without regard for its retail holders. As the company grows and becomes more well-known however this becomes less and less acceptable, yet based on the modus operandi of many ASX-listed companies I'm not optimistic retail shareholders will be given fair opportunity to participate.
On the plus side it looks as though this could be the last 'fundraising' activity for a while, with Newzulu estimating it could earn $8m in revenue with the addition of its new, recently announced clients.
Ideally this should also lead to an operating profit as management has suggested its current cost base is "expected to support numerous major client signings", which could suggest expenses will remain fairly constant as revenue rises.
The downside is that it will all be diluted by a share base that just keeps multiplying. Expect a further comment when Newzulu updates the market with the details.
