Struggling tech Appen is looking for $60 million from institutions and ordinary shareholders in what could be a final effort to remain viable.
The signs of Appen’s need for quick cash were all there in Tuesday’s announcement – a deeply discounted equity raising in two parts – an entitlement offer and a placement to institutions at $1.85 a share, or a near 20% discount to the last sale on Monday of almost 20%.
That will see more than 32 million shares issued, or around 26% of existing capital, so it is a dilutive issue, another sign of a company under pressure and needing cash.
Westpac, Appen’s bank, is supporting the company with a relaxation of a key debt requirement.
Appen’s cash balance at the end of April was just $27 million, according to a trading update last week which also revealed a plunge in revenue, higher costs and a lurch into losses.
In that update, Appen revealed plans for some quick cost-cutting with an unknown number of jobs going and other cuts to be made after it reported revenue for the four months ended April 30 dropped about 21% to $95.7 million from a year-ago period, while its gross profit fell 25% to $35.8 million.
The company took a hit to its earnings last year from spending cuts by its major customers including Facebook, Google and Amazon due to inflation and rising interest rates.
Appen said its planned cost-saving initiatives are expected to deliver annualised cost savings of about $36 million in the 2023-24 financial year.
But judging from Tuesday’s announcement of the raising, it clearly doesn’t have enough money to do that and survive.
The company told the ASX that the proceeds of the raising “will be used to fund one-off costs associated with implementing the cost reduction program. Estimated costs are expected to be approximately $4 – 5 million relating to severance and will be reported as a non-recurring expense and excluded from underlying EBITDA for FY23 as well as leave provision payouts of $1.5 – 2 million that were provided for in the statement of profit or loss in prior periods.
“The remaining proceeds from the Equity Raising (after transaction costs) are expected to provide balance sheet flexibility and support general working capital requirements to support Appen’s return to profitability.”
An important indicator of the extent of the problems Appen face was the news that its lender, Westpac had “granted a waiver of financial covenants in relation to the June testing date for its Credit Facility, conditional on completion of the equity raising. The facility is currently undrawn.”
Bankers never do that for companies that pay their way, in fact they usually offer more. Westpac is doing its bit (it hasn’t lent any money from the facility – yet, but there’s a presumption that it will and it will then relax its covenants on any monies owed.
Appen’s CEO Armughan Ahmad said in Tuesday’s statement: “Appen is committed to its strategy to unlock the value of generative AI for enterprise customers while running the business with operational rigour. The Equity Raising is necessary to support the company as it delivers on identified cost out opportunities and returns to profitability.”
The raising will consist of an offer of fully paid ordinary shares through a 1 for six accelerated non-renounceable entitlement offer at $1.85 a share (a 19.6% discount to Monday’s last sale of $2.30) to existing eligible shareholders to raise around $38 million; and an institutional placement to raise around $21 million.
The shares were halted yesterday at Monday’s close of $2.30.
