Following its first-quarter earnings release last week, streaming TV platform Roku (NASDAQ:ROKU) is now looking to raise approximately $500 million in fresh capital. In regulatory papers filed yesterday, the company said it had entered into an equity distribution agreement with Morgan Stanley and Citigroup to sell up to 4 million shares in an "at-the-market" offering.

The deal is not a secondary offering open to public investors; an equity distribution agreement is a type of private placement. Here's what investors need to know.

Roku Channel displayed on a TV mounted on a wall

Image source: Roku.

Raising up to $500 million

Roku says it will use the net proceeds for working capital and general corporate purposes, which may include debt repayment, capital expenditures, or acquisitions, according to the prospectus for the deal. The company does not have any current commitments or agreements regarding acquisitions or investments. Based on the stock's closing price on May 12, Roku estimates that the maximum gross proceeds from the deal could be as much as $508.6 million before factoring in fees and other expenses.

The company will have considerable discretion and flexibility in determining how many shares it sells, and the banks will earn a 2% commission for any shares that they help sell. There is no minimum offering amount required, so Roku hasn't yet determined how much it will ultimately raise through the agreement.

Saving for a rainy day

At the end of the first quarter, Roku had $590 million in cash on the balance sheet, meaning the company could nearly double those reserves at the high end of the offering. The company drew $70 million from its revolver, which CFO Steve Louden characterized as a "prudent move in light of current financial market conditions." Roku has another $30 million available on the $100 million credit facility.

The COVID-19 pandemic is creating unprecedented macroeconomic uncertainty, and while the crisis is resulting in higher levels of engagement as people end up watching more TV while staying at home, the flip side is that advertisers are starting to pull back on spending. Monetizing the increased engagement won't be that simple, particularly given advertising revenue represents the bulk of Roku's platform segment.

Roku acknowledged last week that it experienced an uptick in video ad campaign cancellations in March as the coronavirus outbreak spread around the world. As one might expect, advertisers from sectors getting hit especially hard by the pandemic -- travel, restaurants, and theaters, among others -- are canceling ad campaigns because consumers aren't spending much money in those industries right now.

Considering the uncertainties ahead, raising cash now is a smart move to reduce financial risk. Additionally, raising equity capital instead of debt also offers flexibility because that money doesn't need to be repaid, and dilution will be minimal since the stock is currently trading at a lofty valuation. Besides, Roku doesn't need to take on any more debt than it already has ($167 million).

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