Concerns are mounting that Faritec could fail if it does not urgently receive the R60 million in funding it has been trying to raise for several months.
On Monday, the company told the market it had ditched its original plan to raise the R60 million it needs in order to implement a turnaround strategy and keep operating. Now it is in talks with another party to raise half of what it needs, with the balance expected to come from converting debt to shares.
This news came on the back of an e-mail, sent to staff last Friday, in which they were told that salaries would be paid late due to “Faritec's current financial constraints”. Faritec told staff they will only be paid half of their April salaries last Sunday, and the rest would follow by early next month.
Monday's announcement that the fund-raising plan had been changed did not indicate why majority shareholder Shoden and the management consortium, which includes CEO Fanie van Rensburg, had decided not to go ahead with a 50% underwritten rights offer.
Hopeful
However, Faritec, which has 320 employees, is in further discussion with the management consortium and Tabara Investments, with the hope that the two entities will invest R30 million in Faritec.
In addition, Faritec aims to swap debt owed by Faritec Enterprise Solutions to creditors for shares. Creditors will receive shares worth 1c for every 1c of debt that is owed by Faritec.
Faritec's shares have plummeted from a five-year high of 171c, on 28 May 2007, to close at 3c on Monday, the last closing price as the market was closed for a public holiday on Tuesday.
Later in April, Faritec concluded a deal with storage company Shoden Data Systems, which saw the latter take a controlling interest in Faritec, in return for R29 million.
I owe, I owe
At the end of December, Faritec owed R157.8 million to creditors, but was owed R94.6 million by its debtors. Faritec warned the market on Monday that its working capital is under pressure, but said it was selling off non-core items and trimming operating costs.
At the end of March, Faritec reported a loss of R14.4 million for the six months to December. While this is a substantial improvement on the R159.5 million loss it reported for the full-year to June, it does raise doubts about its ability to continue operating.
The company's half-year results included the warning that: “The group's current trading conditions give rise to an uncertainty, which may cast doubt about the group's ability to continue as a going concern.”
However, at the time, the listed company was confident that “if the scheme and the rights offer are implemented, the board is of the opinion that Faritec will be well positioned to recover strongly”.
Faritec's auditors previously queried whether the company can continue operating. Auditor Charles Orbach & Company noted Faritec incurred a net loss of R159.5 million for the year to June. The auditor added that it had continued to incur losses and has restricted cash flows.
“These conditions... indicate the existence of a material uncertainty, which may cast significant doubt on the group's and company's ability to continue as a going concern.”
Warning bells
Chris Gilmour, an analyst with Absa Investments, says “when people don't get paid their full amount of money, warning bells go off”.
He says Faritec's inability to pay full salaries on pay day indicates a serious cash flow problem. “It usually doesn't get much worse than this. In my experience, this suggests that the end of the road may not be too far away.”
Warwick Lucas, an analyst with Imara SP Reid, says he doesn't think creditors have any choice but to convert their debt to shares. However, he does not hold out much hope for Faritec.
Irnest Kaplan, MD of Kaplan Equity Analysts, says he is hopeful that Faritec's alternative fund-raising measures will work. However, it is a difficult time to be raising money on the market, he adds. “It is a tough time to be asking shareholders for money.”
Kaplan says, operationally, Faritec is moving in the right direction as it has been narrowing its losses.
Faritec CEO Fanie van Rensburg says he is not in a position to comment on the company's financial situation at the moment, but will do so in about two or three days.
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