(Nasdaq:CTCH) today announced that it has secured a $14.5 million line of credit from investment bank Torneaux. The new equity credit will allow the company to issue stock to the bank and receive cash in return. The bank will benefit from a 10% discount off the previous month's average CommTouch share price. The agreement stipulates that the lowest sum to be raised in this way will be $3 million and the highest will be $40 million.
CommTouch is limited to issuing four million shares, which at just under $4 per share means that its new line of credit is currently restricted to $14.5 million. Should the firm's stock price rise, its line of credit will increase in direct proportion and the dilution factor will decrease. If the bank purchases all 4 million shares it will become the largest CommTouch shareholder with a 20% stake.
CommTouch provides integrated email and messaging solutions to service providers, enterprises, wireless carriers and online businesses around the world. The company sought additional financing after releasing a severe earnings warning, and admitting that its Q4 income would only amount to 5.5 million, or half of analyst's expectations. The company had also changed its business module, abandoning its dot.com customer base and investors worried that the firm might not survive the coming year and would have to file for bankruptcy.
The firm's growth in 2001 is also expected to fall shy of expectations.
After accounting for losses in the previous quarter, CommTouch has $30 million in its coffers but expects to spend $8 million in Q1 of 2000. At such a high cash burn rate, the new funding will barely last one and a half quarters. CFO Eliezer Parnafes told TheMarker.com that anxiety over the firm's survival is unjustified and cash burn concerns are oversimplified and disregard efficiency measures and expected business improvements.
Parnafes says that the current business plan calls for a huge cash influx by Q1 in 2002, a projection that the firm's CEO Gideon Mantel agrees with. Clearly though CommTouch's future is hardly secure, and its ability to stick to its plans are also in question.
Parnafes admits that the firm's recent cash crisis is what led to the latest financing deal. He says that although CommTouch is not yet utilizing its new line of credit, it may do so later on.
Although the current deal gives CommTouch valuable breathing space, it will be short-lived unless its stock recovers on Nasdaq. At $4 a share, a price much scoffed at by CommTouch, the stock still has not reached rock bottom. Recently it traded closer to $2 a share. Any further decrease in the market cap will reduce the company's ability to raise funds in the future.
CommTouch is probably unhappy about the decision to postpone its secondary offering at $30 a share. Initially, the firm's management thought the price excessively low. Today though, management has little choice but to sell stock in an unclear, convoluted deal at 85% less than the price which had been offered in better days.