Auditors warn of Seadragon's going concern ability as firm breaches covenant

Seadragon's [NZX: SEA] auditors have warned the fish oil extractor may not have sufficient cash reserves to meet its obligations if it fails to achieve its forecast cash flow and doesn't receive continued support from investors and financiers.

In a note to the company's audited financial accounts, PWC indicates an uncertainty that casts doubt on the Nelson-based company's ability to continue as a going concern.

In a statement published with its annual report, Seadragon said it had breached an agreement with one of its lenders because it wrote down the value of its Omega-2 fish oil stocks.

The fish oil extractor agreed to sell its Omega-2 inventory to what it describes a major international food and fine chemicals company for about $2.5 million. As a result, it wrote down the value of its inventory by a further $600,000, bringing the total write-down of inventory for the year to $4.3 million.

Seadragon said the write down meant that the company "did not comply with one of its lending covenants set out in its lending facilities with Heartland Bank as of 31 March 2016 and 30 June 2016." Seadragon breached an agreement that covers the ratio of working capital it must hold compared to its debt.

Heartland Bank agreed to waive compliance and is in discussions with Seadragon about using some of the $2.5 million raised from the sale of the Omega-2 stocks to repay some of its debt.

The announcement was made as Seadragon published its audited financial results for the year to the end of March. Sales fell to $5.6 million from $6.2 million a year earlier. The net loss almost doubled to $5.5 million from $2.8 million a year earlier. It had previously flagged an unaudited net loss of $4.9 million.

Chairman Colin Graves said the results reflected the downturn in the Omega-2 market. "Recent weakness meant we were unable to meet sales targets for the last financial year and led to our Omega-2 inventory levels being much higher than usual at year end," he said, adding that the industry sale of its Omega-2 stocks was a "major step in executing our strategy to exit the Omega-2 markets".

Seadragon is taking a number of steps to try to preserve its cash position. It is cutting its operating costs, exiting office leases where they are not fully used and looking to speed up the sale of stocks that are selling slowly or are not seen as crucial to the business. It is also looking to ramp up sales of its Omega-3 products.

Its financial accounts show it had $195,000 in cash and was due to receive $685,000 in trade and other receivables for the year ended March 31, 2016. It owed $884,000 to trade creditors and had an overdraft of $3.87 million.

Graves said the company was reviewing the terms of their relationship with its bankers and looking at options to raise additional capital "if needed". Notes to the financial accounts show the company's response to questions about Seadragon's ability to continue as a going concern is to seek additional cornerstone investors and look at other funding options. It raised $10 million in a rights issue last September.

The results were released at about 5pm as the market closed. Seadragon shares were unchanged at 1.3 cents today and have fallen 7.1 percent since the start of the year.

(BusinessDesk)