SeaDragon auditor PwC struggles to find evidence supporting asset valuations; withholds opinion

Sea Dragon is New Zealand’s largest refiner and blender of high-quality, internationally-certified Omega fish oils. Photo: Getty Images

SeaDragon's annual accounts got a black mark from its auditors for a second year, with PwC declining to express an opinion on the financial statements after failing to find enough evidence supporting the fish oil supplement maker's asset valuations.

The Nelson-based company today released its annual report, having published unaudited accounts earlier this month showing a narrower loss of $6.1 million in the year ended March 31, while also negotiating a $6 million lifeline from its cornerstone shareholders. PwC's audit report shows the firm couldn't reliably predict SeaDragon's future cashflows to support the $11.6 million value attributed to property, plant and equipment (PP&E), and was unable to validate management's valuation on $537,000 of a particular type of inventory or find independent evidence supporting the realisable value of inventory.

"As a result, we were unable to obtain sufficient appropriate audit evidence to support the carrying value of the PP&E and inventory recorded in the consolidated statement of financial position," PwC said. "Consequently, we were unable to determine whether any adjustment to the carrying values were necessary as at 31 March 2018, and the consequential impact on the consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and the consolidated statement of cash flows."

The auditor again noted the material uncertainty over SeaDragon's ability to continue as a going concern, citing conditions attached to the $6 million convertible note issue to major shareholders and the question marks over the company's ability to hit sales targets.

PwC gave a qualified opinion on the 2017 accounts over the $12.2 million valuation of property, plant and equipment, and in 2016 it noted SeaDragon's cash outflow and net debt position as creating an uncertainty over its ability to continue trading. That concern was also raised by previous auditor Staples Rodway in the 2015 accounts.

SeaDragon's directors said the company's ongoing losses were due to lengthy product testing delaying sales, regulatory changes blocking access to key customers and minor process deficiencies that have since been rectified.

The report said management's estimates include "an assessment of the level of sales and margin to be made from new concentrated products" that SeaDragon doesn't currently make "but has negotiated toll arrangements with other parties to produce the product on its behalf". Despite the uncertainty, the board believes "the company has the ability to generate sufficient operational cash flow combined with the $6 million facility to continue operations for at least 12 months from the date of authorising the financial statements."

SeaDragon's operating cash outflow widened to $4.7 million in the year ended March from $3.9 million a year earlier. It raised $1 million in the year through another convertible note, leaving it with cash of $1 million as at March 31.

The shares last traded at 0.3 cents, valuing the firm at $13.5 million.