External auditors at Deloitte & Touche have expressed concerns that continuing losses by Notore Chemical Industries Plc raise significant doubts about the ability of the company to continue as a going concern.
In its audit report for the 2023 business year, released yesterday at the Nigerian Exchange (NGX), the auditors stated that there were “material uncertainty related to going concern” status of the company.
The external auditors noted that Notore incurred net loss of N114.3 billion in 2023 as against N7.2 billion in 2022, with accumulated losses rising from N38.9 billion in 2022 to N148.6 billion in 2023.
The report also noted that the group had net current liabilities grew to N130.1billion in 2023 compared with N72.1 billion in 2022
“These events or conditions, along with other matters as set forth in Note 30, indicate that a material uncertainty exists that may cast significant doubt on the group and the company’s ability to continue as a going concern,” Deloitte & Touche stated.
Key extracts of the audited report and accounts for the year ended December 31, 2023 showed that turnover dropped from N32.30 billion in 2022 to N21.55 billion in 2023. Gross loss stood at N12.1 billion in 2023 as against gross profit of N2.90 billion in 2022. Operating profit of N7.22 billion in 2022 reversed to loss of N23.04 billion in 2023.
The group’s huge indebtedness to banks also impacted its performance. Finance costs jumped from N19.18 billion to N23.45 billion. Exchange difference on bank borrowings leapt from N4.08 billion in 2022 to N67.69 billion in 2023. With these, loss before tax jumped from N16.04 billion to N114.18 billion. After taxes, net loss stood at N114.25 billion in 2023 as against N7.16 billion in 2022.
While total assets rose from N279.21 billion to N352.45 billion, shareholders’ funds halved from N75.38 billion in 2022 to N42.81 billion in 2023.
Providing further clarity on the auditors’ concern, the board of the company stated that there wera also concerns that the timing of the approval of the Securities and Exchange Commission (SEC) to finalise the equity raise process to enable the company to access the equity funds deposited by the new investor in the escrow account in Providus Bank Limited is uncertain due to procedural delay.
The report also noted that the group and the company’s ability to retain its customer base when they become fully operational due to long year of non-production and sales which may negatively impact the recoverability of their market share.
It also expressed worried that the continued support of gas suppliers and the finalisation of repayment plans to settle their outstanding payments to mitigate interruption in gas supply.
“These events or conditions indicate that a material uncertainty exists that may cast significant doubt on the group and the company’s ability to continue as a going concern so as to be able to realise their assets and discharge their liabilities in the normal course of business,” the report noted.
The board of the company however stated that it has taken numerous steps with a view to increasing its plant production capacity output, operational stability, improve working capital and return to profitability.
According to the report, the board has taken steps to inject equity capital into the company.
“The company over the past few months explored various equity raise options and finally settled on additional capital injection through an offer for subscription. After careful consideration and evaluation, the company identified a suitable investor and obtained approval from the board of directors to proceed with the equity raise.
“An emergency general meeting of shareholders was convened, and approval was granted to move forward with the equity raise and have submitted our request for approval to both the Securities and Exchange Commission and Federal Competition and Consumer Protection Commission. The expectation is to finalise the equity raise by 30th April 2024.
“The funds raised-N105.8 billion will be utilised for the following purposes: bank debt repayment and restructuring, plant-related capital expenditure, purchase of critical spares, and other company sundry liabilities. We believe that this capital injection will not only enhance our ability to seize market opportunities but also contribute to the overall growth and long-term stability of the company and establish a foundation for future expansion,” the board stated.
The board stated that it was aware that the capital injection would not be sufficient to cushion the total debt exposure, so in addition to the capital injection through equity raise, and the intended continuous support of the new investor, more steps have been taken to improve the cash flows generation.
On spare parts, the company noted that the major challenge regarding production capacity is the unavailability of sufficient spare parts that would significantly reduce downtime. The plan is to begin purchasing spare parts as funds are transferred from the escrow account to the company. We expect production capacity and uptime to be bumped up to at least 90 per cent on completion. The company aims to reduce shutdown years and enhance production output by investing in equipment and spares, leading to increased cash flows. The additional cash flow from improved production volumes will lead to immediate increases in cash flow, ensuring timely payment of obligations.
On exchange rate edge, given that some of the bank debt is in dollars, the strategy is to channel a larger portion of production to the export market. This will ensure that maturity foreign currency loans are paid when due.
“We are also exploring options with the banks to convert foreign currency debt to local currency. This approach will effectively manage currency risks. We already have off-take agreements with two international buyers and expect to sell about 95,000MT to the export market this year. At current prices, that translates to revenue of over $30 million,” the board stated.
On debt restructuring, the company stated that it has engaged its lenders on debt restructuring and already working on extending loan tenor and thereby reducing monthly repayment amounts to better align with our expected cashflows.
“We firmly believe that these actions demonstrate proactive measures to strengthen the group and company’s financial position and manage its working capital effectively. To forestall further occurrences, the business-initiated discussions with various gas suppliers and the new operators of the OML-18 JV. An agreement has been reached with the JV partners on the terms of the Gas Supply Agreement (GSA), which is scheduled to be executed and signed in the coming weeks. These actions are anticipated to improve stability in the upcoming financial year and beyond.
“The directors believe that upon the implementation of the above-mentioned measures, the company would return to profitability and settle its obligations as they fall due and consider it appropriate to prepare the consolidated financial statement of both the group and the company based on the accounting policies applicable to a going concern,” the board stated.
