Crocs Steps onto Going-concern Turf

The fad shoemaker's annual report is qualified by Deloitte, the latest in a group of troubled companies that is widening by the week.
Stephen TaubMarch 18, 2009

The stream of companies getting going-concern qualifications from their auditor is widening as the downturn deepens — and as accounting firms get more cautious.

Stepping out in the latest round of warnings about what their auditors might say about future viability was Crocs Inc., which got its start in a footwear fad. But walking that path in the days before were companies including Poniard Pharmaceuticals, biofuels company Verenium Corp., and hotel operator Lodgian Inc.

In its annual report, Crocs said that auditor Deloitte & Touche expressed “substantial doubt” about the company’s ability to continue as a going concern. Deloitte cited the maturity of the company’s revolving credit facility on April 2 and losses from operations. On Feb. 13, Crocs extended the facility until that date, and will be required to pay all amounts outstanding. Crocs said that it currently is discussing an asset backed credit facility to replace the revolving credit facility. However, it warned it may not procure the new asset backed credit facility in time and may need to seek an extension of the maturity date with its current lenders.

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“We are also exploring other means of raising capital including equity financing,” it said, though it could not offer assurances that it will be able to secure additional debt or equity financing, or receive an extension of the current revolver. As a result, its liquidity and ability to pay its obligations when due could be adversely affected, Crocs warned. It also said that it is currently evaluating its operating plans for 2009, considering “restructuring and right-sizing activities.” It said its ability to keep operating “is dependent upon achieving a cost structure which supports the levels of revenues we are able to achieve.”

Shares of Crocs, whose market cap is slightly above $100 million, dropped more than 7 percent on the news.

Poniard Pharmaceuticals said on Monday that its audited financial statements for the Dec. 31 fiscal year contained a going-concern qualification from KPMG. Unless it raises additional funds, Poniard noted, it will be in default of the minimum unrestricted cash requirement and potentially other provisions of its loan facility. After a default “we might not have sufficient funds to repay the loan or to fund our continuing operations,” the company said, and strong measures might then be forced, including selling the company, ceasing operations, or declaring bankruptcy.

Verenium said its accountant raised “substantial doubt” about its ability to continue as a going concern, citing recurring losses from operations, the company’s operating plan and existing working capital deficit. The company, which plans to build a $300-million biorefinery with oil giant BP PLC, said that it needs capital to fund the project, and that it believes it “will be successful in raising or generating additional cash to fund these requirements through a combination of additional corporate partnerships and collaborations, federal, and state grant funding and loan guarantees, project financing, including non-recourse debt, product sales, selling or financing assets, and, if necessary and available, the sale of equity or debt securities.” In its annual report, it also said that if it were unsuccessful in raising additional capital it might need to defer, reduce or eliminate expenditures. “If we are not able to reduce or defer our expenditures, secure additional sources of revenue or otherwise secure additional funding, we may be unable to continue as a going concern, and we may be forced to restructure or significantly curtail our operations, file for bankruptcy or cease operations,” it added.

Lodgian said that about $128 million of outstanding mortgage debt is scheduled to mature in July 2009, but the “current severe economic recession” has negatively impacted its operating results, which affects operating cash flows and the company’s ability to refinance the maturing indebtedness. “In the absence of an extension, refinancing or repayment of the July 2009 debt, these factors raise substantial doubt as to our ability to continue as a going concern,” it warned. Lodgian has hired mortgage bankers to help it refinance its debt. It is also trying to extend the maturing mortgage debt. “However, management can provide no assurance that we will be able to refinance or extend the debt,” it conceded.