UMAM Umami Sustainable Seafood Inc (CE)

By Ian Gilson, PHD, CFA

When Umami Sustainable Seafood Inc. (OTC:UMAM) reported its second quarter results it stated that there was insufficient cash flow to meet its requirements over the next six months. The company is also in default on $30.0 million of debt due on Dec. 31, 2012, which has not been paid as of April 16, 2013, and debt due in one year is $56.6 million. There is also $16.9 million in receivables from Atlantis that is probably worthless.

Excluding the write off of $2.08 million (a provision for doubtful accounts) the company made a profit of $1.2 million and $0.02 a share. However, as shown below, gross margins declined on a Y/Y basis. Cash on the balance sheet declined from $10.8 million to $$4.3 million and that included borrowings of $25.2 million.

The tuna catch in the first quarter was a record. Tons sold over the six months were well below the prior year numbers. Given the significant amount of tuna in inventory in the 60 to 90 Kg range ($31 million) at the end of the first quarter it is surprising that sales were not higher in the second quarter. Also, by our calculation (which is not the one the company uses), growth of the fish stock was a record in the first quarter and for the six months of the current fiscal year.

Despite a record price paid for the first tuna sold at the Japanese auction (which, in our opinion, has, in the past, been a reasonable guide to the season's pricing) the company recorded a significant decline in selling prices in the second quarter, as shown above. Part of this was due to a decline in the value of the yen versus the US dollar but the company recorded a decline in selling prices per kilogram.

On Dec. 20, 2012 Daito Gyorui acquired, by purchase, 13 million shares in Umami, representing close to 22% of the shares outstanding at that time. Daito Gyorui was the largest buyer of tuna from Umami in the 2010 fiscal but did not buy any fish in the first six months of fiscal 2013.

Effective Dec. 8, 2012 Oli Steindorsson, CEO Board Chairman, resigned from Umami and all of its subsidiaries. Subsequent to his resignation the Board of Directors determined that his resignation should be deemed a termination for cause, and all of his vested and unvested options were cancelled. Since then Mr. Steindorsson and The Atlantis Group, which he controlled, have declared bankruptcy.

Mr. Steindorsson was replaced by Mr. James White, a member of the Board since Jan. 2011. Mr. White has significant experience in the mining and gold industries. The company has stated that they are conducting a search for a new CEO. The company does not currently have a board member with the experience and knowledge of the Japanese tuna business of the previous CEO.

Given the cash flow problems of the company and the apparent problems in appointing an experienced CEO we have decided to rate the company "Underperform" and discontinue coverage.

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