No wonder Funtastic is looking to delist from the ASX to save money and hopefully raise enough new money to continue in business.
According to the company’s brief half year report filed with the ASX at 7.10pm on Friday, the company’s future is clouded to say the least.
The report showed a fall in revenue, lower costs and a smaller loss for the latest half year compared with a year ago.
But the directors and the company’s auditors have both cast considerable doubt on whether Funtastic is a “going concern” if its financial performance is worse than expected.
The shares fell to a 10th of a cent on Friday – down 12.5%. The company is worth just $5.1 million.
After having carefully assessed the Group’s forecasted cash flows and with increased control over costs, the directors believe that the Group will continue to operate as a going concern for at least the next 12 months and it is therefore appropriate to prepare the financial statements on the going concern basis,” directors said.
But they added “Should the Group’s actual results vary significantly from forecast and it is unable to manage any shortfall through the measures outlined above, a material uncertainty would exist as to whether the Company and the Group will be able to continue as a going concern and therefore whether they will realise their assets and discharge their liabilities in the normal course of business.
Directors said the financial report does not include any adjustments relating to the recoverability and classification of the recorded asset amounts, nor to the amounts and classification of liabilities that might be necessary should the Company and the Group not continue as a going concern. And auditors Grant Thornton wrote in the report:
"Included within Note 3 of the financial report, the Company has reported Goodwill amounting to $14,163,000. We have been unable to obtain sufficient appropriate audit evidence in respect to forecasts relating to new product revenue and margins to be achieved on these products contained within the Directors’ assessment of Goodwill. These uncertainties may require an impairment of Goodwill in the future, should management be unable to achieve these targets.
“We draw attention to Note 1 of the financial report, which indicates that the consolidated entity incurred a net loss of $4,400,000 during the half-year ended 31 January 2017 and, as of that date, the consolidated entity’s current liabilities exceeded its current assets by $45,285,000 with a net asset deficiency of $21,325,000.
“These conditions along with other matters set forth in Note 1, indicate the existence of a material uncertainty which may cast significant doubt about the consolidated entity’s ability to continue as a going concern. Therefore, the consolidated entity may be unable to realise its assets and discharge its liabilities in the normal course of business, and at amounts stated in the financial report. Our opinion is not modified in relation to this matter.“ the auditors said. But the company must have some sort of future because the interim report reveals that the National Australia Bank has given an extra $3 million loan.
"Based on the Group’s forecasts, the company has secured additional short term funding of $3,000,000 from the NAB ($1 million from a participation agreement with a related entity to Mr. N. Pizmony) in order to meet the Group’s fluctuating cashflow. This, together with the flexibility of the bank facility provides sufficient flexibility to meet the Group’s fluctuating cash flow requirements. However, in assessing the Group’s cash flow forecasts, the Directors note the following significant uncertainties:
"Although the Directors are confident the cash flow forecasts are realistic and achievable after applying a more conservative sales forecast and implementing cost reductions, the Group’s product portfolio contains many new items and operates in many diverse countries. These together with the concentration of the Australian retail environment (where some key customers are going through transformation strategies and facing increased competition) coupled with short product lifecycles, means forecast accuracy involves significant uncertainty.
"Whilst certain months are forecasted to have limited headroom to the facility limits, cash flow forecasts have been assessed against possible sensitivity scenarios and the Group is satisfied that the headroom is sufficient. However, in the event that a potential shortfall does arise, such shortfalls would have to be mitigated by the Group negotiating extended payment arrangements with creditors, early payment arrangements with major customers, and/or negotiating additional funding sources. The ability to negotiate such arrangements, if required, is uncertain, directors said.
The interim report reveals that the company incurred a loss before tax from continuing operations of $1,906 million (2016: $2,501 million) and net operating cash inflow of $1,348 million (2016: outflow $5,944 million). Directors said these "in the current financial period are an improvement over the same period last financial year. The improvement in the loss before income tax from continuing operations is primarily driven by an improved gross margin, reduced overheads and a lower impairment charge to the Income statement in the current financial year of $ nil (2016: $377,000).”
"Whilst the result from continuing operations for the first half of the financial year was an improvement over the same period for the prior year, business conditions remain challenging. Management has significantly reduced the fixed costs of the business, reducing the risk of incurring further losses. With cost reductions, margin improvement and securing of additional agency partners, the consolidated entity (“Group”) expects to improve its financial performance and return to a profit over the next twelve months.
"There is a net current liability position of $45,285,000 (excluding borrowings, the net current asset position is $3,967,000) and a net asset deficiency of $21,325,000 (2016: 17,098,000). Included in the current liabilities is bill finance of $27,965,000. Whilst this facility does not mature until 1 November 2018 along with the total facility, because it has a review date for November 2017, it has been classified as a current liability as at 31st January 2017 in accordance with accounting standards.”
Looking to the future, directors were upbeat in their outlook statement.
“We have secured a number of new agencies which will, over time, help to return the company to growth. We remain committed to the expansion of our own brands through new product development and innovation. Margins will continue to improve with better products, less clearance activity and new channel development. Further cost reduction initiatives have been implemented, the full benefits of which will materialise over the next twelve months. We have commenced the process to de-list which will enable the company to reduce costs associated with listing, improve its ability to raise capital and restructure its debt arrangements.
"We continue to work closely with the company’s main financier The National Australia Bank “NAB” who continue to provide support and are currently in negotiation with in relation to the restructure of its debt. We are confident that with the addition of new agencies, continued development of our brands, the full benefits of the cost savings initiatives and a restructured Balance Sheet, that the company will return to profits. The implementation of these changes will continue into the second half of this financial year, with the full benefits materialising in 2018. Of course, no dividend has been declared.
