There wasn’t much ‘fun’ and nothing Fantastic (FUN) in the latest accounts and results from embattled toy group, Funtastic.
More red ink, weak revenues and a warning from the company’s auditors that there is “significant doubt” that the company can continue as a going concern in the wake of a larger-than-expected annual loss.
The shares ended steady on 1.6 cents with only 31,250 shares changing hands – a level of caution that was understandable given the huge risks involved in the company.
Funtastic, which counts Harvey Norman executive chairman Gerry Harvey and Lachlan Murdoch as shareholders, provided some good news – it trimmed its net loss to $23.4 million for the 2015-16 year to July 31, compared with a loss of $52.8 million for 2014-15.
But earnings before interest, tax, depreciation and amortisation from continuing operations slumped to a loss of $8.2 million, deeper than the loss of $6.5 million to $7.5 million forecast by the company in an update issued on August 1, the day after the July 31 balance date.
Funtastic blamed this on higher-than-expected write-downs associated with the end of its distribution partnership with educational games maker Leapfrog, whose parent company was acquired earlier this year.
Funtastic has been under rising pressures as its losses and debts have mounted. The company raised $3 million in April to help reduce debt level but in its August 1 statement, questions were raised about whether it was within its banking covenants (with its bankers who have lent it close to $50 million).
The accounts reveal that the company has a net asset deficiency of $17.1 million, and owes the National Australia Bank $48.9 million. Earlier this year this facility was extended until November 2018, but it has been classified as a current liability in the 2015-16 accounts.
But the company said that while "the bank facility provides sufficient flexibility to meet the Group’s fluctuating cash flow requirements", there were "significant uncertainties" around its cashflow forecasts, in part due to the restructuring of the Big W and Target chains. Their respective owners Woolworths and Wesfarmers are trying to turn the businesses around after extended periods of poor performance.
"The market environment in Australia has continued to be challenging with two of the company’s major customers embarking on their own transformation plans and leadership changes that have impacted on the short term performance of the business. It is anticipated that outcomes of these plans will lead to increased vertical integration resulting in further consolidation of their traditional supplier base. Whilst challenging, this further confirms the validity of our diversification strategy,” directors said
"Whilst foundations have been set, the process of researching and testing various business models to best establish and manage its new product development processes and global distribution channels, it has taken longer than originally anticipated. Despite the delays, the company has exciting new prospects in terms of product and distribution opportunities that will further add to its efforts to diversify.”
And Funtastic’s auditor, Stephen Roche from Deloitte, said the net asset deficiency, the size of the company’s loss and its debt load "indicate the existence of a material uncertainty that may cast significant doubt about the ability of the consolidated entity and the company to continue as going concerns".
"(W)e draw attention to Note 1 in the financial report, which indicates that the consolidated entity incurred a net loss before income tax of $21,900,000 and had a net operating cash outflow of $7,329,000 during the year ended 31 July 2016 and, as of that date, had a net asset deficiency of $17,098,000. These conditions, along with other matters as set forth in Note 1, indicate the existence of a material uncertainty that may cast significant doubt about the ability of the consolidated entity and the company to continue as going concerns and therefore, the consolidated entity and the company may be unable to realise their assets and discharge their liabilities in the normal course of business,” the auditor noted in his report.
But the company’s chief financial officer, Grant Mackenzie, insisted yesterday Funtastic is now on a much stronger footing after deep costs cuts and restructuring, and says its banking arrangement is no longer subject to covenants.
"This is the first financial year period where I haven’t had to go to the bank and get waivers and covenants," he told The Australian Financial Review. "The structure we’ve got, there are no covenants. We just need to keep within our limits and pay our interest bills,” he added.
The company said it had identified and was implementing just over $5 million of cost cuts, mainly in the areas of “staff, warehousing and office costs”. It said that senior management team will take pay cots of 10%-20% and its product development team will move from Hong Kong to Valencia, Spain.
While Funtastic has not provided firm forecasts for its 2017 earnings, is said on Monday that the first quarter of the financial year "has started positively" and the board "is confident that the company will meet its targets for 2017 as a profitable entity".
The company says it is now significantly more stable than in previous financial periods, with enhanced internal controls, sound cash management principles, reduction in excess inventories and appropriate short term financing. The first quarter has started positively and the Board is confident that the company will meet its targets for 2017 as a profitable entity.
The company continues its strategy of re-defining its core business and rightsizing the organisation for the future with the appropriate focus on the right products and markets. The organisation has gone through significant structural changes appointing key people in positions aligned to the company’s long term strategy. This has resulted in increased employee engagement with sound commitment and capabilities supported by appropriate incentive programs.
The company continues its focus on developing a strong, diverse and relevant range of new and innovative products enabling the company to effectively leverage its cost base. Trade and distributor inventory are currently operating at normal levels that will ensure a more solid performance.
