The auditors of beleaguered toy maker Funtastic have warned there is “significant doubt” that the company can continue as a going concern after it slumped to a bigger-than-expected annual loss.
Funtastic, which counts Harvey Norman executive chairman Gerry Harvey as one of its major shareholders, narrowed its net loss to $23.4 million for the year to July 31, compared with a loss of $52.8 million in the previous corresponding period.
But earnings before interest, tax, depreciation and amortisation from continuing operations slumped to a loss of $8.2 million, deeper than the loss of $5.5 million to $6 million forecast by the company on August 1.
The company blamed this on higher-than-expected writedowns associated with the end of its distribution partnership with educational games maker Leapfrog, whose parent company was acquired earlier this year.
Pressure has been building on Funtastic as its losses and debts have mounted. The company raised $3 million in April to help reduce debt level but in August it was questions over whether it may have breached its banking covenants.
The accounts reveal that the company has a net asset deficiency of $17.1 million, and owes 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 2016 accounts.
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 “transformation strategies” underway at its “key customers”.
This is likely to refer to Wesfarmers (which owns the struggling Target chain) and Woolworths (which owns the underperforming Big W discount departmern store business.
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”.
The company said it had identified and was implementing cost cuts worth $5.2 million, mainly in the areas of “staff, warehousing and office costs”.
The senior management team will take pay cots of 10-20 per cent and its product development team will move from Hong Kong to Valencia, Spain.
As well as further developing its cooking gizmos Chill Factor (a slushie-making device) and Zap Chef (which allows easier cooking in microwaves), Funtastic is keen to expand its partnership with Argentinean soccer star Leo Messi, with which they market a range of products including the Foot Bubble soccer game.
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”.
It said trade and distributor inventory “are currently operating at normal levels that will ensure a more solid performance.”
Funtastic shares, which have fallen more than 55 per cent since the start of the year, were unchanged a 2c in morning trade.