This excerpt is from SG's last published Financial Report. Given the statements and the balance sheet (link in post above) it is puzzling, at least to me, why all of the financial eggs were dumped into the 7,000,000 Pound Magenta basket.
Funding & Cash Flow
As at the balance sheet date the Group had cash balances of £2.5m and a loan of £14.3m repayable in March 2023, provided there is no event of default in the meantime. This loan is due to Phoenix S. G. Limited, the Group's controlling shareholder. The Group has headroom of £2m remaining on this facility. Net cash inflows from operating activities for the six months ended 30 September 2020 were £0.2m (2019: £0.5m outflow). This was achieved despite the impact COVID-19 had on our revenues. The Group has benefited from property rates being waived for 2020 (£0.1m), UK government schemes (VAT and furlough - £0.1m), a delay in pension contributions (£0.2m), waiving of interest cost (£0.2m) and non-payment of US rent (£0.2m). Other savings have been identified in operating costs and have been actioned by the Group's management. Some of the savings identified are due to unwind during January to March 2021. Since 30 September 2020 the Group has completed a £0.9m transaction of older inventory to a trade buyer. The deal was on commercial terms consistent with other bulk transactions of old inventory but generated a small loss. As at 20 November 2020 the Group had net cash balances of £2.2m and £2m of headroom remaining on the facility.
The Group's forecasts show that it will remain within current loan facility limits, although it will draw down the remaining £2m headroom, for the foreseeable future. Although the Directors have built the forecast based on current trading trends, including the impact of the COVID-19 pandemic, and historical knowledge of the business, the Directors recognise that forecasts are dependent on the underlying assumptions and that trading conditions can always be affected by unforeseen events. The COVID-19 pandemic has increased the uncertainty of the assumptions that the Directors use to forecast future liquidity. The pandemic has impacted consumer confidence in the wider economy, which has directly led to a fall in the Group's revenue and impacted other areas of the Groups operations. The Group's forecast indicates that the remaining £2m facility will be drawn down in the next 12 months. The Directors have mitigating courses of actions which are available to them to limit the impact of the pandemic including operating cost initiatives, the faster sell down of Group's large inventory holding, discussing options with long term creditors of the business and approaching lenders for further short term funding. The loan facilities are provided by the Group's controlling party Phoenix S. G. Limited and are due for repayment in March 2023. The Group would have been in default of the financial covenants at 31 March 2020, which would result in the loan becoming payable on demand. On 27 March 2020 the Group sought and was granted a waiver from Phoenix S.G. Limited for the default. The forecast, taking into account of the implications on the Group's demand of the COVID-19 pandemic, shows the Group will fail to meet its financial covenants in March 2021. The Directors recognise that Phoenix S. G. Limited had granted the waiver of the default at 31 March 2020, stated that it intends to be a long term investor, is the Group's controlling party with an interest of just over 58%, granted a waiver of interest for the period April to July 2020, and has given no current indication that it would withdraw its support before March 2023 when the loan facility is repayable. As such, having regard to the matters above, and after making reasonable enquiries and taking account of uncertainties discussed above, the Directors have a reasonable expectation that the Company and the Group have access to adequate resources to continue operations and to meet its liabilities, as and when they fall due, for the foreseeable future. For that reason, they continue to adopt the going concern basis in the preparation of the accounts.
Regular readers of our report will be aware of the overarching goals of the Group and our approach to achieving these is unchanged. I have also talked before about the challenge of providing any definitive outlook for this type of business and this has, for obvious reasons become even more difficult. However, with the benefit of a prudent approach to costs, some significant sales of old inventory – at fair, as opposed to fire sale prices – and the aforementioned efforts of everybody at the Group, a few months ago we challenged ourselves to aim for a whole financial year without needing to draw down further on our debt facility. While there is still a lot of work to do and more battles to be won, I believe that we are on course to achieve this. This would be the first time in several years where we would be able to say that we had neither increased borrowing or heavily discounted some of our best inventory, while also continuing to invest in the future rather than diminishing our long-term prospects. There are many moving parts to this, some of which may not recur, and we may well need to draw down further on our debt facility in the subsequent year; however, it would undoubtedly be indicative of the progress being made if we are able to achieve this. Part of the desire to keep pushing forward includes an appreciation of our financial position and as one would expect our focus on costs includes those associated with our largest liabilities. We proactively and constructively engaged with all our major, non-trade creditors at the start of the crisis and are thankful for the support we received. Just like the crisis, these discussions continue and we are hopeful of making further, significant, progress on all fronts. We have been disrupted and we have been bloodied by the impact of COVID-19 but we have come out fighting and fought hard, continuing to make progress and keeping our sights on our longer term ambitions. To all shareholders, suppliers, customers and colleagues, I hope you remain healthy and wish you the best for what will undoubtedly be an unusual festive season. I look forward to reporting to you further in future, hopefully with the global pandemic well behind us.