Freedom Foods Group Ltd (ASX: FNP) has finally revealed its FY20 result to investors. It has also outlined the accounting pain.
What has Freedom Foods been doing?
It has been around five months since the company first announced some accounting difficulties
and it has been suspended for months.
In summary, its financial position has now been established following a rigorous process with independent advisors. It will require a significant recapitalisation, so shareholders will need time to understand the results before this can occur.
Freedom Foods has been engaging with its customers and suppliers and undertaken reviews of its operations and product range.
The company has secured $45 million of interim liquidity, guaranteed by the major shareholder, and a standstill agreement with its lenders.
It has been conducting investigations to find out what happened whilst rebuilding its management team. It has also rebuilt its financial reporting, cashflow, monitoring and improving its financial reporting tools.
Freedom Foods said it had improved its management processes, updated its costing standards and accounting policies and practices.
It has had an external audit done, including the restatement of historical financial accounts.
Summary of accounting matters
Freedom Foods said there was a $372.8 million impact on its fixed assets – its capitalisation practices have been reviewed and amended, with costs reclassified. Only directly attributable expenses will be capitalised. It’s a similar story with new product development costs with a $38.9 million impact, an impairment was recognised for underperforming products.
For an impact of $60.1 million, inventory stock take and write-off policies and practices have been reviewed and amended, result in writedowns being recognised.
Revenue and receivables were reviewed, with an impact of $22.1 million. The company said that long-dated receivables were unlikely to be collected, so it has provided provisions for those. Policies for provisioning and credit losses have been formalised.
Accrual recognition practices have been reviewed, trade spend will be accrued when the inventory is sold to the customer – for an impact of $11.9 million.
There was another almost $10 million of impacts relating to share based payments and ‘other’.
Finally, Freedom Foods recognised a $75.9 million impairment of its goodwill and brands value.
FY20 result
In FY20, Freedom said it grew revenue by 26% to $580.2 million. Offshore revenue rose by 29% to $109.8 million and now represents 19% of overall revenue.
Dairy and nutritional revenue rose 37% (this includes UHT dairy milk, nutritional products and performance powders). Plant-based beverage revenue went up 30% (which includes soy, rice and almond milk and liquid stocks), this includes MilkLab. Its cereal and snack revenue declined 14% to $69.9 million with reduced sales to Asia (this includes the brand Messy Monkeys).
FY19 numbers were restated, but Freedom Foods’ adjusted EBITDA (EBITDA explained) rose 2% to a loss of $86.5 million.
The net loss worsened by 20% to $174.5 million, after showing a loss of $145.8 million in FY19.
Net debt soared 125% to $275.2 million.
Recapitalisation
Freedom Foods has decided the best approach is an ASX-listed convertible note. It’s anticipated the capital raising will raise up to $280 million and existing shareholders are expected to be able to participate.
Major shareholder Arrovest intends to participate.
This is intended to complete in the middle of December.
Summary thoughts
This has been quite the process and it’s still not quite finished. It’s good to see there’s a path to the finish line though. I don’t know if it would be worth investing in after all this, so I’d prefer to focus on other ASX growth shares with a simpler set of accounts like Pushpay Holdings Ltd (ASX: PPH).
