Thorn Group (ASX: TGA) has reported a statutory net loss after tax of $14.9 million for the 2019 financial year, casting doubt on whether it will exist in the foreseeable future.
The loss marks a staggering 676 per cent drop from FY18 and is well below guidance issued on 1 April 2019, which foreshadowed a loss of only $8 million.
The company says its results were impacted by a struggling Radio Rentals which triggered a $10 million asset impairment, coupled with a slew of bad debt.
Thorn also reported revenue of $221.9 million (down from $234.3 million in FY18).
The company is now subject to a drawstop, meaning they must obtain lender consent before accessing the undrawn balance of their borrowing facility.
As a result, $10 million worth of further drawdowns can only take place with the lender's prior approval.
Thorn says the auditor's report includes a material uncertainty related to going concern and an emphasis of matter of uncertainty regaring the unresolved class action litigation.
Ultimately, Thorn is uncertain as to whether they will survive for the foreseeable future.
"As a consequence of the above matters, a material uncertainty exists that may cast significant doubt as to whether Thorn will be able to continue as a going concern and therefore whether Thorn will be able to realise its assets and extinguish its liabilities," says Thorn.
Despite these problems, the company expects to return to profit in FY20.
Managing director and CEO Tim Luce says Radio Rentals has ongoing problems made worse by a difficult retail environment.
"As we forecast, the challenges facing Radio Rentals are taking time to resolve," says Luce.
"With retail trading conditions difficult and customer's financial positions tight, it has been a difficult year for profits. We remain encouraged that our renewed customer focus on choice, value and convenience has led to increased sales and, with the market consolidating with the exit of a major competitor, we look forward to further improvement."
The company's strategic review is ongoing but Thorn's directors say that if a sale of Radio Rentals is to occur they are looking to go no lower than $172 million.
That major competitor mentioned by Luce is likely to be the South Australian business also called Radio Rentals.
Ironically, it has also been a definitive year for the SA Radio Rentals brand, which is not owned by Thorn Group. It closed in April, leaving hundreds of employees in the lurch.
Thorn's problems are not exclusively localised to its Radio Rentals division. The company's business finance arm was required to make an $11.5 million provision for the predicted non-recovery of debts from a set of customers who challenged the enforceability of their leases in an industry wide issue.
"Thorn Business Finance was forced to slow its pace of originations in the face of capital constraints, but the business has performed well despite being forced to take a large provision against an unexpected industry wide issue," says Luce.
"The outlook for Business Finance remains positive with strong demand for its products and the new warehouse debt facility in place."
Thorn Group is currently embroiled in a class action brought by Maurice Blackburn regarding its Radio Rentals business.
The case relates to allegations that Radio Rentals engaged in deceptive and/or unconscionable conduct on the basis that customers paid excessive amounts on their Rent Try $1 Buy leases.
It argues that, contrary to Radio Rentals' advertising, customers were not entitled to buy the rented goods for $1.
Maurice Blackburn believes that over 200,000 people in Australia paid excessive amounts for these leases.
The action is scheduled for trial later this year, and the company's previous CEO and its insurer have now been joined to the action by the plaintiffs.
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