| Financial instruments | 12. Financial instruments 12.1 Financial assets Set out below is an overview of financial assets,
other than cash and short-term deposits, held by the Group as at June 30, 2023 and December 31, 2022:
At At
Financial assets at amortized cost
Trade receivables 18,888 24,475
Contract assets 263 248
Lease deposits 4,356 5,664
23,507 30,387
Current 19,151 24,723
Non-current 4,356 5,664 12.2 Financial liabilities Set out below is an overview of financial liabilities
held by the Group as at June 30, 2023 and December 31, 2022: Financial liabilities: Interest-bearing loans and borrowings
At At
Interest rate % Maturity £’000 £’000
Current
Convertible Notes 2% Within one year 1,248 1,301
Stocking loans Base rate + 0.5% – 2% On earlier of sale or 180 days 82,350 161,592
Subscription facilities Base rate + 1.7% Within one year 763 14,983
Secured asset financing 3% – 12% Within one year 1,024 1,479
Bank loans Within one year — 30
Lease liabilities 1% – 13% Within one year 17,972 28,596
103,357 207,981
Non-current
Convertible Notes 2% 2027 275,169 265,631
Secured asset financing 3% – 12% 2026 – 2027 2,338 4,113
Lease liabilities 1% – 13% 2024 – 2042 76,056 88,864
353,563 358,608 Other financial liabilities
At At 2022
£’000 £’000
Financial liabilities at fair value through profit or loss
Warrants 16 515
Embedded derivative 78,978 82,108
78,994 82,623
Current — —
Non-current 78,994 82,623 12.3 Fair value Management assessed that the fair value of trade
receivables, other receivables, stocking loans, subscription facilities, secured asset financing and trade and other payables approximate
their carrying value due to the short-term maturities of these instruments. The fair value of trade receivables, other receivables,
stocking loans, subscription facilities, secured asset financing and trade and other payables has been measured using Level 3 valuation
inputs. Warrants are classified as Level 3 due to the
use of unobservable inputs. The fair value is determined using a Black-Scholes model. The public warrants are classified as Level 3
due to the use of unobservable inputs. The fair value is determined using a Binomial Lattice model. The public warrants were previously
classified as Level 1 as at December 31, 2022 with a fair value of £0.2 million. However, they were transferred into Level 3 during
the six months ended June 30, 2023 following the suspension in trading of the public warrants by the NYSE on January 3, 2023. The embedded derivative of the Convertible Notes
is classified as Level 3 due to the use of unobservable inputs. The fair value is determined using a Monte-Carlo simulation to model the
conversion, redemption and repayment premium features. The following table provides the fair value measurement
hierarchy of the Group’s financial assets and financial liabilities as at June 30, 2023:
Level 1 Level 2 Level 3 Total
At June 30, 2023 £’000 £’000 £’000 £’000
Warrants — — 16 16
Embedded derivative — — 78,978 78,978
— — 78,994 78,994 The following information is relevant in the determination
of fair value of the warrants and the embedded derivative at June 30, 2023:
Warrants Embedded
Expected term (years) 7 4
Expected volatility 81.1 % 79.6 %
Dividend yield Nil Nil
Risk free interest rate 4.08 % 4.38 % Reconciliation of fair values The fair value movements are set out as follows:
Warrants
Embedded derivative Total
£’000
£’000 £’000
At January 1, 2023 515 82,108 82,623
Fair value movement (478 ) 226 (252 )
Foreign exchange movements (21 ) (3,356 ) (3,377 )
At June 30, 2023 16 78,978 78,994 The fair value decrease and foreign exchange movements
is recognized in the statement of profit or loss within other income and expenses. Sensitivity analysis For
the warrants, a 100 basis point increase in the expected volatility rate would increase the fair value by £0.0 million. For the embedded derivative, a 100 basis point
increase in the credit spread would decrease the fair value by £76.6 million. | 24. Financial instruments 24.1 Financial assets Set out below is an overview of financial assets,
other than cash and short-term deposits, held by the Group as at December 31, 2022 and December 31, 2021:
At December 31 At December 31
2022 2021
£’000 £’000
Financial assets at amortized cost
Trade receivables 24,475 14,796
Contract assets 248 3,451
Lease deposits 5,664 5,124
Total financial assets 30,387 23,371
Current 24,723 18,247
Non-current 5,664 5,124 24.2 Financial liabilities On February 16, 2022, the Company issued $630.0
million in aggregate principal amount of 2.00% Convertible Senior Notes due 2027. This was equivalent to £460.0 million in net proceeds,
with £208.7 million attributable to the financial liability and £251.3 million attributable to the embedded derivative. The Convertible Notes will be convertible at the
option of the holders at any time after November 6, 2022 and prior to the close of business on the second scheduled trading day immediately
preceding February 16, 2027. In addition, the Company may force the conversion of the Convertible Notes on or after February 16, 2025,
if the trading price of the Company’s Class A Shares exceeds 150% of the conversion price for at least 20 trading days (whether
or not consecutive) in any consecutive 30 trading day period. If the Convertible Notes have not been converted,
repurchased or redeemed at or prior to February 16, 2027, holders of the Convertible Notes will also be entitled to payment of a premium
at maturity of the Convertible Notes, equal to 50% of the principal amount of the Convertible Notes. The premium is payable in cash, Class
A Shares, or a combination of cash and Class A Shares at the option of the Company. The premium will not be payable if the trailing 10
trading day volume weighted average price of the Class A Shares is above $135.00 (after giving effect to the reverse stock split) for
any trading day beginning on (and excluding) March 4, 2024 and ending on (and including) March 18, 2024 (the “premium fall-away
trigger”), provided that in connection with a share exchange event on or prior to March 4, 2024 involving a third party acquirer,
the premium fall-away trigger shall be tested using the fair market value of the consideration paid per Class A Share on the date of the
share exchange event or if resulting in less consideration, the date on which any lock-up applicable to holders of the Class A Shares
expires after the share exchange event. For the avoidance of doubt, this premium will not be payable by the Company (i) in the event of
a mandatory conversion on or prior to the maturity date, (ii) in the event of a voluntary conversion by a holder on or prior to the maturity
date, (iii) in connection with the redemption of the Convertible Notes on or prior to the maturity date, or (iv) in connection with a
make-whole Fundamental Change or an offer to purchase Convertible Notes upon a Fundamental Change. The Convertible Notes were not guaranteed or secured
upon issuance but will receive the benefit of any guarantees or security provided at any time for the benefit of certain other indebtedness
of the Company for borrowed money issued or incurred in the future, other than indebtedness incurred to purchase, finance or refinance
the purchase of vehicles, vehicle parts, supplies and inventory and certain other indebtedness. The Indenture also contains covenants,
events of default and other provisions which are customary for offerings of convertible notes. Set out below is an overview of financial liabilities
held by the Group as at December 31, 2022 and December 31, 2021: Financial liabilities: Interest-bearing loans and borrowings
Interest At December 31 At
% Maturity £’000 £’000
Current
Convertible Notes 2% Within one year 1,301 —
Stocking loans Base rate + 0.5% – 2.2% On earlier of sale or 180 days 161,592 169,170
Subscription facilities Base rate + 1.7% Within one year 14,983 10,188
Secured asset financing 3% – 7% Within one year 1,479 —
Bank loans Within one year 30 635
Mortgages — 547
Lease liabilities 1% – 13% Within one year 28,596 18,826
207,981 199,366
Non-current
Convertible Notes 2% 2027 265,631 —
Stocking loans — 8,809
Subscription facilities — 56,987
Secured asset financing 3% – 7% 2027 4,113 —
Bank loans — 815
Mortgages — 1,502
Lease liabilities 1% – 13% 2024 – 2042 88,864 71,574
358,608 139,687 The Convertible Notes are accounted for as a hybrid
financial instrument comprising: (i) a liability for the principal and interest amount, and (ii) a single compound embedded derivative
instrument for the conversion options and premium feature. The embedded derivative is presented within Financial liabilities at fair value
through profit or loss on the next page. The stocking loans are secured against the inventory
of the Group. The stocking loan facilities have varying due dates, ranging from the earlier of a sale of a vehicle by the Group to a customer
or 180 day term from the inception of the individual loan. The stocking loans rates are in reference to the Bank of England base rate
or SONIA. At December 31, 2022, the Group had available a maximum of £240.0 million of committed stocking loans. Other financial liabilities
At At
£’000 £’000
Financial liabilities at fair value through profit or loss
Warrants 515 42,692
Embedded derivative 82,108 —
82,623 42,692
Current — —
Non-current 82,623 42,692 As at December 31, 2022 there were
41,254,566 warrants outstanding. The warrants entitle the holder to purchase one Class A ordinary share of Cazoo Group Ltd at a current
exercise price of $230.00 per share (after giving effect to the reverse stock split). Until warrant holders acquire the Class A Shares
upon exercise of such warrants, they have no rights with respect to the Class A Shares.
Public Private Total
Number Number Number
At December 31, 2021 20,124,748 21,129,818 41,254,566
At December 31, 2022 20,124,748 21,129,818 41,254,566 24.3 Fair value Management assessed that the fair value of trade
receivables, other receivables, stocking loans, subscription facilities and trade and other payables approximate their carrying value
due to the short-term maturities of these instruments. The fair value of trade receivables, other receivables,
stocking loans, subscription facilities and trade and other payables has been measured using Level 3 valuation inputs. Public warrants are classified as Level 1 due
to the use of an observable market quote in an active market. Private warrants are classified as Level 3 due to the use of unobservable
inputs. The fair value is determined using a Black-Scholes model for the private warrants. The embedded derivative of the Convertible Notes
is classified as Level 3 due to the use of unobservable inputs. The fair value is determined using a Monte-Carlo simulation to model the
conversion, redemption and repayment premium features. The following table provides the fair value measurement
hierarchy of the Group’s financial assets and financial liabilities:
Level 1 Level 2 Level 3 Total
At December 31, 2022 £’000 £’000 £’000 £’000
Warrants 166 - 349 555
Embedded derivative - - 82,108 82,108
166 - 82,457 82,623
Level 1 Level 2 Level 3 Total
At December 31, 2021 £’000 £’000 £’000 £’000
Warrants 13,418 - 29,274 42,692 The following information is relevant in the determination
of fair value of the private warrants and the embedded derivative at December 31, 2022:
Private Embedded
At December 31, 2022
Expected term (years) 7 4
Expected volatility 93.4 % 62.3 %
Credit spread N/A 25.9 %
Dividend yield Nil Nil
Risk free interest rate 3.9 % 4.1 % The following information is relevant in the determination
of fair value of the private warrants at December 31, 2021:
Private
At December 31, 2021
Expected term (years) 7
Expected volatility 47.1 %
Dividend yield Nil
Risk free interest rate 1.4 % Reconciliation of fair values The fair value movements are set out as follows:
Public Private Embedded Total
£’000 £’000 £’000 £’000
At December 31, 2020 - - - -
Warrants issued upon acquisition of Drover - 6,566 - 6,566
Fair value movement - 102 - 102
Exercise of warrants - (6,667 ) - (6,667 )
Warrants issued in the Transaction 22,475 46,887 - 69,362
Fair value movement (9,057 ) (17,614 ) - (26,671 )
At December 31, 2021 13,418 29,274 - 42,692
Issuances - - 251,287 251,287
Fair value movement (14,799 ) (32,298 ) (198,769 ) (245,866 )
Foreign exchange movements 1,547 3,373 29,590 34,510
At December 31, 2022 166 349 82,108 82,623 The fair value decrease and foreign exchange movements
is recognized in the statement of profit or loss within other income and expenses. Sensitivity analysis For the private warrants, a 100 basis point increase
in the expected volatility rate would increase the fair value by £0.02 million. For the embedded derivative, a 100 basis point
increase in the expected volatility rate would increase the fair value by £0.04 million. A 100 basis point increase in the credit spread would decrease the fair value by £2.8 million. 24.4 Interest rate risk management Interest rate risk is the risk that changes in
interest rates will affect the income and financial management of the Group. The Group is exposed to interest rate risk through its stocking
loans and subscription facilities where interest is charged in reference to a base interest rate. However, the exposure to interest rate
risk is minimal since the Group is in a net cash position as at December 31, 2022 and December 31, 2021 and is therefore able to reduce
exposure through repayment of the facilities. The Group does not hedge against interest rate risk.
Change Effect on profit Effect on profit
in basis points £’000 £’000
Loans and borrowings +100 (2,350 ) (1,393 )
Loans and borrowings -100 1,754 95 A 100 basis points decrease in interest rates
would have less effect on profit before tax than a 100 basis points increase in interest rates because the Group’s stocking loans
and subscription facilities are generally subject to reference rate floors. 24.5 Foreign currency risk management Foreign currency risk is the risk that the fair
value or future cash flows of an exposure will fluctuate because of changes in foreign exchange rates. The Group is exposed to foreign
currency risk through its remaining operating activities in Europe (when revenue and expenses are denominated in Euros) and through certain
expenses denominated in US dollars. The Group does not currently hedge against currency risk through the use of financial instruments
such as foreign currency swaps. The following tables demonstrate the sensitivity
to a reasonably possible change in EUR exchange rate, with all other variables held constant. The impact on the Group’s profit before
tax is due to changes in the fair value of monetary assets and liabilities. The Group’s exposure to foreign currency changes for
all other currencies is not material.
Increase/decrease
Effect on profit from discontinued operations Effect on
in EUR rate £’000 £’000
2022 +5 % (8,613 ) (6,516 )
-5 % 8,613 6,516
2021 +5 % (1,336 ) (1,170 )
-5 % 1,336 1,170 24.6 Credit risk management Credit risk is the risk of financial loss to the
Group if a customer or bank (“counterparty”) fails to meet its contractual obligations resulting in a financial loss to the
Group. The Group is exposed to credit risk from its operating activities (primarily trade receivables) and from its financing activities,
including deposits with banks and financial institutions. For retail and wholesale sales, the Group’s
exposure to credit risk is minimal since the settlement of amounts due for the sale of a vehicle to a consumer is completed prior to the
delivery of the vehicle. The trade receivables balance represents customer funds to be received from our consumer finance partners and
payment gateway provider. For subscription sales and third-party reconditioning,
the expected credit losses are estimated using a provision matrix based on the Group’s historical credit loss experience, adjusted
for factors that are specific to the debtors, general economic conditions and an assessment of both the current as well as the forecast
direction of conditions at the reporting date, including time value of money where appropriate. Credit risk from balances with banks and financial
institutions is managed in accordance with the Group’s treasury policy. The Group’s maximum exposure to credit risk on cash
and cash equivalents is the carrying amount of cash and cash equivalents on the statement of financial position. 24.7 Liquidity risk management Liquidity risk refers to the ability of the Group
to meet the obligations associated with its financial liabilities that are settled as they fall due. The treasury strategy of the Group is to retain
cash on the balance sheet by financing the purchase of inventory and to maximize interest received while maintaining liquidity and flexibility
in the availability of funds. The table below summarizes the maturity profile
of the Group’s financial liabilities based upon contractual undiscounted payments:
Less than one year 1 to 5 years Over 5 years Total
At December 31, 2022 £’000 £’000 £’000 £’000
Convertible Notes 10,411 554,366 - 564,777
Stocking loans 164,478 - - 164,478
Subscription facilities 15,354 - - 15,354
Secured asset financing 1,727 4,408 - 6,135
Bank loans 30 - - 30
Lease liabilities 24,203 56,324 72,644 153,171
Trade payables 68,201 - - 68,201
Total 284,404 615,098 72,644 972,146
Less than one year 1 to 5 years Over 5 years Total
At December 31, 2021 £’000 £’000 £’000 £’000
Stocking loans 169,170 8,809 - 177,979
Subscription facilities 12,155 65,797 - 77,952
Bank loans 741 869 - 1,610
Mortgages 600 1,653 - 2,253
Lease liabilities 18,917 46,772 34,526 100,215
Trade payables 29,224 - - 29,224
Total 230,807 123,900 34,526 389,233 24.8 Changes in liabilities arising from financial
activities
Stocking loans Subscription facilities Secured asset financing Bank loans Mortgages Lease liabilities Convertible Notes and embedded derivative Warrants Total
£’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000
At December 31, 2020 86,709 - - - 3,494 48,048 - - 138,251
New leases - - - - - 26,228 - - 26,228
Acquisition of subsidiaries - 19,878 - 1,468 - 36,352 - 6,566 64,264
Issue of debt 665,325 107,683 - 30 - - - - 773,038
Repayment (574,055 ) (60,386 ) - (48 ) (1,445 ) (18,597 ) - - (654,531 )
Terminations - - - - - (2,969 ) - - (2,969 )
Net accrued interest - - - - - 1,338 - - 1,338
Warrants issued and exercised - - - - - - - 62,695 62,695
Fair value movement - - - - - - - (26,569 ) (26,569 )
At December
31, 2021 177,979 67,175 - 1,450 2,049 90,400 - 42,692 381,745
New leases - - - - - 51,757 - - 51,757
Sale and leasebacks - - - - - 5,466 - - 5,466
Transfers - - - - - (3,529 ) - - (3,529 )
Acquisition of subsidiaries - 10,193 - - - 6,276 - - 16,469
Disposal of subsidiaries - (14,731 ) - - - (5,878 ) - - (20,609 )
Issue of
debt 1,202,039 101,967 5,971 3 11 - 460,021 - 1,770,012
Repayment (1,218,426 ) (120,559 ) (379 ) (1,423 ) (2,060 ) (29,198 ) - - (1,372,045 )
Terminations - - - - - (2,307 ) - - (2,307 )
Net accrued interest - - - - - 5,245 33,425 - 38,670
Fair value movement - - - - - - (198,769 ) (47,098 ) (245,867 )
Foreign exchange movements - - - - - 231 54,363 4,921 59,515
Liabilities
held for sale - (29,062 ) - - - (1,003 ) - - (30,065 )
At December
31, 2022 161,592 14,983 5,592 30 - 117,460 349,040 515 649,212 24.9 Hedge accounting The Group has not entered into any agreements
designed to hedge financial risk in the year ended December 31, 2022 (2021: none, 2020: none). 24.10 Derecognition of financial instruments The Group has not recorded any gains or losses
arising through the derecognition of financial assets or financial liabilities in the year ended December 31, 2022 (2021: none, 2020:
none). The Company is not subject to any externally imposed
capital requirements. 24.11 Capital management For the purposes of the Group’s capital
management, capital includes cash raised through the issue of share capital and stocking and subscription loans. The primary objective
of the Group’s capital management is to finance operational and developmental activities. Stocking loans are used specifically by
the Group to finance the purchase of inventory.
At December 31 At December 31
£’000 £’000
Inventory 232,565 364,585
Stocking loans (161,592 ) (177,979 )
Net inventory 70,973 186,606
Cash and cash equivalents 258,321 192,629 |
