Financial Instruments

6 Months Ended

12 Months Ended

Jun. 30, 2023

Dec. 31, 2022

Financial Instruments [Abstract]

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 June 30 2023 £’000		At December 31 2022 £’000
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 June 30 2023		At December 31 2022
	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 June 30 2023		At December 31 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 derivative
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 rate		At  December 31 2022		At December 31 2021
	%	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 December 31 2022		At December 31 2021
	£’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 warrants			Embedded derivative
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 warrants
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 warrants			Private warrants			Embedded derivative			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 before tax 2022			Effect on profit before tax 2021
	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 before tax from discontinued operations			Effect on pre-tax equity
	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 2022			At December 31 2021
	£’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