REG - Warpaint London PLC - Results for the year ended 31 December 2020
28 April 2021
Warpaint London PLC
("Warpaint", the "Company" or the "Group")
Results for the year ended 31 December 2020
Warpaint London plc (AIM: W7L), the specialist supplier of colour cosmetics and owner of the W7 and Technic brands is pleased to announce its audited results for the year ended 31 December 2020.
2020 Financial Highlights
·
Group revenue of £40.3 million (2019: £49.3 million) in light of the Covid-19 pandemic and the impact of temporary closures of a number of customers' retail outlets
·
Cash generated from operating activities increased by 70.7% to £7.5 million (2019: £4.4 million)
·
Adjusted profit from operations of £2.5* million (2019: £5.6* million)
·
Reported loss before tax of £1.1 million (2019: profit before tax £1.8 million)
·
Adjusted earnings per share of 3.1p* (2019: 6.3p*)
·
The Group continued to generate significant cash and cash at the year end increased by 81.5% to £4.9 million (31 December 2019: £2.7 million)
·
Final dividend recommended of 3.0 pence per share, bringing the total dividend for the year to 5.8 pence per share, including a special dividend of 1.3 pence per share paid in November 2020 to reflect that no final dividend was declared for 2019
* Adjusted for £0.3 million of exceptional costs (2019 £0.2 million),£2.4 million of amortisation of intangible assets (2019: £2.4 million) and share based payments of £0.7 million (2019: £0.8 million). Adjusted numbers are closer to the underlying cash flow performance of the business which is regularly monitored and measured by management.
2020 Operational Highlights
·
Swift reaction to the impact of Covid-19 with a plan quickly formulated and successfully executed
·
Repositioned business to increase focus on mainstream high street stores and online
·
Commencement of sales of:
· W7 products in Tesco stores
· Technic and Body Collection products in wilko stores
·
Launch of Amazon FBA and e-Commerce revenue significantly accelerated in the UK and the USA
·
Rationalisation of brand and product range in line with focused strategy
Post-Period End Highlights
·
Improved trading experienced in the first quarter of 2021 - sales for the first three months of 2021 9% ahead of the same period in 2020, a period that was only impacted by Covid-19 related lockdowns in its last few weeks, with sales increases seen in all the Group's geographic regions
·
Product gross margin improved in the first quarter of 2021 versus the same period in 2020.
·
Further expansion in the number of Tesco stores stocking the Group's products and the stocking of additional W7 product lines
·
Further product expansion in USA with W7 products now being stocked in over 1,000 Five Below stores
·
The Company is now debt free with the remaining loans and HP contracts totalling £0.3 million being repaid in full in April 2021. As at 27 April 2021 the Company had cash balances of £5.8 million
Commenting, Clive Garston, Chairman, said: "2020 was a year dominated by the Covid-19 pandemic. These were unprecedented trading conditions, with the economy and industry facing some of its most significant challenges ever. Warpaint entered the pandemic in robust health, with a strong balance sheet and an agile management team capable of dealing with the challenges. I believe the Group has weathered the pandemic storm well and has proved its flexibility and resilience in dealing with an unprecedented and unforeseeable situation.
"During the year we took the opportunity to reposition the business to increase our focus on mainstream high street stores and to build our online presence. We also worked to ensure that our product range, pricing and customer base gives us the best possible opportunity for future growth as the world recovers.
"I am particularly pleased to note the progress we have made with the expansion of the number and type of UK retailers stocking the Group's products and the growth of our online presence during 2020, together with the more recent roll out with Five Below in the USA.
"Trading improved in the second half of 2020 and we are pleased to report this trend has continued into the first quarter of 2021. I am optimistic that these encouraging trends will continue and that we have the right strategy in place to deliver profitable future growth."
This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014 which is part of UK law by virtue of the European Union (Withdrawal) Act 2018
Investor Webinar
Warpaint's management will be hosting an online presentation and Q&A session later today at 5.30 p.m. BST. This session is open to all existing and prospective shareholders. Those who wish to attend should register via the following link and they will be provided with access details:
https://us02web.zoom.us/webinar/register/WN_PV_VdWVcQJWjoEyrdf8cyQ
Participants will have the opportunity to submit questions during the session, but questions are welcomed in advance and may be submitted to: warpaint@investor-focus.co.uk.
Enquiries:
Warpaint London
c/o IFC
Sam Bazini - Chief Executive Officer
Eoin Macleod - Managing Director
Neil Rodol - Chief Financial Officer
N+1 Singer (Nominated Adviser & Joint Broker)
020 7496 3000
Shaun Dobson, Jen Boorer, Alex Bond - Corporate Finance
Tom Salvesen - Corporate Broking
Shore Capital (Joint Broker)
020 7408 4090
Patrick Castle, Daniel Bush - Corporate Advisory
Fiona Conroy - Corporate Broking
IFC Advisory (Financial PR & IR)
020 3934 6630
Tim Metcalfe
Graham Herring
Florence Chandler
Warpaint London plc
Warpaint is made up of two divisions.
The largest division sells branded cosmetics under the lead brand names of W7 and Technic. W7 is sold in the UK primarily to retailers and internationally to local distributors or retail chains. The Technic brand is sold in the UK and continental Europe with a significant focus on the gifting market, principally for high street retailers and supermarkets. In addition, this division supplies own brand white label cosmetics produced for several major high street retailers. The Group also sells cosmetics using our other own brand names of Man'stuff, Body Collection, Vintage, Very Vegan, and Chit Chat.
The other division trades in close-out and excess inventory of branded cosmetics and fragrances from around the world.
HEADLINE RESULTS FOR THE YEAR ENDED 31 DECEMBER 2020
Statutory Results
Year ended 31 Dec 2020
Year ended 31 Dec 2019
Revenue
£40.3m
£49.3m
Profit / (loss) from operations
£(0.9)m
£2.1m
Profit margin from operations
na
4.3%
PBT / (LBT)
£(1.1)m
£1.8m
EPS / (LPS)
(1.3)p
1.8p
Cash
£4.9m
£2.7m
Adjusted Statutory Results
Year ended 31 Dec 2020
Year ended 31 Dec 2019
Revenue
£40.3m
£49.3m
Adjusted profit from operations
£2.5m*
£5.6m*
Adjusted profit margin from operations
6.2%*
11.4%*
Adjusted PBT
£2.3m*
£5.2m*
Adjusted EPS
3.1p*
6.3p*
Cash
£4.9m
£2.7m
* Adjusted for £0.24 million of staff restructuring and voluntary redundancy costs (2019: £0.07 million), and inventory relocation costs in the US of £nil (2019: £0.08 million) and £0.08 million of legal costs (2019: £0.03 million) and £2.4 million of amortisation of intangible assets (2019: £2.4 million) and share based payments of £0.7 million (2019: £0.8 million). Adjusted numbers are closer to the underlying cash flow performance of the business which is regularly monitored and measured by management.
CHAIRMAN'S STATEMENT
2020 was a year dominated by the the Covid-19 pandemic. Prior to the onset of the pandemic, trading in the first two months of the year was strong. However, with global lockdowns commencing in March the picture changed dramatically and the Group witnessed a significant reduction in sales as many of our customers' retail outlets in the UK which were regarded as non-essential and in other markets were forced to close, in particular in the EU and the USA. These were unprecedented trading conditions, with the economy and industry facing some of its most significant challenges ever.
Warpaint entered the pandemic in robust health, with a strong balance sheet and an agile management team capable of dealing with the challenges presented by the pandemic. During the year we took the opportunity to reposition the business to increase our focus on mainstream high street stores and to build our online presence. We also reviewed our brands and product lines with a subsequent reduction in the number of products. This enabled us to remove those that do not fit with our strategic goals and worked to ensure that our product range, pricing and customer base gives us the best possible opportunity for future growth as the world recovers.
I believe the Group has weathered the pandemic well and has proved its flexibility and resilience in dealing with an unprecedented and unforeseeable situation. I am particularly pleased to note the progress we have made with the expansion of the number and type of UK retailers stocking the Group's products and the growth of our online presence during 2020. Trading improved in the second half of the year and we are pleased to report this trend has continued into the first quarter of 2021.
Results
Revenue was significantly impacted as a consequence of the pandemic, with a corresponding impact on Group profitability. It is the board's opinion that without the impact of the coronavirus pandemic 2020 would have been a year of recovery and improvement in financial performance for the Group, a statement which is supported by the robust trading we saw in the first two months of 2020.
Adjusted profit from operations was £2.5 million (2019 £5.6 million) on revenue of £40.3 million (2019 £49.3 million) with basic earnings per share of (1.3)p (2019 1.8p) and adjusted earnings per share of 3.1p (2019 6.3p). Adjusted numbers exclude exceptional costs (staff restructuring and voluntary redundancy costs, certain legal costs and stock relocation costs), amortisation in relation to acquisitions and share based payments.
During 2020, the Group took the opportunity to streamline and reduce stock levels, with cash generated from operations increasing by 70.7% . The balance sheet remains strong, with cash at 31 December 2020 of £4.9 million (31 December 2019 £2.7 million), and management are confident Warpaint entered 2021 as a more efficient business with an improved focus.
Dividend
As announced in our results for 2019 the board decided in the interests of prudence given the considerable on-going uncertainty caused by Covid-19 at the time, and in order to further preserve its cash resources, not to recommend a final dividend for 2019. However, as the business adapted to the issues presented by Covid-19 and the outlook improved the Group resumed dividend payments at the time of the 2020 interim results with an interim dividend declared of 2.8p per share, maintaining the prior year interim dividend of 1.5p per share, together with a one off additional 1.3p per share, to reflect that no final dividend was declared for 2019.
In accordance with the Group's policy to continue to pay appropriate dividends, the board is pleased to recommend a final dividend of 3.0p per share which, if approved by shareholders at the AGM, will be paid on 5 July 2021 to shareholders on the register at 18 June 2021. The shares will go ex-dividend on 17 June 2021.
Board and People
The pandemic has dramatically impacted the personal and working lives of everyone. For the team at Warpaint this has required significant changes to working practices and personal uncertainties to be overcome. I am delighted with the way in which everyone has met these challenges and I would like to offer my particular thanks this year to my fellow board members and the Group's employees for their exceptional efforts, good humour and resilience in these difficult times.
As announced in November 2020 the Company has commenced a search for an additional non-executive director following Paul Hagon's move to an executive role and I anticipate that we will be able to make an appointment during the first half of 2021.
Annual General Meeting
The Company's annual general meeting will be held on 11 June 2021 at 10.00 a.m. In light of the continuing public health restrictions associated with the Covid-19 pandemic, further details of the annual general meeting arrangements will be provided when the notice of annual general meeting is sent to shareholders.
Outlook
I was pleased that despite much of the world having some level of lockdown during the first three months of 2021 and the continued enforced temporary closure of a number of the Group's customers' retail outlets, sales for the first three months of 2021 in all the Group's geographic regions were ahead of the same period in 2020, a period that was only impacted by Covid-19 related lockdowns in its last few weeks. Product gross margin has also improved in the first quarter of 2021 versus the same period in 2020.
We are growing sales in the UK, and the launch of our products in over 1,000 Five Below stores in the USA is a significant step for the Group. We anticipate adding further retailers in due course and with our growing online sales we are well positioned for the future.
I am optimistic that these encouraging trends will continue and that we have the right strategy in place to deliver profitable future growth.
Clive Garston
Chairman
27 April 2021
CHIEF EXECUTIVE'S STATEMENT
The Covid-19 pandemic has had and is still having, a significant impact on people's lives and businesses. Warpaint was not immune to its effects and whilst we continued to perform well with retailers that stayed open, the temporary closure of many retail outlets had a significant impact on our business.
At the beginning of the outbreak, and before the impact was felt in the UK, our initial focus was around the supply of our colour cosmetic products sourced in China, this being the main region of supply to the Group and I am pleased to report we experienced no impact on the availability of our product.
As the pandemic hit the UK the wellbeing of the Warpaint staff was our primary concern, whilst also continuing to ensure we traded to support the durability of our business for stakeholders. We took significant preventative measures across our business, both to protect the health of our staff and to minimise operational disruption.
As countries began to lock down first in Europe, then in the UK and USA, consumer demand switched to essential items and food, and away from colour cosmetics, particularly as their social interactions were curtailed. In response we reduced discretionary spend, those staff not working because of the decrease in business activity were furloughed and we temporarily deferred rental payments. Those staff still working to maintain operations did so wherever possible from home, and for those staff working in our offices and warehouses social distancing practices were quickly put in place to ensure their safety.
In the second half of the year, as the world adapted and some retail outlets reopened, demand returned for Warpaint's products. As sales and orders returned nearer to expected levels, so too did our discretionary spend (with the exception of PR, exhibitions and travel costs), nearly all staff returned to work full time and rental payments were bought up to date and recommenced. The Group utilised minimal government Covid-19 related support other than the UK Government's furlough scheme, which was used for a short period of time during the first lockdown and where affected staff continued to be paid in full, and a small amount of temporary support in the USA covering three employees.
We also took the opportunity in 2020 to review our overall strategy, rationalise our product range and increase our focus on online sales. I believe this strategy is already bearing fruit and I am particularly pleased with the trends in the UK, highlighted by the commencement of sales in Tesco and wilko stores.
W7
The Group's most significant brand remains W7, with sales in 2020 accounting for 45% of total Group revenue (2019: 46%). Overall W7 sales reduced by 19% in 2020 compared to 2019.
However, in the UK, W7 revenues in 2020 increased by 8%, despite the impact of the pandemic and an 18% reduction in H1 2020 sales compared to H1 2019. The UK is the most important market for W7, having grown in importance to account for 47% of sales in 2020, compared to 35% in 2019. We have implemented a strategy in the UK which we believe will increase sales of the W7 brand further and are seeing the fruits of this with the successful launch of the W7 brand into Tesco, including a further increase in both the number of Tesco stores stocking W7, and the number of W7 products being stocked, in the first quarter of 2021. We are in discussions with other major retailers in the UK with a view to them stocking W7 products.
Internationally W7 sales were down in all reported regions due to the strict lockdowns imposed due to the Covid-19 pandemic, particularly in the first half of the year. In Europe sales fell by 29% compared to 2019, in the USA sales fell by 53% compared to 2019, and in the rest of the world sales fell by 34% compared to 2019.
Towards the end of the year, as Covid-19 lockdowns eased, we saw a strong recovery for W7 in the UK, Europe and the rest of the world, with sales in the later months of the year in line with the board's budget for the year, set prior to the Covid-19 pandemic. This trend has continued through the first quarter of 2021, with an especially positive performance for W7 in the UK, despite the reintroduction of lockdowns in the UK and elsewhere.
We believe that W7 has a compelling brand proposition and will continue to benefit from consumers wanting a high quality but cost effective product.
Technic
The Technic brands comprise Technic, Body Collection and Man'stuff. Since the acquisition of the Technic brands, through the acquisition of Retra Holdings in November 2017, we have taken steps to improve the sales of the all year round cosmetics sold under the brands, and to make the business profitable throughout the whole year, not only in the second half when Christmas gifting is delivered. The split of gifting at 48% and single products at 52% remained the same as in 2019, although there was a shift to more all year round from specific Christmas focussed gifting product.
Sales of branded Technic product in 2020 was 36% of total Group revenue (2019: 34%). Overall Technic sales only declined by 10% despite the Covid-19 impact, as the brands have a strong presence in essential retailers, although the largest customer for the Technic brands was closed for significant parts of the year.
In 2020, UK revenues were 49% of Technic's sales and they decreased by 11% over the year, despite being down 30% in the first half. The improved second half performance was predominantly a reflection of the successful launch in September of a range of Technic and Body Collection branded products in wilko, with Christmas gifting delivered to wilko from October. We anticipate sales will continue to grow through wilko, particularly as store footfall increases following the opening of non-essential retail on the high street.
In Europe, Technic's largest market in 2019, sales fell by 9% compared to 2019. As with W7, sales fell in Europe due to the strict lockdowns in the key countries.
In the USA, sales increased by 11% compared to 2019, and in the rest of the world sales fell by 34% compared to 2019, albeit the sales were small in these regions in the context of the Group as a whole.
The business encompassing the Technic brands also produces and sells own brand white label cosmetics for several major high street retailers, with such sales being 7% of Group revenue (2019: 5%). These sales grew by 7% in 2020, compared to 2019. We continue to assess private label opportunities on a case by case basis, based on the return they can deliver.
As with W7 we saw a strong recovery in sales for Technic in the UK, Europe and the rest of the world since the easing of the Covid-19 lockdowns in the later part of 2020, with this trend continuing into 2021, despite the reintroduction of lockdowns in some territories.
Close-out
Whilst the Group's close-out division continues to provide a good source of intelligence in the colour cosmetics market the focus on these activities further reduced in 2020, particularly with the decision taken to significantly reduce close-out sales in the USA, as the Group concentrated on selling its own brands there. Consequently, the close-out division represented 12% of Group revenue in 2020, down from 15% in 2019 and 16% in 2018. Close-out sales have been intentionally reduced further in the first quarter of 2021, as the Group focuses on sales of its brands.
New Product Development
New product development remained a key focus of the Group's activity in 2020, despite the pandemic, and will continue to be core to the Group's proposition to provide new products that are on trend, fast to market and that meet the consumer's quickly changing needs.
Our New Product Development Team continues to develop a strong pipeline of new products, focussed on the demands of our customers. New products introduced in 2020 included the W7 skincare range, which has been extremely well received, with many positive online reviews, together with a revamping of the vegan range.
Our new product development strategy continues to utilise manufacturing partners, predominantly in China and Europe, that provide the best product quickly, for the best price, and meet our legal and ethical compliance requirements. This process is supported by the Group's Hong Kong based subsidiary sourcing office and its China subsidiary (Jinhua Badgequo Cosmetics Trading Company Ltd), with local employees able to explore new factories and oversee quality control and ethical sourcing.
The Group is also focussed on the environmental impact of its products and has removed all plastics from the outer packaging of its gifting and all year-round products, and has virtually eliminated the use of single use packaging in its products completely. The Group's product packaging therefore uses paper and cardboard wherever practicable, which enables the Group, the wholesaler and end user to recycle the waste effectively. In terms of the Group's product casings, the use of plastic is sometimes practically unavoidable but recyclable packaging is used wherever possible.
All new W7 brand products are being manufactured without parabens and the Company is reformulating existing products where feasible. The Group aims to be paraben free for all products in the next 24 to 36 months.
e-Commerce
During 2020 we placed an increased emphasis on driving online sales and ensuring that our online pricing was closely matched to that of our larger retailers. Whilst direct online sales remain a modest proportion of the Group's overall sales, they more than doubled from £0.2 million in 2019 to over £0.5 million in 2020, and we anticipate further significant progress in 2021. In Q1 2021 the Group's e-commerce sales were £0.24 million.
In 2020 we listed our brands in the UK, in May, and the USA, in August, on Amazon FBA (Fulfilment by Amazon), in addition to using our own websites, which has helped accelerate our online sales. The strategy is to appropriately apply marketing spend in order to generate further sales momentum and a further launch on Amazon EU is planned to be implemented in the near future.
Marketing and PR
In 2020 we continued our focus on ensuring our marketing programmes were both fresh and innovative, in both the traditional and social media environment. In particular we instituted a loyalty programme and specific social media programme targeted at driving website visit conversions into sales and increasing basket size.
Strategy
As previously outlined, in early 2018, the board adopted a three-year strategic plan for the business. This is measured, monitored and reviewed regularly and was updated by the board in 2021 with a view to it forming the basis of the Group's development through to the end of 2024. The plan is designed to drive shareholder value and has defined targets for sales, EBITDA, earnings per share and cash generation, with a particular emphasis on driving incremental EBITDA growth. The strategic plan comprises six key pillars:
· Develop and build the Group's brands and provide new product development that meets changing trend and consumer needs
The Group continues to review, evaluate and develop the Group's portfolio of brands to ensure there is a clear brand hierarchy; a clear proposition by brand; non-core brands and product stock are eliminated; and that the Group delivers new product development and gifting sets that meet customer needs.
· Develop and nurture the current core business
A major objective of the Group is to continue to develop and grow the presence of the Warpaint brands beyond their existing worldwide customer base. There is still, however, significant potential to be realised in the current customer base and the Group is committed to ensuring this potential is maximised. The Group is focused on ensuring there is a clarity of product offering to each customer segment and to supporting its customers with relevant new products; by using appropriate marketing to draw consumers into customer stores; and by cross selling the Group's brands where appropriate.
· Grow Market Share in the UK
The business continues to focus on increasing the presence of the Group's brands in channels that our consumers shop in, to increase accessibility and drive profitable market share growth. As a result of this strategy, the Group has successfully launched the W7 brand into Tesco and the Technic brands into wilko. It continues to have active discussions with other major retailers who are currently in channels that the Group is yet to materially supply to and expanding the UK customer base is a key focus of management. This is particularly opportune as retailers across all sectors are increasingly looking to provide quality products to their customers at affordable prices.
· Grow market share in the USA and China
The USA and China continue to provide a major growth opportunity for the Group. In the USA, the Group continues to investigate the optimal route to market through established agency channels and/or direct to retailers, and is establishing a core product range for the USA with minimum margin requirements. In China the Group conducts business locally through its Chinese subsidiary company. We are also continuing to register products for sale in China in order to grow our total offering and increase sales. This has led to the development of relationships with distributors in the region who have the capability to drive sales of the W7 brand there.
· Develop the online/e-commerce strategy for brand development and profitable sales
The Group aims to grow its profitable sales across the Group's online sales channels, ensuring the process is optimised and efficient. The Group continues to develop and build its brands by utilising brand ambassadors, influencers and make-up artists to engage actively with its target audience. The Group wants to ensure that consumers are adequately inspired and educated on how the Group's products can be used to experiment and achieve different looks. The Group has launched a loyalty programme that creates a W7 community of customers to drive sales conversion on the Company's website. The aim of these activities is to create an interactive community of consumers and drive recommendation. Developing the social media strategy also directly impacts the Group's online sales strategy. As an example, 45% of W7's target customers are buying cosmetics online.
· Develop the appropriate organisational structure, people strategy and organisational efficiency
Warpaint continues to review the businesses' structures, resources and capabilities with the objective of delivering the strategic plan, communicating the plan to ensure that all employees are engaged, and rewarding employees suitably for doing a good job.
Brands
During 2020 we undertook a review of all our brands, removing from sale those small number of brands that were sub-scale and did not have a compelling market position. This exercise has enabled the Group to focus on its core W7, Technic, Body Collection, Man'stuff, Chit Chat and Very Vegan brands. We are also developing Body Collection as a key brand, which we believe has untapped potential given it is currently sold in only one UK retailer.
Customers & Geographies
UK
The UK accounted for 52.5% of Group sales in 2020 (2019: 46.1%), with UK sales reducing by only 6.9% to £21.1 million (2019: £22.7 million) despite the effects of Covid-19 forcing temporary UK high street store closures. In the UK the Group performed better through the Covid-19 crisis than in our international regions because the imposed lockdown was not as severe and some of our UK customers were deemed "essential", so they remained open for business.
The top ten UK Group customers accounted for 63% of UK sales in 2020 (2019: 64%). Those customers that remained open through Covid-19 performed well in 2020. Additionally the Group benefited in the second half of the year from the sales of W7 product in Tesco and the Technic brands in wilko, both of which were new retailers for the Group.
Europe
Europe has for some time been an area of excellent growth for the Group and accounted for 37.5% of Group sales in 2020 (2019: 38.2%). However the Covid-19 pandemic impacted sales severely once country wide lockdowns started in March 2020 and stores were forced to close. Sales for the Group's brands into Europe are mainly to Spain, Denmark, Sweden and Germany.
European sales for 2020 reduced 19.7% to £15.1 million (2019: £18.8 million). However, with Group sales overall in Europe decreasing in H1 2020 by 35% compared to the same period in 2019, there was a significant recovery in the second half of the year as the Covid-19 lockdowns were eased.
Advance plans were made to ensure business continuity, as far as possible, whilst the nature of the UK's future trading relationship with the EU remained uncertain. Following the UK trade deal with the EU at the end of the year there has been some disruption in early 2021, however, this has now largely been overcome. The Group is utilising the Company's wholly owned subsidiary, Warpaint Cosmetics (ROI) Limited, in the Republic of Ireland, which was formed specifically to facilitate the Group's EU trading and to help mitigate against UK/EU cross-border disruption.
USA
The USA was the hardest hit of any of the Group's markets by the impact of Covid-19. USA sales, in sterling terms, reduced by 56.7% in 2020 to £2.1 million (2019: £5.0 million) and equated to 5.3% of overall 2020 Group sales. Current customers in the USA include Macys Backstage, Marshalls, and TJ Maxx, all of whom have been required to shut stores for periods during 2020. Post year end, following a successful trial with store group Five Below, W7 products are now being stocked in over 1,000 of their stores in the USA.
The Group's USA subsidiary, LMS, is now fully integrated into the Group. Prior to its acquisition in August 2018 two thirds of LMS revenue was from distributing W7 products, the remainder being the sale of other branded cosmetics through its close-out activities. Since the acquisition the focus has been more on own brands and leveraging the marketing and other synergies contributed at a Group level. The USA is the largest colour cosmetics market in the world and developing sales there is a strategic goal for the Group. As previously reported, we implemented a number of measures to improve margins in the USA business, including changing our third party warehousing arrangements to reduce costs and by restructuring the staff levels in the USA, saving US$0.4 million in 2020.
Nevertheless, despite these actions, the impact of the Covid-19 lockdown on the USA business has been significant, and therefore we have re-evaluated our strategy for the USA and we have accelerated our online sales strategy via Amazon FBA, and reduced the locally sourced close-out.
Rest of the World
Sales in the rest of the world reduced from £2.8 million in 2019 to £1.9 million in 2020, accounting for 4.7% of overall Group sales. As with our other international regions, overall sales were down due to the Covid-19 pandemic. However, sales did recover in the later part of the year as Covid-19 lockdowns eased, although some countries retain significant restrictions. In Australia which is a key country in the rest of the world region sales increased slightly.
Summary and Outlook
Whilst 2020 was undoubtably a challenging year and the pandemic had a significant impact on the Warpaint business, I am pleased with the progress that we were able to make and I believe Warpaint has emerged as stronger business. In particular, we made substantial advances with our retail presence in the UK, commencing significant sales through Tesco and wilko for the first time. Our W7 products are selling well at Tesco and we have further expanded the number of Tesco stores that are stocking our products, and the number of products being stocked, post period end. Likewise our Body Collection and Technic ranges have been very well received by wilko customers. We intend to further expand our UK retail presence in 2021.
We have also taken the opportunity to review all elements of our strategy in 2020 and I believe that we have a compelling product proposition that is attractive to our global customer base. The late Brexit trade deal led to unexpected issues in the early part of 2021 for our sales into the EU, but I am pleased to say that these are now largely overcome.
The USA remains a challenging market, but I believe we now have an appropriate strategy for profitable growth in this region, including accelerating our online proposition. In the USA I am particularly pleased to see our W7 products now being stocked in over 1000 Five Below stores following a successful trial.
Trading in 2021 has started strongly with sales for the first three months of 2021 9% ahead of the same period in 2020, with sales increasing in all our geographic regions, despite the continuing lockdowns and enforced temporary customer store closures in many of our markets. I am encouraged by the outlook for the rest of the year and beyond as we seek to increase our high street penetration and online sales, together with looking to grow our sales through our existing customer outlets.
In closing, I would like to thank all our staff for their efforts in 2020 and helping us to overcome the challenges of the pandemic.
Sam Bazini
Chief Executive Officer
27 April 2021
FINANCIAL REVIEW
The Covid-19 pandemic had a material impact on our financial performance in the year, resulting in lower than budgeted sales and profits. Group revenue decreased in the year by 18%, and adjusted profit before tax decreased in the year by 56%.
The actions we took as a business in response to Covid-19 enabled us to remain focused on margin, being net debt free, generating cash and safeguarding the business and the jobs of our employees.
Covid-19 Stress Testing and Liquidity
The lockdowns in 2020 throughout the world in response to Covid-19 meant the Group traded in a very uncertain and difficult time. In response, the board reacted swiftly and decisively with a plan to protect our staff, the business and to put in place measures to conserve cash, including not recommending a final dividend for 2019.
In the second half of the year trade across the Group returned to near normal levels and consequently dividends were resumed against a background of good control of cash and continued cash generation, plus a testament to the response of the business through Covid-19. The board declared an interim dividend of 2.8p per share, maintaining the prior year interim dividend of 1.5p per share, together with a one off additional 1.3p per share, to reflect that no final dividend was declared for 2019. The dividend payment of 2.8p per share was paid on 20 November 2020.
With Covid-19 still causing economic uncertainty in 2021 we have modelled a range of scenarios based on varying levels of annual sales revenue, through to the end of 2022. In each scenario, mitigating actions within the control of management have been modelled, each showing there are sufficient cash balances to meet liabilities as they fall due and so the board is confident that the Group has sufficient financial strength to withstand the current disruption to its activities.
Revenue
Group revenue for the year reduced by 18.3% from £49.3 million in 2019 to £40.3 million in 2020. The fall in sales year on year was due to the Covid-19 lockdowns in the UK and internationally.
Company branded sales were £32.8 million in the year (2019: £39.2 million). Our W7 brand had sales in the year of £18.2 million (2019: £22.5 million). Our Technic brand contributed sales of £14.5 million in the year (2019: £16.7 million).
In the UK Group sales reduced 6.9% from 22.7 million in 2019, to £21.1 million in 2020, with a strong recovery in the second half of the year. Internationally, Group revenue reduced 28.0% from £26.6 million in 2019, to £19.1 million in 2020. In Europe Group sales reduced by 19.7% to £15.1 million (2019: £18.8 million). In the rest of the world Group sales fell by 32.6% to £1.9 million (2019: £2.8 million). In the USA Group sales fell by 56.7% to £2.1 million (2019: £5.0 million), in part because of the decision to concentrate on the sale of our Group brands ahead of locally sourced close-out opportunities, and from the disruption caused by Covid-19.
Our strategy for growth includes continuing to develop and build our Group brands and provide new product development that meets changing trends and consumer needs, to develop and nurture the current core business, to grow market share in the UK, USA and China, to develop an online strategy for brand development and sales and, to put in place appropriate organisational structure, people and efficiencies in the business. A detailed commentary on our sales growth strategy and trading performance is included in the Chief Executive Officer's statement.
Our Retra business had sales of retailer own brand white label cosmetics of £2.6 million in the year (2019: £2.5 million). The white label business is traditionally cost competitive and Retra chooses which projects to undertake based on commercial viability, and in particular margin.
The close-out business revenue reduced by 36.2% from £7.7 million in 2019 to £4.9 million in 2020.
Other income of £0.4 million was received from the UK Government's furlough scheme in the year.
Product Gross Margin
Gross margin for the Group decreased by 2.4% from 33.5% to 31.1%.
Gross margin reduced largely due to sales of inventory at lower than normal margin across the Group. This was in response to Covid-19 in order to maximise cash generated in the business and reduce overall inventory holding by the year end in the UK and USA. In the USA this was an acceleration of our strategy to exit sales of locally sourced close-out brands and to focus on the sale of our Group brands.
A thorough review of inventory was carried out considering stock turn, margin, and stock age, so that those with the worst scores in each category and combined could be identified and sold off. In total £1.5 million of inventory identified in this process was sold in the year for £0.9 million. Without this action gross margin for the year would have been in line with 2019 at 33.4%.
During the year we did not experience pressure on the cost of inventory and made good use of our Hong Kong buying office to ensure this continued. However, since the start of 2021 we have noticed slight price increases coming from our supply base in China and container freight rates have increased dramatically before falling back steadily, both these cost increases have been offset by a weakening dollar.
To counter currency pressure we have in place a discount mechanism linked to the US dollar exchange rate from one of our key suppliers in China, although in 2020 this did not apply as buying volumes were greatly reduced because of Covid-19. When business levels return to normal, we expect to be making use of this US dollar discount mechanism again. We also continue to move production to new factories of equal quality to retain or improve margin and have a natural hedge from our US dollar revenue. We remain focused on improving gross margin in all our businesses.
The Group brands segment had sales of £35.4 million at a margin of 31.1% (2019: £41.6 million at a margin of 34.9%). Margin reduced because of the inventory reduction plan implemented in response to Covid-19.
The close-out segment of the Group had sales of £4.9 million at a margin of 31.2% (2019: £7.7 million at a margin of 25.7%). The inventory reduction plan also applied to close-out, however any negative effect on close-out margin was more than offset by the availability in the year of some high margin close-out parcels and consequently close-out margin improved in the year.
At 31 December 2019 options were in place for the purchase of US$15 million at US$1.3142/£ and this helped to protect our margin through a turbulent period in the foreign exchange markets, in which the US dollar strengthened to US$1.15/£ during the peak of the Covid-19 pandemic. Similarly, at 31 December 2020 options were in place for the purchase of US$18 million at US$1.3260/£.
Operating Expenses
Total operating expenses before exceptional items, amortisation costs, depreciation, foreign exchange movements and share based payments, decreased by £0.8 million to £8.7 million in the year. This decrease was made up of a reduction in discretionary spend on travel, planned events and exhibitions totalling £0.9 million in response to Covid-19, an increase in cost in trading online of £0.1 million as sales online increased sharply in response to Coivd-19, an increase in the charge for bad debts of £0.2 million in the USA from a large retail customer entering Chapter 11 bankruptcy as a result of the pandemic, and a decrease in other overheads of £0.2 million.
The most significant operating costs in the Group are wages and salaries of £5.5 million (2019: £5.5 million) and planned events and exhibitions for our brands of £0.6 million (2019: £1.2 million).
Wages and salaries remained unchanged year on year. During the first Covid-19 lockdown in 2020 use was made of the government job retention scheme (and a similar grant scheme in the USA) giving rise to other operating income of £0.36 million. All staff were paid 100% of their salaries whilst furloughed. The reduction in planned events and exhibitions was in response to the Covid-19 pandemic, exhibitions were cancelled across the world and planned events and promotional activity had to be postponed or cancelled.
Warpaint remains a business with most operating expenses relatively fixed and evenly spread across the whole year. We continue to monitor and examine significant costs to ensure they are controlled and strive to reduce them. In addition, the increased scale of the business has given the Group increased buying power.
Profit Before Tax
In 2020 Group loss before tax was £1.1 million compared to a profit before tax of £1.8 million in 2019.
The material changes in profitability between 2020 and 2019 were:
Effect on Profit
· Reduction in Group gross margin of 2.4% for 2020
(£1.0) million
· Gross margin on decrease in sales for 2020 at 33.5%
(£3.0) million
· Increase in other operating income in 2020 (job retention scheme)
· Decrease in operating expenses (see above heading)
£0.4 million
£0.8 million
· Increase in exceptional costs in the year
(£0.1) million
· FX charge in the year £0.4 million (2019: £0.2 million)
(£0.2) million
· Decrease in the cost of the LTIP and EMI share option schemes
£0.2 million
Adjusted profit before tax (before exceptional items, amortisation costs, and share based payments) was £2.3 million compared to £5.2 million in 2019, a fall of 55.8%.
Exceptional Items
Exceptional costs in 2020 included £0.24 million of staff restructuring and voluntary redundancy costs and £0.08 million of legal costs (2019: £0.15 million of staff restructuring plus inventory relocation costs, and £0.03 million of legal costs).
Tax
The tax rate for the Group for 2020 was 10% compared to the UK corporation tax standard rate of 19% for the year. Since the acquisition of LMS, the Group is exposed to tax in the USA at an effective rate of approximately 25% and in other jurisdictions the Group operates cost centres, but these are not materially exposed to changes in tax rates.
Earnings Per Share
The statutory basic earnings per share was a loss of 1.31p in 2020, compared to the 1.78p achieved in 2019.
Adjusted earnings per share before exceptional items, amortisation costs and share based payment costs was 3.11p in 2020, a decrease of 50.3% on the 6.26p achieved in 2019.
Dividends
The board is recommending a final dividend for 2020 of 3.0 pence per share, making a total dividend for the year of 5.8 pence per share of which 2.8 pence per share, including a special dividend of 1.3 pence per share to reflect that no final dividend was declared for 2019, was paid on 20 November 2020 (2019: The board in the interests of prudence given the considerable on-going uncertainty due to Covid-19, and in order to further preserve the Company's cash resources, resolved not to recommend a final dividend for 2019, making the interim dividend of 1.5 pence per share in effect the only dividend declared in respect of 2019). The dividend for the year was covered 0.5 times by adjusted earnings per share.
Cash Flow and Cash Position
Net cash flow generated from operating activities was £7.5 million (2019: £4.4 million), after payment of the £0.3 million (2019: £0.2 million) exceptional items previously referred to. The Group's cash balance increased by £2.2 million to £4.9 million in 2019 (2019: £2.7 million). The cash generated was principally used to make dividend payments in the year.
We expect capital expenditure requirements of the Group to remain low, however as part of our strategy to grow market share in the UK and USA there will be occasions where investment in store furniture is required to secure that business. In 2020 £0.66 million was spent on store furniture for Tesco and wilko (2019: £0.05 million), and £0.18 million was spent on new computer software and equipment, and other general office fixtures and fittings and plant upgrades (2019: 0.23 million).
LTIP, EMI & CSOP Share Options
On 20 May 2020 CSOP share options were granted over a total of 454,686 ordinary shares of 25p each in the Company under the Warpaint London PLC Company Share Option Plan. The options provide the right to acquire 454,686 ordinary shares at an exercise price of 49.5p per ordinary share.
The LTIP, EMI & CSOP share options had no dilutive impact on earnings per share in the period. The share-based payment charge of the LTIP, EMI and CSOP share options for the year was £0.66 million (2019: £0.82 million) and has been taken to the share option reserve.
Balance Sheet
Trade receivables are monitored by management to ensure collection is made to terms, to reduce the risk of bad debt and to control debtor days. At the year end trade receivables, excluding other receivables, were £7.7 million (2019: £10.3 million), the decrease on 2019 is mainly due to the fall in sales year on year because of the Covid-19 lockdowns. Apart from writing off a bad debt in the USA of £0.2 million, collection of cash was excellent in the year including payments from those customers that were in some distress because of the pandemic lockdowns in 2020. The provision at the year end for bad and doubtful debts carried forward is £0.04 million, 0.6% of gross trade receivables (2019: £0.04 million, 0.4%).
Inventory was lower at the year end at £14.9 million (2019: £16.4 million). The fall in inventory was due to the action taken to reduce inventory across the group in response to Covid-19, and our strategy of exiting the sale of locally sourced close-out brands in the USA. The provision for old and slow inventory was £0.52 million, 3.5% at the year end (2019: £0.19 million, 1.2%). The increase in provision arises from the Group policy of providing for 50% of the cost of perishable items that are over two years old, and mainly from providing for inventory in our USA business, LMS, that has aged to over two years old, without the chance of a sale because of the Covid-19 crisis. However, we remain comforted by the fact that in reality many such items in the normal course of business are eventually sold through our close-out division without a loss to the Group.
On acquiring Retra in 2017 the Group took on their debt of £8.7 million being £7.6 million of invoice and trade finance facilities, and £1.1 million of term loans and HP contracts. At the year end £0.3 million of invoice finance remained outstanding which was repaid in full by March 2021 (2019: £1.2 million). The balance outstanding on the term loans and HP contracts at the year end totalled £0.3 million (2019: £0.6 million). The remaining loans and HP contracts totalling £0.3 million were repaid in full in April 2021.
Working capital decreased by £2.3 million in the year, to £25.4 million. The main components were a decrease in inventory of £1.8 million, a decrease in trade and other receivables of £0.2 million, an increase in cash at the year end of £2.1 million, and an increase in trade and other payables of £0.6 million.
Free cash flow remained strong at £6.6 million (2019: £4.1 million).
The Group's balance sheet remains in a very healthy position. Net assets totalled £37.4 million at 31 December 2020, a decrease of £2.4 million from 2019. The majority of the balance sheet is made up of liquid assets of inventory, trade receivables and cash. Included in the balance sheet is £7.3 million of goodwill (2019: £7.3 million) and £4.7 million of intangible fixed assets (2019: £7.1 million) arising from acquisition accounting. As at the year end cash totalled £4.9 million (31 December 2019: £2.7 million).
The balance sheet also includes £3.8 million of right-of-use assets. £3.5 million is the inclusion of the Group leasehold properties, now recognised as right-of-use assets as directed by IFRS 16. An equivalent lease liability is included of £3.7 million at the balance sheet date.
Foreign Exchange
The Group imports most of its finished goods from China paid for in US dollars, which are purchased throughout the year at spot as needed, or by taking forward purchase foreign exchange options when rates are deemed favourable, and with consideration for the budget rate set by the board for the year. Similarly, foreign exchange options are taken to sell forward our expected Euro income in the year to ensure our sales margin is protected.
We started 2020 with options in place for the purchase of US$15 million @ US$1.3142, this allowed us to purchase goods in the first half of the year at contracted dollar rates well above the spot rate which at one time fell as low as $1.1492.
Around the time of Brexit being finalised in 2020 when currency rates were favourable, we purchased 42 foreign exchange options which were outstanding at 31 December 2020 (31 December 2019: 33). In total at 31 December 2020 options were in place for the purchase of US$18 million at US$1.3260, and the sale of €5.1 million @ €1.1077 (31 December 2019: $15 million @ $1.3142nil, and €4.4 million @ €1.1402).
The Group has a natural hedge from sales to the US which are entirely in US dollars, in 2020 these sales were $2.74 million (2019: $6.32 million). Together with the discount mechanism available from one of our main suppliers in China, sourcing product from new factories where it makes commercial sense to do so and by buying dollars when rates are favourable, we are able to mitigate the effect of a strong US dollar against sterling.
Neil Rodol
Chief Financial Officer
27 April 2021
INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF WARPAINT LONDON PLC
Opinion on the financial statements
In our opinion:
· the financial statements give a true and fair view of the state of the Group's and of the Parent Company's affairs as at 31 December 2020 and of the Group's loss for the year then ended;
· the Group financial statements have been properly prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006;
· the Parent Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and
· the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the financial statements of Warpaint London Plc (the 'Parent Company') and its subsidiaries (the 'Group') for the year ended 31 December 2020 which comprise the consolidated statement of comprehensive income, the consolidated and company statements of changes in equity, the consolidated and company statements of financial position, the consolidated statement of cash flows and notes to the financial statements, including a summary of significant accounting policies.
The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and international accounting standards in conformity with the requirements of the Companies Act 2006. The financial reporting framework that has been applied in the preparation of the Parent Company financial statements is applicable law and United Kingdom Accounting Standards, including Financial Reporting Standard 102 The Financial Reporting Standard in the United Kingdom and Republic of Ireland (United Kingdom Generally Accepted Accounting Practice).
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We remain independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC's Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
Conclusions relating to going concern
In auditing the financial statements, we have concluded that the Directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate. Our evaluation of the Directors' assessment of the Group and the Parent Company's ability to continue to adopt the going concern basis of accounting included:
- A critical evaluation of the Directors' assessment of the entity's ability to continue as a going concern, covering the period of at least 12 months from the date of approval of the financial statements by;
· Evaluating the process the Directors followed to make their assessment, including confirming the assessment and underlying projections were prepared by appropriate individuals with sufficient knowledge of the detailed figures as well as an understanding of the entities markets, strategies and risks. Understanding, challenging and corroborating the key assumptions included in their cash flow forecasts against prior year, our knowledge of the business and industry, and other areas of the audit.
· We considered the potential impact on the statement of financial position, specifically around trade receivables and assessed Director's judgement around the recoverability of these balances. This included reviewing post year end, post lockdown sales values and cash receipts post year end.
· Searching through enquiry with the Directors, review of board minutes and review of external resources for any key future events that may have been omitted from cash flow forecasts and assessing the impact these could have on future cash flows and cash reserves.
· Assessing stress test scenarios, including those in respect of COVID-19 considerations, and challenging whether other reasonably possible scenarios could occur and including these where appropriate.
· Considering the adequacy of the disclosures relating to going concern included within the annual report against the requirements of the accounting standards and consistency of the disclosures against the forecasts and going concern assessment.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the group and company's ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.
Our responsibilities and the responsibilities of the Directors with respect to going concern are described in the relevant sections of this report.
The directors' assessment of going concern involves a number of highly subjective judgements, therefore, this was accordingly identified as a Key Audit Matter.
Overview
Coverage1
87% (2019: 93%) of Group profit before tax
94% (2019: 100%) of Group revenue
98% (2019: 99%) of Group total assets
Key audit matters
2020
2019
Impairment of intangible assets and goodwill
P
P
Carrying value of inventory
P
P
Going concern
P
P
Materiality
Group financial statements as a whole
£245,000 (2019: £248,000) based on capped 5% (2019: 5%) of average profit before interest, tax, amortisation, and exceptional items.
An overview of the scope of our audit
Our Group audit was scoped by obtaining an understanding of the Group and its environment, including the Group's system of internal control, and assessing the risks of material misstatement in the financial statements. We also addressed the risk of management override of internal controls, including assessing whether there was evidence of bias by the Directors that may have represented a risk of material misstatement.
The group consists of three trading subgroups, all of which are run from the UK except for Marvin Leeds Marketing Services Inc. which is based on the United States of America. In establishing the overall approach to the group audit, we completed full scope audits on the underlying subgroups and the parent company as significant components, except for Marvin Leeds Marketing Services Inc, on which we performed specific audit procedures on certain account balances. Marvin Leeds Marketing Services Inc. Is not deemed to be a significant component and so our work was tailored to focus on specific risk areas. All audit work was carried out by BDO LLP.
1 These are areas which have been subject to a full scope audit or specific procedures by the group engagement team
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit, and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Aside from the going concern key audit matter identified above, we identified the following areas as the key audit matters relevant to our audit of the financial statements.
Key audit matter
How the scope of our audit addressed the key audit matter
Impairment of intangibles assets and goodwill
(with reference to notes 1, 9 and 10)
The Directors perform annual impairment reviews of goodwill for all cash generating units (CGUs).
This review also covers the carrying value of other intangible assets, property plant and equipment, and other assets of the CGUs.
The estimated recoverable amount of these balances is subjective due to the inherent uncertainty involved in forecasting and discounting future cash flows, which form the basis of the Group's value in use calculation and assessment of the carrying value of goodwill and intangible asset values. Due to the impact of Covid-19 on the Group there is increased uncertainty surrounding management's trading assumptions.
We have determined as part of our risk assessment that the value in use calculation used in the assessment of carrying value of goodwill and intangible assets has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole. The financial statements disclose the sensitivities estimated by the Group.
Key assumptions include revenue, gross margin, and cash flow forecast assumptions.
The impairment test is also based on key assumptions in respect of the appropriate discount rates and longer-term growth rates.
As a result of the review, management did not identify any impairments.
We assessed management's allocation of assets for each CGU based on our knowledge of the Group and its operations.
We challenged management's assumptions and assessed the achievability of the forecasts included in the impairment model using a number of techniques including assessing accuracy of historic forecasting, post year-end performance and industry trends, including the impact of COVID-19 on each CGU.
We considered whether the revenue, and where relevant associated costs, used in the value in use calculations was reasonable in light of historic performance and industry projections. This included using our own sector experience in challenging the key assumptions made and performing sensitivity analysis on these assumptions. These areas included the projected economic growth and cost inflation, margin and known or probable changes in the business environment.
We used our own valuation specialists to challenge the value in use and the fair value less cost to sell model. We assessed the competence, independence and expertise of the third-party expert used by management in formulating the value in use model. We also challenged management and their third-party experts regarding the assumptions made in the model including the cash flow forecast, weighted average cost of capital and discount rate used. We benchmarked the key assumptions applied against a variety of similar businesses and considered whether these fell within our acceptable ranges. We assessed whether the selected price index was reasonable by comparing this to other data sources, including from a number of similar businesses.
Key observations:
Based on the procedures we performed, no issues arose from our work that suggested goodwill and intangible assets are materially misstated.
Net realisable value of inventory
(with reference to notes 1 and 13)
The Group has significant levels of inventory and estimates are made in the valuation of slow moving and obsolete inventories, some of which have a limited shelf life. There is also some uncertainty over changes in consumer preferences and spending patterns, which are primarily driven by wider trends in the fashion industry as well as seasonality, which could impact the saleability of inventory.
There is a recoverability risk associated with new product launches and judgement is required in forecasting demand which can lead to obsolete inventory. Given the level of judgement and estimation involved by management, the carrying value of inventory is considered to be a key audit matter.
Our procedures included assessing the carrying value of inventory as being appropriate at the lower of cost of net realisable value. This was done through testing a sample of items to their unit cost and then to the average sale price in the period leading up to and around the year end. Where there were indicators of negative margin or zero margin, we determined whether these balances were considered appropriately in the inventory provision balance.
In addition, we considered the principles and appropriateness of the Group's inventory provisioning policies based on our understanding of the business and the accuracy of previous provisioning estimates. We considered the inventory write off figure during the year and compared this to the Group's expected recoveries brought forward and to the position at the yearend date.
Further, we tested the unprovided inventory balance by reviewing sales volumes and values after the balance sheet date by testing a sample of items.
Key observations:
Based on the procedures we performed, no issues arose from our work that suggested net realisable value of inventories are materially misstated.
Our application of materiality
We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. We consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of reasonable users that are taken on the basis of the financial statements.
In order to reduce to an appropriately low level the probability that any misstatements exceed materiality, we use a lower materiality level, performance materiality, to determine the extent of testing needed. Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also take account of the nature of identified misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole and performance materiality as follows:
Group financial statements
Parent company financial statements
2020
£
2019
£
2020
£
2019
£
Materiality
245,000
248,000
150,000
100,000
Basis for determining materiality
5% of adjusted profit before tax (2020: capped to lower than previous year).
1.5% of Total assets capped to address aggregation risk.
Rationale for the benchmark applied
We considered adjusted profit before tax (profit before interest, tax, amortisation, and exceptional items) to be the most
appropriate measure for the basis of materiality given it is a key performance indicator of the Group and management.
Adjustments are included in the consolidated statement of comprehensive income and note 4 to the financial statements.
Adjusted measures have been used as a benchmark given the importance of underlying trading profit as a measure for users of the financial statements in assessing the performance of the Group.
For 2020, the benchmark used is the average 3 years adjusted profit before tax to alleviate the fluctuations caused by Covid-19.
We considered total assets to be the most appropriate measure for the basis of materiality as the Parent Company is primarily an investment holding company.
Our application of materiality (continued)
Performance materiality
183,750
186,000
112,500
75,000
Basis for determining performance materiality
75% of Group materiality, based on our overall risk assessment. In setting the level of performance materiality, we considered a number of factors including the control environment, our testing strategy, the expected total value of known and likely misstatements (based on past experience and other factors) and management's attitude towards proposed adjustments.
75% of Company materiality, based on our overall risk assessment. In setting the level of performance materiality, we considered a number of factors including the control environment, our testing strategy, the expected total value of known and likely misstatements (based on past experience and other factors) and management's attitude towards proposed adjustments.
Component materiality
We set materiality for each component of the Group based on a percentage of between 47% and 90% (2019: 40% to 90%) of Group materiality dependent on the size and our assessment of the risk of material misstatement of that component. Component materiality ranged from £116,000 to £221,000 (2019: £100,000 to £223,000). In the audit of each component, we further applied performance materiality levels of 75% of the component materiality to our testing to ensure that the risk of errors exceeding component materiality was appropriately mitigated.
Reporting threshold
We agreed with the Audit Committee that we would report to them all individual audit differences in excess of £12,250 (2019: £12,400). We also agreed to report differences below this threshold that, in our view, warranted reporting on qualitative grounds.
Other information
The directors are responsible for the other information. The other information comprises the information included in the Annual Report and Financial Statements other than the financial statements and our auditor's report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the course of the audit, or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.
We have nothing to report in this regard.
Other Companies Act 2006 reporting
Based on the responsibilities described below and our work performed during the course of the audit, we are required by the Companies Act 2006 and ISAs (UK) to report on certain opinions and matters as described below.
Strategic report and Directors' report
In our opinion, based on the work undertaken in the course of the audit:
· the information given in the Strategic report and the Directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
· the Strategic report and the Directors' report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the Group and Parent Company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the Directors' report.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion:
· adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or
· the Parent Company financial statements are not in agreement with the accounting records and returns; or
· certain disclosures of Directors' remuneration specified by law are not made; or
· we have not received all the information and explanations we require for our audit.
Responsibilities of Directors
As explained more fully in the Directors' responsibilities statement, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Group's and the Parent Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so.
Auditor's responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
Extent to which the audit was capable of detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below:
· We obtained an understanding of the legal and regulatory frameworks that are applicable to the group and the industry in which it operates. We determined that the most significant laws and regulations which are directly relevant to specific assertions in the financial statements are those related to the reporting framework, including international accounting standards in conformity with the requirements of the Companies Act 2006, and significant regulations relating to the sector in which the group operates are employment and taxation laws and regulations in the jurisdictions in which the Group operates.
· We understood how the company is complying with those legal and regulatory frameworks, including those under industry regulation, by making enquiries of management and those responsible for legal and compliance procedures. We corroborated our enquiries through our review of board minutes and reviewing summary of claims, litigations and regulatory inquiries that we have obtained from the Group's Compliance Officer.
· We assessed the susceptibility of the Group's financial statements to material misstatement, including how fraud might occur, by meeting with management from across the Group to understand where they considered there was a susceptibility to fraud.
· Our audit planning identified fraud risks in relation to management override and revenue recognition. We considered the processes and controls that the Group has established to address risks identified, or that otherwise prevent, deter and detect fraud; and how management monitors that processes and controls.
· We designed our audit procedures to detect irregularities, including fraud. Our procedures included journal entry testing, with a focus on large or unusual transactions based on our knowledge of the business; existence of revenue, enquiries with the Compliance Officer, the Group management; and focussed testing as referred to in the Key Audit Matters section above.
Our audit procedures were designed to respond to risks of material misstatement in the financial statements, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery, misrepresentations or through collusion. There are inherent limitations in the audit procedures performed and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we are to become aware of it.
A further description of our responsibilities is available on the Financial Reporting Council's website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor's report.
Use of our report
This report is made solely to the Parent Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Parent Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Parent Company and the Parent Company's members as a body, for our audit work, for this report, or for the opinions we have formed.
Kieran Storan (Senior Statutory Auditor)
For and on behalf of BDO LLP, Statutory Auditor
London, United Kingdom
27 April 2021
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2020
Year ended 31 December
2020
2019
Note
£'000
£'000
Revenue
2
40,286
49,282
Cost of sales
2
(27,742)
(32,780)
Gross profit
12,544
16,502
Administrative expenses
4,5
(13,807)
(14,355)
Other operating income
3
361
Analysed as:
Adjusted profit from operations1
2,514
5,580
Amortisation
4,10
(2,443)
(2,439)
Exceptional items
4
(317)
(178)
Share based payment
22
(656)
(816)
(Loss)/profit from operations
(902)
2,147
Finance expense
6
(212)
(370)
(Loss)/profit before tax
(1,114)
1,777
Tax expense
7
111
(409)
(Loss)/profit for the year attributable to equity holders of the parent company
(1,003)
1,368
Other comprehensive income:
Item that will or maybe reclassified to profit or loss:
Exchange gain/(loss) on translation of foreign subsidiary
53
(12)
Total comprehensive income attributable to equity holders of the parent company
(950)
1,356
Basic earnings per share (pence)
27
(1.31)
1.78
Diluted earnings per share (pence)
27
(1.31)
1.78
Note 1 - Adjusted profit from operations is calculated as earnings before interest, taxation, amortisation of intangible assets, any impairment costs, share based payments and exceptional items.
The notes on form part of these financial statements.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 2020
As at 31 December
2020
2019
Note
£'000
£'000
Non-current assets
Goodwill
9
7,274
7,274
Intangibles
10
4,651
7,082
Property, plant, and equipment
11
1,149
684
Right-of-use assets
12
3,799
4,685
Deferred tax assets
18
581
374
Total non-current assets
17,454
20,099
Current assets
Inventories
13
14,413
16,194
Trade and other receivables
14
9,187
12,624
Cash and cash equivalents
15
4,875
2,731
Derivative financial instruments
24
40
39
Total current assets
28,515
31,588
Total assets
45,969
51,687
Current liabilities
Trade and other payables
16
(3,121)
(3,933)
Borrowings and lease liabilities
17
(914)
(2,206)
Derivative financial instruments
24
(400)
-
Corporation tax liability
(119)
(548)
Total current liabilities
(4,554)
(6,687)
Non-current liabilities
Borrowings and lease liabilities
17
(3,045)
(3,863)
Deferred tax liability
18
(1,000)
(1,324)
Total non-current liabilities
(4,093)
(5,187)
Total liabilities
(8,599)
(11,874)
NET ASSETS
37,370
39,813
2020
2019
£'000
£'000
Equities
Share capital
20
19,187
19,187
Share premium
19,359
19,359
Merger reserve
(16,100)
(16,100)
Foreign exchange reserve
89
36
Share option reserves
21
1,633
977
Retained earnings
13,202
16,354
TOTAL EQUITY
37,370
39,813
The notes form part of these financial statements.
The financial statements of Warpaint London PLC were approved and authorised for issue by the Board of Directors and were signed on its behalf by:
Neil Rodol
Chief Financial Officer
27 April 2021
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2020
Share Capital
Share Premium
Merger Reserve
Foreign exchange reserve
Share option reserve
Retained Earnings
Total Equity
£'000
£'000
£'000
£'000
£'000
£'000
£'000
At 1 January 2019
19,187
19,359
(16,100)
48
161
18,363
41,018
Comprehensive Income for the year
On translation of foreign subsidiary
-
-
-
(12)
-
-
(12)
Profit for the year
-
-
-
-
-
1,368
1,368
Total comprehensive income for the year
-
-
-
(12)
-
1,368
1,356
Transactions with owners
Share based payment charge
-
-
-
-
816
-
816
Dividends paid
-
-
-
-
-
(3,377)
(3,377)
Total transactions with owners
-
-
-
-
816
(3,377)
(2,561)
As at 31 December 2019
19,187
19,359
(16,100)
36
977
16,354
39,813
Comprehensive Income for the year
On translation of foreign subsidiary
-
-
-
53
-
-
53
Loss for the year
-
-
-
-
-
(1,003)
(1,003)
Total comprehensive income for the year
53
(1,003)
(950)
Transactions with owners
Share based payment charge
-
-
-
-
656
-
656
Dividends paid
-
-
-
-
-
(2,149)
(2,149)
Total transactions with owners
656
(2,149)
(1,493)
As at 31 December 2020
19,187
19,359
(16,100)
89
1,633
13,202
37,370
The notes form part of these financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 DECEMBER 2020
Year ended 31 December
2020
2019
Note
£'000
£'000
Operating activities
(Loss)/profit before tax
(1,114)
1,777
Interest paid
6
212
370
Amortisation of intangible assets
10
2,443
2,439
Depreciation of property, plant, and equipment
11/12
1,252
1,194
Loss on disposal of property, plant, and equipment
2
39
Share based payment
22
656
816
Decrease/(increase) in trade and other receivables
3,437
(327)
Decrease/(increase) in inventories
13
1,781
(832)
(Decrease)/increase in trade and other payables
(812)
444
Fair value loss/(gain) on derivative financial instruments
399
(39)
Foreign exchange translation differences
53
(13)
Cash generated from operations
8,309
5,868
Tax paid
(853)
(1,499)
Net cash flows from operating activities
7,456
4,369
Investing activities
Purchase of intangible assets
10
(12)
(35)
Purchase of property, plant, and equipment
11
(869)
(284)
Sale of property, plant, and equipment proceeds
21
-
Net cash used in by investing activities
(860)
(319)
Financing activities
Repayment of borrowings
17
(90)
(83)
Lease payments
(810)
(811)
Decrease in stock and invoice finance facilities
(1,191)
(719)
Interest paid
6
(212)
(370)
Dividends
19
(2,149)
(3,377)
Net cash used in financing activities
(4,452)
(5,360)
Net increase/(decrease) in cash and cash equivalents
2,144
(1,310)
Cash and cash equivalents at beginning of period
2,731
4,041
Cash and cash equivalents at end of period
15
4,875
2,731
Cash and cash equivalents consist of:
Cash and cash equivalents
15
4,875
2,731
4,875
2,731
The notes form part of these financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT ENDED 31 DECEMBER 2020
1. Significant accounting policies
Basis of preparation
The financial statements of Warpaint London PLC (the "Company" or "Warpaint") and its subsidiaries (together the "Group") for the year ended 31 December 2020 were authorised for issue by the board of directors 27 April 2021.
Warpaint London PLC is a public limited Company incorporated and registered in England and Wales. Its registered office is Units B&C, Orbital Forty-Six, The Ridgeway Trading Estate, Iver, Buckinghamshire, SL0 9HW.
The Group's financial statements have been prepared in accordance in accordance with international accounting standards and in conformity with the requirements of the Companies Act. The financial statements are presented in pounds sterling because that is the currency of the primary economic environment in which the Group operates. All values are rounded to the nearest thousand (£'000) except where otherwise indicated.
The annual financial statements have been prepared on the historical cost basis, except for certain financial assets and liabilities which are carried at fair value or amortised cost as appropriate.
The preparation of financial statements in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Although these estimates are based on management's best knowledge of current events and actions, actual results ultimately may differ from those estimates. The principal accounting policies adopted are set out below.
Basis of consolidation
Where the company has control over an investee, it is classified as a subsidiary. The company controls an investee if all three of the following elements are present: power over the investee, exposure to variable returns from the investee, and the ability of the investor to use its power to affect those variable returns. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control.
The consolidated financial statements present the results of the company and its subsidiaries as if they formed a single entity. Intercompany transactions and balances between group companies are therefore eliminated in full. All subsidiaries have a reporting date of December.
The consolidated financial statements incorporate the results of business combinations using the acquisition method. In the statement of financial position, the acquiree's identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of acquired operations are included in the consolidated statement of comprehensive income from the date on which control is obtained. They are deconsolidated from the date on which control ceases.
On consolidation, the results of overseas operations are translated into pounds sterling at rates approximating to those ruling when the transactions took place. All assets and liabilities of overseas operations, including goodwill arising on the acquisition of those operations, are translated at the rate ruling at the reporting date. Exchange differences arising on translating the opening net assets at opening rate and the results of overseas operations at actual rate are recognised in other comprehensive income and accumulated in the foreign exchange reserve.
Exchange differences recognised profit or loss in Group entities' separate financial statements on the translation of long-term monetary items forming part of the Group's net investment in the overseas operation concerned are reclassified to other comprehensive income and accumulated in the foreign exchange reserve on consolidation.
On disposal of a foreign operation, the cumulative exchange differences recognised in the foreign exchange reserve relating to that operation up to the date of disposal are transferred to the consolidated statement of comprehensive income as part of the profit or loss on disposal.
Going concern
The Directors have concluded that it is reasonable to adopt a going concern basis in preparing the financial statements. This is based on a reasonable expectation that the Group has adequate resources to continue in operational existence for at least twelve months from the date of signing of these accounts. The Group made a statutory loss of £1.0 million in the year to 31 December 2020 (2019: £1.4 million profit) and had net current assets of £24.0 million at 31 December 2020 (2019: £24.9 million). The Group occasionally makes use in its Retra subsidiary of a £10 million facility that can be used for confidential invoice discounting and stock finance, the facility renews each year at the end of June, and contains certain covenants, including a minimum EBITDA for Retra to be tested on a cumulative quarterly basis.
The Directors have prepared forecasts covering the period to December 2022, built from the detailed Board approved budget for 2021. The forecasts include a number of assumptions in relation to varying levels of sales revenue. Whilst the Group's trading and cash flow forecasts have been prepared using current trading assumptions, the operating environment presents a number of challenges which could negatively impact the actual performance achieved. Excluding the potential impact of COVID-19, which is considered below, these risks include, but are not limited to, achieving forecast levels of sales and order intake, the impact on customer confidence as a result of general economic conditions and leaving the European Union, achieving forecast margin improvements and the director's ability to implement cost saving initiatives in areas of discretionary spend where required.
The Group's cash flow forecasts and projections, taking account of reasonable and possible changes in trading performance excluding the potential impact of COVID-19 (which is considered below), offset by mitigating actions within the control of management including reductions in areas of discretionary spend, show that the Group will be able to operate comfortably through to the end of December 2022, and in Retra within the level of its facility and associated covenants.
The uncertainty as to the future impact on the Group of the COVID-19 outbreak has been separately considered as part of the directors' consideration of the going concern basis of preparation. The Group experienced a material impact in trading performance due to COVID-19 in 2020 and this has to a lesser extent continued into 2021 with many but not all customers closed at times in the UK and overseas. In the downside scenario analysis performed, the directors have considered the reasonably plausible impact of the ongoing COVID-19 outbreak on the Group's trading and cash flow forecasts.
In preparing this analysis, a number of scenarios were modelled with the benefit of experience having come through the three lockdowns in the UK in 2020. The scenarios modelled were all based on varying levels of sales revenue, including no growth for 2021 and 2022, and more extreme falls in revenue of up to 30% in both years as a worst-case scenario. In each scenario, mitigating actions within the control of management have been modelled. Under each of the scenarios modelled, the Group has sufficient cash to meet its liabilities as they fall due and consequently, the directors believe that the Group has sufficient financial strength to withstand the possible disruption to its activities.
Based on the above indications the directors believe that it remains appropriate to prepare the financial statements on a going concern basis.
Revenue Recognition
Performance obligations and timing of revenue recognition
The Group's revenue is derived from selling goods with revenue recognised at a point in time when control of the goods has transferred to the customer. This is generally when the goods are delivered to the customer. However, for export sales, control might also be transferred when delivered either to the port of departure or port of arrival, depending on the specific terms of the contract with a customer. There is limited judgement needed in identifying the point control passes: once physical delivery of the products to the agreed location has occurred, the group no longer has physical possession, usually will have a present right to payment (as a single payment on delivery) and retains none of the significant risks and rewards of the goods in question.
UK sales are recognised and invoiced to the customer once the goods have been delivered to the customer. Overseas sales are recognised and invoiced to the customer once the goods have been delivered to the customer or collected by the customer from the Group's warehouse according to the terms of sale.
Where the Group has entered into distributor arrangements the satisfaction of performance obligations and transfer of control to the distributor is from the date of dispatch from either the Group's overseas supplier or from the Company's UK warehouse. Revenue is therefore recognised on the date of dispatch.
Under IFRS 15, volume rebates and early settlement discounts represent variable consideration and is estimated and recognised as a reduction to revenue as performance obligations are satisfied. Management recognises revenue based on the amount of estimated rebate to the extent that revenue is highly probably of not reversing. Management monitors this estimate at each reporting date and adjusts it as necessary.
Determining the transaction price
Most of the group's revenue is derived from fixed price contracts and therefore the amount of revenue to be earned from each contract is determined by reference to those fixed prices. Exceptions are as follows:
· Some contracts provide customers with a limited right of return. These relate predominantly, but not exclusively, to online sales direct to consumers and retailers. Historical experience enables the group to estimate reliably the value of goods that will be returned and restrict the amount of revenue that is recognised such that it is highly probable that there will not be a reversal of previously recognised revenue when goods are returned.
· Variable consideration relating to volume rebates has been considered in estimating revenue in order that it is highly probable that there will not be a future reversal in the amount of revenue recognised when the amount of volume rebates has been determined.
Allocating amounts to performance obligations
For most contracts, there is a fixed unit price for each product sold, with reductions given for bulk orders placed at a specific time. Therefore, there is no judgement involved in allocating the contract price to each unit ordered in such contracts (it is the total contract price divided by the number of units ordered). Where a customer orders more than one product line, the Group is able to determine the split of the total contract price between each product line by reference to each product's standalone selling prices (all product lines are capable of being, and are, sold separately).
Practical Exemptions
The group has taken advantage of the practical exemptions:
· not to account for significant financing components where the time difference between receiving consideration and transferring control of goods (or services) to its customer is one year or less; and
· expense the incremental costs of obtaining a contract when the amortisation period of the asset otherwise recognised would have been one year or less.
Expenditure and provisions
Expenditure is recognised in respect of goods and services received when supplied in accordance with contractual terms. Provision is made when an obligation exists relating to a past event and where the amount of the obligation can be reliably estimated.
Retirement Benefits: Defined contribution schemes
Contributions to defined contribution schemes are charged to the consolidated statement of comprehensive income in the year to which they relate.
Exceptional items and Alternative performance measures
Exceptional items which have been disclosed separately on the face of the income statement in order to summarise the underlying results. Exceptional items in the current period relate to restructuring costs and legal and professional fees. Neither 'underlying profit or loss' nor 'exceptional items' are defined by IFRS however the directors believe that the disclosures presented in this manner provide a clearer presentation of the underlying financial performance of the Group.
Alternative performance measures (APM's) are used by the Board to assess the Group's performance and are applied consistently from one period to the next. They therefore provide additional useful information for shareholders on the underlying performance and position of the Group. Additionally, adjusted profit from operations is used to determine adjusted EPS which is used as a key performance indicator for the Long-Term Incentive Plan (LTIP) and the Company Share Option Scheme (CSOP). These measures are not defined by IFRS and are not intended to be a substitute for IFRS measures. The Group presents underlying operating profit, profit before tax and EPS which are calculated as the statutory measures stated before non-underlying items, including exceptional items, amortisation of intangible assets and share-based payments where applicable.
Underlying results are used in the day-to-day management of the Group. They represent statutory measures adjusted for items which could distort the understanding of performance and comparability year on year. Non-underlying items include the amortisation of intangible assets, exceptional items and share-based payments. Exceptional items are those items which the group consider to be significant in nature and not in the normal course of business or are consistent with items that were treated as exceptional in prior periods.
Intangible assets
Patents
Patents are used by the Group in order to generate future economic value through normal business operations. Patents are acquired separately and carried at cost less amortisation and impairment. The underlying assets are amortised over the period from which the Group expects to benefit, which is typically between five to ten years.
Intangible assets acquired separately
Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortisation and accumulated impairment losses. Amortisation is recognised on a straight-line basis over their estimated useful lives. The estimated useful life and amortisation method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Intangible assets with indefinite useful lives that are acquired separately are carried at cost less accumulated impairment losses. Amortisation is provided on Licences and Website costs so as to write off the carrying value over the expected useful economic life of five years.
Intangible assets acquired in a business combination
Intangible assets acquired in a business combination and recognised separately from goodwill are initially recognised at their fair value at the acquisition date (which is regarded as their cost). Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets that are acquired separately. Amortisation is provided on customer lists and brands so as to write off the carrying value over the expected useful economic life of five years. Other details of the acquisition are detailed in note 8.
Goodwill
Goodwill represents the excess of the cost of a business combination over the Group's interest in the fair value of identifiable assets, liabilities and contingent liabilities acquired.
Cost comprises the fair value of assets given, liabilities assumed, and equity instruments issued, plus the amount of any non-controlling interests in the acquiree. Contingent consideration is included in cost at its acquisition date fair value and, in the case of contingent consideration classified as a financial liability, remeasured subsequently through profit or loss.
Goodwill is capitalised as an intangible asset with any impairment in carrying value being charged to the consolidated statement of comprehensive income. Where the fair value of identifiable assets, liabilities and contingent liabilities exceed the fair value of consideration paid, the excess is credited in full to the consolidated statement of comprehensive income on the acquisition date.
Impairment of non-financial assets (excluding inventories and deferred tax assets)
Impairment tests on goodwill and other intangible assets with indefinite useful economic lives are undertaken annually at the financial year end. Other non-financial assets are subject to impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Where the carrying value of an asset exceeds its recoverable amount (i.e. the higher of value in use and fair value less costs to sell), the asset is written down accordingly.
Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the smallest group of assets to which it belongs for which there are separately identifiable cash flows; its cash generating units ('CGUs'). Goodwill is allocated on initial recognition to each of the Group's CGUs that are expected to benefit from a business combination that gives rise to the goodwill.
Impairment charges are included in profit or loss, except to the extent they reverse gains previously recognised in other comprehensive income. An impairment loss recognised for goodwill is not reversed.
Derecognition of intangible assets
An intangible asset is derecognised on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognised in profit or loss when the asset is derecognised.
Property, plant and equipment
Items of property, plant and equipment are initially recognised at cost. As well as the purchase price, cost includes directly attributable costs.
Depreciation is provided on all items of property, plant and equipment so as to write off their carrying value over the expected useful economic lives. It is provided at the following rates:
Plant and machinery - 25% reducing balance and 20% straight line
Fixtures and fittings - 25% reducing balance and 20% straight line
Computer equipment - 25% reducing balance and 33.33% straight line
Motor vehicles - 20% straight line
Right-of-Use Assets
In the previous period, the Group only recognised lease assets and lease liabilities in relation to leases that were classified as "finance leases" under IAS 17 "Leases". The assets were presented in property, plant and equipment and the liabilities as part of the Group's borrowings. For adjustments recognised on adoption of IFRS 16 on 1 January 2019, please refer to note 12.Right-of-use assets are measured at cost, which is made up of the initial measurement of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the asset at the end of the lease, less any lease incentives received.
The Group depreciates the right-of-use assets on a straight-line basis from the lease commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term.
The Group also assesses the right-of-use asset for impairment when such indicators exist.
The right-of-use assets are included in a separate line within non-current assets on the Consolidated Balance Sheet
Financial assets
The Group classifies its financial assets into one of the categories discussed below, depending on the purpose for which the asset was acquired. Other than financial assets in a qualifying hedging relationship, the Group's accounting policy for each category is as follows:
Fair value through profit or loss
This category comprises in-the-money derivatives and out-of-money derivatives where the time value offsets the negative intrinsic value (see "Financial liabilities" section for out-of-money derivatives classified as liabilities). They are carried in the statement of financial position at fair value with changes in fair value recognised in the consolidated statement of comprehensive income in the finance income or expense line. Other than derivative financial instruments which are not designated as hedging instruments, the Group does not have any assets held for trading nor does it voluntarily classify any financial assets as being at fair value through profit or loss.
Amortised cost
These assets arise principally from the provision of goods and services to customers (e.g. trade receivables), but also incorporate other types of financial assets where the objective is to hold these assets in order to collect contractual cash flows and the contractual cash flows are solely payments of principal and interest. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment.
New impairment requirements use an 'expected credit loss' ('ECL') model to recognise an allowance. Impairment is measured using a 12- month ECL method unless the credit risk on a financial instrument has increased significantly since initial recognition in which case the lifetime ECL method is adopted. For receivables, a simplified approach to measuring expected credit losses using a lifetime expected loss allowance is available and has been adopted by the Group. During this process the probability of the non-payment of the trade receivables is assessed. This probability is then multiplied by the amount of the expected loss arising from default to determine the lifetime expected credit loss for the trade receivables. For trade receivables, which are reported net, such provisions are recorded in a separate provision account with the loss being recognised within administrative expenses in the consolidated statement of comprehensive income. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision.
The Group's financial assets measured at amortised cost comprise trade and other receivables, and cash and cash equivalents in the consolidated statement of financial position.
Cash and cash equivalents include cash in hand, deposits held at call with banks, other short term highly liquid investments with original maturities of three months or less, and - for the purpose of the statement of cash flows - bank overdrafts. Bank overdrafts are shown within loans and borrowings in current liabilities on the consolidated statement of financial position.
Financial liabilities
The Group classifies its financial liabilities into one of two categories, depending on the purpose for which the liability was acquired. The Group's accounting policy for each category is as follows:
Fair value through profit or loss
This category comprises out-of-the-money derivatives where the time value does not offset the negative intrinsic value (see "Financial assets" for in-the-money derivatives and out-of-money derivatives where the time value offsets the negative intrinsic value). They are carried in the consolidated statement of financial position at fair value with changes in fair value recognised in the consolidated statement of comprehensive income. The Group does not hold or issue derivative instruments for speculative purposes, but for hedging purposes. Other than these derivative financial instruments, the Group does not have any liabilities held for trading nor has it designated any financial liabilities as being at fair value through profit or loss.
Other financial liabilities
Other financial liabilities include the following items:
· Bank loans which are initially recognised at fair value net of any transaction costs directly attributable to the issue of the instrument. Such interest-bearing liabilities are subsequently measured at amortised cost ensuring the interest element of the borrowing is expensed over the repayment period at a constant rate.
· Trade payables, other borrowings and other short-term monetary liabilities, which are initially recognised at fair value and subsequently carried at amortised cost using the effective interest method.
Derivative financial instruments
The Group enters into a variety of derivative financial instruments to manage its exposure to foreign exchange rate risk, through the use of foreign exchange rate forward contracts.
Derivatives are initially recognised at fair value at the date the derivative contracts are entered into and are subsequently re-measured to their fair value at the end of each reporting period. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship.
Foreign currencies
Transactions entered into by Group entities in a currency other than the currency of the primary economic environment in which they operate (their "functional currency") are recorded at the rates ruling when the transactions occur. Foreign currency monetary assets and liabilities are translated at the rates ruling at the reporting date. Exchange differences arising on the retranslation of unsettled monetary assets and liabilities are recognised immediately in profit or loss, except for foreign currency borrowings qualifying as a hedge of a net investment in a foreign operation, in which case exchange differences are recognised in other comprehensive income and accumulated in the foreign exchange reserve along with the exchange differences arising on the retranslation of the foreign operation.
Leases
All leases are accounted for by recognising a right-of-use asset and a lease liability except for:
· Leases of low value assets; and
· Leases with a duration of 12 months or less.
Lease liabilities are measured at the present value of the contractual payments due to the lessor over the lease term, with the discount rate determined by reference to the rate inherent in the lease unless (as is typically the case) this is not readily determinable, in which case the group's incremental borrowing rate on commencement of the lease is used. Variable lease payments are only included in the measurement of the lease liability if they depend on an index or rate. In such cases, the initial measurement of the lease liability assumes the variable element will remain unchanged throughout the lease term. Other variable lease payments are expensed in the period to which they relate.
On initial recognition, the carrying value of the lease liability also includes:
· amounts expected to be payable under any residual value guarantee;
· the exercise price of any purchase option granted in favour of the group if it is reasonably certain to assess that option;
· any penalties payable for terminating the lease, if the term of the lease has been estimated on the basis of termination option being exercised.
Right of use assets are initially measured at the amount of the lease liability, reduced for any lease
incentives received, and increased for:
· lease payments made at or before commencement of the lease;
· initial direct costs incurred; and
· the amount of any provision recognised where the group is contractually required to dismantle, remove or restore the leased asset.
Subsequent to initial measurement lease liabilities increase as a result of interest charged at a constant rate on the balance outstanding and are reduced for lease payments made. Right-of-use assets are amortised on a straight-line basis over the remaining term of the lease or over the remaining economic life of the asset if, rarely, this is judged to be shorter than the lease term.
When the group revises its estimate of the term of any lease (because, for example, it re-assesses the probability of a lessee extension or termination option being exercised), it adjusts the carrying amount of the lease liability to reflect the payments to make over the revised term, which are discounted at the same discount rate that applied on lease commencement. The carrying value of lease liabilities is similarly revised when the variable element of future lease payments dependent on a rate or index is revised. In both cases an equivalent adjustment is made to the carrying value of the right-of-use asset, with the revised carrying amount being amortised over the remaining (revised) lease term.
When the group renegotiates the contractual terms of a lease with the lessor, the accounting depends
on the nature of the modification:
· if the renegotiation results in one or more additional assets being leased for an amount commensurate with the standalone price for the additional rights-of-use obtained, the modification is accounted for as a separate lease in accordance with the above policy
· in all other cases where the renegotiated increases the scope of the lease (whether that is an extension to the lease term, or one or more additional assets being leased), the lease liability is remeasured using the discount rate applicable on the modification date, with the right-of-use asset being adjusted by the same amount
· if the renegotiation results in a decrease in the scope of the lease, both the carrying amount of the lease liability and right-of-use asset are reduced by the same proportion to reflect the partial of full termination of the lease with any difference recognised in profit or loss. The lease liability is then further adjusted to ensure its carrying amount reflects the amount of the renegotiated payments over the renegotiated term, with the modified lease payments discounted at the rate applicable on the modification date. The right-of-use asset is adjusted by the same amount.
For contracts that both convey a right to the group to use an identified asset and require services to be provided to the group by the lessor, the group has elected to account for the entire contract as a lease, i.e. it does allocate any amount of the contractual payments to, and account separately for, any services provided by the supplier as part of the contract.
Nature of leasing activities (in the capacity as lessee)
The group leases a number of property, plant and equipment in the jurisdictions from which it operates with a fixed periodic rent over the lease term. The group has a total of 6 property leases and 1 plant and machinery lease.
Taxation
Income tax expense represents the sum of the tax currently payable and deferred tax.
Current tax
The tax currently payable is based on taxable profit for the year. Taxable profit differs from 'profit before tax' as reported in the consolidated statement of comprehensive income and other comprehensive income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible.
The Group's current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.
Deferred taxation
Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the combined statement of financial position differs from its tax base, except for differences arising on:
· the initial recognition of goodwill;
· the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting or taxable profit; and
· investments in subsidiaries and jointly controlled entities where the Group is able to control the timing of the reversal of the difference and it is probable that the difference will not reverse in the foreseeable future.
Recognition of deferred tax assets is restricted to those instances where it is probable that taxable profit will be available against which the difference can be utilised.
The amount of the asset or liability is determined using tax rates that have been enacted or substantively enacted by the end of the reporting period and are expected to apply when the deferred tax liabilities or assets are settled or recovered. Deferred tax balances are not discounted.
Deferred tax assets and liabilities are offset when the Group has a legally enforceable right to offset current tax assets and liabilities and the deferred tax assets and liabilities relate to taxes levied by the same tax authority on either:
· the same taxable group company; or
· different company entities which intend either to settle current tax assets and liabilities on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets and liabilities are expected to be settled or recovered.
Inventories
Inventories are initially recognised at cost, and subsequently at the lower of the cost and net realisable value. Cost comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.
Operating segments
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision maker has been identified as the management team including the Chief Executive Officers and the Chief Financial Officer.
The Board considers that the Group's project activity constitutes two operating and two reporting segments, as defined under IFRS 8. Management reviews the performance of the Group by reference to total results against budget.
The total profit measures are operating profit and profit for the year, both disclosed on the face of the combined income statement. No differences exist between the basis of preparation of the performance measures used by management and the figures in the Group financial information.
Earnings per share
Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders of the parent by the weighted average number of ordinary shares outstanding during the year, excluding treasury shares and shares in employee benefit trusts, determined in accordance with the provisions of IAS 33 earnings per Share. Diluted earnings per share is calculated by dividing earnings attributable to ordinary shareholders of the parent by the weighted average number of ordinary shares outstanding during the year adjusted for the potentially dilutive ordinary shares.
Share Capital
The Group's ordinary shares are classified as equity instruments.
Share-based payments
Where equity settled share options are awarded to employees, the fair value of the options at the date of grant is charged to the consolidated statement of comprehensive income over the vesting period. Non-market vesting conditions are considered by adjusting the number of equity instruments expected to vest at each reporting date so that, ultimately, the cumulative amount recognised over the vesting period is based on the number of options that eventually vest. Non-vesting conditions and market vesting conditions are factored into the fair value of the options granted. As long as all other vesting conditions are satisfied, a charge is made irrespective of whether the market vesting conditions are satisfied. The cumulative expense is not adjusted for failure to achieve a market vesting condition or where a non-vesting condition is not satisfied.
Where the terms and conditions of options are modified before they vest, the increase in the fair value of the options, measured immediately before and after the modification, is also charged to the consolidated statement of comprehensive income over the remaining vesting period.
Where equity instruments are granted to persons other than employees, the consolidated statement of comprehensive income is charged with the fair value of goods and services received.
Dividends
Dividends are recognised when they become legally payable. In the case of interim dividends to equity shareholders, this is when declared by the directors. In the case of final dividends, this is when approved by the shareholders at the annual general meeting.
Changes in accounting policies
New standards, interpretations and amendments effective from 1 January 2020.
There were no new standards or interpretations impacting the Group that will be adopted in the annual financial statements for the year ended 31 December 2020, and which have given rise to changes in the Group's accounting policies.
At the date of authorisation of these financial statements, certain new standards, amendments and interpretations to existing standards have been published by the IASB and adopted by the EU but are not yet effective and have not been adopted early by the Group. Management anticipates that all of the relevant pronouncements will be adopted in the Group's accounting policies for the first period beginning after the effective date of the pronouncement. Information on new standards, amendments and interpretations that are expected to be relevant to the Group's financial statements is provided below. Certain other new standards and interpretations have been issued but are not expected to have a material impact on the Group's financial statements.
Effect annual periods beginning before or after
IFRS 3
amendments updating a reference to the Conceptual Framework
1st January 2022
IFRS 4, 7,9,16
IAS 39amendments regarding replacement issues in the context of the IBOR reform
1st January 2021
IFRS 9
Amendments resulting from the annual improvements to IDRS Standards 2018-2020 (fees in the '10 per cent' test for derecognition of financial liabilities)
1st January 2022
IFRS 17
Amendments to address concerns and implementation challenges that were identified after IFRS 17 was published
1st January 2023
IAS 1
Amendments to defer the effective date of January 2020 amendments
Amendments regarding the disclosure of accounting policies
1st January 2023
IAS 8
amendments regarding the definition of accounting estimates
1st January 2023
IAS 16
Amendments prohibiting a company from deducting from the cost of property, plant and equipment amounts received from selling items while the company is preparing the asset for its intended use
1st January 2022
IAS 37
Amendments regarding the costs to include when assessing whether a contract is onerous
1st January 2022
Critical accounting estimates and judgements
The Group makes certain estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based on historical experience and other factors, including the expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
Government Grants
Grants from the government are recognised at their fair value where there is reasonable assurance that the grant will be received and the group will comply with all attached conditions. Government grants which are revenue in nature are recognised on a systematic basis within Other operating income in the Statement of Comprehensive income over the period in which the group recognises as expenses the related costs for which the grants are intended to compensate.
Judgements and accounting estimates and assumptions
a) Inventories
Inventories are initially recognised at cost, and subsequently at the lower of the cost and net realisable value. There is judgement involved in assessing the level of inventory provision required in respect of slow-moving inventory.
The Group makes a 50% provision for perishable items of stock that are greater than two years old. Should the Group increase the provision to 100% of perishable items that are greater than two years old, this would decrease profit by £251,000. The Group does not provide any provision on its non-perishable goods that are greater than two years old on the basis that the products have long shelf life. Should the Group increase the provision to 100% of non-perishable items that are greater than two years old, this would decrease profit by £137,000.
b) Impairment of goodwill
The assessment of the recoverable amount of goodwill allocated to Retra Holdings Limited and Leeds Marketing Services, Inc., as detailed in note 10, was based on a value in use calculation which involved judgement in assessing the projected future cashflows arising from the CGU and a suitable discount rate to be used to measure the future cash flows to present value. A one per cent increase in the pre-tax discount rate for Retra Holdings Limited from 8.03% to 9.03% would reduce the recoverable amount by approximately £1.6 million and will still not result in any impairment, while a one percent increase in the pre-tax discount rate for Leeds Marketing Services, Inc. from 7.62% to 8.62% would reduce the recoverable amount by approximately £1.3 million and will still not result in any impairment.
c) Deferred tax assets
Deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the assets to be recovered.
2. Segmental information
For management purposes, the Group is organised into two operating segments; Branded and Close-out. The segment 'Branded' relates to the sale of own branded products whereas 'close-out' relates to the purchase of third-party stock which is then repackaged for sale. These segments are the basis on which the Group reports internally to the Board.
Year ended 31 December
2020
2020
2020
2019
2019
2019
Own Brand
Close-out
Total
Own Brand
Close-out
Total
£'000
£'000
£'000
£'000
£'000
£'000
Revenue
35,397
4,889
40,286
41,619
7,663
49,282
Cost of sales
(24,375)
(3,367)
(27,742)
(27,086)
(5,694)
(32,780)
Gross profit
11,022
1,522
12,544
14,533
1,969
16,502
Administrative expenses
(11,853)
(1,637)
(13,490)
(13,110)
(1,067)
(14,177)
Exceptional items
(279)
(38)
(317)
(155)
(23)
(178)
Other operating income
317
44
361
-
-
-
Segment result
(793)
(109)
(902)
1,268
879
2,147
Reconciliation of segment result to profit before tax:
Segment result
(793)
(109)
(902)
1,268
879
2,147
Finance expense
(212)
-
(212)
(370)
-
(370)
Profit before tax
(1,005)
(109)
(1,114)
898
879
1,777
Analysis of total revenue by geographical market:
UK
16,909
4,233
21,142
17,863
4,838
22,701
Europe
5,271
48
5,319
6,289
680
6,969
Spain
4,555
72
4,627
7,268
-
7,268
Denmark
4,987
171
5,158
4,580
-
4,580
USA
1,790
358
2,148
2,825
2,131
4,956
Australia and New Zealand
1,206
-
1,206
1,408
2
1,410
Rest of World
679
7
686
1,386
12
1,398
Total
35,397
4,889
40,286
41,619
7,663
49,282
During the year ended 31 December 2020, there was no single material external customer from which revenues were derived exceeding 10% of annual sales. During the year ended 31 December 2019, revenues of approximately £5,269,000 were derived from a single external customer based in Spain and £3,797,000 were derived from a single external customer based in Denmark.
The Directors are not able to attribute the Group's assets and liabilities by reportable business segment.
Analysis of non -current assets by geographical market.
Year ended 31 December
2020
2020
2020
2019
2019
2019
UK
USA
Total
UK
USA
Total
£'000
£'000
£'000
£'000
£'000
£'000
Goodwill
6,720
554
7,274
6,720
554
7,274
Intangibles
4,066
585
4,651
6,286
796
7,082
Property, plant and equipment
1,142
7
1,149
675
9
684
Right of use assets
3,684
115
3,799
4,399
286
4,685
15,612
1,261
16,873
18,080
1,645
19,725
3. Other operating income
Year ended 31 December
2020
2019
£'000
£'000
Government grants receivable
361
-
361
-
The group applied for various government support Programs introduced in response to the global pandemic.
Included within the consolidated statement of comprehensive income is £361,000 of government grants obtained relating to supporting the payroll of the Group's employees. The Group has elected to present this government grant separately, rather than reducing the related expense. The Group had to commit to spending the assistance on payroll expenses, and not reduce employee headcount below prescribed levels for a specified period of time. The Group does not have any unfulfilled obligations relating to this program.
4. Operating (loss)/profit
Operating (loss)/profit for the period is stated after charging:
Year ended 31 December
2020
2019
£'000
£'000
Foreign exchange loss
420
227
Depreciation
385
326
Amortisation of right of use assets
867
868
Amortisation of intangible assets
2,443
2,439
Write-down inventories at net realisable value
312
83
Exceptional costs
317
178
The expenditure incurred within the table above falls wholly within Administrative expenses.
Exceptional costs
Year ended 31 December
2020
2019
£'000
£'000
Non-recurring legal and professional fees
76
16
Restructuring costs
241
162
317
178
Auditor's Remuneration
Analysis of auditor's remuneration is as follows:
Year ended 31 December
2020
2019
£'000
£'000
Fees payable to the Company's auditor for the audit of the Group's annual accounts
60
49
Fees payable to the Company's auditor for the audit of subsidiary companies
89
102
149
151
Other services pursuant to legislation:
Tax advice
26
12
Other assurance
3
3
Total non-audit fees
29
15
5. Staff costs
Year ended 31 December
2020
2019
£'000
£'000
Wages and salaries
4,889
4,576
Social security costs
407
449
Pension costs
83
81
5,379
5,106
The average monthly number of employees during the period was as follows:
Year ended 31 December
2020
2019
No.
No.
Directors
6
7
Administrative
27
40
Finance
7
5
Warehouse
53
45
Sales
8
3
Other
12
11
113
111
2020
2019
Directors' remuneration, included in staff costs
£'000
£'000
Salaries
838
740
Share based payments
545
674
Benefits
18
16
Pension contributions
3
2
1,404
1,432
Remuneration in respect of Directors was as follows:
Salary/fees
Share based payment
Benefits
Pension contribution
2020
2019
£'000
£'000
£'000
£'000
£'000
£'000
Executive Directors
S Bazini
230
240
10
-
480
493
E Macleod
230
240
8
-
478
491
N Rodol
180
63
-
1
244
253
S Craig
58
2
-
1
61
55
Non-executive Directors
C Garston
60
-
-
-
60
60
K Sadler
40
-
-
-
40
40
P Hagon
40
-
-
-
40
40
838
545
18
2
1,403
1,432
Number of Share options at January 2020
Number of Share options awarded in the year
Number of Share options lapsed in the year
Number of Share options at December 2020
Exercise Price
Earliest Exercise Date
Exercise Expiry Date
N Rodol
412,258
-
-
412,258
105,262 @237.5p
306,996 @254.5p
29/06/2020
21/09/2021
29/06/2027
21/09/2028
S Bazini
1,534,986
-
-
1,534,986
254.5p
21/09/2021
21/09/2028
E Macleod
1,534,986
-
-
1,534,986
254.5p
21/09/2021
21/09/2028
S Craig
10,000
10,000
-
20,000
10,000@ 237.5p 10,000@ 49.5p
29/06/2020
20/05/2023
29/06/2027
20/05/2030
Total share options
3,492,230
10,000
-
3,502,230
The directors of the Group are the only key management personnel.
6. Financial Expense
Year ended 31 December
2020
2019
£'000
£'000
Loan interest
18
26
Lease liability interest
143
225
Other interest
51
119
212
370
7. Income tax
Year ended 31 December
2020
2019
£'000
£'000
Current tax expense
Current tax on profits for the period
429
1,102
Adjustment in respect of previous periods
-
(75)
429
1,027
Deferred tax expense
Origination and reversal of temporary differences
(544)
(618)
Total tax expense
(111)
409
The reasons for the difference between the actual tax charge for the year and the standard rate of corporation tax in the United Kingdom applied to profit for the year as follows:
Year ended 31 December
2020
2019
£'000
£'000
(Loss)/Profit for the period before taxation
(1,114)
1,777
Expected tax charge based on corporation tax rate of 19% (2019: 19%)
(212)
337
Expenses not deductible for tax purposes
29
170
Other adjustments
2
5
Different tax rates applied in overseas jurisdiction
(69)
86
Adjustments in relation to prior year
-
(75)
Adjustment to deferred tax to average rate
139
(114)
Total tax expense
(111)
409
The UK corporation tax at the standard rate for the year is 19.0% (2019: 19.0%).
The Group's effective tax rate for the year is 19.30% (2019: 25.19%).
8. Subsidiaries
At the period end, the Group has the following subsidiaries:
Subsidiary name
Nature of business
Place of incorporation
Percentage owned
Warpaint Cosmetic Group Limited
Holding company
England and Wales
100%
Warpaint Cosmetics (2014) Limited*
Wholesaler
England and Wales
100%
Treasured Scents (2014) Limited
Dormant
England and Wales
100%
Treasured Scents Limited*
Holding company
England and Wales
100%
Warpaint Cosmetics Inc.
Dormant
U.S.A.
100%
Retra Holdings Limited
Holding company
England and Wales
100%
Badgequo Limited*
Wholesaler
England and Wales
100%
Retra Own Label Limited*
Dormant
England and Wales
100%
Badgequo Deutschland GmbH*
Supply chain management
Germany
100%
Badgequo Hong Kong Limited*
Supply chain management
Hong Kong
100%
Jinhua Badgequo Cosmetics Trading Co., Ltd
Wholesaler
People's Republic of China
100%
Marvin Leeds Marketing Services, Inc.
Wholesaler
U.S.A.
100%
Warpaint Cosmetics (ROI) Limited
Dormant
Republic of Ireland
100%
* indicates indirect interest
All entities detailed above have been in existence for the whole of the reporting period.
The registered office for all UK incorporated subsidiaries is Units B&C, Orbital Forty-Six, The Ridgeway Trading Estate, Iver, Bucks. SL0 9HW.
The registered office for Warpaint Cosmetics Inc.is 445 Northern Boulevard - Great Neck, New York 11021.
The registered office for Badgequo Deutschland GmbH is Robert-Bosch-Straße 10, Haus 1, 56410 Montabaur, Germany.
The registered office for Badgequo Hong Kong Limited is 12F, 3 Lockhart Road, Wanchai, Hong Kong.
The registered office for Jinhua Badgequo Cosmetics Trading Co. Ltd is Room 1401, Gongyuan Building No. 307 South Shuanglong Street, Wucheng District, Jinhua, Zhejiang, China 321000.
The registered office for Marvin Leeds Marketing Services, Inc. is 34W. 33rd St. - Suite 1015, New York NY 10001.
The registered office for Warpaint Cosmetics (ROI) Limited is 6th Floor, South Bank House, Barrow Street, Dublin 4, D04 TR29.
9. Goodwill
Cost
£'000
At 1 January 2020
8,086
At 31 December 2020
8,086
Impairment
At 31 December 2019
812
Impairment during the year
-
At 31 December 2020
812
Net book value
At 31 December 2020
7,274
At 31 December 2019
7,274
Goodwill represents the excess of consideration over the fair value of the Group's share of the net identifiable assets of the acquired business/CGU at the date of acquisition. The carrying value at 31 December 2020 includes Treasured Scents Limited (Close-out business) of £513,000, Retra Holdings Limited £6,207,000 and Marvin Leeds Marketing Services, Inc. £554,000.
Impairment is calculated by comparing the carrying amounts to the recoverable amount being the higher of value in use derived from discounted cash flow projections or the fair value less costs to sell. A CGU is deemed to be an individual division, and these have been grouped together into similar classes for the purpose of formulating operating segments as reported in note 2. Value in use calculations are based on a discounted cash flow model ("DCF") for the subsidiary, which discounts expected cash flows over a five-year period using a pre-tax discount rate of 10.1% (2019: 15.6%) for Retra Holdings Limited and 8.0% (2019: 14.1%) for Marvin Leeds Marketing Services, Inc. Cash flows beyond the five-year period are extrapolated using a long-term average growth rate of 2.0% (2019: 2.0%). The average growth rate beyond the five-year period is lower than current growth rates and is in line with Management's expectations for the business.
The fair value less costs to sell was based on a multiple of earnings less estimated costs to sell. Management have performed the annual impairment review as required by IAS 36 and have concluded that no impairment is indicated for Treasured Scents Limited, Retra Holdings Limited or Marvin Leeds Marketing Services, Inc. as the recoverable amount exceeds the carrying value.
Key Assumptions and sensitivity to changes in assumptions
The key assumptions are based upon management's historical experience. The calculation of VIU is most sensitive to the following assumptions:
· Sales and EBITDA - for LMS this is based on forecasts incorporating growth of 15.6% in revenue over the next five years. For Retra, the growth rate over the next year is anticipated to be 9.8% increasing to approximately 10.0% in years 2 to 5. EBITDA percentages for both LMS and Retra are based on historical rates achieved.
· Discount Rate - pre-tax discount rate of 10.1% for Retra Holdings Limited and 8.0% for Marvin Leeds Marketing Services, Inc. reflects the Directors' estimate of an appropriate rate of return, considering the relevant risk factors
· Growth Rate - used to extrapolate beyond the budget period and for terminal values based on a long-term average growth rate of 2.0% for LMS and Retra.
Sensitivity to changes in assumptions
The impairment review of the Group is sensitive to changes in the key assumptions, most notably the pre-tax discount rate, the terminal growth rate, the projected operating cash flows and the multiple applied in the fair value less cost to sell calculation. Reasonable changes to these assumptions are considered to be:
· 1.0% increase in the pre-tax discount rate.
· 1.0% reduction in the terminal growth rate.
· 10.0% reduction in projected operating cash flows.
· 10.0% reduction in valuation multiple.
Reasonable changes to the assumptions used, considered in isolation, would not result in an impairment of goodwill for LMS or Retra.
10. Intangible assets
Brands
Customer lists
Patents
Website
Licences
Total
£'000
£'000
£'000
£'000
£'000
£'000
Cost
At 1 January 2019
3,802
8,240
217
45
6
12,310
Additions
-
-
35
-
-
35
At 31 December 2019
3,802
8,240
252
45
6
12,345
Additions
-
-
12
-
-
12
At 31 December 2020
3,802
8,240
264
45
6
12,357
Accumulated amortisation
At 1 January 2019
824
1,908
70
19
3
2,824
Charge for the year
761
1,646
22
9
1
2,439
At 31 December 2019
1,585
3,554
92
28
4
5,263
Charge for the year
765
1,644
24
9
1
2,443
At 31 December 2020
2,350
5,198
116
37
5
7,706
Net book value
At 31 December 2020
1,452
3,042
148
8
1
4,651
At 31 December 2019
2,217
4,686
160
17
2
7,082
At 1 January 2019
2,978
6,332
147
26
3
9,486
11. Property, plant and equipment
Plant and machinery
Fixtures and fittings
Computer equipment
Motor vehicles
Total
£'000
£'000
£'000
£'000
£'000
Costs
At 1 January 2019
897
771
331
141
2,140
Reclassification to right-of-use assets
(760)
-
(77)
-
(837)
Additions
116
119
49
-
284
Disposals
(3)
(42)
(1)
-
(46)
At 31 December 2019
250
848
302
141
1,541
Additions
2
825
42
-
869
Disposals
-
-
-
(21)
(21)
At 31 December 2020
252
1,673
344
120
2,389
Accumulated depreciation
At 1 January 2019
233
328
162
59
782
Reclassification to right-of-use assets
(208)
-
(36)
-
(244)
Charge for year
35
205
56
30
326
On disposals
(1)
(5)
(1)
-
(7)
At 31 December 2019
59
528
181
89
857
Charge for year
41
257
70
17
385
On disposals
-
-
-
(2)
(2)
At 31 December 2020
100
785
251
104
1,240
Net book value
At 31 December 2020
152
888
93
16
1,149
At 31 December 2019
191
320
121
52
684
At 1 January 2019
664
443
169
82
1,358
12. Right-of-use assets
Leasehold property
Plant and machinery
Computer equipment
Total
£'000
£'000
£'000
£'000
Costs
At 1 January 2019
-
-
-
-
Reclassified from property, plant and equipment
-
760
77
837
Recognised on adoption of IFRS 16
4,960
-
4,960
At 31 December 2019
4,960
760
77
5,797
Additions
139
-
-
139
Disposals
(303)
-
-
(303)
At 31 December 2020
4,796
760
77
5,633
Accumulated amortisation
At 1 January 2019
-
-
-
-
Reclassified from property, plant and equipment
-
208
36
244
Charge for year
729
113
26
868
At 31 December 2019
729
321
62
1,112
Charge for the year
702
150
15
867
Disposals
(145)
-
-
(145)
At 31 December 2020
1,286
471
77
1,834
Net Book Value
At 31 December 2020
3,510
289
-
3,799
At 31 December 2019
4,231
439
15
4,685
13. Inventories
As at 31 December
2020
2019
£'000
£'000
Finished goods
14,934
16,387
Provision
(521)
(193)
14,413
16,194
The cost of inventories recognised as an expense and included in 'cost of sales' amounted to £24.30 million in the year ended 31 December 2020 (2019: £29.11 million).
14. Trade and other receivables
As at 31 December
2020
2019
£'000
£'000
Trade receivables - gross
7,750
10,310
Provision for impairment of trade receivables
(44)
(44)
Trade receivables - net
7,706
10,266
Other receivables
600
1,237
Prepayments and accrued income
881
1,121
Total
9,187
12,624
The directors consider that the carrying value of trade and other receivables measured at book value and amortised cost approximates to fair value.
Trade receivables amounting to £Nil (2019: £506,000) are pledged as collateral against an invoice financing facility.
The individually impaired receivables relate to the supply of goods to customers. A provision is recognised for amounts not expected to be recovered. Movements in the accumulated impairment losses on trade receivables were as follows:
As at 31 December
2020
2019
£'000
£'000
Accumulated impairment losses at 1 January
44
114
Additional impairment losses recognised/(released) during the year, net
256
(10)
Amounts written off during the year as uncollectible
(256)
(60)
Accumulated impairment losses at 31 December
44
44
The impairment losses recognised during the year of £256,000 (2019: credit of £10,000 relating to the recovery of amounts previously written off as uncollectable).
Contract Liabilities
As at 31 December
2020
2019
£'000
£'000
At 1 January
321
305
Amounts included in contract liabilities that was recognised as revenue during the period
611
660
Amounts settled during the period
(640)
(644)
At 31 December
292
321
Contract liabilities are included within "trade and other receivables" in the face of the statement of financial position being settled net of the trade debtor balances. They arise from the group's own brand segment, which enter into contracts with customers for early settlement discounts, marketing contributions and volume rebates, because the invoiced amounts to customers at each balance sheet date do not consider the amount or rebate and discounts the customers are entitled to until settlement of the debtor balance at a certain time.
15. Cash and cash equivalents
Cash and cash equivalents include the following for the purposes of the cash flow statement:
As at 31 December
2020
2019
£'000
£'000
Cash at bank and in hand
4,875
2,731
4,875
2,731
16. Trade and other payables
As at 31 December
2020
2019
£'000
£'000
Current
Trade payables
1,439
957
Social security and other taxes
523
546
Other payables
32
58
Accruals and deferred income
1,127
2,372
Total
3,121
3,933
The directors consider that the carrying value of trade and other payables measured at book value and amortised cost approximates to fair value.
17. Loans and borrowings
As at 31 December
2020
2019
£'000
£'000
Bank loans
Repayable within 1 year
48
1,281
Repayable within 2 - 5 years
-
48
48
1,329
Lease liabilities
Repayable within 1 year
866
925
Repayable within 2 - 5 years
2,375
2,584
Repayable in more than 5 years
670
1,231
3,911
4,740
Total
Repayable within 1 year
914
2,206
Repayable within 2 - 5 years
2,375
2,632
Repayable in more than 5 years
670
1,231
3,959
6,069
Lease liabilities
As at 31 December
Leasehold property
Plant and machinery
Computer equipment
Total
£'000
£'000
£'000
£'000
At 1 January 2019
4,960
550
41
5,551
Interest expense
168
53
4
225
Lease payments
(802)
(205)
(29)
(1,036)
As at 31 December 2019
4,326
398
16
4,740
Lease additions
139
-
-
139
Lease disposals
(158)
-
-
(158)
Interest expense
97
44
2
143
Lease payments
(745)
(190)
(18)
(953)
As at 31 December 2020
3,659
252
-
3,911
Nature of lease liabilities
The group leases a number of properties in the United Kingdom and United States of America as well as certain items of plant and equipment.
An additional £2,617 has been expensed to the statement of comprehensive income in respect of low value operating leases. Interest payments of £4,501 have also been expensed in respect of leases that expired during the period.
The interest rates expected are as follows:
As at 31 December
2020
2019
%
%
Finance loans
7.0
7.0
Bank loans
8.75
8.75
Invoice financing
3.25
3.25
Secured loans
The borrowings of the subsidiary companies, Retra Holdings Limited and Badgequo Limited, are secured by a debenture including a fixed charge over the present leasehold property, a first fixed charge over book and other debts and a first floating charge over all assets of those companies.
Bank borrowings include stock and invoice financing facilities amounting to £Nil (2019: £1,086,000 invoice financing). The carrying value of assets pledged as collateral approximates to £Nil (2019: £1,086,000).
18. Deferred tax
Deferred tax is calculated in full on temporary differences under the liability method using tax rate of 19% - 25%.
The movement on the deferred tax account is as shown below:
Deferred tax liability
Deferred tax asset
Year ended 31 December
Year ended 31 December
2020
2019
2020
2019
£'000
£'000
£'000
£'000
Opening balance
(1,324)
(1,796)
374
241
Foreign exchange adjustment
3
-
(16)
(13)
Recognised in profit and loss:
Tax expense
321
472
223
146
Closing balance
(1,000)
(1,324)
581
374
The deferred tax liability has arisen due to the timing difference on accelerated capital allowances amounting to £42,000 (2019: £37,000) and on the intangible assets acquired in a business combination amounting to £1,057,000 (2019: £1,057,000).
Deferred tax asset has arisen from loss carry forward for LMS amounting to £2,323,000 (2019: £1,497,000) and recognised at a rate of 25%.
19. Dividends
Year to December 2020
Paid
Amount per share
Total £'000
Final dividend - 2019
-
-
-
Interim dividend - 2020
20 Nov 20
2.8p
2,149
2,149
Year to December 2019
Paid
Amount per share
Total £'000
Final dividend - 2018
11 Jul 19
2.9p
2,226
Interim dividend - 2019
12 Nov 19
1.5p
1,151
3,377
20. Called up share capital
No of shares
'000
£'000
Allotted and issued
Ordinary shares of £0.25 each:
At 1 January 2019 and 2020
76,749
19,187
At 31 December 2019 and 2020
76,749
19,187
All ordinary shares carry equal rights.
21. Reserves
Share premium
The share premium reserve contains the premium arising on the issue of equity shares, net of issue expenses incurred by the Company.
Retained earnings
Retained earnings represent cumulative profits or losses, net of dividends and other adjustments.
Merger reserve
The merger reserve arose due to the group reconstruction in 2016. The effect of the application of merger accounting principles on the merger reserve is that the share capital and other distributable reserves that existed in Warpaint Cosmetics Group Limited (the Company) as at the point Warpaint London PLC legally acquired Warpaint Cosmetics Group Limited is accounted for as if it had been in existence as at 31 December 2015 and as at the 1 January 2015. The corresponding entry being the merger reserve so the overall net assets as at the comparative dates are not affected.
The 2016 movement on the merger reserve arose due to the acquisition of Treasured Scents (2014) Limited on 11 November 2016. The shareholders of Treasured Scents (2014) Limited transferred their shares to Warpaint London PLC in exchange for shares in Warpaint London PLC, the difference in fair value of the consideration was £2,005,233. This is adjusted through the merger reserve as it is considered part of the consideration paid by Warpaint London PLC to acquire Treasured Scents (2014) Limited.
The 2017 movement in merger reserve represents the difference between the issue price and the nominal value of shares issued as consideration for the acquisition of subsidiary undertaking.
Share option reserves
'Share option reserves' have arisen from the share-based payment charge. The shares over which the options were issued are that of the parent company. 'Other reserves' have also arisen on translation of foreign subsidiaries.
22. Share based payments
Movements in the number of options and their weighted average exercise prices are as follows:
Weighted average exercise price (pence)
Number of options
Weighted average exercise price (pence)
Number of options
2020
2020
2019
2019
Outstanding at the beginning of the year
253.45
4,088,302
253.52
4,070,617
Granted during the year
49.50
454,686
-
-
Expired during the year
83.36
(14,026)
237.50
(3,368)
Period adjustments
-
-
237.50
21,053
Outstanding at the end of the year
233.50
4,528,962
253.45
4,088,302
The weighted average remaining contractual life of the options is 3.0 years (2019: 4.0 years).
The following options over ordinary shares have been granted by the Company:
Exercise price
Exercise period
Number of options
Pence
(years)
29 June 2017
237.50
3
255,051
24 September 2018
254.50
5
3,837,462
20 May 2020
49.50
3
454,686
At the date of grant, the options were valued using the Black-Scholes option pricing model. The fair value per options granted and the assumptions used in the calculations were as follows:
20 May 2020
24 Sept 18
29 June 17
Expected volatility
76%
78%
64%
Expected life (years)
3
2-4
3
Risk-free interest rate
0.01%
1.61%
0.38%
Expected dividend yield
2.08%
1.53%
2%
Fair value per option (£)
0.213
0.422
0.963
On 20 May 2020, the Company granted, in aggregate, 454,686 share options with an exercise price of 49.50 pence per Ordinary share under a Company Share Option Plan (CSOP). Key persons discharging managerial responsibilities (PDMR's) were awarded a cumulative 112,106 share options as part of their annual remuneration and incentivisation packages. The remaining 342,580 options granted have been awarded to other members of the company's workforce. No directors of the company were awarded options in relation to this CSOP. The options are exercisable for a period of seven years from 20 May 2023, subject to the same performance conditions dictated by the Enterprise Management Incentive Scheme detailed below.
On 24 September 2018, share options with an exercise price of 254.50p, equal to the closing mid-market value immediately prior to the date of grant, and subject to the achievement of demanding Earnings Per Share ("EPS") and Total Shareholder Return ("TSR") performance conditions measured over a period of up to 5 years were granted to certain directors.
The share options are exercisable up to 10 years from the date of grant. Vesting is subject to the performance conditions set out below:
· 50% of the award is subject to an adjusted EPS growth performance condition. One third of this portion of the award will be tested and vest after three, four and five years. Vesting is based on adjusted EPS in the years ending Dec 2020, 2021 and 2022. Threshold vesting of 20% of the award is achieved at 12.5% compound annual EPS growth and full vesting at 22.5% compound annual EPS growth, measured from 31 December 2017.
· 50% of the award is subject to an absolute TSR performance condition tested following the announcement of results for the years ending 31 December 2020, 2021 and 2022. Threshold vesting of 20% of the award is achieved at 8% compound annual TSR and straight line vesting up to 100% vesting at 18% compound annual TSR, measured from 31 December 2017.
An additional grant of 460,494 share options with the same terms was made on the same date to three senior management individuals of the Company.
On 29 June 2017, the Company granted in aggregate over 277,788 ordinary shares of 25 pence each in the Company under the Enterprise Management Incentive Scheme to all staff members, including the Company's Chief Financial Officer, Neil Rodol, but excluding all other directors. The Options are exercisable for a period of seven years from 29 June 2020, subject to certain performance conditions being met, including that the compound annual growth rate in the Company's earnings per share must exceed 8 per cent over the three financial years commencing 1 January 2017, subject to the discretion of the Company's remuneration committee.
The charge in the statement of comprehensive income for the share-based payments during the year was £656,000 (2019: £816,000).
23. Related party transactions
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation.
Key management personnel are considered to be the directors. Compensation of the directors is disclosed in note 5 with the exception of dividends and drawings which are disclosed in note 19.
During 2020, Warpaint Cosmetics (2014) Limited paid rent in the sum of £120,000 (2019: £120,000) to Direct Supplies (2014) Group Limited, of which S Bazini is a director. At the year end the amount due to Direct Supplies (2014) Group Limited was £Nil (2019: £Nil).
During 2020, Warpaint Cosmetics (2014) Limited paid rent in the sum of £120,000 (2019: £120,000) to Trading Scents Group Limited, of which E Macleod is a director. At the year end the amount due from Trading Scents Group Limited was £1,000 (2019: £Nil).
During 2020, Retra Holdings Limited paid rent in the sum of £340,000 (2019: £340,000) to Warpaint Cosmetics Limited, of which E Macleod and S Bazini are directors.
During 2020, the Group renewed its contract with Ward & Hagon Management Consulting LLP for a further 12 months ("Ward & Hagon"). Ward & Hagon, a provider of practical business solutions, were initially appointed in February 2020 to assist the Group in implementing its strategic growth plan. The Contract has a total annual value of £210,000, and includes the services of Paul Hagon, an executive director of the Group and Martyn Ward, amongst other members of the Ward & Hagon team. During 2020, the Group paid £200,000 in consultancy fees and £7,299 in expenses. At the year end the amount due from Ward & Hagon was £Nil. In addition, Ward & Hagon will be paid a commission of 3% on all sales generated from their introductions in the 12-month period from the point of first sale, and 4% on all sales generated from their introductions in the 12-month period thereafter. Paul Hagon, an executive director of Warpaint London Plc, is a member of Ward & Hagon and therefore the contract renewal constitutes a related party transaction under the AIM Rules for Companies.
24. Financial instruments
Capital risk management
The Board has overall responsibility for the determination of the Group's risk management objectives and policies. The overall objective of the Board is to set policies that seek to reduce risk as far as possible without unduly affecting the Group's competitiveness and flexibility. The Group reports in Sterling. All funding requirements and financial risks are managed based on policies and procedures adopted by the Board of Directors.
The Group manages its capital to ensure its ability to continue as a going concern and to maintain an optimal capital structure to reduce cost of capital. The capital structure of the Group comprises equity attributable to equity holders of the Company consisting of invested capital as disclosed in the Statement of Changes in Equity and cash and cash equivalents.
The Group's invested capital is made up of share capital and retained earnings totalling £32,389,000 as at 31 December 2020 (2019: £35,541,000) as shown in the statement of changes in equity.
The Group maintains or adjusts its capital structure through the payment of dividends to shareholders and issue of new shares.
Year ended 31 December
2020
2019
£'000
£'000
Financial assets
Financial assets at amortised cost:
Trade and other receivables
8,306
11,503
Financial assets measured at fair value through the profit and loss:
Cash and cash equivalents
4,875
2,731
Derivative financial instruments
40
39
13,221
14,279
Financial liabilities
Financial liabilities at amortised cost:
Trade and other payables
(2,598)
(3,387)
Loan and borrowings
(3,959)
(6,069)
Financial liabilities measured at fair value through the profit and loss:
Derivative financial instruments
(400)
-
(6,957)
(9,456)
Net
6,264
4,823
Financial assets measured at fair value through the profit and loss comprise cash and cash equivalents and derivative financial instruments.
Financial assets measured at amortised cost comprise trade receivables and other receivables.
Financial liabilities measured at amortised cost comprise trade payables and other payables, and bank loans.
Cash and cash equivalents
This comprises cash and short-term deposits held by the Group. The carrying amount of these assets approximates their fair value.
General risk management principles
The Group's activities expose it to a variety of risks including market risk (interest rate risk), credit risk and liquidity risk. The Group manages these risks through an effective risk management programme and through this programme, the Board seeks to minimise potential adverse effects on the Group's financial performance. The Directors have an overall responsibility for the establishment of the Group's risk management framework. A formal risk assessment and management framework for assessing, monitoring and managing the strategic, operational and financial risks of the Group is in place to ensure appropriate risk management of its operations.
The following represent the key financial risks that the Group faces:
Market risk
The Group's activities expose it to the financial risk of interest rates.
Interest rate risk
The Group's interest rate exposure arises mainly from its interest-bearing borrowings. Contractual agreements entered into a floating rate expose the entity to cash flow risk. Interest rate risk also arises on
the Group's cash and cash equivalents. The Group does not enter into derivative transactions in order to hedge against its exposure to interest rate fluctuations. An increase in the rate of interest by 100 basis points would decrease profits by £7,000 (2019: £21,000) with an increase in profits by the same amount for a decrease in the rate of interest by 100 basis points.
Credit risk
Credit risk is the risk of financial loss to the Group if a customer or a counterparty to a financial instrument fails to meet its contractual obligations.
The Group's principal financial assets are trade and other receivables and bank balances and cash. The credit risk on liquid funds is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies.
The Group's credit risk is primarily attributable to trade receivables. The Group has a policy of assessing credit worthiness of potential and existing customers before entering into transactions. There is ongoing credit evaluation on the financial condition of accounts receivable using independent ratings where available or by assessment of the customer's credit quality based on its financial position, past experience and other factors. The Group manages the collection of its receivables through its ongoing contact with customers so as to ensure that any potential issues that could result in non-payment of the amounts due are addressed as soon as identified. The Group makes a provision in the financial statements for expected credit losses based on an evaluation of historical data and applies percentages based on the ageing of trade receivables.
The maximum exposure to credit risk in respect of the above is the carrying value of financial assets recorded in the financial statements. At 31 December 2020, the Group has trade receivables of £7,706,000 (2019: £10,266,000).
The following table provides an analysis of trade receivables that were due, but not impaired, at each financial year end. The Group believes that the balances are ultimately recoverable based on a review of past impairment history and the current financial status of customers.
As at 31 December
2020
2019
£'000
£'000
Current
4,682
7,416
1 - 30 days
1,801
1,981
31 - 60 days
944
456
61 - 90 days
220
155
91 + days
103
302
Provision for impairment of trade receivables
(44)
(44)
Total trade receivables - net
7,706
10,266
The Directors are unaware of any factors affecting the recoverability of outstanding balances at 31 December 2019 and, consequently, no further provisions have been made for bad and doubtful debts.
The allowance for bad debts has been calculated using a 12-month lifetime expected credit loss model, as set out below, in accordance with IFRS 9.
As at 31 December
As at 31 December
2020
2019
£'000
%
£'000
£'000
%
£'000
Current
4,682
0.135
6
7,416
0.096
7
1 - 30 days
1,801
0.405
7
1,981
0.288
6
31 - 60 days
944
1.215
11
456
0.864
4
61 - 90 days
220
3.645
8
155
2.592
4
91 + days
103
10.935
12
302
7.776
23
44
44
Credit quality of financial assets
As at 31 December
2020
2019
Trade receivables, gross (note 14):
£'000
£'000
Receivable from large companies
4,270
6,561
Receivable from small or medium-sized companies
412
855
Total neither past due nor impaired
4,682
7,416
As at 31 December
2020
2019
Past due but not impaired:
£'000
£'000
Less than 30 days overdue
1,801
1,981
30 - 90 days overdue
1,223
869
Total past due but not impaired
3,024
2,850
Lifetime expected loss provision:
Less than 30 days overdue
-
13
30 - 90 days overdue
44
31
Total lifetime expected loss provision (gross)
44
44
Less: Impairment provision
(44)
(44)
Total trade receivables, net of provision for impairment
7,706
10,266
Cash and cash equivalents, neither past due nor impaired (Moody's ratings of respective counterparties):
As at 31 December
2020
2019
£'000
£'000
AAA rated
10
7
AA rated
303
786
A rated
1,115
-
BAA rated
3,447
1,938
Total cash and cash equivalents
4,875
2,731
For the purpose of the groups monitoring of credit quality, large companies or groups are those that, based on information available to management at the point of initially contracting with the entity, have annual turnover in excess of £100,000 (2019: £100,000).
Liquidity risk
Liquidity risk arises from the Group's management of working capital. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due. The Group's policy is to ensure that it will always have sufficient cash to allow it to meet its liabilities when they become due. To achieve this aim, it closely monitors its access to bank and other credit facilities in comparison to its outstanding commitments on a regular basis to ensure that it has sufficient funds to meet the obligations as they fall due.
The Board receives regular forecasts which estimate cash flows over the next eighteen months, so that management can ensure that sufficient funding is in place as it is required.
The tables below summarise the maturity profile of the combined group's non-derivative financial liabilities at each financial year end based on contractual undiscounted payments, including estimated interest payments where applicable:
Year ended 31 December 2020
Less than 6 months
Between 6 months and 1 year
Between 1 and 5 years
Over 5 years
Total
£'000
£'000
£'000
£'000
£'000
Trade payables
1,439
-
-
-
1,439
Other payables
32
-
-
-
32
Accruals
1,127
-
-
-
1,127
Loans and borrowings
491
444
2,526
686
4,147
3,089
444
2,526
686
6,745
Year ended 31 December 2019
Less than 6 months
Between 6 months and 1 year
Between 1 and 5 years
Over 5 years
Total
£'000
£'000
£'000
£'000
£'000
Trade payables
957
-
-
-
957
Other payables
58
-
-
-
58
Accruals
2,372
-
-
-
2,372
Loans and borrowings
1,667
477
2,755
1,271
6,170
5,054
477
2,755
1,271
9,557
The borrowings of the group are secured by a debenture including a fixed charge over all present freehold and leasehold property, a first fixed charge over book and other debts and a first floating charge over all assets.
Foreign exchange risk
The Group operates in a number of markets across the world and is exposed to foreign exchange risk arising from various currency exposure in respect of cash and cash equivalents, trade receivables and trade payables, in particular with respect to the US dollar. The Group mitigates its foreign exchange risk by negotiating contracts with key suppliers that offer a flexible discount structure to offset any adverse foreign exchange movements and through the use of forward currency contracts. At December 2020, there were total sums of £375,000 (2019: £255,000) held in foreign currency.
The Group is also exposed to currency risk as the assets of its subsidiary are denominated in US Dollars. At 31 December 2020, the net foreign liability was £0.4m (2019: £0.3m). Differences that arise from the translation of these assets from US dollar to sterling are recognised in other comprehensive income in the year and the cumulative effect as a separate component in equity. The Group does not hedge this translation exposure to its equity.
A 5% weakening of sterling would result in a £4,000 increase in reported profits and equity, while a 5% strengthening of sterling would result in £3,000 decrease in profits and equity.
2020
2019
£'000
£'000
Derivatives carried at fair value:
Exchange (loss)/gain on forward foreign currency contracts
(360)
39
The Group, along with other businesses, will face the risk of inflationary pressures through commodities cost increases, further driven by currency weakness post Brexit.
Forward contracts and options
The Group enters into forward foreign exchange contracts and options to manage the risk associated with anticipated sale and purchase transactions which are denominated in foreign currencies.
As at 31 December 2020, the group has 42 (2019: 33) forward foreign exchange contracts outstanding. Derivative financial instruments are carried at fair value.
The following table details the foreign currency contracts outstanding as at the balance sheet date.
a) Contracted exchange rate
2020
2019
2020
2019
£/$
£/€
3 months or less
1.3353
1.2953
1.1082
1.1394
3 to 6 months
1.3222
1.3280
1.1099
1.1405
6 to 12 months
1.3265
-
1.1024
-
b) Contract value
2020
2019
2020
2019
£/$
£/€
£'000
£'000
£'000
£'000
3 months or less
2,620
4,723
947
904
3 to 6 months
7,008
6,408
2,479
2,899
6 to 12 months
3,766
-
1,133
-
13,394
11,131
4,559
3,803
c) Foreign currency
2020
2019
2020
2019
$'000
$'000
€'000
€'000
3 months or less
3,500
6,175
1,050
1,030
3 to 6 months
9,254
8,500
2,750
3,335
6 to 12 months
5,000
-
1,250
-
17,754
14,675
5,050
4,365
Fair value of financial assets and liabilities
Financial instruments are measured in accordance with the accounting policy set out in Note 1. All financial instruments carrying value approximates its fair value with the exception of foreign currency forward contracts and options which are considered Level 2. The Directors consider that there is no significant difference between the book value and fair value of the Group's financial assets and liabilities and is considered to be immaterial.
25. Pension costs
The Group operates a defined contribution pension scheme. Contributions payable to the company's pension scheme are charged to the statement of comprehensive income in the period to which they relate. The amount charged to profit in each period was £91,019 (2019: £80,210).
26. Controlling party
In the opinion of the directors there is no ultimate controlling party.
27. Earnings/(loss) per share
Basic earnings per share are calculated by dividing profit or loss attributable to ordinary equity holders by the weighted average number of ordinary shares in issue during the period.
The weighted average number of shares for the current year includes the shares issued as consideration for the acquisition of Retra Holdings Limited on 30 November 2017.
2020
2019
Basic earnings/(loss) per share (pence)
(1.31)
1.78
Diluted earnings per/(loss) share (pence)
(1.31)
1.78
The calculation of basic and diluted earnings/(loss) per share is based on the following data:
2020
2019
Earnings
£'000
£'000
Earnings for the purpose of basic earnings per share, being the net (loss)/profit
(1,098)
1,368
Number of shares
2020
2019
Weighted number of ordinary shares for the purpose of basic earnings per share
76,749,125
76,749,125
Potentially dilutive shares awarded
67,040
-
Weighted number of ordinary shares for the purpose of diluted earnings per share
76,816,165
76,749,125
The 4,088,302 share options (2019: 4,088,302) in issue throughout the year have not been included in the computation of diluted earnings per share, as per IAS 33, the share options are not dilutive as they are not likely to be exercised given that the exercise price is higher than the average market price.
The additional 454,686 share options granted 20 May 2020 have been included in the computation of diluted earnings per share as the exercise price of the options is below the average annual market price of Ordinary shares.
28. Notes supporting statement of cash flows
Non-cash transactions from financing activities are shown in the table below.
Non-current loans and borrowings
Current loans and borrowings
Total
£'000
£'000
£'000
At 1 January 2019
553
2,169
2,722
Non-cash flows:
Amount recognised in respect of lease liabilities on adoption of IFRS 16.
4,271
688
4,959
Cash flows
-
(1,612)
(1,612)
Reclassification from Non-current loans and borrowings to current loans and borrowings
(960)
960
-
At 31 December 2019
3,864
2,205
6,069
Non-cash flows:
(19)
(19)
Cash flows
-
(2,091)
(2,091)
Reclassification from Non-current loans and borrowings to current loans and borrowings
(819)
819
-
At 31 December 2020
3,045
914
3,959
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