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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Warpaint London Plc | LSE:W7L | London | Ordinary Share | GB00BYMF3676 | ORD 25P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 470.00 | 465.00 | 470.00 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Misc Retail Stores, Nec | 64.06M | 6.25M | 0.0810 | 57.72 | 360.57M |
From Apr 2019 to Apr 2024
TIDMW7L
RNS Number : 6879V
Warpaint London PLC
10 April 2019
10 April 2019
Warpaint London plc
("Warpaint London" or the "Company")
Full Year Results for the 12 months ended 31 December 2018
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 2018.
Financial Highlights
-- Revenue increased by 49.2% to GBP48.5 million (2017: GBP32.5 million) -- Adjusted profit from operations GBP8.3 million (2017: GBP7.7 million) -- Adjusted earnings per share 9.1p (2017: 9.6p) -- Net cash at the year end of GBP1.3 million (31 December 2017: GBP2.0 million) -- Cash generated from operating activities GBP4.3 million (2017: GBP4.8 million)
-- Final dividend for the year of 2.9p per share, total dividend for the year of 4.4p per share (2017: 4.0p per share)
Operational Highlights
-- Strategic acquisition of US distributor LMS, for US$2.08 million (GBP1.6 million) on 2 August 2018
-- International revenue increased by 59.2% to GBP25.1 million (2017: GBP15.8 million)
-- UK revenue now 48% of total business (2017: 52%) as strategic emphasis on international expansion continues
-- Close-out revenue increased by 34.3% to GBP7.6 million (2017: GBP5.7 million)
Commenting, Clive Garston, Chairman, said:
"2018 was a challenging year for the Company as it faced continuing uncertainty caused by the prospect of Brexit, a fluctuating Sterling exchange rate and a severe decline in retail sales on the UK high street. However, despite the challenges of 2018 I believe the Company is well placed for the future.
"Whilst trading conditions remain difficult in the UK, we have had a promising start to the current financial year. We continue to grow internationally and expect our sales outside the UK to be an ever greater proportion of Group sales going forward. In particular, I am encouraged by the sales of the Retra brands and our growth in the US.
"The Group has a sound financial footing with a strategy for growth across all our markets. The board is cautiously optimistic for the 2019 financial outturn, with growth in sales and EBITDA anticipated."
Enquiries:
Warpaint London PLC c/o IFC Sam Bazini - Joint Chief Executive Officer Eoin Macleod - Joint Chief Executive Officer Neil Rodol - Chief Financial Officer Stockdale Securities Limited (Nominated Adviser and Broker) Antonio Bossi- Corporate Finance Fiona Conroy - Corporate Broking 020 7601 6100 IFC Advisory Limited (Financial PR & IR) Tim Metcalfe Heather Armstrong Florence Chandler 020 3934 6630
Warpaint London plc
Warpaint London is a colour cosmetics business, based in Iver, Buckinghamshire. It is made up of two divisions: own brand and close-out. The larger own brand division primarily consists of the Group's flagship brand, W7, together with the Technic, Body Collection and Man'stuff brands acquired through the acquisition of Retra Holdings in 2017.
Headline results for the year to 31 December 2018
Warpaint London plc ("Warpaint", the "Company" or the "Group") is made up of two divisions.
The largest division sells own brand cosmetics under the lead brand names of W7 and Technic. W7 is sold in the UK primarily to discount retailers and internationally to local distributors or retail chains. The Technic brand is sold in the UK and the rest of 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 the smaller own brand names of Man'stuff, Body Collection, Vintage, Outdoor Girl, Very Vegan, Chit Chat, Smooch, Copy Cat and Taxi.
The second division trades in close-out and excess stock of branded cosmetics and fragrances from around the world.
On 2 August 2018, the Group acquired Marvin Leeds Marketing Services, Inc. ("LMS") for a consideration of GBP1.6 million ($2.08 million). LMS sells the Group brands as well as close-out to their existing US customers. In the previous year on 30 November 2017, the Group acquired Retra Holdings Ltd ("Retra") for GBP17.8 million. This annual report has been prepared in accordance with IFRS as adopted by the European Union, which requires use of acquisition method for business combinations. The reported figures for 2017 only included the results of Retra for one month post acquisition, therefore in order to aid shareholders' understanding of the underlying performance of the business we have focused our comments on the consolidated statement of comprehensive income for the year ended 31 December 2018 compared with the consolidated statement of comprehensive income for the year ended 31 December 2017, with reference where appropriate to "like for like" numbers which include the Retra business for the whole of 2017. Like for like numbers have not been adjusted for the business of LMS in 2017. LMS was a customer of the Group prior to acquisition and distributed the W7 brand throughout the period 1 January 2017 to 1 August 2018. The business conducted by LMS prior to acquisition is already included in the consolidated statements of comprehensive income for the years ended 31 December 2017 and 31 December 2018.
Headline results, shown below, represent the performance comparisons between the consolidated statements of income for the years ended 31 December 2017 and 31 December 2018.
The statutory consolidated statement of comprehensive income for the years ended 31 December 2017 and 31 December 2018, include the trade of the existing own brand and close-out businesses for the whole of each year, plus the trade of Retra from the acquisition date of 30 November 2017 only, and the trade of LMS from the date of its acquisition on 2 August 2018 only.
Hot Features
Premium
Statutory Results
Year ended 31 Year ended 31 Growth
Dec 2018 Dec 2017 %
------------------------
Revenue GBP48.5m GBP32.5m 49.2
Profit from operations GBP4.9m GBP6.9m -29.0
Profit from operations
margin 10.1% 21.5%
PBT GBP4.7m GBP6.9m -31.9
EPS 4.7p 8.3p -43.4
Net cash GBP1.3m GBP2.0m
Adjusted Statutory Results
Year ended 31 Year ended 31 Growth %
Dec 2018 Dec 2017
----------------------------------------
Revenue GBP48.5m GBP32.5m 49.2
Adjusted profit from operations GBP8.3m* GBP7.7m* 7.8
Adjusted profit from operations margin 17.1%* 23.7%*
Adjusted PBT GBP8.2m* GBP7.7m* 6.5
Adjusted EPS 9.1p* 9.6p* -4.2
Net cash GBP1.3m GBP2.0m
*Adjusted for GBP0.16 million of LMS acquisition costs, plus GBP0.10 million of Retra acquisition costs, plus GBP0.08 million of Retra staff restructuring costs incurred in the year (2017: GBP0.4 million of Retra acquisition costs) and GBP2.3 million of amortisation of intangible assets (2017: 0.5 million) and GBP0.8 million of Retra impairment costs in the year (2017: Nil).
Chairman's Statement
2018 was a challenging year for the Company as it faced continuing uncertainty caused by the prospect of Brexit, a fluctuating Sterling exchange rate and a severe decline in retail sales on the UK high street.
During the year Retra was integrated into the enlarged Group and Marvin Leeds Marketing Services, Inc. ("LMS"), our US distributor was acquired. The acquisition of LMS will accelerate our growth into the largest colour cosmetics market in the world and provide the Group with US dollar income. A new showroom was opened in Manhattan which is beginning to drive increased sales and US prospects are encouraging. US sales were up 108% compared to 2017. EU sales in 2018 were also ahead with Spain, in particular, trending up.
At Retra we have concentrated on introducing all year round product, so that gifting is not so dominant for that business and we expect results for the first half of 2019 to reflect this.
Results
Like for like numbers and adjusted numbers will be quoted where appropriate in this annual report in order to give shareholders clarity in understanding the results for the year. Like for like numbers include the trade of Retra for the whole of 2017, as if it had been part of the Group for the whole of that year. Like for like numbers have not been adjusted for the business of LMS in 2017 as it was the exclusive distributor for our W7 brand into the US in that year and therefore the business conducted through LMS is already included in the consolidated statement of comprehensive income for the year ended 31 December 2017. Adjusted numbers exclude acquisition costs, staff restructuring costs, amortisation in relation to acquisitions and impairment costs.
Adjusted profit before tax was GBP8.2 million (2017 GBP7.7 million) on revenue of GBP48.5 million (2017 GBP32.5 million) with basic earnings per share of 4.7p (2017 8.3p) and adjusted earnings per share of 9.1p (2017 9.6p). Net cash at 31 December 2018 was GBP1.3 million (31 December 2017 GBP2.0 million), after having paid in the year GBP1.6 million for LMS emphasising the Group's strong cash generation. Sales margin reduced in 2018 and our priorities are to return to previous margins and increase earnings. The main reason for the reduced margin was the increased proportion of Group sales attributed to the close-out division. Sales from the close-out division are at a lower margin historically than of our own brands.
The UK is Warpaint's largest market and accounted for 48% of Group sales in 2018. Sales in the close-out division were 34% ahead of 2017, and Group sales outside of the UK were ahead of 2017 by 8% on a like for like basis.
Dividend
In accordance with the Group's progressive dividend policy, the board is pleased to recommend a final dividend of 2.9p per share (2017 2.6p) which, if approved by shareholders at the AGM, will be paid on the 1 July 2019 to shareholders on the register at 14 June 2019. The shares will go ex-dividend on the 13 June 2019.
Board and People
I would like to thank my fellow board members and all the Group's employees for their dedication and commitment throughout the year. Notwithstanding the challenges in 2018 Warpaint remains a progressive, energetic and dynamic company and this is driven by the commitment of its employees.
Sally Craig joined the board as General Counsel & Company Secretary on 17 September 2018. Sally has been Warpaint's Company Secretary since February 2017. She is a solicitor, has previously practised as a corporate lawyer and has many years' experience providing company secretarial services to public and private companies in the UK. This appointment provides additional skills and experience to the board.
Nowhere is the culture of Warpaint demonstrated more than by the dedication and ambition of the executive directors and senior management. They are determined to drive Warpaint forward. The non-executive directors, Keith Sadler and Paul Hagon make a very meaningful contribution to the board and I regard it as a privilege and pleasure to work alongside them all.
As outlined in my statement last year a LTIP has been introduced to incentivise senior employees.
Annual General Meeting
The annual general meeting will be held on 21 May 2019 at 11am at the offices of DAC Beachcroft LLP, 25 Walbrook, London EC4N 8AF. I look forward to meeting all shareholders who are able to attend.
Outlook
Despite the challenges of 2018 I believe the Company is well placed for the future. Whilst trading conditions remain difficult in the UK, we have had a promising start to the current financial year. We continue to grow internationally and expect our sales outside the UK to be an ever greater proportion of Group sales going forward. In particular, I am encouraged by the sales of the Retra brands, which are growing strongly compared to 2018 and, our growth in the US. As with all International businesses results for 2019 may be impacted by prevailing exchange rates.
The Group has a sound financial footing with a strategy for growth across all our markets. The board is cautiously optimistic for the 2019 financial outturn, with growth in sales and EBITDA anticipated.
Clive Garston
Chairman
10 April 2019
Joint Chief Executives' Statement
2018 was a challenging year for Warpaint nevertheless, at the same time the business has shown resilience and adapted to the changing market conditions, managing to increase international sales by 8% on a like for like basis.
Our strategy of producing a wide range of high quality cosmetics at an affordable price has remained our key focus and we are very pleased with the reaction that our expanding product range received during the year.
With the acquisition of Retra in November 2017 now fully integrated into the Group, sales of own brand colour cosmetics accounted for 79% of revenue (2017: 82% on a like for like basis), the small drop in overall percentage is because of the increase in close-out opportunities bought and sold in 2018. The own brand cosmetics business remains the primary strategic focus of the Group.
The Group's lead brand remains W7 with sales in 2018 being 48% of total revenue (2017: 51% on a like for like basis). In the UK, revenue of W7 was down 24% due to the tough trading conditions in the high street as footfall continues to decline and certain retailers struggle to survive in their present form. We believe the consumer is behaving (possibly because of Brexit fatigue) as if the UK economy is in recession, despite real wage growth and high employment levels. This is affecting spending patterns, shopping behaviour and consumer attitude. In our opinion the UK high street was also impacted in 2018 by the cold winter with snow in February and the record hot summer. We have implemented a strategy in the UK which we believe will increase sales of the W7 brand in the medium term. Whilst the UK was challenging, the W7 brand continued to grow in Europe up 15% and the US up 67%, in the rest of the world if we adjust for the timing of a large order to Australia in December 2017, sales were flat year on year.
The Retra business has a large proportion of gifting within its sales mix, in 2018 this was 53% of Retra sales (2017: 54%). UK high street conditions meant that some retailers reduced forecasts and orders for Christmas gifting and as a consequence sales were down in the year at GBP9.4 million, compared to GBP10.1 million in 2017. We have taken steps to improve the sales of the all year round cosmetics sold under the Retra brands, and have already seen an improvement in the start of 2019.
The close-out division represented 16% of the overall revenue of the Group (2017: 11% on a like for like basis). Whilst not a core focus for the Group, this side of the business provides a significant source of intelligence in the colour cosmetics market and access to new market trends. Although close-out is less significant for the Group's strategy, it has had a very good year with sales ahead of 2017 by 34% to GBP7.6 million. There are more close-out opportunities available due to the current retail climate in the UK and from contacts acquired in the US after purchasing LMS.
We announced, on 23 April 2018, that Warpaint had been awarded the Queen's Award for Enterprise - International Trade. This is a very prestigious award of which we are very proud and is testament to the efforts we have made in recent years on international expansion. We intend to continue to drive export sales to new and existing markets and develop our increased portfolio of brands.
We continue to use manufacturing partners in China and Europe for our own brand business giving us the flexibility to choose those manufacturers we feel produce the best product for the best price, and meet our legal and ethical compliance requirements. Helping in this process is the Hong Kong based subsidiary sourcing office (acquired as part of the Retra transaction) and its locally based China subsidiary (Jinhua Badgequo Cosmetics Trading Company Ltd) with local employees able to explore new factories and oversee quality control and ethical sourcing from new factories. The China company has started to conduct sales locally in China and Hong Kong with sales for the year of GBP0.3 million (2017: GBP0.2 million).
The W7 brand is supported by an informed customer base, driven by the success of beauty blogs, celebrity endorsement and social media. We have applied the same approach during the year to the Retra brands with Technic and Man'stuff now having their own bespoke e-commerce sites. A similar marketing strategy has been deployed for our US e-commerce site launched during 2018, with sales made in local currency and with local fulfilment in place.
Acquisition of Marvin Leeds Marketing Services, Inc. ("LMS")
On 2 August 2018 the Group acquired its US distributor, LMS, for US$2.08 million in cash (GBP1.6 million). Prior to the date of acquisition two thirds of LMS revenue was from distributing W7 products, the remainder being the sale of other branded cosmetics through its close-out activities. LMS sells W7 to retail groups in the US and Canada including TJ Maxx and Winners, and has recently opened new accounts for the W7 brand with Century 21, Forever 21 and Macys Backstage. The US is the largest colour cosmetics market in the world and developing sales into the region is a strategic goal for the growth of our brands. We have relocated the sales office of LMS to the heart of Manhattan, New York, with a showroom displaying all the Group brands and situated in a building where other health and beauty businesses are located. This will be more convenient for buyers and should help increase sales. We have made an encouraging start in the first quarter of 2019 with sales year on year made by LMS up 36% and, in particular for the W7 brand, up 38%.
Strategy
In early 2018 the board adopted a three year strategic plan for the business, which is measured, monitored and reviewed regularly. The plan is designed to drive shareholder value and has defined targets for sales, EBITDA, earnings per share, cash and share price. Recently the strategic plan has been amended by the board and includes six revised key strategic priorities. Understanding and following the six key strategic priorities will help deliver the expected growth in the business:
1. Continue to develop and build our brands
We continue to build our major brands, by utilising brand ambassadors, bloggers and vloggers to engage with our target audience. Much of this is done through social media campaigns to educate and interact with our loyal brand users.
Other brands will continue to be used for customer bespoke orders and we are actively seeking sales partnerships with high street retailers. The bestselling lines in each range and brand have been identified to be launched in trial programmes in new retail outlets with the goal of delivering increased presence in the high street and grow market share.
2. Provide New Product Development ("NPD") that meets consumers changing needs and tastes
A key focus of the business and NPD team is to supply our customers with a wide range of affordable, high quality cosmetics. The NPD team is made aware of our required margin and minimum sales revenue per item before development begins, but affordability and quality remain important drivers in the development process.
While most of our brand ranges include core colour cosmetic items, we add on trend items and colourways developed by our growing NPD team, especially in our all year round ranges of our lead brands, W7 and Technic. This on trend and quick to market model is something our customers demand and expect from us.
Our Body Collection brand is being developed further to cater for the growing mature female cosmetics market, the Man'stuff brand allows us the opportunity to develop a growing male grooming market and our Very Vegan range continues to grow as a vegan lifestyle or product choice becomes more prevalent.
With our lead brands we are exploring opportunities into new sales channels and product categories e.g. tattoos, body scented sprays, and health and beauty accessories.
3. Grow Market Share in the UK
Following the Retra acquisition, we have started developing the combined customer base of the enlarged business to sell all brands to all customers in the UK and overseas. Over 75% of the UK market remains unexploited by us, in particular pharmacy chains and several high street multiples and grocers. Expanding the UK customer base is a focus of management and plans are in place to gain market share.
4. Grow Market Share in the US and China
The US strategic goal is underway with the acquisition of LMS; this locally based resource together with the US e-commerce site will enable a more rapid expansion in the US. A more detailed sales and marketing plan for growth in the US is currently in development, including the use of a locally based digital PR agency.
In China, we are conducting business locally through our China subsidiary company. Sales are made to our exclusive distributor after individual products are registered with the authorities in China. The distributor is overseeing local promotional and social media based marketing campaigns. We participate in and contribute to marketing activity and provide online content to support our brands through the distributor. We are continuing to register products for sale in China in order to grow our total offering and increase sales.
5. Develop an online / e-commerce strategy for online brand development and sales
Of W7's target customers, 45% are buying colour cosmetics online. We are currently considering a differentiated own brand offering which will be available exclusively online.
6. Develop the appropriate Organisational Structure and People Plan
Our roles have been further defined to avoid overlap of time and effort as the business continues to grow.
We continue to review the structures, resources and capabilities in the business with the objective of delivering the three year strategic plan, and communicate the plan throughout the Group to key staff.
Brands
During 2018 Warpaint continued to focus on the development of its own brands.
Our Very Vegan range launched in 2017 has continued to sell well with revenue of GBP0.5 million in 2018 (2017: GBP0.3million). For 2018, this range included 22 Stock Keeping Units ("SKUs") and for 2019 we are adding 8 SKUs as we continue to build the range and provide greater variety for the consumer. We are also updating and modernising the packaging to be more eco-friendly.
Outdoor Girl now has 22 SKUs in its range and there are 50 new SKUs planned for 2019 of which 35 are an assortment of nail varnish colours, plus further eye and lip products. Sales of Outdoor Girl were GBP0.2 million in the year (2017: GBP0.2 million). We believe there is an opportunity in the value sector in the US for a larger range of Outdoor Girl given that the pricing at retail is less than the lead brand W7.
The W7 range has now grown to 1115 live SKUs (2017: 762). The increase is partly from additional new ranges i.e. face masks, and from providing existing product as carded single item SKUs (ideal for selling through certain grocery and multiple retailers).
Warpaint also own the brands Smooch, Copy Cat and Taxi which are used occasionally for bespoke one off orders.
The total SKU count for all the Retra brands (Technic, Body Collection, Man'stuff, Vintage and Chit Chat) was 762 live SKUs (2017: 672). Retra has a wide gifting range and this is redeveloped and redesigned each year. There were 151 SKUs in the gifting range for 2018.
2017
Group own brand sales 2018 (like for like)
------ ------------------
W7 brand 59% 61%
Technic brand 27% 26%
Other own brands 14% 13%
100% 100%
----------------------- ----- ------------------
Products
W7's largest selling product categories are eye products, face makeup and lip products, which together represented 80% of the W7 brand revenue in 2018. For the Retra portfolio of brands the largest selling product categories are gift sets, face makeup and eye products which together represented 76% of Retra business sales in 2018.
Customers & Geographies
In 2018 our top ten customers represented 49% of revenues (2017: 55%). Group sales are now made in 67 countries (2017: 62 countries).
US
We have continued to see growth in the US through our now acquired distributor LMS. Group sales for all our brands and close-out sold into the US were up in the year, increasing 102% compared to 2017 (in local currency the increase was 99%, the difference being due to exchange rates). Sales of W7 into the US were up 67% in the year compared to 2017. Current customers include Century 21, Forever 21, Macys Backstage and TJ Maxx.
Europe
Group sales in Europe increased by 111% compared to 2017, on a like for like basis including sales made by Retra for the whole of 2017 sales increased in Europe by 10%. This increase was predominantly for our lead brand W7 which was 15% up in the year, with significant growth in Spain and Scandinavia.
Rest of the World
Sales in our Rest of the World region for the Group are down by 41% in the year compared to 2017. This was due to the timing of a large order supplied to our Australian distributor for W7 late in 2017, if we adjust for this order sales were flat year on year across the Group. We expect sales to the Rest of the World region to improve in 2019.
UK
Trading conditions in the UK remain challenging because of the UK high street slow down and ongoing Brexit anxiety. Group sales in the UK were down by 13% in the year on a like for like basis compared to 2017. The W7 brand was down in the UK by 24%, and Retra brands collectively were down 9% in the UK on a like for like basis.
Summary
We are extremely grateful to our employees for their continued loyalty, commitment and hard work during 2018, a year that has seen yet another big change for Warpaint following the acquisition of Retra at the end of 2017, and as we welcomed the LMS team into our enlarged Group.
Sam Bazini & Eoin Macleod
Joint Chief Executive Officers
10 April 2019
Financial Review
Our KPIs of revenue and adjusted profit before tax improved in the year by 49% and 7% respectively (on a like for like basis including the Retra business for the whole of 2017 revenue fell 3%). We remain focused on margin, being net debt free, generating cash and delivering a progressive dividend policy.
In order to aid shareholders' understanding of the underlying performance of the business we have focused our comments on the consolidated statement of comprehensive income for the year ended 31 December 2018 compared with the consolidated statement of comprehensive income for the year ended 31 December 2017, with reference where appropriate to "like for like" numbers which include the Retra business for the whole of 2017. Like for like numbers include the trade of Retra for the whole of 2017 as if it had been part of the Group for the whole of that year. Like for like numbers have not been adjusted for the business of LMS in 2017. LMS was a customer of the Group prior to acquisition and distributed the W7 brand throughout the period 1 January 2017 to 1 August 2018. The business conducted by LMS prior to acquisition is already included in the consolidated statements of comprehensive income for the years ended 31 December 2017 and 31 December 2018.
Headline results, shown below, represent the performance comparisons between the consolidated statements of income for the years ended 31 December 2017 and 31 December 2018.
Acquisitions
On 2 August 2018, the Group acquired its US distributor LMS. In the year to 31 December 2017 LMS had revenue of US$5.9 million and profit before tax (adjusted for non-recurring costs after completion of the acquisition) of approximately US$0.4 million. Net Assets, adjusted for a capital reorganisation on completion of the acquisition, as at 31 December 2017, were US$1.1 million. The final consideration paid in cash was $2.08 million (GBP1.6 million) after applying a net assets adjustment to the purchase price. The final net assets position acquired was $0.6 million. The US is the largest colour cosmetics market in the world and developing sales into the region with the help of LMS is a strategic goal for the growth of the business. (see note 8).
Revenue
Group revenue for the year grew by 49.2% from GBP32.5 million in 2017 to GBP48.5 million in 2018. Like for like revenue fell by 3.2% from GBP50.1 million in 2017 to GBP48.5 million in 2018. Like for like revenue for 2017 includes GBP17.6 million from the Retra business being the sales made from 1 January 2017 to 30 November 2017, prior to its acquisition.
Internationally, like for like revenue grew 8.0% from GBP23.2 million in 2017, to GBP25.1 million in 2018. Our international growth strategy remains on track and in 2018 we received the Queen's Award for Enterprise - International Trade as testament to this.
Strategy for growth includes continuing to develop and build our brands, provide new product development that meets consumers changing needs and tastes, to grow market share in the UK, US and China, develop an online strategy for brand development and sales and, to put in place appropriate organisational structure and people in the business. A detailed commentary on our sales growth strategy and trading performance is included in the CEO's report.
The sales of W7 branded product fell by 9.3% from GBP25.5 million in 2017 to GBP23.2 million in 2018. The decline in sales was partly due to the UK where the market remains challenging, but also the timing of a large order for Australia received at the back end of 2017 which was not repeated in 2018. However, in the US and Europe there were significant increases for the W7 brand, with sales ahead by 66.5% and 14.8% respectively.
The own brands acquired with Retra in November 2017 contributed sales of GBP14.9 million in the year, this was down 3.5% on a like for like basis on 2017. Retra in particular, because of their high proportion of Christmas gifting, suffered from reduced uptake against original forecasts and orders from some UK high street retailers, with sales in the UK down 8.7% on a like for like basis. The white label business of Retra was also down in the year 19.9% to GBP2.7 million on a like for like basis. The white label business is traditionally cost competitive and Retra choose which projects to embark on based on commercial viability, in particular margin. In 2018 it was decided not to tender for certain projects when the margin went below the minimum requirement. Retra business to Europe is the only other region of significant sales and this was down 12.9% on a like for like basis and most of this decline was from the lower white label business.
The issue in the UK high street is demonstrated when we look at Christmas gifting across the Group which is significant and mostly delivered to UK customers. Sales for Christmas gifting in the year were GBP11.0 million compared to GBP12.8 million in 2017 on a like for like basis. At the half year, we reported a growing order book totalling GBP8.2 million, compared to GBP7.2 million at 30 June 2017 on a like for like basis. The expected uplift, experienced in prior years from UK customers on the initial half year order book, did not materialise.
The close-out business revenue grew by 34.3% from GBP5.7 million in 2017 to GBP7.6 million in 2018.
Product Gross Margin
Gross margin for the Group decreased by 3.3% from 38.8% to 35.5%. The main reason for the reduced margin was our margin mix across the Group. Sales from the close-out division are at a lower margin historically than our own brands, and close-out sales at a lower margin were a greater proportion of total sales than we expected for the year. In addition, the lower margin sales from Retra brands in particular gifting were not included in 2017 until the date of acquisition on the 30 November 2017. Sales at LMS since acquisition were also below the W7 margin as this business changed from being a distributor on commission only basis.
We are not experiencing cost pressure on our manufactured pricing and making good use of our Hong Kong buying office to ensure this continues. Currency pressure due to Brexit is mitigated with a discount mechanism linked to the US dollar exchange rate from our key supplier in China, by moving production to new factories of equal quality to retain or improve margin, and from US dollar revenue which continues to provide a natural hedge. We remain focused on improving gross margin in both our own brand and close-out businesses and now in the enlarged Group including Retra and LMS.
W7 margin excluding sales made by LMS after acquisition was down 0.9% to 39.6% for the year, this was the effect of currency translations in the year with the gain on currency shown in overheads.
The Retra margin for the year decreased 0.6% on a like for like basis to 34.7%. Currency, whilst a concern for Retra, is built into the costing margin at the start of the year when selling in advance to customers especially for the gift offering, with any dollar or euro exposure covered at the time of receiving orders. The reason for the fall in margin is the adoption of the Group stock ageing policy in the year, which addressed some small value older stock SKUs that needed selling off or providing against in the year, and sales commissions payable for the first time from using the integrated sales network of the Group.
Gross margin for LMS was low at 3.2% on sales of GBP2.4 million. Up to the date of acquisition this business earnt commission on W7 sales, and Warpaint would sell stock to its US distributor at full margin, effectively the price charged to the customers in the US. Since the acquisition, commission is not charged back to Warpaint, so the majority of sales made by LMS of its stock holding on hand at the date of acquisition were sold through at little to no margin. As the initial stock holding is sold through, margin will recover to similar levels to the rest of the Group and we have seen this happen as 2019 starts.
Close-out margin improved 4.3% to 35.4% for the year, much of this gain was from buying several large parcels in the year where the opportunity, margin and capital commitment were attractive.
Operating Expenses
Total operating expenses before exceptional items, amortisation and impairment costs, depreciation, foreign exchange movements and share based payments increased by GBP4.0 million to GBP8.6 million in the year. This increase was from the addition of Retra operating expenses for the full year (GBP3.8 million) and for the first time LMS, from the date of acquisition (GBP0.2 million).
The most significant costs in the Group are wages and salaries of GBP5.0 million, rent and rates of GBP1.1 million and PR and marketing for our brands of GBP0.6 million. In 2017 on a like for like basis these costs were, GBP4.8 million, GBP1.0 million and GBP0.7 million respectively. The increase in wages is inflationary plus the cost of auto enrolment across the Group, the increase in rent and rates is in our Retra business which leased an extra warehouse facility rather than using third party logistics to fulfil orders, and the decrease in PR and marketing is a function of not having a long term brand ambassador on contract for the W7 brand and instead using ad hoc PR activity across a broader range of celebrity influencers.
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 and Exceptional Items
Group profit before tax was GBP4.7 million compared to GBP6.9 million in 2017, a fall of 32%. Adding back amortisation of intangibles, impairment charges, depreciation charges, exceptional items and finance costs would adjust profit before tax to GBP8.8 million in 2018, compared to GBP7.9 million for 2017 on the same basis, an increase of 11%. The increase in profit before tax for 2018 is due to the profits included for the full year for the first time from the Retra business.
Exceptional Items
Exceptional costs in 2018 included GBP0.16 million of acquisition costs as they were one off legal and professional fees incurred in acquiring LMS on 2 August 2018, plus GBP0.10 million of professional fees relating to the acquisition of Retra in 2017, plus GBP0.08 million of staff restructuring costs at Retra (2017: GBP0.40 million of acquisition costs as they were legal and professional fees and commissions incurred in acquiring Retra on 30 November 2017. Total acquisition costs were GBP1.2 million of which GBP0.8 million related to the issue of new shares to fund the purchase of Retra and these were charged against the share premium account).
Tax
The tax rate for the Group for 2018 was 24.5% compared to the UK corporation tax standard rate of 19.0% for the year. Some of the costs of the acquisition of Retra and LMS have been disallowed for tax purposes, as have the impairment charge for Retra this year which has increased the effective tax rate. Since the acquisition of LMS, the Group is exposed to tax in the US 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. We would expect the tax rate on adjusted profits to be approximately 19% in 2019 and falling in line with the UK Government measures to reduce corporation tax to 17% by 2020.
Earnings Per Share
The statutory basic earnings per share was 4.66p in 2018, a decrease of 44.1% on the 8.34p achieved in 2017.
Adjusted earnings per share before exceptional items, amortisation costs and impairment charges was 9.1p in 2018, a decrease of 5.2% on the 9.6p achieved in 2017.
Dividends
The board is recommending a final dividend for 2018 of 2.9 pence per share, making a total dividend of 4.4 pence per share of which 1.5 pence per share was paid on 16 November 2018 (2017: Total dividend of 4.0 pence per share, of which the interim dividend was 1.4 pence per share and the final dividend was 2.6 pence per share). The dividend for the year is covered 2.1 times by adjusted earnings per share.
Long Term Incentive Plan ("LTIP") & EMI Share Options
On 24 September 2018, the Company announced the implementation of a new LTIP with initial grants to six senior team members including Sam Bazini and Eoin Macleod, the Joint Chief Executive Officers, and Neil Rodol, the Chief Financial Officer. The LTIP has been established to incentivise management to increase shareholder value over the long term. Share options were granted with an exercise price of 254.5p, equal to the closing mid-market value immediately prior to the date of grant, and subject to the achievement of demanding Earnings Per Share and Total Shareholder Return performance conditions measured over a period of up to 5 years. The entire award represents 5.0% of the current issued share capital of the Company.
On 29 June 2017 EMI share options were granted over 277,788 ordinary shares of 25p each in the Company under the Warpaint London PLC Enterprise Management Incentive Scheme. The options provide the right to acquire 277,788 ordinary shares at an exercise price of 237.5p per ordinary share.
The LTIP and EMI share options had no dilutive impact on earnings per share in the period. The share-based payment charge of the LTIP and EMI share options for the year was GBP0.12 million (2017: GBP0.05 million) and has been taken to the share option reserve. (see Note 21).
Cash Flow and Cash Position
Net cash flow generated from operating activities was GBP4.3 million (2017: GBP4.8 million), after payment of the GBP0.3 million (2017: GBP0.4 million) exceptional items previously referred to. The Group's cash balance increased by GBP0.6 million to GBP4.0 million in 2018 (2017: GBP3.4 million). The cash generated was principally used to make dividend payments in the year, and to pay from cash the consideration for the acquisition of LMS.
Capital expenditure requirements of the Group remain modest and we expect it to continue to be so. In 2018 GBP0.39 million (2017: GBP0.56 million) was spent on display stands for use in store by customers, on refurbishment works necessary as a one off cost in the new leased warehouse for Retra and general fixtures and plant upgrades.
Balance Sheet
Management are continually monitoring trade receivables and stock levels to avoid working capital lock up as the business continues to grow.
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 were GBP11.1 million (2017: GBP12.1 million), the decrease on 2017 is mainly due to the timing at the back end of 2017 of a large order for one customer in Australia that has not repeated at the same time in 2018. In 2018 there was a bad and doubtful debt credit of GBP0.008 million because of the collection of debts previously provided for in 2017 (2017: GBP0.052 million). The provision at the year end for bad and doubtful debts carried forward is GBP0.11 million, 1.0% of gross trade receivables (2017: GBP0.17 million, 1.4%).
Stock was higher at the year end at GBP15.5 million (2017: GBP11.6 million), this increase was due to the increase in range offering across the Group and the acquisition of LMS who hold stock of our brands locally in the US. The provision for old and slow stock was GBP0.11 million, 0.7% at the year end (2017: GBP0.11 million, 1.0%). The reduction in provision percentage reflects the close attention of management in dealing with slower stock items as they occur and on stock purchase order levels that are reasoned. Whilst provisioning for older and slow stock is prudent, the reality is that any such items are generally sold through our close-out division without a loss to the business.
On acquiring Retra in 2017 the Group took on their debt of GBP8.7 million being GBP7.6 million of invoice and trade finance facilities, term loans of GBP0.3 million and HP contracts of GBP0.8 million. At 31 December 2017, after repaying some of these amounts through cash flow, GBP1.4 million of debt remained outstanding of which GBP1.1 million related to term loans and HP contracts. In 2018 a further GBP0.3 million of the term loans and HP contracts has been repaid leaving GBP0.8 million outstanding at the year end. The remaining loans and HP contracts are being repaid to terms in order to avoid unnecessary early settlement charges. At the year end GBP1.9 million of invoice finance remained outstanding and was repaid in full February 2019.
Working capital increased by GBP3.6 million in the year (2017: GBP11.3 million) with the main components an increase in stock of GBP3.8 million, a decrease in trade and other receivables of GBP0.9 million, and an increase in cash at the year end of GBP0.7 million.
Free cash flow remained strong at GBP3.9 million (2017: GBP4.2 million).
The Group's balance sheet remains in a very healthy position being net debt free. Net assets totaled GBP41.0 million at 31 December 2018, an increase of GBP0.6 million from 2017. The impairment charge of GBP0.8 million on the Retra acquisition for the year has impacted retained profits leaving a smaller than expected surplus after payment of dividends, it is expected that the impairment is a one off charge and that the balance sheet will continue to grow from retained profits ongoing. The majority of the balance sheet is made up of liquid assets of stock, trade receivables and cash. Included in the balance sheet is GBP7.1 million of goodwill (2017: GBP7.5 million) and GBP9.5 million of intangible fixed assets (2017: GBP10.7 million) arising from acquisition accounting.
Foreign Exchange
The Group imports the majority of its finished goods from China paid for in US dollars, which this year weakened on average against Sterling by 4% compared to 2017 ($1.341 v $1.289). Although Sterling has recovered a little in 2018 this is the second year following the Brexit referendum of a strong dollar. The Group has a natural hedge from sales to the US which are entirely in US dollars, in 2018 these sales were higher at $6.3 million (2017: $3.2 million). Together with the discount mechanism from our main supplier in China, sourcing product from new factories where it makes commercial sense to do so and by buying dollars when rates are favourable, we have been able to mitigate the effect of the strong US dollar against Sterling.
Neil Rodol
Chief Financial Officer
10 April 2019
WARPAINT LONDON PLC
INDEPENT AUDITOR'S REPORT TO THE MEMBERS OF WARPAINT LONDON PLC
Opinion
We have audited the financial statements of Warpaint London Plc (the 'parent company') and its subsidiaries (the 'group') for the year ended 31 December 2018 which comprise the consolidated statement of comprehensive income, the consolidated and company statement 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 Financial Reporting Standards (IFRSs) as adopted by the European Union. 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).
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 2018 and of the group's profit for the year then ended;
-- the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;
-- 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.
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 are 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. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Conclusions relating to going concern
We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where:
-- the directors' use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or
-- the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the group's or the parent company's ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue.
Key audit matters
Key audit matters are those matters that, in our professional judgment, 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) 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.
The following matters were identified by us as the most significant assessed risks of material misstatement:
Impairment of intangible assets and goodwill
See accounting policy and details of judgements and accounting estimates given in note 1.
The issue - the group is required to consider whether impairment of goodwill is required in respect of the acquisition of Retra Holdings or Marvin Leeds Marketing. Judgement is required in respect of this consideration, and the use of an inappropriate model or inappropriate assumptions within the model in respect of discount rate, long term growth rate or underlying short-term forecasts may lead to any impairment being materially misstated.
The group has engaged third party experts to assist with the preparation of the impairment model and to assist in determining the key assumptions within the model. The results of the model are extremely sensitive to changes in the discount rate in particular as explained in note 9 to the financial statements.
We have highlighted this as a key audit matter due to the size of the acquisition of the Retra business, the judgements involved in determining any impairment charge, and the challenging trading conditions currently experienced by the business.
How we addressed the issue -
We checked that management had appropriately determined the carrying amount for each Cash Generating Unit (CGU).
We confirmed the cash flow forecasts prepared by management were consistent with those approved by the Board and examined the cashflow forecasts by testing the underlying models, including an analysis of underlying assumptions and a comparison to recent performance trends and results after the year end.
We assessed the competence and independence of the third party experts engaged by management in preparing the underlying impairment model.
The key assumptions of the discount rate and long term growth rate underlying the impairment test were addressed using the expertise of our own valuation specialists to benchmark the key assumptions against comparator companies and general market indicators.
We checked that appropriate and adequate disclosures were included in the financial statements which were in accordance with the requirements of the accounting standards.
We discussed the key assumptions used within the model and how we challenged the discount rate applied with the audit committee.
Carrying value of inventory
See accounting policy and details of judgements and accounting estimates given in note 1.
The issue - The group holds significant levels of inventory and a number of estimates are involved in valuing slow moving and obsolete inventories, some of which have a limited shelf life. There are inherent uncertainties in consumer preferences and spending patterns, which are primarily driven by wider trends in the fashion and cosmetics industry. There is a recoverability risk associated with new product launches as well as with close out stock purchased at the end of ranges or seasons with judgement required in forecasting demand.
How we addressed the issue - Our procedures included assessing 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. In assessing inventory provisions our procedures included testing the methodology applied by management in preparing their provision including the identification of slow moving and obsolete items. 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 year end date. Further, we tested the unprovided inventory balance by reviewing sales volumes and values after the balance sheet date.
We discussed the key assumptions within the inventory provision and the movements and aging of inventory with the audit committee.
Our application of materiality
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality which, together with qualitative considerations, help us to determine the nature, timing and extent of our audit procedures on the individual financial statement areas and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a whole.
We determined materiality for the financial statements as a whole to be GBP405,000 which represents 5% of profit before tax, amortisation, impairment and exceptional items. In the prior year materiality was calculated at GBP388,000 which was based on 5% of profit before tax and exceptional items.
We used profit before tax, amortisation, impairment and exceptional items as a benchmark given that this represents the underlying trading position of the business and it is this figure which is considered most important for shareholders in assessing the performance of the Group.
Each component of the Group was audited to a lower level of materiality. Component materiality ranged from GBP100,000 to GBP330,000.
Performance materiality is the application of materiality at the individual account or balance level set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. Performance materiality was set at GBP303,750 (2017: GBP271,600) which represents 75% (2017: 70%) of the above materiality levels.
We agreed with the audit committee that we would report to them misstatements identified during our audit above GBP20,250. We also agreed to report differences below these thresholds that, in our view, warranted reporting on qualitative grounds.
Materiality of the company was set at GBP105,000 with performance materiality set at GBP78,750 based on 75% of materiality. Materiality was based on a capped asset basis and is equivalent to 0.2% of assets of the company.
An overview of the scope of our audit
The group consists of four trading subgroups, all of which are run from the UK except for Marvin Leeds Marketing Services Inc. which is based in 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, except for Marvin Leeds Marketing Services Inc, on which we tested specific account balances. All audit work was carried out by BDO LLP.
Other information
The directors are responsible for the other information. The other information comprises the information included in the annual report, 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.
In connection with our audit of the financial statements, 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 audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. 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.
Opinions on other matters prescribed by the Companies Act 2006
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.
Matters on which we are required to report by exception
In the light of the knowledge and understanding of the group and the 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.
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, 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 set out in the Directors' report, 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.
A further description of our responsibilities for the audit of the financial statements is located 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 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 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 company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.
Mark RA Edwards (Senior Statutory Auditor)
For and on behalf of BDO LLP, Statutory Auditor
London, UK
10 April 2019
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).
WARPAINT LONDON PLC
CONSOLIDATION STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEARED 31 DECEMBER 2018
Year ended 31 December
2018 2017
------- ------------ -----------
Note GBP'000 GBP'000
------- ------------ -----------
Revenue 1,2 48,477 32,549
------- ------------ -----------
Cost of sales (31,263) (19,911)
------- ------------ -----------
Gross profit 17,214 12,638
------- ------------ -----------
Administrative expenses 3,4 (12,330) (5,744)
------- ------------ -----------
Analysed as:
Adjusted profit from operations(1) 8,303 7,749
-------------------------------------------- ------- ------------ -----------
Amortisation 3,9,10 (2,272) (469)
-------------------------------------------- ------- ------------ -----------
Impairment losses 3,9,10 (812) -
-------------------------------------------- ------- ------------ -----------
Exceptional items 3 (335) (386)
-------------------------------------------- ------- ------------ -----------
Profit from operations 3 4,884 6,894
------- ------------ -----------
Finance expense 5 (150) (37)
------- ------------ -----------
Profit before tax 4,734 6,857
------- ------------ -----------
Tax expense 6 (1,159) (1,384)
------- ------------ -----------
Profit for the year attributable to equity
holders of the parent company 3,575 5,473
------- ------------ -----------
Other comprehensive income:
------- ------------ -----------
Item that will or maybe reclassified
to profit or loss:
------- ------------ -----------
Exchange gain on translation of foreign 48 -
subsidiary
------- ------------ -----------
Total comprehensive income attributable
to equity holders of the parent company 3,623 5,473
------- ------------ -----------
Basic earnings per share (pence) 27 4.66 8.34
------- ------------ -----------
Diluted earnings per share (pence) 27 4.66 8.34
------- ------------ -----------
Note 1 - Adjusted profit from operations is calculated as earnings before interest, taxation, amortisation, impairment and exceptional items.
WARPAINT LONDON PLC
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 2018
Year ended 31 December
2018 2017
----- ----------- ------------
(restated)
----- ----------- ------------
Note GBP'000 GBP'000
----- ----------- ------------
Non-current assets
----- ----------- ------------
Goodwill 9 7,051 7,532
----- ----------- ------------
Intangibles 10 9,486 10,653
----- ----------- ------------
Property, plant and equipment 11 1,358 1,497
----- ----------- ------------
Total non-current assets 17,895 19,682
----- ----------- ------------
Current assets
----- ----------- ------------
Inventories 12 15,362 11,531
----- ----------- ------------
Trade and other receivables 13 12,761 13,676
----- ----------- ------------
Cash and cash equivalents 14 4,041 3,369
----- ----------- ------------
Total current assets 32,164 28,576
----- ----------- ------------
Total assets 50,059 48,258
----- ----------- ------------
Current liabilities
----- ----------- ------------
Trade and other payables 15 (3,489) (3,537)
----- ----------- ------------
Loans and borrowings 16 (2,169) (582)
----- ----------- ------------
Corporation tax liability (1,034) (939)
----- ----------- ------------
Derivative financial instruments 23 - (3)
----- ----------- ------------
Total current liabilities (6,692) (5,061)
----- ----------- ------------
Non-current liabilities
----- ----------- ------------
Bank loan 16 (553) (814)
----- ----------- ------------
Deferred tax liability 17 (1,796) (1,959)
----- ----------- ------------
Total non-current liabilities (2,349) (2,773)
----- ----------- ------------
Total liabilities (9,041) (7,834)
----- ----------- ------------
NET ASSETS 41,018 40,424
----- ----------- ------------
Equities
----- ----------- ------------
Share capital 19 19,187 19,187
----- ----------- ------------
Share premium 19,359 19,359
----- ----------- ------------
Merger reserve (16,100) (16,100)
----- ----------- ------------
Other reserves 20 209 45
----- ----------- ------------
Retained earnings 18,363 17,933
----- ----------- ------------
TOTAL EQUITY 41,018 40,424
----- ----------- ------------
The financial statements of Warpaint London PLC were approved and authorised for issue by the Board of Directors on 10 April 2019 and were signed on its behalf by:
Neil Rodol
Chief Financial Officer
WARPAINT LONDON PLC
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEARED 31 DECEMBER 2018
Share Share Merger Foreign Share Retained Total
Capital Premium Reserve exchange option Earnings Equity
reserve reserve
Note GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
----- --------- --------- --------- ---------- --------- ---------- --------
At 1 January 2017 16,135 1,806 (17,995) - - 14,332 14,278
----- --------- --------- --------- ---------- --------- ---------- --------
Comprehensive Income
for the year
----- --------- --------- --------- ---------- --------- ---------- --------
Profit for the year - - - - - 5,473 5,473
----- --------- --------- --------- ---------- --------- ---------- --------
Dividends paid 18 - - - - - (1,872) (1,872)
----- --------- --------- --------- ---------- --------- ---------- --------
Total comprehensive
income for the year - - - - - 3,601 3,601
----- --------- --------- --------- ---------- --------- ---------- --------
Transactions with
owners
----- --------- --------- --------- ---------- --------- ---------- --------
Shares issued during
the year 19 2,789 18,410 - - - - 21,199
----- --------- --------- --------- ---------- --------- ---------- --------
Shares issued for
Retra Holdings 19 263 - 1,895 - - - 2,158
----- --------- --------- --------- ---------- --------- ---------- --------
Share issue costs - (857) - - - - (857)
----- --------- --------- --------- ---------- --------- ---------- --------
Movement in other
reserves 19 - - - - 45 - 45
----- --------- --------- --------- ---------- --------- ---------- --------
Total transactions
with owners 3,052 17,553 1,895 - 45 - 22,545
----- --------- --------- --------- ---------- --------- ---------- --------
As at 31 December
2017 19,187 19,359 (16,100) - 45 17,933 40,424
----- --------- --------- --------- ---------- --------- ---------- --------
Comprehensive Income
for the year
----- --------- --------- --------- ---------- --------- ---------- --------
On translation of
foreign subsidiary - - - 48 - - 48
----- --------- --------- --------- ---------- --------- ---------- --------
Profit for the year - - - - - 3,575 3,575
----- --------- --------- --------- ---------- --------- ---------- --------
Total comprehensive
income for the year - - - 48 - 3,575 3,623
----- --------- --------- --------- ---------- --------- ---------- --------
Transactions with
owners
----- --------- --------- --------- ---------- --------- ---------- --------
Movement in other
reserves 21 - - - - 116 - 116
----- --------- --------- --------- ---------- --------- ---------- --------
Dividends paid 18 - - - - - (3,145) (3,145)
----- --------- --------- --------- ---------- --------- ---------- --------
Total transactions
with owners - - - - 116 (3,145) (3,029)
----- --------- --------- --------- ---------- --------- ---------- --------
As at 31 December
2018 19,187 19,359 (16,100) 48 161 18,363 41,018
----- --------- --------- --------- ---------- --------- ---------- --------
WARPAINT LONDON PLC
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARED 31 DECEMBER 2018
Year ended 31 December
2018 2017
----- ---------- -------------
(restated)
----- ---------- -------------
Note GBP'000 GBP'000
----- ---------- -------------
Operating activities
----- ---------- -------------
Profit before tax 4,734 6,857
----- ---------- -------------
Interest paid 5 150 37
----- ---------- -------------
Impairment of goodwill 9 812 -
----- ---------- -------------
Amortisation of intangible assets 10 2,272 469
----- ---------- -------------
Depreciation of property, plant and equipment 11 529 184
----- ---------- -------------
Loss on disposal of property, plant and equipment 7 6
----- ---------- -------------
Share based payment 116 45
----- ---------- -------------
Decrease/(increase) in trade and other receivables 1,574 419
----- ---------- -------------
Decrease/(increase) in inventories (2,524) 224
----- ---------- -------------
Decrease in trade and other payables (1,753) (1,356)
----- ---------- -------------
Foreign exchange translation differences 48 -
----- ---------- -------------
Cash generated from operations 5,965 6,885
----- ---------- -------------
Tax paid (1,565) (2,077)
----- ---------- -------------
Interest paid (150) (37)
----- ---------- -------------
Net cash flows from operating activities 4,250 4,771
----- ---------- -------------
Investing activities
----- ---------- -------------
Purchase of intangible assets 10 (48) (52)
----- ---------- -------------
Purchase of property, plant and equipment 11 (392) (555)
----- ---------- -------------
Acquisition of business 8 (1,591) (15,750)
----- ---------- -------------
Bank balances acquired 8 272 242
----- ---------- -------------
Proceeds from sale of property, plant and
equipment - 33
----- ---------- -------------
Net cash used in by investing activities (1,759) (16,082)
----- ---------- -------------
Financing activities
----- ---------- -------------
Proceeds from new share capital subscribed - 21,199
----- ---------- -------------
Share issue costs - (857)
----- ---------- -------------
Repayment of borrowings (261) (20)
----- ---------- -------------
Increase/(decrease) in stock and invoice
finance facilities 1,587 (7,273)
----- ---------- -------------
Dividends 18 (3,145) (1,872)
----- ---------- -------------
Net cash (used in)/ generated by financing
activities (1,819) 11,177
----- ---------- -------------
Net increase in cash and cash equivalents 672 (134)
----- ---------- -------------
Cash and cash equivalents at beginning of
period 3,369 3,503
----- ---------- -------------
Cash and cash equivalents at end of period 4,041 3,369
----- ---------- -------------
Cash and cash equivalents consists:
----- ---------- -------------
Cash and cash equivalents 4,041 3,369
----- ---------- -------------
4,041 3,369
----- ---------- -------------
WARPAINT LONDON PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARED 31 DECEMBER 2018
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 2018 were authorised for issue by the board of directors on 10 April 2019 and the statement of financial position was signed on the board's behalf by Neil Rodol.
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, Bucks, SL0 9HW.
The Group's financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. 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 (GBP'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 conformity with International Financial Reporting Standards adopted by the European Union 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 pound 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 prepared a detailed forecast with a supporting business plan for the foreseeable future. The forecast indicates that the Group will remain in a positive cash position throughout the forecast period. As such, the Directors have a reasonable expectation the Company and Group will have adequate resources to continue in operational existence for the foreseeable future. As such, they continue to prepare the financial statements on the basis of going concern.
Revenue Recognition
The Group has adopted IFRS 15 from 1 January 2018. The standard provides a single comprehensive model for 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 in to distributor arrangements the risk and rewards are considered to be with the distributor 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.
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 for a future liability 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
Exceptional items which have been disclosed separately on the face of the income statement in order to summarise the underlying results. Exceptional items relate to legal and professional fees incurred on the acquisition of Marvin Leeds Marketing Services, Inc. (2017: Retra Holdings Limited). Neither 'underlying profit or loss' nor 'exceptional items' are defined by IFRS however the directors believe that the disclosures presented in this manner provide clear presentation of the financial performance of the Group.
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.
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
Financial assets
The Group has adopted IFRS 9 from 1 January 2018. The standard introduced new classification and measurement models for 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 (eg 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.
Operating Leases
Where substantially all of the risks and rewards incidental to ownership are not transferred to the Group (an 'operating lease'), the total rentals payable under the lease are charged to the combined statement of comprehensive income on a straight-line basis over the lease term. The aggregate benefit of lease incentives is recognised as a reduction of the rental expense over the lease term on a straight-line basis.
Leased assets
Assets obtained under hire purchase contract and finance leases are capitalised as tangible fixed assets. Assets acquired by finance lease are depreciated over the shorter of the lease term and their useful lives. Assets acquired by hire purchase are depreciated over their useful lives. Finance leases are those where substantially all of the benefits and risks of ownership are assumed by the Company. Obligations under such agreements are included in creditors net of the finance charge allocated to future periods. The finance element of the rental payment is charged to the statement of comprehensive income so as to produce a constant periodic rate of charge on the net obligation outstanding in each period.
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 taken into account 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
a) New standards, interpretations and amendments effective from 1 January 2018
New standards impacting the Group that will be adopted in the annual financial statements for the year ended 31 December 2018, and which have given rise to changes in the Group's accounting policies are:
-- IFRS 9, Financial Instruments (IFRS 9); and -- IFRS 15, Revenue from Contracts with Customers (IFRS 15)
Details of the impact these two standards have had are given above. Other new and amended standards and Interpretations issued by IASB and adopted by the EU that will apply for the first time in the next annual financial statements are not expected to impact the Group as they are either not relevant to the Group's activities or require accounting which is consistent with the Group's current accounting policies.
b) 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.
IFRS 16 'Leases'
IFRS 16 is effective for the periods commencing 1 January 2019 and the first reporting date when IFRS 16 will be applied will be the interim period ending 30 June 2019. IFRS 16 introduces new or amended requirements with respect to lease accounting. It introduces significant changes to the lessee accounting by removing the distinction between operating and finance leases and requiring the recognition of a right-of-use asset and a lease liability at the lease commencement for all leases, except for short-term leases and leases of low value assets.
The Group intends to adopt the modified retrospective approach. Under this approach, a lessee does not restate comparative information. Consequently, the date of initial application is the first day of the annual reporting period in which a lessee first applies the requirements of the new leases standard. At the date of initial application of the new leases standard, lessees recognise the cumulative effect of initial application as an adjustment to the opening balance of equity as of 1 January 2019.
The Directors have estimated the impact of adopting this new standard and it is anticipated the Group will recognise right-of-use assets in respect of the properties it leases with a value of approximately GBP5.0m being attributed to right-of-use assets and a lease liability of the same amount.
Effect of changes in accounting policies
IFRS 15 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 has superseded the previous revenue recognition guidance including IAS 18 Revenue, IAS 11 Construction Contracts and the related interpretations. The group has adopted IFRS 15 for the year ended 31 December 2018 and has applied the modified retrospective approach without restatement of comparatives.
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 probable of not reversing. Management monitors this estimate at each reporting date and adjusts it as necessary. There has been no material impact to the recognition of revenue relating to variable consideration.
The Group has applied IFRS 9 from 1 January 2018. The Group has elected not to restate comparatives on initial application of IFRS 9.
With respect to the classification and measurement of financial assets, the number of categories of financial assets under IFRS 9 has been reduced compared to IAS 39. Under IFRS 9 the classification of financial assets is based both on the business model within which the asset is held and the contractual cash flow characteristics of the asset. There will be no change in the accounting for any other financial liabilities.
The impairment model under IFRS 9 reflects expected credit losses, as opposed to only incurred credit losses under IFRS 9. Under the impairment approach in IFRS 9, it is not necessary for a credit event to have occurred before credit losses are recognised. Instead, an entity always accounts for expected credit losses and changes in those expected credit losses. The amount of expected credit losses should be updated at each reporting date.
The new impairment model applies to the Group's financial assets that are debt instruments measured at amortised costs or FVTOCI.
The Group has applied the simplified approach to recognise lifetime expected credit losses for its trade receivables, as required or permitted by IFRS 9. To measure the expected credit losses on a collective basis, trade receivables are grouped based on aging and the group believes that all trade receivables are on a similar credit risk. The Group's calculation of the loss allowance for these assets as at 31 December 2017 is GBP19,000 lower compared to the amount disclosed previously under IAS 39. The expected loss rates are based on the Group's historical credit losses over the three-year prior period end. The rates have not been adjusted for current and forward looking information, including macroeconomic factors affecting its customers, as the impact is immaterial to the group as a whole.
Prior year restatement
During the year ended 31 December 2018, the consideration for the acquisition of Retra Holdings Limited was finalised. The previously disclosed purchase price of GBP18.36 million was reduced by GBP450,000, on delivery of a final EBITDA statement to the previous owners of Retra, resulting in a reduction in the goodwill figure arising on acquisition from GBP7,469,000 to GBP7,019,000. The comparative figures at 31 December 2017 have been adjusted retrospectively. This has no impact on the reserves or the shareholders' funds.
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.
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 GBP130,000.
b) Intangible assets acquired
On acquisition of Marvin Leeds Marketing Services, Inc. ("LMS") the group has recognised the customer list also obtained in the business combination. The valuation of the customer list is based on judgement involved in assessing the projected future cashflows arising from those customers. Further judgement is involved in assessing the life of the intangible asset and a suitable discount rate to be used to measure the future revenues to present value.
The valuation of the customer list is based on judgement involved in assessing the projected future cashflows arising from those customers. Further judgement is involved in assessing the life of the intangible asset and a suitable discount rate to be used to measure the future revenues to present value. A one per cent increase in the discount rate from 20.1% to 21.1% would reduce the fair value of customer lists by approximately GBP22,000.
c) Impairment of goodwill
Following the assessment of the recoverable amount of goodwill allocated to Retra Holdings Limited, the directors consider the recoverable amount of goodwill to have been impaired by GBP812,000. The assessment of the recoverable amount of goodwill 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 discount rate from 16.7% to 17.7% would reduce the recoverable amount by approximately GBP1.25 million.
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 2018 2018 2018 2017 2017 2017
Own Brand Close-out Total Own Brand Close-out Total
---------- ---------- --------- ---------- ---------- --------------
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
---------- ---------- --------- ---------- ---------- --------------
Revenue 40,875 7,602 48,477 26,890 5,659 32,549
---------- ---------- --------- ---------- ---------- --------------
Cost of sales (26,188) (5,075) (31,263) (16,012) (3,899) (19,911)
---------- ---------- --------- ---------- ---------- --------------
Gross profit 14,687 2,527 17,214 10,878 1,760 12,638
---------- ---------- --------- ---------- ---------- --------------
Administrative expenses (10,213) (970) (11,183) (4,423) (935) (5,358)
---------- ---------- --------- ---------- ---------- --------------
Exceptional items (327) (8) (335) (386) - (386)
---------- ---------- --------- ---------- ---------- --------------
Impairment losses (812) - (812) - - -
---------- ---------- --------- ---------- ---------- --------------
Segment result 3,335 1,549 4,884 6,069 825 6,894
---------- ---------- --------- ---------- ---------- --------------
Reconciliation of segment
result to profit before
tax:
---------- ---------- --------- ---------- ---------- --------------
Segment result 3,335 1,549 4,884 6,069 825 6,894
---------- ---------- --------- ---------- ---------- --------------
Finance expense (150) - (150) (37) - (37)
---------- ---------- --------- ---------- ---------- --------------
Profit before tax 3,185 1,549 4,734 6,032 825 6,857
---------- ---------- --------- ---------- ---------- --------------
Analysis of total revenue
by geographical market:
---------- ---------- --------- ---------- ---------- --------------
UK 18,430 4,954 23,384 12,330 4,460 16,790
---------- ---------- --------- ---------- ---------- --------------
Europe 15,121 1,557 16,678 7,132 767 7,899
---------- ---------- --------- ---------- ---------- --------------
USA 4,227 1,069 5,296 2,419 198 2,617
---------- ---------- --------- ---------- ---------- --------------
Australia and New Zealand 1,282 20 1,302 4,062 232 4,294
---------- ---------- --------- ---------- ---------- --------------
Rest of World 1,815 2 1,817 947 2 949
---------- ---------- --------- ---------- ---------- --------------
Total 40,875 7,602 48,477 26,890 5,659 32,549
---------- ---------- --------- ---------- ---------- --------------
During the year ended 31 December 2018, the Group had no customers that exceeded 10% of total revenue. During the year ended 31 December 2017, the Group had one customer that exceeded 10% of total revenue being 11%.
Information regarding segment assets and liabilities as at 31 December 2018 and capital expenditure for the period then ended:
2018 2018 2018 2018 2017 2017 2017 2017
Own Brand Close-out Eliminations* Total Own Brand Close-out Eliminations* Total
---------- ---------- -------------- -------- ---------- ---------- -------------- --------
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
---------- ---------- -------------- -------- ---------- ---------- -------------- --------
Total assets 79,925 4,172 (34,038) 50,059 76,389 3,108 (31,239) 48,258
---------- ---------- -------------- -------- ---------- ---------- -------------- --------
Total liabilities (6,115) (763) (2,163) (9,041) (5,112) (817) (1,905) (7,834)
---------- ---------- -------------- -------- ---------- ---------- -------------- --------
Tangible asset
additions 292 - - 292 1,483 - - 1,483
---------- ---------- -------------- -------- ---------- ---------- -------------- --------
Intangible asset
additions 786 - - 786 12,539 - - 12,539
---------- ---------- -------------- -------- ---------- ---------- -------------- --------
Total capital
expenditure 1,078 - - 1,078 14,022 - - 14,022
---------- ---------- -------------- -------- ---------- ---------- -------------- --------
*The eliminations are as a result of adjustments arising on consolidation of the financial statements.
3. Operating Profit
Operating profit for the period is stated after charging/ (crediting):
Year ended 31 December
2018 2017
------------ -----------
GBP'000 GBP'000
------------ -----------
Foreign exchange (gain)/loss (359) 71
------------ -----------
Depreciation 529 184
------------ -----------
Amortisation 2,272 469
------------ -----------
Impairment 812 -
------------ -----------
Loss on disposal of fixed asset 7 6
------------ -----------
Operating lease costs
------------ -----------
* Land and buildings 557 360
------------ -----------
* Equipment 71 70
------------ -----------
Reversal of write-down inventories at net realisable
value
------------ -----------
Reversal of stock provision 114 189
------------ -----------
Exceptional costs 335 386
------------ -----------
Exceptional costs in 2018 included GBP0.16 million of acquisition costs as they were one off legal and professional fees incurred in acquiring LMS USA on 2 August 2018, plus GBP0.10 million of professional fees relating to the acquisition of Retra in 2017, plus GBP0.08 million of staff restructuring costs at Retra (2017: GBP0.40 million of acquisition costs as they were legal and professional fees and commissions incurred in acquiring Retra on 30 November 2017. Total acquisition costs were GBP1.2 million of which GBP0.8 million related to the issue of new shares to fund the purchase of Retra and these were charged against the share premium account).
Analysis of auditor's remuneration is as follows:
Year ended 31 December
2018 2017
------------ -----------
GBP'000 GBP'000
------------ -----------
Fees payable to the Company's auditor for the
audit of the Group's annual accounts 36 20
------------ -----------
Fees payable to the Company's auditor for the
audit of subsidiary companies 78 66
------------ -----------
114 86
------------ -----------
Other services pursuant to legislation:
------------ -----------
Tax advice 7 1
------------ -----------
Other assurance 3 2
------------ -----------
Transaction related services - 114
------------ -----------
Total non-audit fees 10 117
------------ -----------
4. Staff costs
Year ended 31 December
2018 2017
------------ -----------
GBP'000 GBP'000
------------ -----------
Wages and salaries 4,252 2,789
------------ -----------
Social security costs 521 243
------------ -----------
Pension costs 68 19
------------ -----------
4,841 3,051
------------ -----------
The average monthly number of employees during the period was as follows:
Year ended 31 December
2018 2017
----------------- -----------------
No. No.
----------------- -----------------
Directors 6 6
----------------- -----------------
Administrative 40 6
----------------- -----------------
Finance 3 3
----------------- -----------------
Warehouse 45 25
----------------- -----------------
Sales 6 4
----------------- -----------------
Other 12 8
----------------- -----------------
112 52
----------------- -----------------
2018 2017
----------------- -----------------
Directors' remuneration, included in staff costs GBP'000 GBP'000
----------------- -----------------
Salaries 719 653
----------------- -----------------
Pension contributions 3 -
----------------- -----------------
722 653
----------------- -----------------
Remuneration in respect of Directors was as follows:
Salary Benefits Pension 2018 2017
/fees contribution
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------- --------- -------------- -------- --------
Executive Directors
-------- --------- -------------- -------- --------
C Garston 60 - - 60 60
-------- --------- -------------- -------- --------
S Bazini 200 8 - 208 206
-------- --------- -------------- -------- --------
E Macleod 200 6 - 206 205
-------- --------- -------------- -------- --------
N Rodol 150 - 1 151 112
-------- --------- -------------- -------- --------
Non-executive Directors
-------- --------- -------------- -------- --------
K Sadler 40 - 1 41 40
-------- --------- -------------- -------- --------
P Hagon 40 - - 40 30
-------- --------- -------------- -------- --------
S Craig 29 - 1 30 -
-------- --------- -------------- -------- --------
719 14 3 736 653
------------------------- -------- --------- -------------- -------- --------
Number Number Number Number Exercise Earliest Exercise
of Share of Share of Share of Share Price Exercise Expiry
options options options options Date Date
at January Awarded Lapsed at December
2018 in the in the 2018
year year
105,262
@237.59p 29/06/2020 29/06/2027
306,996
N Rodol 105,262 306,996 - 412,258 @254.5p 21/09/2021 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
------------ ---------- ---------- ------------- ---------- ------------ ------------
Total share
options 105,262 3,376,968 - 3,482,230
------------ ---------- ---------- ------------- ---------- ------------ ------------
The directors of the Group are the only key management personnel.
5. Finance expense
Year ended 31 December
2018 2017
------------ -----------
GBP'000 GBP'000
------------ -----------
Loan interest 28 15
------------ -----------
Hire Purchase interest 59 5
------------ -----------
Other interest 63 17
------------ -----------
150 37
------------ -----------
6. Income tax
Year ended 31 December
2018 2017
------------ -----------
GBP'000 GBP'000
------------ -----------
Current tax expense
------------ -----------
Current tax on profits for the period 1,660 1,473
------------ -----------
Adjustment in respect of previous periods - (30)
------------ -----------
1,660 1,443
------------ -----------
Deferred tax expense
------------ -----------
Origination and reversal of temporary differences (501) (59)
------------ -----------
Total tax expense 1,159 1,384
------------ -----------
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
2018 2017
-------- -----------------
GBP'000 GBP'000
-------- -----------------
Profit for the period before tax 4,734 6,857
-------- -----------------
Expected tax charge based on corporation tax
rate of 19% (2017: 19.25%) 899 1,319
-------- -----------------
Expenses not deductible for tax purposes 47 178
-------- -----------------
Other adjustments 12 4
-------- -----------------
Different tax rates applied in overseas jurisdiction 20 -
-------- -----------------
Prior year adjustments - (30)
-------- -----------------
Adjustment to deferred tax to average rate 181 (87)
-------- -----------------
Total tax expense 1,159 1,384
-------- -----------------
The UK corporation tax at the standard rate for the year is 19.0% (2017: 19.0%).
In the Finance Act 2016 the UK government announced its intention to reduce the standard corporation tax rate to 17% by 2020. The measure to reduce the rate to 17% for the financial year beginning 1 April 2020 was substantively enacted on 6 September 2016 and has, where applicable, been reflected in the financial statements.
The Group's effective tax rate for the year is 24.5% (2017 : 20.2%).
7. 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 Wholesaler 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%
Supply chain
Badgequo Deutschland GmbH* management Germany 100%
Supply chain
Badgequo Hong Kong Limited* management Hong Kong 100%
Jinhua Badgequo Cosmetics People's Republic
Trading Co., Ltd Wholesaler of China 100%
Marvin Leeds Marketing
Services, Inc. Wholesaler U.S.A. 100%
* indicates indirect interest
On 2 August 2018, the Company acquired 100% of the issued share capital of Marvin Leeds Marketing Services, Inc.
All the other 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 Marvin Leeds Marketing Services, Inc. is 34W. 33rd St. - Suite 1015, New York NY 10001.
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.
8. Acquisitions
Marvin Leeds Marketing Services, Inc.
On 2 August 2018, the Group acquired the entire share capital of Marvin Leeds Marketing Services, Inc. ("LMS"), the Group's USA distributor. The principal reason for acquiring LMS was to provide direct access to the Warpaint brand to some key existing customers and to open a number of new opportunities in the USA and the Americas more widely. LMS has contributed GBP2,356,000 to revenue for the period between the date of acquisition and the balance sheet date. Had LMS been consolidated from 1 January 2018, the consolidated income statement for the year ended 31 December 2018 would show additional revenue of $5,500,000 (GBP4,093,000) and a loss before tax of $198,000 (GBP148,000).
The provisional fair Book Fair Total Book Fair Total
value of the net assets value value value value
at the acquisition adjust-ment adjust-ment
date is as follows:
$'000 $'000 $'000 GBP'000 GBP'000 GBP'000
-------- ------------- -------- -------- ------------- --------
Customer lists - 1,381 1,381 - 1,057 1,057
-------- ------------- -------- -------- ------------- --------
Property, plant and
equipment 11 - 11 8 - 8
-------- ------------- -------- -------- ------------- --------
Stock 1,708 - 1,708 1,307 - 1,307
-------- ------------- -------- -------- ------------- --------
Trade and other receivables 546 - 546 418 - 418
-------- ------------- -------- -------- ------------- --------
Cash and cash equivalents 356 - 356 272 - 272
-------- ------------- -------- -------- ------------- --------
Trade and other payables (2,228) - (2,228) (1,705) - (1,705)
-------- ------------- -------- -------- ------------- --------
Deferred tax asset 219 - 219 168 168
-------- ------------- -------- -------- ------------- --------
Deferred tax liability - (346) (346) - (265) (265)
-------- ------------- -------- -------- ------------- --------
Net assets acquired 612 1,035 1,647 468 792 1,260
-------- ------------- -------- -------- ------------- --------
Goodwill arising on
acquisition 433 331
-------- ------------- -------- -------- ------------- --------
Consideration 2,080 1,591
-------- ------------- -------- -------- ------------- --------
The gross contractual amount of trade receivables is equal to the fair value. The fair value adjustment is based on level 3 inputs.
Goodwill comprises the value of expected synergies and other opportunities arising from the acquisition, management know how, the skilled work force employed by LMS and other intangible assets that do not qualify for separate recognition. None of the goodwill recognised is expected to be deductible for tax purposes.
The fair value of consideration paid is as $'000 GBP'000
follows:
Cash consideration 2,080 1,591
------ --------
2,080 1,591
------ --------
Costs associated with the acquisition of LMS are GBP160,000 and are disclosed within exceptional costs in note 3.
The profit and loss for LMS from the date of acquisition to 31 December 2018 is as follows:
$'000 GBP'000
Revenue 3,029 2,356
-------- --------
Cost of sales (2,935) (2,284)
-------- --------
Gross profit 94 72
-------- --------
Administrative expenses (442) (344)
-------- --------
Loss before tax (348) (272)
-------- --------
Tax expense 75 58
-------- --------
Total comprehensive loss for the period (273) (214)
-------- --------
Retra Holdings Limited
On 30 November 2017, the Group acquired the entire share capital of Retra Holdings Limited ("Retra Holdings"), a cosmetics wholesaler based in the UK. The principal reason for acquiring Retra Holdings was due to the company operating in the same industry, it also holds additional customer base, product ranges and brands.
Retra has contributed GBP1,323,000 to revenue for the period between the date of acquisition and the balance sheet date, 31 December 2017. Had Retra Holdings been consolidated from 1 January 2017, the consolidated statement of comprehensive income for the year ended 31 December 2017 would show additional revenue of GBP18,944,000 and profit before tax of GBP1,849,000.
The fair value of the net assets at the acquisition Book Fair value Total
date is as follows: value adjustment
GBP'000 GBP'000 GBP'000
-------- ------------ --------
Brands - 3,802 3,802
-------- ------------ --------
Customer lists - 5,865 5,865
-------- ------------ --------
Property, plant and equipment 929 - 929
-------- ------------ --------
Stock 4,088 - 4,088
-------- ------------ --------
Trade and other receivables 8,698 - 8,698
-------- ------------ --------
Cash and cash equivalents 242 - 242
-------- ------------ --------
Trade and other payables (2,234) - (2,234)
-------- ------------ --------
Corporation tax (74) - (74)
-------- ------------ --------
Loans (8,687) - (8,687)
-------- ------------ --------
Deferred tax liability - (1,740) (1,740)
-------- ------------ --------
Net assets acquired 2,962 7,927 10,889
-------- ------------ --------
Goodwill arising on acquisition (as restated) 7,019
-------- ------------ --------
Consideration (as restated) 17,908
-------- ------------ --------
The gross contractual amount of trade receivables is equal to the fair value.
The fair value adjustment is based on level 3 inputs.
Goodwill comprises the value of synergies and other opportunities arising from the acquisition, management know how, the skilled work force employed by Retra Holdings Limited and other intangible assets that do not qualify for separate recognition. None of the goodwill recognised is deductible for tax purposes.
The fair value of consideration paid is as GBP'000
follows:
Cash consideration (as restated) 15,750
--------
Share consideration 2,158
--------
17,908
-------------------------------------------- --------
Share consideration is based on the issue of 1,052,631 shares at a market value on 30 November 2017 at GBP2.05 per share.
The final consideration amount was based on a completion statement according to the Sale and Purchase agreement terms and delivery of the statutory accounts of Retra Holdings Limited. The purchase price was GBP17.7536 million (GBP15.75 million in cash and GBP2 million of consideration shares) which takes into account a reduction of up to GBP450,000 following the delivery of the final EBITDA statement, as a result the comparatives were restated by reducing Goodwill by GBP450,000 and the inclusion of a receivable for the same amount.
The profit and loss for Retra Holdings Limited from the date of acquisition to 31 December 2017 is as follows:
GBP'000
Revenue 1,323
--------
Cost of sales (796)
--------
Gross profit 527
--------
Administrative expenses (368)
--------
Finance expense (20)
--------
Profit before tax 139
--------
Tax expense (21)
--------
Total comprehensive income for the period 118
--------
9. Goodwill
Cost GBP'000
At 1 January 2017 513
--------
Arising on acquisition of Retra Holdings Limited 7,019
--------
At 31 December 2017 (as restated) 7,532
--------
Arising on acquisition of Marvin Leeds Marketing
Services, Inc. 331
--------
At 31 December 2018 7,863
--------
Impairment
--------
At 1 January 2017 and 2018 -
--------
Impairment during the year 812
--------
At 31 December 2018 812
--------
Net book value
--------
At 31 December 2018 7,051
--------
At 31 December 2017 (as restated) 7,532
--------
Goodwill represents the excess of consideration over the fair value of the Group's share of the net identifiable assets of the acquired subsidiary at the date of acquisition. The carrying value at 31 December 2018 includes Treasured Scents GBP513,000, Retra GBP6,207,000 and LMS GBP331,000.
Goodwill arising on acquisition in the year ended 31 December 2017 relates to the Group's acquisition of Retra Holdings Limited. During the year ended 31 December 2018, the consideration for the acquisition of Retra Holdings Limited was finalised. The previously disclosed purchase price of GBP18.36 million was reduced by GBP450,000 resulting in a reduction in the goodwill figure arising on acquisition from GBP7,469,000 to GBP7,019,000. The comparative figures at 31 December 2017 have been adjusted retrospectively. Goodwill arising on acquisition in the year ended 31 December 2018 relates to the Group's acquisition of Marvin Leeds Marketing Services, Inc.
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 16.7% (2017: 15%) for Retra Holdings Limited and 20.1% for Marvin Leeds Marketing Services, Inc.. Cash flows beyond the five-year period are extrapolated using a long term average growth rate of 2% (2017: 4.5%). 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 or Marvin Leeds Marketing Services, Inc as the recoverable amount exceeds the carrying value but that for Retra Holdings Limited goodwill should be impaired by GBP812,000 as the recoverable amount was assessed as being GBP6,207,000 compared to the carrying value of GBP7,019,000.
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 approximately 75% for the first-year post-acquisition reducing to 10% growth rate for years two to five. For Retra, the growth rate over the next year is anticipated to be 9.1% reducing to approximately 4.3% 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 16.7% for Retra Holdings Limited and 20.1% for Marvin Leeds Marketing Services, Inc reflects the Directors' estimate of an appropriate rate of return, taking into account 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% 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 and projected operating cash flows. 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.
Reasonable changes to the assumptions used, considered in isolation, would not result in an impairment of goodwill for LMS. For LMS, the value-in-use exceeded the goodwill value by GBP3.3m.
At 31 December 2018, Retra's goodwill was impaired as its value-in-use fell below the goodwill value. A 1% increase in the pre-tax discount rate would increase the impairment by GBP1.25 million, a 1% reduction in the terminal growth rate would increase the impairment by GBP0.8 million and a 10% reduction in projected operating cash flows would increase the impairment by GBP2.6m.
10. Intangible assets
Brands Customer Patents Website Licences Total
lists
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------- --------- -------- -------- --------- --------
Cost
-------- --------- -------- -------- --------- --------
At 1 January 2017 - 1,318 132 30 6 1,486
-------- --------- -------- -------- --------- --------
On acquisition of subsidiaries 3,802 5,865 - - - 9,667
-------- --------- -------- -------- --------- --------
Additions - - 42 10 - 52
-------- --------- -------- -------- --------- --------
At 31 December 2017 3,802 7,183 174 40 6 11,205
-------- --------- -------- -------- --------- --------
On acquisition of subsidiaries - 1,057 - - - 1,057
-------- --------- -------- -------- --------- --------
Additions - - 43 5 - 48
-------- --------- -------- -------- --------- --------
At 31 December 2018 3,802 8,240 217 45 6 12,310
-------- --------- -------- -------- --------- --------
Accumulated amortisation
-------- --------- -------- -------- --------- --------
At 1 January 2017 - 44 34 4 1 83
-------- --------- -------- -------- --------- --------
Charge for the year 63 382 16 7 1 469
-------- --------- -------- -------- --------- --------
At 31 December 2017 63 426 50 11 2 552
-------- --------- -------- -------- --------- --------
Charge for the year 761 1,482 20 8 1 2,272
-------- --------- -------- -------- --------- --------
Impairment losses - - - - - -
-------- --------- -------- -------- --------- --------
At 31 December 2018 824 1,908 70 19 3 2,824
-------- --------- -------- -------- --------- --------
Net book value
-------- --------- -------- -------- --------- --------
At 31 December 2018 2,978 6,332 147 26 3 9,486
-------- --------- -------- -------- --------- --------
At 31 December 2017 3,739 6,757 124 29 4 10,653
-------- --------- -------- -------- --------- --------
At 1 January 2017 - 1,274 98 26 5 1,403
-------- --------- -------- -------- --------- --------
11. Property, plant and equipment
Plant Fixtures Computer Motor Total
and machinery and fittings equipment vehicles
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------- -------------- ----------- ---------- --------
Costs
--------------- -------------- ----------- ---------- --------
At 1 January 2017 91 73 68 80 312
--------------- -------------- ----------- ---------- --------
Additions 5 440 22 88 555
--------------- -------------- ----------- ---------- --------
On acquisition of subsidiary 731 60 137 - 928
--------------- -------------- ----------- ---------- --------
Disposals - - - (40) (40)
--------------- -------------- ----------- ---------- --------
At 31 December 2017 827 573 227 128 1,755
--------------- -------------- ----------- ---------- --------
Additions 73 192 114 13 392
--------------- -------------- ----------- ---------- --------
On acquisition of subsidiary - 6 2 - 8
--------------- -------------- ----------- ---------- --------
Disposals (3) - (12) - (15)
--------------- -------------- ----------- ---------- --------
At 31 December 2018 897 771 331 141 2,140
--------------- -------------- ----------- ---------- --------
Accumulated depreciation
--------------- -------------- ----------- ---------- --------
At 1 January 2017 40 12 12 11 75
--------------- -------------- ----------- ---------- --------
Charge for year 25 122 16 21 184
--------------- -------------- ----------- ---------- --------
On disposals - - - (1) (1)
--------------- -------------- ----------- ---------- --------
At 31 December 2017 65 134 28 31 258
--------------- -------------- ----------- ---------- --------
Charge for year 170 194 137 28 529
--------------- -------------- ----------- ---------- --------
On disposals (2) - (3) - (5)
--------------- -------------- ----------- ---------- --------
At 31 December 2018 233 328 162 59 782
--------------- -------------- ----------- ---------- --------
Net book value
--------------- -------------- ----------- ---------- --------
At 31 December 2018 664 443 169 82 1,358
--------------- -------------- ----------- ---------- --------
At 31 December 2017 762 439 199 97 1,497
--------------- -------------- ----------- ---------- --------
At 1 January 2017 51 61 56 69 237
--------------- -------------- ----------- ---------- --------
The net book value of assets held under finance leases or hire purchase contracts, included above are as follows:
As at 31 December
2018 2017
--------- ---------
GBP'000 GBP'000
--------- ---------
Plant and machinery 12 21
--------- ---------
Computer equipment 41 67
--------- ---------
53 88
--------- ---------
12. Inventories
As at 31 December
2018 2017
--------- ---------
GBP'000 GBP'000
--------- ---------
Finished goods 15,472 11,645
--------- ---------
Provision (110) (114)
--------- ---------
15,362 11,531
--------- ---------
The cost of inventories recognised as an expense and included in 'cost of sales' amounted to GBP28,299,077 in the year ended 31 December 2018 (2017: GBP19,215,000).
13. Trade and other receivables
As at 31 December
2018 2017
-------- -----------
(restated)
-------- -----------
GBP'000 GBP'000
-------- -----------
Trade receivables - gross 11,139 12,076
-------- -----------
Allowance for doubtful debts (114) (173)
-------- -----------
Trade receivables - net 11,025 11,903
-------- -----------
Other receivables 485 1,022
-------- -----------
Prepayments and accrued income 1,010 751
-------- -----------
Deferred tax asset 241 -
-------- -----------
Total 12,761 13,676
-------- -----------
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 GBP1,909,000 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
2018 2017
--------- ---------
GBP'000 GBP'000
--------- ---------
Accumulated impairment losses at 1 January 173 110
--------- ---------
Additional impairment losses (released)/recognised
during the year, net (14) 93
--------- ---------
Amounts written off during the year as uncollectible (45) (30)
--------- ---------
Accumulated impairment losses at 31 December 114 173
--------- ---------
The impairment losses recognised during the year are net of a reversal of GBP14,000 (2017: loss of GBP93,000) relating to the recovery of amounts previously written off as uncollectable.
14. Cash and cash equivalents
Cash and cash equivalents include the following for the purposes of the cash flow statement:
As at 31 December
2018 2017
--------- ---------
GBP'000 GBP'000
--------- ---------
Cash at bank and in hand 4,041 3,369
--------- ---------
4,041 3,369
--------- ---------
15. Trade and other payables
As at 31 December
2018 2017
--------- ---------
GBP'000 GBP'000
--------- ---------
Current
--------- ---------
Trade payables 1,435 1,671
--------- ---------
Social security and other taxes 476 568
--------- ---------
Other payables 847 41
--------- ---------
Accruals and deferred income 731 1,257
--------- ---------
Total 3,489 3,537
--------- ---------
The directors consider that the carrying value of trade and other payables measured at book value and amortised cost approximates to fair value.
16. Loans and borrowings
As at 31 December
2018 2017
--------- ---------
GBP'000 GBP'000
--------- ---------
Bank loans -
--------- ---------
Repayable within 1 year 1,992 401
--------- ---------
Repayable within 2 - 5 years 139 221
--------- ---------
2,131 622
--------- ---------
Hire purchase finance
--------- ---------
Repayable within 1 year 177 181
--------- ---------
Repayable within 2 - 5 years 414 593
--------- ---------
591 774
--------- ---------
Total
--------- ---------
Repayable within 1 year 2,169 582
--------- ---------
Repayable within 2 - 5 years 553 814
--------- ---------
2,722 1,396
--------- ---------
The interest rates expected are as follows:
As at 31 December
2018 2017
--------- ---------
% %
--------- ---------
Finance loans 7 7
--------- ---------
Bank loans 10 10
--------- ---------
Invoice financing 3.5 -
--------- ---------
Secured loans
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.
17. Deferred tax
Deferred tax is calculated in full on temporary differences under the liability method using tax rate of 17% - 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
------------------------- -------------------------
2018 2017 2018 2017
------------ ----------- ------------ -----------
GBP'000 GBP'000 GBP'000 GBP'000
------------ ----------- ------------ -----------
Opening balance (1,959) (278) - -
------------ ----------- ------------ -----------
On acquisition of subsidiary (265) (1,740) 168 -
------------ ----------- ------------ -----------
Recognised in profit
and loss:
------------ ----------- ------------ -----------
Tax expense 428 59 73 -
------------ ----------- ------------ -----------
Closing balance (1,796) (1,959) 241 -
------------ ----------- ------------ -----------
The deferred tax liability has arisen due to the timing difference on accelerated capital allowances amounting to GBP51,000 (2017: GBP57,000) and on the intangible assets acquired in a business combination amounting to GBP1,057,000 (2017: GBP1,902,000).
In the Finance Act 2016 the UK government announced its intention to reduce the standard corporation tax rate to 17% by 2020. The measure to reduce the rate to 17% for the financial year beginning 1 April 2020 was substantively enacted on 6 September 2016 and has, where applicable, been reflected in the financial statements.
Deferred tax asset has arisen from loss carry forward for LMS amounting to GBP964,000 and recognised at a rate of 25%.
18. Dividends
Year to December 2018 Paid Amount per Total GBP'000
share
Final dividend - 2017 10 Jul 18 2.6p 1,995
----------- ----------- --------------
Interim dividend - 2018 13 Nov 18 1.5p 1,150
----------- ----------- --------------
3,145
------------------------------------- ----------- --------------
Year to December 2017 Paid Amount per Total GBP'000
share
Final dividend - 2016 13 Jul 17 1.5p 968
----------- ----------- --------------
Interim dividend - 2017 13 Nov 17 1.4p 904
----------- ----------- --------------
1,872
------------------------------------- ----------- --------------
19. Called up share capital
Date No of
shares
'000 GBP'000
-------- -------- --------
Allotted and issued
-------- -------- --------
Ordinary shares of GBP0.25
each:
-------- -------- --------
At 1 January 2017 64,538 16,135
-------- --------
30 Nov
New share issue 17 12,211 3,052
---------- -------- --------
At 31 December 2017 and 2018 76,749 19,187
-------- --------
All ordinary shares carry equal rights.
20. 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 Scent (2014) Limited on 11 November 2016. The shareholders of Treasured Scent (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 GBP2,005,233. 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.
Other reserves
'Other 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.
21. Share based payments
Movements in the number of options and their weighted average exercise prices are as follows:
Weighted Number Weighted Number
average exercise of options average of options
price (pence) exercise
price (pence)
2018 2018 2017 2017
------------------ ------------ --------------- ------------
Outstanding at the beginning
of the year 237.5 255,892 - -
------------------ ------------ --------------- ------------
Granted during the year 244.0 3,837,462 237.5 277,788
------------------ ------------ --------------- ------------
Expired during the year 237.5 (22,737) - (21,986)
------------------ ------------ --------------- ------------
Outstanding at the end of
the year 243.6 4,070,617 237.5 255,892
------------------ ------------ --------------- ------------
The weighted average remaining contractual life of the options is 5.0 years.
The following options over ordinary shares have been granted by the Company:
Exercise Exercise Number
price period of options
Pence (years)
29 June 2017 237.50 3 255,051
21 September 2018 254.5 5 3,837,462
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:
24 Sept 29 June
18 17
Expected volatility 78% 64%
Expected life (years) 10 3
Risk-free interest rate 1.61% 0.38%
Expected dividend yield 1.53% 2%
Fair value per option (GBP) 0.422 0.963
On 21 September 2018, share options with an exercise price of 254.5p, 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 GBP116,000 (2017: GBP45,000).
22. Related party transactions
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation. Related party transactions are considered to be conducted at arm's length.
Key management personnel are considered to be the directors. Compensation of the directors is disclosed in note 4 with the exception of dividends and drawings which are disclosed in note 18.
During 2018, Warpaint Cosmetics (2014) Ltd paid rent in the sum of GBP120,000 (2017: GBP120,000) to Direct Supplies Group Ltd, of which Mr Bazini is a director. At the year end the amount due to Direct Supplies group was GBP39,518 (2017: GBP80,000).
During 2018, Warpaint Cosmetics (2014) Ltd paid rent in the sum of GBP120,000 (2017: GBP120,000) to Warpaint Cosmetics Ltd, of which Mr Macleod And Mr Bazini are directors. At the year end the amount due to Warpaint Cosmetics Ltd was GBPnil (2017: GBP36,000).
During 2018, Retra Holdings Limited paid rent in the sum of GBP197,083 (2017: GBPnil) to Warpaint Cosmetics Ltd, of which Mr Macleod and Mr Bazini are directors.
During the year, the Company advanced GBPnil (2017: GBP12,500) to Mr S Bazini, a director of the Company. During the year, the director repaid GBP100 (2017: GBP26,276). Mr S Bazini incurred expenses on behalf of the Company totalling GBPnil (2017: GBP1,804). At the year end the Company owed the sums of GBP100 (2017: GBPnil) to Mr S Bazini.
During the year, the Company advanced GBPnil (2017: GBP12,500) to Mr E Macleod, a director of the Company. During the year, the director repaid GBP100 (2017: GBP17,711). Mr E Macleod was reimbursed expenses on behalf of the Company totalling GBPnil (2017: GBP4,071). At the year end the Company owed the sums of GBP100 (2017: GBPNil) to Mr E MacLeod.
23. 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 GBP37,550,000 as at 31 December 2018 (2017: GBP37,120,000) 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
2018 2017
---------- -------------
(restated)
---------- -------------
GBP'000 GBP'000
---------- -------------
Financial assets
---------- -------------
Financial assets at amortised cost (2017: loans
and receivables) including cash and cash equivalents:
---------- -------------
Cash and cash equivalents 4,041 3,369
---------- -------------
Trade and other receivables 11,510 12,925
---------- -------------
15,551 16,294
---------- -------------
Financial liabilities
---------- -------------
Financial liabilities at amortised cost:
---------- -------------
Trade and other payables (3,013) (2,969)
---------- -------------
Bank loan (2,722) (1,396)
---------- -------------
(5,735) (4,365)
---------- -------------
Net 9,816 11,929
---------- -------------
Financial assets measured at fair value through the income statement comprise cash and cash equivalents.
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 rates 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 GBP18,000 (2017: GBP13,000) 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 2018, the Group has trade receivables of GBP11,025,000 (2017: GBP11,903,000).
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
2018 2017
--------- ---------
GBP'000 GBP'000
--------- ---------
Current 4,206 4,241
--------- ---------
1 - 30 days 3,014 3,550
--------- ---------
31 - 60 days 2,597 2,623
--------- ---------
61 - 90 days 924 868
--------- ---------
91 + days 398 794
--------- ---------
Allowance for doubtful debts (114) (173)
--------- ---------
Total trade receivables - gross 11,025 11,903
--------- ---------
The Directors are unaware of any factors affecting the recoverability of outstanding balances at 31 December 2018 and, consequently, no further provisions have been made for bad and doubtful debts.
The allowance for bad debts has been calculated using a 12month expected credit loss model, as set out below, in accordance with IFRS 9. There are no receivables subject has been subject to a significant increase in credit risk. The figures presented below for 2017 are for comparison purposes only. The actual doubtful debt allowance for 2017 was GBP173,000 and the comparatives have not been restated.
As at 31 December As at 31 December
2018 2017
-------------------------- --------------------------
GBP'000 % GBP'000 GBP'000 % GBP'000
-------- ------ -------- -------- ------ --------
Current 4,206 0.122 5 4,241 0.122 5
-------- ------ -------- -------- ------ --------
1 - 30 days 3,014 0.366 11 3,550 0.366 13
-------- ------ -------- -------- ------ --------
31 - 60 days 2,597 1.098 29 2,623 1.098 29
-------- ------ -------- -------- ------ --------
61 - 90 days 924 3.294 30 868 3.294 29
-------- ------ -------- -------- ------ --------
91 + days 398 9.882 39 794 9.882 78
-------- ------ -------- -------- ------ --------
114 154
-------- ------ -------- -------- ------ --------
Credit quality of financial assets
As at 31 December
2018 2017
--------- ---------
Trade receivables, gross (Note 13): GBP'000 GBP'000
--------- ---------
Receivable from large companies 3,617 3,929
--------- ---------
Receivable from small or medium-sized companies 589 312
--------- ---------
Total neither past due nor impaired 4,206 4,241
--------- ---------
Past due but not impaired:
Less than 30 days overdue 3,014 3,550
------ ------
30 - 90 days overdue 3,805 4,112
------ ------
Total past due but not impaired 6,819 7,662
------ ------
Individually determined to be impaired (gross):
Less than 30 days overdue 16 -
---- ----
30 - 90 days overdue 98 173
---- ----
Total individually determined to be impaired
(gross) 114 173
---- ----
Less: Impairment provision (114) (173)
------- -------
Total trade receivables, net of provision
for impairment 11,025 11,903
------- -------
Cash and cash equivalents, neither past due nor impaired (Moody's ratings of respective counterparties):
As at 31 December
2018 2017
--------- ---------
GBP'000 GBP'000
--------- ---------
A rated 434 800
--------- ---------
AA rated 1,086 -
--------- ---------
BAA rated 2,521 2,569
--------- ---------
Total cash and cash equivalents 4,041 3,369
--------- ---------
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 GBP100,000 (2017: GBP100,000).
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 2018
Less than Between Between Total
6 months 6 months 1 and 5
and 1 year years
GBP'000 GBP'000 GBP'000 GBP'000
---------- ------------ --------- --------
Trade payables 1,435 - - 1,435
---------- ------------ --------- --------
Other payables 847 - - 847
---------- ------------ --------- --------
Accruals 731 - - 731
---------- ------------ --------- --------
Bank loans 1,910 259 553 2,722
---------- ------------ --------- --------
Estimated interest 50 125 491 666
---------- ------------ --------- --------
4,973 384 1,044 6,401
---------- ------------ --------- --------
Year ended 31 December 2017
Less than Between Between Total
6 months 6 months 1 and 5
and 1 year years
GBP'000 GBP'000 GBP'000 GBP'000
---------- ------------ --------- --------
Trade payables 1,671 - - 1,671
---------- ------------ --------- --------
Other payables 41 - - 41
---------- ------------ --------- --------
Accruals 1,257 - - 1,257
---------- ------------ --------- --------
Bank loans - 582 814 1,396
---------- ------------ --------- --------
Estimated interest 102 63 201 366
---------- ------------ --------- --------
3,071 645 1,015 4,731
---------- ------------ --------- --------
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 2018, there were total sums of GBP72,345 (2017: GBP304,527) 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 2018 the net foreign assets were GBP0.3m (2017: GBPnil). 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 GBP4,000 increase in reported profits and equity, while a 5% strengthening of sterling would result in GBP3,000 decrease in profits and equity.
2018 2017
GBP'000 GBP'000
Derivatives carried at fair value:
Exchange (loss)/gain on forward foreign currency
contracts - (3)
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 2018, the group has 4 (2017: 1) forward foreign exchange contracts outstanding. Derivative financial instruments are carried at fair value.
The following table details the USD foreign currency contracts outstanding as at the balance sheet date.
a) Contracted exchange rate GBP/$ rate 2018 2017
3 months or less 1.1293 1.3393
------- -------
3 to 6 months 1.1275 -
------- -------
2018 2017
b) Contract value GBP'000 GBP'000
-------- --------
3 months or less 779 359
-------- --------
3 to 6 months 195 -
-------- --------
974 359
-------- --------
2018 2017
c) Foreign currency EUR'000 EUR'000
-------- --------
3 months or less 880 481
-------- --------
3 to 6 months 220 -
-------- --------
1,100 481
-------- --------
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.
24. 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 GBP62,900 (2017: GBP13,800).
25. Operating lease commitments - Group company as lessee
The group leases offices and warehouses under non-cancellable operating lease agreements. The lease terms are between 5 and 10 years and are renewable at the end of the lease period at market rate.
The future aggregate minimum lease payments under non-cancellable operating leases are as follows:
Land and buildings 2018 2017
GBP'000 GBP'000
-------- --------
Not later than 1 year 700 466
-------- --------
Later than 1 year and not later than 5 years 2,800 1,542
-------- --------
Later than 5 years 2,345 1,290
-------- --------
Total 5,845 3,298
-------- --------
26. Controlling party
In the opinion of the directors there is no ultimate controlling party.
27. Earnings 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.
2018 2017
Basic earnings per share (pence) 4.66 8.34
----------- -----------
Diluted earnings per share (pence) 4.66 8.34
----------- -----------
The calculation of basic and diluted earnings
per share is based on the following data:
----------- -----------
2018 2017
----------- -----------
Earnings GBP'000 GBP'000
----------- -----------
Earnings for the purpose of basic earnings per
share, being the net profit 3,575 5,473
----------- -----------
Number of shares 2018 2017
----------- -----------
Weighted number of ordinary shares for the purpose
of basic earnings per share 76,749,125 65,575,658
----------- -----------
Potentially dilutive shares awarded - -
----------- -----------
Weighted number of ordinary shares for the purpose
of diluted earnings per share 76,749,125 65,575,658
----------- -----------
The 4,092,513 share options (2017: 255,862) in issue during the year has 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.
28. Notes supporting statement of cash flows
Significant non-cash transactions from investing activities is the equity consideration for the business combination of GBP2,158,000 during the year ended 31 December 2017. The non-cash transactions arising on the acquisition of LMS during the year ended 31 December 2018 and Retra during the year ended 31 December 2017 are as follows:
2018 2017
Total Total
GBP'000 GBP'000
-------- --------
Property, plant and equipment 8 929
-------- --------
Stock 1,307 4,088
-------- --------
Trade and other receivables 417 8,698
-------- --------
Deferred tax 168 -
-------- --------
Cash and cash equivalents 272 292
-------- --------
Trade and other payables (1,704) (2,234)
-------- --------
Corporation tax - (74)
-------- --------
Loans - (8,687)
-------- --------
468 2,962
------------------------------- -------- --------
Non-cash transactions from financing activities are shown in the table below.
Non-current Current
loans and loans and
borrowings borrowings Total
GBP'000 GBP'000 GBP'000
------------ ------------ --------
At 1 January 2017 - - -
------------ ------------ --------
Non-cash flows:
------------ ------------ --------
Amounts recognised on business
combinations 834 7,855 8,689
------------ ------------ --------
Cash flows (20) (7,273) (7,293)
------------ ------------ --------
At 31 December 2017 814 582 1,396
------------ ------------ --------
Non-cash flows: reclassification
of loans (261) 261 -
------------ ------------ --------
Cash flows - 1,326 1,326
------------ ------------ --------
At 31 December 2018 553 2,169 2,722
------------ ------------ --------
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
END
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