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9
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Clarit y
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Strategic Report
01 Highlights
02 At a glance
04 Chairman’s statement
Investment case
05
06 Market overview
08 Chief Executive’s statement
11 Platform features
12 Business model
14 Strategy and our progress
16 Strategy in action
20 Key performance indicators
22 Financial review
24 People and Culture
26 Risks and uncertainties
Corporate Governance
30 Corporate governance report
34 Board of Directors
36 Directors’ report
38 Statement of Directors’ responsibilities in
respect of the Annual Report and the
Financial Statements
Financial Statements
39
45 Consolidated Statement of Profit and
Independent Auditor’s Report
Loss and Other Comprehensive Income
46 Consolidated Statement
of Financial Position
47 Consolidated Statement
of Changes in Equity
48 Consolidated Statement of Cash Flows
49 Notes (forming part of the
financial statements)
75 Company Balance Sheet
76 Company Statement of Changes
in Equity
77 Notes to the Company Financial
Statements (forming part of the financial
statements)
Intro
Operating in a £4.9bn European market,
Gear4music is the UK’s largest retailer of
musical instruments and music equipment,
having grown revenues from £24m in 2015 to
£110m in the 12 months to 28 February 2019.
Leveraging a market-leading bespoke e-commerce
technology platform, a wide range of products including
a unique own-brand offering, and a low-cost European
logistics infrastructure, our objective is to deliver value to
customers and shareholders through long-term
profitable growth.
01
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Highlights
Strategic
Report
Revenue £m
£118.2m
+48%
Gross margin %
22.8%
-260 bps
EBITDA £m
£2.3m
–34%
2019¹
2018²
2017²
£80.1m
£56.1m
£118.2m
2019
2018
2017
22.8%
25.4%
27.0%
2019¹
2018²
2017²
£2.3m
£3.5m
£3.6m
Cash at year end £m
£5.3m
+51%
Website visitors m
27.1m
+60%
Conversion rate %
3.40%
+15 bps
2019
2018
2017
£3.5m
£3.0m
£5.3m
2019¹
2018²
2017²
16.9m
12.6m
27.1m
2019
2018
2017
3.40%
3.25%
2.75%
1 13-month period.
2 12-month period.
Operational highlights
• Growth strategy continues to deliver
results with 37% revenue growth on a
12-month to 28 February 2019 basis
(FY18: 43%).
• Website statistics improved for a fourth
consecutive period – over 27m visitors
and conversion improving to 3.4%.
• Restricted profitability reflects
Commercial and Operational
challenges. Management have taken
quick and decisive action to improve
profitability in FY20.
• Over £5m cash at 31 March 2019 to
support the business in delivering its
objectives.
CorporateGovernanceFinancialStatements 0002
Gear4music (Holdings) plc
Annual Report and Accounts 2019
At a glance
T he Group
Gear4music is an e-commerce retailer selling over
51,500 SKUs across all major categories of musical
instruments and music equipment. Products are
sourced from over 880 manufacturers, and range
from kazoos costing less than £1, to digital pianos,
drum kits and guitars costing thousands of pounds.
Our numbers
Number of active customers
727,000
SKUs listed
51,572
Number of websites
20
Number of languages
15
Number of currencies
9
Revenue by geography
Product split
£54.5m
£63.7m
£82.1m
£31.3m
£35.8m
£44.3m
£56.1m
£21.0m
2019
UK
Europe
and ROTW
2018
UK
Europe
and ROTW
2019
Own brand
Other brand
2018
Own brand
Other brand
03
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Strategic
Report
Corporate
Governance
Keys
Acoustic and digital
pianos, keyboards
and synthesisers
21%of product sales
Drums
Electric and acoustic,
and other percussion
instruments
11%of product sales
Orchestral
Strings, brass,
woodwind
and
accessories
7%of product sales
Our product range
Guitars
Electric, acoustic and
bass guitars, and
related accessories
27%of product sales
Live and PA
PA equipment,
speakers, stands and
microphones
21%of product sales
Studio
Mixers, headphones,
microphones,
monitors and
interfaces
12%of product sales
Excludes departments where <1% share.
Leading brands
Other brands
Own brands
FinancialStatements 04
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Chairman’s statement
Performance
Operating in a fragmented niche market, our customer
proposition continues to be fundamental to our
success, and it is pleasing to note the significant uplift
in overall website visits, customer conversion and high
levels of satisfaction.
Ken Ford | Chairman
We announced in September 2018 that we
were changing our financial year-end from
28 February to 31 March and this has
resulted in us reporting on a 13-month
accounting period ended 31 March 2019
(‘FY19’) and, as such, unless otherwise stated,
numbers may not be directly comparable.
It has been reassuring, however, to see the
Executive Directors and management team
reacting swiftly, and taking the decisions
and actions necessary, as outlined in our
Chief Executive Officer Andrew Wass’s
report, to ensure the challenges arising
during FY19 are appropriately addressed.
With continuing strong growth taking
revenue to £118m in FY19 (FY18: £80m,
up 48%), the Group continues to rapidly
gain market share, although, overall, it
proved to be a challenging year. Despite
another year of strong revenue growth and
further expansion of our customer base,
it was disappointing to announce that the
Group’s profits for the period would be
materially below previous expectations.
Since Gear4music listed on AIM in 2015,
annual revenues have grown from £24m
to £110m in the 12 months to 28 February
2019 and £118m in FY19. We have achieved
this growth by implementing our core
strategy of best-in-class customer service,
e-commerce excellence, bespoke platform
development, international expansion and
supply chain evolution. Like any rapidly
growing business, the challenges faced in
FY19 have provided the Executive team and
Board an opportunity to review all aspects
of the business to ensure that we are
correctly positioned to achieve our next leg
of growth and rebuild shareholder value.
Operating in a fragmented niche market,
our customer proposition continues to
be fundamental to our success, and it is
pleasing to note the significant uplift in
overall website visits, customer conversion
and high levels of satisfaction evidenced
on review sites such as Trustpilot.com.
This high level of customer satisfaction, and
the implementation of our growth strategy,
have only been possible because of the
passion and dedication of our staff, and on
behalf of the Board I would like to thank
all of our employees for their continued
energy and commitment. We continue to
look forward to the future with confidence.
Corporate governance
It is the Board’s responsibility to ensure that
the Group has a corporate governance
framework that is effective whilst dynamic,
as a foundation for a sustainable growth
strategy, and identifying, evaluating and
managing risks and opportunities that
will underpin long-term value creation.
I am therefore pleased to confirm that,
in compliance with the AIM Rules for
Companies, the Board formally adopted
the 2018 QCA Corporate Governance
Code with effect from 26 September
2018. Enhanced disclosures in this
regard are included in the various
sections of this year’s Annual Report,
and available on the Group’s website.
Outlook
The Board has taken decisive action to
address the underlying causes of the
profitability challenges in FY19. Pleasingly,
many of the issues faced are within our
grasp to resolve and we are already starting
to see the benefits of a more rigorous
focus on margin. In parallel with these
initiatives, we continue to see a significant
opportunity to continue to win market
share in the UK and across Europe.
With over £5m cash on hand at 31 March
2019, the Directors remain confident that
the Group has the financial resources
required to achieve its business objectives
during the next financial period.
I believe the Group will emerge from this
period as a stronger and leaner business,
well prepared and better placed for the
next phase of our exciting growth journey.
Ken Ford
Chairman
2 August 2019
05
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Investment case
Strategic
Report
Competitive advantages and Barriers to entry
Gear4music is well positioned to capitalise on the
opportunities available within its markets, due to barriers
to entry and our unique competitive advantages:
• We are an agile, online retailer, and have an increasingly
well-recognised brand
• We are the UK’s largest retailer of musical instruments
and music equipment
•
‘Gear4music’ is the number one search term driving
traffic in the category ‘Music Shops’ (source: Hitwise)
• Our bespoke e-commerce platform provides a high
degree of operational flexibility and scalability which
the Directors believe cannot easily be replicated
• A strong own-brand offering has been developed over
16 years, and has established a reputation for ‘good’
and ‘better’ quality products at affordable prices, whilst
providing enhanced margin opportunities
Key strength
Track record of success – long-term
revenue and market share growth
• Revenues have increased every year since launch
in 2003
• 36% revenue growth in FY19 (13-month basis), building
on 43% revenue growth in FY18, and 58% in FY17
• We have developed long-term relationships with the
• Strong European growth validates website roll-out
major branded musical instrument and music
equipment manufacturers, placing us in a strong
position during a period of retailer consolidation
• Significant scalable distribution capabilities
• The Directors and senior management have an intimate
knowledge of the musical instrument and music
equipment market
strategy
• Database of 2.81m registered users, with active
customers increasing by 53%
Key strength
Bespoke and proprietary e-commerce
platform delivers competitive advantage
Key strength
Specialist knowledge facilitates strong
relationships with customers/suppliers
• End-to-end solution encompassing all aspects
• Strong, committed and experienced management team
of trading operations
• 49 in-house software developers providing cost-
effective development
• Currently supports 20 websites in 15 languages
and 9 currencies
• Ability to rapidly respond to changing customer
behaviours and expectations
• Capability to expand into new markets
• Capacity to handle significantly increased volumes
and website traffic
• Additional functionality in continuous development
• Large team with in-depth specialist knowledge
• Expertise means Gear4music is trusted by major musical
instrument and music equipment brands
• Offers a wide range of choice to customers and
provides specialist advice during and after the sales
process
Key strength
Well-developed product ranges
Key strength
Efficient logistics systems
• Enhanced margin opportunities as volumes increase
• Over 51,500 products from over 880 brands
• Reputation for quality and value for money
• Over 3,200 own-brand SKUs, developed over
a 16-year period
• Operates from three modern facilities with
a combined 284,000 square feet footprint
• The most appropriate courier delivery services
are automatically selected from more than
5,600 permutations depending on the weight,
size, value and destination of the goods
being purchased
CorporateGovernanceFinancialStatements 06
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Market overview
Volume
In December 2017 Music Trades estimated the global
music products markets in 2015 to be $15.9bn.
The top ten European retail markets for musical
instruments and music equipment (including the UK)
are worth an estimated £4.9bn and undergoing a
profound shift towards online retail.
Retail markets worth
£4.9bn
Website
www.gear4music.com
www.gear4music.ie
www.gear4music.fr
www.gear4music.es
www.gear4music.pt
www.gear4music.de
www.gear4music.be
www.gear4music.nl
www.gear4music.dk
www.gear4music.no
www.gear4music.se
www.gear4music.fi
www.gear4music.it
Country
UK
Ireland
France
Spain
Portugal
Germany
Belgium
Netherlands
Denmark
Norway
Sweden
Finland
Italy
www.gear4music.ch
Switzerland
www.gear4music.at
www.gear4music.pl
Austria
Poland
Currency
Pound Sterling
Euro
Euro
Euro
Euro
Euro
Euro
Euro
Danish Krone
Swedish Krona
Euro
Euro
Swiss Franc
Euro
New Zloty
www.gear4music.cz
Czech Republic
Czech Crown
www.gear4music.si
www.gear4music.sk
Slovenia
Slovakia
www.gear4music.com/us
USA
Euro
Euro
US Dollar
Our Business
Overview
Gear4music is about making quality music
gear more accessible and affordable
for all musicians. Our mission is to
become the best musical instrument
and equipment retailer in Europe and we
believe we can achieve this by leveraging
technology to deliver an industry-leading
customer experience, providing the
products our customers want delivered
to them quickly and efficiently.
Our specialist market knowledge has
already helped us to become the largest
retailer in the UK, and we continue
to make good progress in Europe. A
bespoke e-commerce platform allows
us to efficiently operate 20 websites, in
15 languages and 9 currencies, and as
we develop this platform further, widen
our product ranges and increase our
marketing reach and brand recognition,
we strongly believe we can continue to
grow our share of the £4.9bn European
market and expand our reach beyond this.
UK
The Board believes that the current dynamics
of the UK competitive landscape, in particular
the significant degree of fragmentation
with no large or dominant retailers,
presents a consolidation opportunity.
Whilst acquisitions do not form a core
part of the current strategy, opportunities
are reviewed on an ad hoc basis.
Languages
English
English
French, English
Spanish, English
Portuguese, English
German, English
Dutch, French, German, English
Dutch, English
Danish, English
Swedish, English
Finnish, English
Italian, English
German, French, Italian, English
German, English
Polish, English
Czech, English
Slovenian, English
Slovak, English
English, Spanish
Norwegian Krone
Norwegian, English
07
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Top European Markets
Operations | Locations (Revenues)
Gear4Music
York | UK
2019: £110m
2018: £80m
+37%
S&T Audio (PMT)
London | UK
2018: £37m
2017: £33m
+12%
Andertons
Guildford | UK
2018: £33m
2017: £30m
+10%
Woodbrass
Paris | France
2018: £41m
2017: £48m
–13%
Country
Germany
France
UK
Italy
Netherlands
Austria
Spain
Switzerland
Sweden
Norway
Total size
* Management estimate.
Estimated
market size (£m)*
1,371
991
860
664
232
208
191
163
123
95
4,898
Bax Shop
Goes |
Netherlands
2018: £100m
2017: £96m
+4%
Musicstore
Cologne | Germany
2018: £123m
2017: £112m
+10%
Thomann
Burgebrach |
Germany
2018: £733m
2017: £708m
+4%
Luthman
Stockholm | Sweden
2018: £100m
2017: £93m
+8%
1 day road/economy delivery
2 days road/economy delivery
3+ days road/economy delivery
StrategicReportCorporateGovernanceFinancialStatements 08
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Chief Executive’s statement
Conduct ing
Financial and Commercial KPIs in our fourth year as a listed business are set out below:
Financial KPIs
Revenue*
UK revenue*
International revenue*
Gross margin
Total admin expenses*
European admin expenses*
EBITDA
Cash at year end
Net debt
Commercial KPIs
Website visitors
Conversion rate
Average order value
Active customers
Products listed
See page 21 for commercial KPI definitions.
FY19 (13m)
FY18 (12m)
Change
£118.2m
£63.7m
£54.5m
22.8%
£26.9m
£2.8m
£2.3m
£5.3m
£7.5m
£80.1m
£44.3m
£35.8m
25.4%
£18.4m
£1.5m
£3.5m
£3.5m
£5.0m
FY19 (13m)
FY18 (12m)
27.1m
3.40%
£117
727,000
51,500
16.9m
3.25%
£127
475,000
44,700
+48%
+44%
+52%
-260bps
+46%
+87%
-34%
+51%
+50%
Change
+60%
+15bps
-8%
+53%
+15%
Footnote: Revenue tables bridging from audited periods to non-GAAP accounting periods:
FY18 Revenue reconciliation
UK revenue*
International revenue*
Total revenue*
FY19 Revenue reconciliation
UK revenue*
International revenue*
Total revenue*
* See Note 2 of the financial statements.
FY18 Audited
12m to 28 Feb 18
£44.3m
£35.8m
£80.1m
March 2018
13m to 31 Mar 18
£3.7m
£2.9m
£6.6m
£48.0m
£38.7m
£86.7m
12m to 28 Feb 19
March 2019
FY19 Audited
13m to 31 Mar 19
£58.9m
£51.0m
£109.9m
£4.8m
£3.5m
£8.3m
£63.7m
£54.5m
£118.2m
Business review
Gear4music has continued to grow
revenue quickly and has gained significant
additional market share throughout
FY19, although, as previously reported,
the Group has been impacted by a
number of operational and commercial
issues, in what continues to be a
challenging retail environment.
In response we have undertaken a
thorough review of all aspects of the
business, and are confident that the swift
strategic and operational changes being
made will significantly reduce the risk of
these issues reoccurring in the year ahead.
Our core growth strategy of continually
improving our customer proposition
remains valid and appropriate, but
in addition we will focus on margin
improvement and distribution
efficiency to ensure the business is
effectively configured to achieve a
sustainable level of profitable growth.
Targeted margin growth
The FY19 gross margin of 22.8% was well
below historical averages, and margin
recovery is a primary objective for FY20
and beyond. To achieve this, we will focus
on more selective inventory investment
where we see higher margin potential,
alongside accelerating own-brand
sales growth relative to other brands. As
first reported in April, product margins
continue to recover, and we are confident
of further progress in the year ahead.
These actions will be supported by a review
of our courier relationships and returns
policies, alongside more targeted marketing
campaigns designed to support greater
profitability as well as revenue growth.
The combined effect of the actions
that we have taken will likely lead to
a lower rate of H1 sales growth than
recent years, particularly against FY19
H1 when gaining market share was
prioritised over profitability. This will
ensure that our margins are realigned
ahead of the H2 peak trading period
and help us to operate profitably and
sustainably within any retail environment.
09
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Distribution efficiency
As previously reported, during our FY19
peak Christmas trading period, our York
distribution centre reached maximum
capacity within its configuration at that
time. This restricted additional revenue
growth, and resulted in higher than
anticipated labour and distribution costs.
Improving the efficiency and scalability
of our distribution and logistics
management systems has become a
priority for the current year, alongside
planning for 24/7 operations during the
peak Christmas period, with contingency
arrangements in place for outsourced
inventory storage if required.
Our strategy of establishing a physical
footprint in Europe continues to benefit
the Group and provides a solid platform
for growth in the future. As our European
business continues to grow, we are
expecting to fulfil a higher proportion of
orders from our European distribution
centres located in Sweden and Germany,
which have significant spare capacity.
As previously notified, courier costs during
FY19 were notably higher, particularly
during the peak trading period. We
continue to take action to ensure
more robust and commercially viable
arrangements with our courier partners
are in place for the future, for instance
through renegotiation of contracts.
Clarit y
Our FY20 H1 focus is on improving gross margins and
ensuring a robust operational infrastructure is in place
ahead of our peak H2 trading period.
Andrew Wass | Chief Executive Officer
StrategicReportCorporateGovernanceFinancialStatements 10
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Chief Executive’s statement continued
Producing
We are confident that we have the right strategy,
customer proposition, financial resources and focus
to overcome the challenges of FY19, and achieve our
objectives of maximising customer satisfaction and
delivering value to shareholders.
Andrew Wass | Chief Executive Officer
Revenue
£118.2m
EBITDA
£2.3m
Trading outlook
We have taken quick and decisive action to
address the operational and commercial
issues that impacted profitability in
FY19. Whilst early in the current year,
we are beginning to see positive trends
establishing themselves, which give us
confidence in our refocused growth
strategy. Alongside this, we will continue
to develop our excellent e-commerce
platform, expand our customer base in
the UK and internationally, extend and
refine our product ranges, and deliver
the market-leading service and value
that has made us a leading European
retailer of musical instruments and
equipment in such a short space of time.
Whilst the ongoing Brexit uncertainty and
its impact on consumer confidence is
unhelpful, we remain well positioned to
benefit from further consolidation within
our market. We believe we are well placed
to deliver on our strategic objectives
with a solid financial base and a better
organised and refocused operational
structure, giving us confidence in our
trading outlook for the new financial year.
Andrew Wass
Chief Executive Officer
2 August 2019
11
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Platform
features
Our bespoke platform provides an
end-to-end solution encompassing
the whole business. Having software
development in-house enables us to
quickly and cost-effectively develop
new features and functionality.
Multi-hub
warehouse
management
READ MORE ON
PAGE 16
Advanced
reporting
Global
stock
visibility
Cloud
based
platform
Delivery
to 190
countries
Multi-
currency
Global capacity
Localised
purchasing
Multi-
lingual
Zonal
pricing
Responsive
design
Consumer
finance
integrated
Mobile
optimised
Website
160
payment
methods
Advanced
content
management
Data
driven
search
WMS
Returns
management
Advanced
inventory
management
Dispatch
management
En d -
e
I
n
k
o
e
t
p
g
s
r
a
e
t
B
e
d
E n d U
n
i
q
u
e
I
e
n
e spok
tegrated B
Single
customer
view
Fully
integrated
Automated
customer
messaging
CRM
POS
Email
marketing
platform
Personalised
content
Anti DDoS
technology
CITES &
ROHS
compliance
Data
‘encryption
at-rest’
Security
Advanced
fraud
prevention
PCI DSS
compliant
GDPR
compliant
European
courier
integrations
Delivery
date
calculation
1000s of
delivery
options
Fulfilment
Delivery
cost
calculation
Optimised
dispatch
locations
Intelligent
service
selection
StrategicReportCorporateGovernanceFinancialStatements
12
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Business model
Gear4music is an online retailer of
musical instruments and music
equipment, operating 20 websites
in 15 languages and 9 currencies.
Gear4music is about making quality
music gear more accessible and
affordable for all musicians.
Our products
Our service
Our customers
At the year-end we listed over
products from over
51,500
880manufacturers
Branded Products
Gear4music has developed long-
term partnerships with many well-
recognised brands within the music
products industry, who rely on the
specialist product knowledge of
Gear4music’s staff, the high standard
of customer service that Gear4music
provides, and the high standard of
presentation both online and at
the Gear4music showrooms.
Own-brand Products
Ongoing development of Gear4music’s
own-brand product range has
been a focus since Gear4music.
com was launched in 2003, and
now covers a wide and varied range
with over 3,200 products listed.
We believe that achieving a
very high degree of customer
satisfaction is fundamental to
sustained long-term growth,
and we are committed to
continually improving the service
experienced by our customers.
We leverage our technology and
empower our specialist staff to ensure
key touchpoints deliver a market-
leading experience, and monitor our
progress carefully using independent
sources such as Trustpilot.
Specialist staff
In FY19 we employed 431 people
(28 February 2018: 313) across three
countries, and many have first-hand
musical instrument and equipment
knowledge, playing in bands
and producing their own music.
Ongoing product training is routinely
undertaken to ensure staff have
relevant and up-to-date knowledge
to enable them to advise customers.
Multilingual support for overseas
customers in non-English speaking
countries continues to be a key
investment focus, and a pre-requisite
for many of the Group’s dealership
agreements when selling outside
the UK.
Customer overview
Gear4music’s customer base is
primarily made up of private
individuals (over 96%), from
beginners and parents buying
musical instruments and music
equipment for their children,
through to professional musicians.
The Group supplies schools and
other educational establishments and
a small number of trade accounts.
On 31 March 2019 we had 2.81m
people registered on our database
(28 February 2018: 1.89m), of which
727,000 are active customers (being
customers who have purchased from
Gear4music during the previous
12 months).
As the Group continues to increase
its European business, it acquired
a further 674,000 new customers
in the period (FY18: 408,500), and
154,900 customers came back to us
to place at least one follow-up order.
Average order value in FY19 was
£117, down from £127 in FY18, having
been £124 in FY17 and £116 in FY16.
Own-brand product range
3,200
products listed
Total number of employees
431
across three countries
On 31 March 2019 we had
2.81mpeople registered on our database
13
Gear4music (Holdings) plc
Annual Report and Accounts 2019
How we work
We believe a successful
e-commerce business requires a
unique combination of talented
staff, excellent products, efficient
systems, robust physical operations
and reliable delivery partners.
Staff
We have a strong, committed and
experienced management team,
working alongside passionate
staff with in-depth knowledge of
their specialist area of focus.
Products
Our own-brand product ranges have
taken over 16 years to develop, working
with some of the best manufacturers
from around the world to ensure we
build on our reputation for great quality
at affordable prices. In addition, we
have built strong relationships with the
industry’s biggest brand names, including
Yamaha, Roland, Fender and many more.
Premises
The Group currently operates from
284,000 square feet of operational
space – 135,000 square feet in York,
77,000 square feet in Sweden, and
72,000 square feet in Germany.
The 50,000 square feet freehold Head
Office acquired in FY18 provides back-
office facilities sufficient to support
the business into the long term.
Systems
Our bespoke and proprietary
e-commerce platform is an end-to-
end solution covering all aspects of
retail operations, including website
content, inventory management,
multi-currency pricing, logistics and
dispatch, CRM, automated marketing,
purchasing, customer receipts
and management reporting.
We believe this platform is a cornerstone
of our business and source of
competitive advantage, delivering
reliability, scalability and unique
functionality, and we have an in-house
team of dedicated programmers
constantly improving our systems
with new features and functionality.
Delivery
Reliable delivery with competitive pricing
is fundamental to our proposition and
success. Our e-commerce platform
is configured to select the most
cost-effective delivery options from
17 different delivery service providers,
to provide our customers with a class-
leading range of delivery options.
READ MORE ON
PAGE 11
The Group currently operates from
284,000 sq ft
of operational space
StrategicReportCorporateGovernanceFinancialStatements 14
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Strategy and our progress
Our Strategy
Gear4music’s strategy is built
around four pillars of growth:
Our strategic priorities
Overview
E-commerce Excellence
We continue to invest in international
marketing initiatives, extending our
reach and penetration into existing
and new international territories. New
website content is constantly being
added, including broadcast-quality
product demonstration videos created
in Gear4music’s in-house studio
facilities. A digital personalisation
platform continues to be developed
and refined to ensure customers
receive relevant information and offers
through all communication channels.
Jonathan Meager
E-commerce Director
Bespoke Platform Development
STRATEGY IN ACTION
PAGES 16-17
Our websites are driven by a bespoke
and proprietary e-commerce platform,
designed to maximise opportunities
and deliver competitive advantage. It
has the capacity to handle significantly
increased volumes, and the capability
to expand into new markets. Having
software development in-house helps
deliver the cost-effective investment in
platform development required to grow
revenues and profitability. Investment
enables us to respond to changing
customer behaviours and expectations,
by rapidly developing new features and
functionality to drive website traffic,
increase conversion rates and maximise
operational efficiencies and reliability.
Tom Walder
Chief Technical Officer
International Expansion
We continue to develop and improve
our customer proposition in each
of the territories we operate. We’ll
achieve this by localising our websites
to drive traffic and improve conversion,
expanding our multilingual customer
service and marketing teams, and,
where the business case supports it, by
opening distribution centres to improve
delivery options and cut delivery times.
Robert Newport
Operations Director
STRATEGY IN ACTION
PAGES 18-19
Supply Chain Evolution
We continue to widen our supply
chain reach and purchase inventory
in different countries and currencies,
whilst at the same time consolidating
where possible and dealing directly
with factories and manufacturers.
We will continue to extend the number
of products available to our customers,
including those for next day delivery,
and to continue the expansion of
our own-brand product ranges
with new and exclusive products.
Gareth Bevan
Chief Commercial Officer
• Market-leading websites
• Informative and engaging
content
• Intelligent digital marketing
• Evolving customer
experience
• Grow in-house
development team
• Accelerate innovation
• Increase efficiency, traffic
and conversion
• Reduce operational costs
• Territory-specific websites
• Multilingual, multicurrency
experience
• Localised payment and
delivery options
• Local distribution where viable
• Continuous product range
expansion
• Factory direct where
possible
• Expand multicurrency
sourcing options
• Automate repetitive
processes
Website visitors:
27.1m
+60%
Trustpilot rating:
9.4
Development team:
49
Updates and upgrades:
1,149
International sales:
£54.5m
+52%
SKUs listed:
51,572
+15%
Own-brand revenue:
£31.3m
+49%
With over 27m website visitors in the period,
required to build customer trust and
conversion rates improving by 15 bps, active
loyalty. We will continue to learn from our
customers, and use our significant technical
resource to design the new solutions
required to satisfy an evolving market.
customer numbers increasing to more
than 727,000, and 47% growth in repeat
customers, our e-commerce strategy
continues to prove highly effective.
Our 9.4 Trustpilot rating from over 50,000
reviews is a reflection of our ‘customer first’
approach, the incredible efforts our team
makes, and the attention to detail that is
Our bespoke e-commerce platform is the
cornerstone of our success and a major
competitor differentiator, and our development
team, now totalling 49, have worked
tirelessly to design and deploy over 1,100
updates and upgrades during the period.
With international sales increasing to
£54.5m during the period in what is a
$16bn market, expanding internationally
continues to be a key area of opportunity
and focus for the Group. Localising our
In March 2018 we opened our German
showroom, which in addition to
physically showcasing our products
and building our brand in the locality,
has created buying opportunities from
websites and customer experience is at the
German distributors in Euros.
core of our growth strategy, and during the
period we have expanded our multilingual
In October 2018 we relocated our Swedish
customer service team, invested further into
operation, providing significant additional
translation and marketing, and improved
our local delivery and payment options.
capacity to service the Scandinavian
and Northern European markets.
At the year-end we listed over 51,500 products,
which is up by 15% in 13 months, and we
know there are opportunities to grow this
significantly.
Whilst only representing 6% of listed
SKUs, own-brand product sales
accounted for 27% of revenue.
Own-brand sales continue to grow
impressively to £31m in the period, building
on 45% growth in FY18 and 58% in FY17.
15
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Progress
Website visitors:
27.1m
+60%
Trustpilot rating:
9.4
Development team:
49
Updates and upgrades:
1,149
International sales:
£54.5m
+52%
SKUs listed:
51,572
+15%
Own-brand revenue:
£31.3m
+49%
required to build customer trust and
loyalty. We will continue to learn from our
customers, and use our significant technical
resource to design the new solutions
required to satisfy an evolving market.
With over 27m website visitors in the period,
conversion rates improving by 15 bps, active
customer numbers increasing to more
than 727,000, and 47% growth in repeat
customers, our e-commerce strategy
continues to prove highly effective.
Our 9.4 Trustpilot rating from over 50,000
reviews is a reflection of our ‘customer first’
approach, the incredible efforts our team
makes, and the attention to detail that is
Our bespoke e-commerce platform is the
cornerstone of our success and a major
competitor differentiator, and our development
team, now totalling 49, have worked
tirelessly to design and deploy over 1,100
updates and upgrades during the period.
SEE PAGE 11
With international sales increasing to
£54.5m during the period in what is a
$16bn market, expanding internationally
continues to be a key area of opportunity
and focus for the Group. Localising our
websites and customer experience is at the
core of our growth strategy, and during the
period we have expanded our multilingual
customer service team, invested further into
translation and marketing, and improved
our local delivery and payment options.
In March 2018 we opened our German
showroom, which in addition to
physically showcasing our products
and building our brand in the locality,
has created buying opportunities from
German distributors in Euros.
In October 2018 we relocated our Swedish
operation, providing significant additional
capacity to service the Scandinavian
and Northern European markets.
At the year-end we listed over 51,500 products,
which is up by 15% in 13 months, and we
know there are opportunities to grow this
significantly.
Whilst only representing 6% of listed
SKUs, own-brand product sales
accounted for 27% of revenue.
Own-brand sales continue to grow
impressively to £31m in the period, building
on 45% growth in FY18 and 58% in FY17.
E-commerce Excellence
Bespoke Platform Development
International Expansion
Supply Chain Evolution
• Market-leading websites
• Informative and engaging
content
• Intelligent digital marketing
• Evolving customer
experience
• Grow in-house
development team
• Accelerate innovation
• Increase efficiency, traffic
and conversion
• Reduce operational costs
• Territory-specific websites
• Multilingual, multicurrency
experience
• Localised payment and
delivery options
• Local distribution where viable
• Continuous product range
• Factory direct where
expansion
possible
• Expand multicurrency
sourcing options
• Automate repetitive
processes
StrategicReportCorporateGovernanceFinancialStatements
16
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Strategy in action
Bespoke
Platform
Development
We have invested £9.2m over 13 years
in developing a bespoke end-to-end
e-commerce platform designed to meet our
exact requirements. The ‘front-end’ websites
are market-leading localised sites that have
responsive design and are multilingual and
multicurrency, supported by robust, flexible,
fully integrated back-office systems. Having
software development in-house enables us
to quickly and cost-effectively develop new
features and functionality.
SEE DIAGRAM ON
PAGE 11
We have 49 software developers in our
team working on a pipeline of exciting new
developments and features.
Tom Walder | Chief Technical Officer
17
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Number of deployments in the period:
1,149
Producing
StrategicReportCorporateGovernanceFinancialStatements 18
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Strategy in action continued
International
expansion
During the period we successfully
relocated our Swedish distribution centre
into a significantly larger facility on the
same logistics park north of Stockholm.
Our showroom moved simultaneously and
now has a purpose-built home adjoining
the warehouse. By selecting a new-build
property owned by the same landlord, we
were able to plan the timing of our move to
manage the transfer without pausing
operations and with tight cost control.
Recognising the relatively high cost base
from operating in Sweden, we have
invested in labour-saving operating systems
and space-efficient equipment to enable us
to accelerate our productivity growth from
our Rosersberg site. The new facility
enabled us to deliver a seasonal peak
performance this year that was markedly
greater than 2017 whilst still retaining
significant spare capacity to deliver future
growth, supporting our ambition to
become the leading Scandinavian music
equipment retailer.
Our strategy of establishing a physical footprint
in Europe continues to benefit the Group and provides
a solid platform for growth in the future.
Robert Newport | Operations Director
19
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Strategic
Report
International sales in the 13-month period:
£54.5m
Volume
CorporateGovernanceFinancialStatements 20
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Key performance indicators
Harmony
We measure ourselves against a number of KPIs
that reflect the key trading trends and are linked
to the strategic pillars of growth.
Financial
Revenue £m
£118.2m
+48%
Gross margin %
22.8%
–260 bps
Cash £m
£5.3m
+51%
20191
20182
20172
£80.1m
£56.1m
£118.2m
2019
2018
2017
22.8%
25.4%
27.0%
2019
2018
2017
£5.3m
£3.5m
£3.0m
Commercial
Marketing return as % of revenue
Unique visitors m
8.2%
–0.1 ppts
2019
2018
2017
27.1m
+60%
Conversion %
3.40%
+15 bps
8.2%
8.3%
8.3%
20191
20182
20172
16.9m
12.6m
27.1m
2019
2018
2017
3.40%
3.25%
2.75%
Average Order Value (‘AOV’)
SKUs listed
£117.39
–8%
51,572
+15%
2019
2018
2017
£117.39
£127.33
£124.02
2019
2018
2017
51,572
44,742
37,122
1 13-month period.
2 12-month period.
21
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Customer
Definitions
Unique Visitors: A distinct person who
visits a G4M site during a given period
Conversion: Total number of
online orders divided by the total
number of unique visitors
Average Order Value: Total revenue
(gross of credit notes) divided by
the total number of orders
Total database size: Number of
people whose details are held on
the G4M database
Proportion of repeat customer:
Number of customers in the period
who have placed more than one order
Customer experience Trustpilot rank
9.4
2019
2018
2017
9.4
9.5
9.6
Proportion of repeat customers %
21.3%
–80 bps
2019
2018
2017
21.3%
22.1%
23.7%
Total database size m
2.81m
+49%
2019
2018
2017
2.81m
1.89m
1.36m
StrategicReportCorporateGovernanceFinancialStatements 22
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Financial review
In FY19 own-brand revenue accounted for 26.5% of total revenue
compared to 26.2% in FY18 and 25.7% in FY17, with these sales
generated from just 3,218 SKUs, representing 6% of the total range
(FY18: 2,629 SKUs; FY17: 2,411 SKUs).
Other revenue comprises carriage income, warranty revenue, and
commissions earned on facilitating point-of-sale credit for retail
customers. These revenues accounted for 4.0% of total revenue in
the period (FY18: 3.8%).
Gross profit
FY19 (13m)
FY18 (12m)
Change
Product sales (£000)
113,414
Product profit (£000)
Product margin
Carriage costs (£000)
Carriage costs as % of
sales
Gross profit (£000)
Gross margin
31,558
27.8%
9,078
7.7%
26,916
22.8%
77,022
23,197
30.1%
5,835
7.3%
20,319
25.4%
-2.3ppts
-0.4ppts
-2.6ppts
Continued strong revenue growth led to a £6.6m increase in gross
profit in the 13-month period compared to last year, but gross
margin fell from 25.4% to 22.8% due to competitive pressures in the
market for other-brand products.
We have been referencing the highly competitive nature of the
market for other-branded products since our AGM statement in
July 2018, and these pressures have led to low other-brand product
margins that are the main contributor to the margin shift in the
period. As communicated, our short-term response was to invest in
our customer proposition in terms of competitive pricing and
delivery options to drive market share gains, but our ability to
achieve this was limited in November and December by UK
distribution challenges. In FY20 we are refocusing on restoring
gross margin and we continue to take action to address this.
Medium-term stock intake price prospects are improving with
increasing scale and the Group’s ability to source other-branded
products in Swedish Krona and Euros.
The Group purchases its own-brand products in US Dollars and, as
such, gross margin can be impacted by exchange rate fluctuations.
This led to cost push inflation in FY18 which was partly mitigated
through negotiation with suppliers and passing on through price
increases to consumers where it made commercial sense. In FY19
own-brand margins have not been subject to the same pressures
and remained stable.
We include our costs of delivery within our cost of sales figure,
which is a different accounting treatment to some other
e-commerce retailers. Delivery costs increased to £9.1m in the
period and represented 7.7% of total revenue (FY18: 7.3%).
Administrative expenses and Operating profit
UK administrative expenses
European administrative expenses
Total administrative expenses
Operating (loss)/profit
FY19 (13m)
£000
(24,113)
(2,814)
(26,927)
(11)
FY18 (12m)
£000
(16,823)
(1,535)
(18,358)
1,961
Tempo
In FY19 the Group delivered continued strong revenue
growth but, as Andrew has detailed in his CEO’s report,
profitability has been adversely impacted, primarily
by a highly competitive market contributing to lower
gross margins as well as operational issues now
being addressed.
Chris Scott | Chief Financial Officer
Revenue
UK revenue
International revenue
Revenue
FY19 (13m)
£000
63,672
54,483
118,155
FY18 (12m)
£000
44,258
35,842
80,100
Revenue increased by £29.8m (37%) over comparable 12-month
periods to the end of February 2019, and £31.5m (36%) on
comparable 13-month periods to the end of March 2019. This
builds on growth of 43% in FY18 and 58% in FY17.
UK revenue growth was 33% on both a 12-month and 13-month
basis, taking Gear4music’s UK market share to an estimated 6.9%
(FY18: 5.9%).
European growth continues to represent a significant opportunity
and international revenue growth of 42% on a 12-month basis/41%
on a 13-month basis followed 69% growth in FY18 and 124%
growth in FY17. Revenues from sales outside of Europe accounted
for 1.3% of total revenue (FY18: 1.0%).
Other-brand product revenue
Own-brand product revenue
Other revenue
Revenue
FY19 (13m)
£000
82,125
31,289
4,741
118,155
FY18 (12m)
£000
56,075
20,947
3,078
80,100
We continue to make good progress in our own-brand business
with revenue growth again over-delivering on the Group’s ambition
of keeping pace with the growth in other-brands.
23
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Total administrative expenses increased 47% in the 13-month period
relative to FY18, compared to a 48% increase in sales. This includes
an 83% increase in European administrative expenses, reflecting the
continued scaling-up of the Group’s European distribution centres.
Marketing and labour costs in the 13-month period were £9.8m
(FY18 12m: £6.7m) and £9.5m (FY18 12m: £6.3m) respectively, and
represented 72% of total administrative expenses (FY18: 71%).
Marketing activities continue to be heavily data-driven and focused
on return on investment, and costs accounted for 8.3% of revenue
in both FY19 and FY18.
Labour costs in FY19 accounted for 8.1% of revenue compared to
7.9% in FY18, reflecting an increase of 118 (38%) in average
headcount, and includes the aforementioned distribution
inefficiencies in November and December.
Administrative expenses include a £421,000 credit relating to the
release of a rent accrual for the difference between cash paid and
the average rent charge as expensed in relation to the leasehold
distribution centre in York. The signing of a new lease in March
2018 triggered this release.
FY19 EBITDA of £2.3m is £1.2m lower than last year, representing an
EBITDA margin of 1.9% compared to 4.3% last year and 6.4% in FY17.
The Group is refocusing on returning profitability towards historical
levels by improving gross margins and cost base management.
Net financial expenses of £598,000 (FY18: £461,000) include
£352,000 interest (FY18: £178,000) relating to property loans,
increased utilisation of the Import Loan facility, and a £249,000 net
foreign exchange loss (FY18: £265,000 loss).
The Group is reporting a loss before tax of £0.6m compared to a
£1.5m profit last year.
The net loss for the period of £0.2m (FY18 net profit: £1.4m)
translates into an EPS loss of 0.8p (FY18: +6.7p).
Cash flow and net debt
The cash flow statement for the financial year reflects the Group
continuing to deploy growth capital to generate returns, by
investing in stock and the e-commerce platform to improve the
customer proposition and drive revenue growth.
FY19 (13m)
£000
FY18 (12m)
£000
Opening cash
(Loss)/profit for the year
Movement in working capital
Depreciation and amortisation
Financial expense
Other operating adjustments
Net cash from operating activities
Net cash from investing activities
Net cash from financing activities
Increase in cash in the year
Foreign exchange
Closing cash
3,540
(163)
(62)
2,293
349
159
2,576
(4,888)
4,085
1,773
(9)
5,304
3,001
1,386
(3,123)
1,497
196
199
155
(9,517)
9,899
537
2
3,540
justify the working capital investment, and a clean-up of overstocked
items resulting from under-delivering on peak revenue and of
slower-moving inventory.
Net cash from investing activities of £4.9m includes £2.7m of
software development (FY18: £1.7m) and £1.8m of tangible fixed
additions comprising £1.0m in the UK which was part funded by
the drawing of £0.5m of finance leases, and £0.6m in Sweden
relating to the new distribution centre.
Net cash from financing activities of £4.1m includes a £4.5m
increase in utilisation of the HSBC Import Loan facility secured
against stock. On 31 May 2019 this facility was increased from £8m
to £10m, providing further headroom should it be required.
Balance sheet and net assets
The Group has a strong year-end balance sheet, with net assets of
£18.7m (FY18: £18.9m), and £5.3m cash (FY18: £3.5m).
Software platform
Other intangible assets
Property, plant and equipment
Total non-current assets
Stock
Cash
Other current assets
Total current assets
Trade payables
Loans and borrowings
Other current liabilities
Total current liabilities
Loans and borrowings
Other non-current liabilities
Total non-current liabilities
Net assets
31 March 2019
£000
28 February 2018
£000
5,814
2,013
10,766
18,593
18,661
5,304
1,657
25,622
(7,464)
(8,555)
(4,069)
(20,088)
(4,272)
(1,148)
(5,420)
18,707
4,304
2,074
10,054
16,432
17,055
3,540
2,704
23,299
(7,325)
(3,914)
(3,591)
(14,830)
(4,616)
(1,400)
(6,016)
18,885
The investment in our bespoke e-commerce platform in the period
was £2.7m (FY18: £1.7m) to develop enhanced functionality and
resilience, taking total investment to date to £9.2m, and net book
value to £5.8m (28 February 2018: £4.3m).
The Group had net debt of £7.5m at the period end (28 February
2018: £5.0m), including debt of £4.6m that relates to and is secured
by the freehold Head Office valued at £7.2m. Period-end net debt is
made up of £3.2m of net debt payable under one year and £4.3m is
due over one year.
Dividends
The Board remains confident in the cash-generative nature of the
business, but in light of the increased level of debt and the
importance of retaining cash reserves to support future growth, the
Board does not consider it appropriate to declare a dividend at this
time, but will continue to review this position on an annual basis.
Investment in working capital was £0.1m compared to £3.1m in
FY18 and £3.5m in FY17, and demonstrates the Group’s ability to
manage working capital to generate cash should it be required.
Period-end stock increased by £1.6m (9%), reflecting lower stock
holdings of brands where the current product margins do not
On behalf of the Board
Chris Scott
Chief Financial Officer
2 August 2019
StrategicReportCorporateGovernanceFinancialStatements 24
Gear4music (Holdings) plc
Annual Report and Accounts 2019
People and Culture
T he Band
We know that the foundations of a successful business
are built on the hard work of a team of talented and
motivated individuals.
We strongly believe in growing our talent by recruiting
only the best people, identifying individual strengths,
and providing development opportunities with the
scope for career progression as a result.
Our diverse workforce is the best part of Gear4music:
different cultures, knowledge and skills makes it a
fantastic place to work, and many of our employees are
musicians in their spare time.
A business for musicians run by
musicians
We are proud of our passionate staff with
in-depth knowledge of their specialist area
of focus.
We offer staff discounts on musical products
and equipment and in FY19 estimate over
75% of our team made a relevant purchase.
Recruitment and Retention
We need to attract talent into our business
to support our growth plans and offer
competitive salaries and a range of benefits
to help attract and retain great people
(https://www.gear4music.com/careers/
why-gear).
As at 31 March 2019, 69 employees are
participating in Group share option plans
in recognition of their contribution to the
continuing success of the business.
In FY19 our average headcount increased
by 38% from 313 to 431, and our retention
levels are good.
Apprenticeships
We believe it is important to encourage
young people into the workplace and
provide training and development for the
future. Working with recognised training
providers, we provide on-the-job training
resulting in a professional qualification.
We offer apprenticeships across many
parts of the business, including Retail,
Warehousing, Graphic Design, Web
Content and Marketing.
Gender Pay Gap report
As of April 2018, we are pleased to report
that our mean gender pay gap (9.2%) has
improved on last year (12.6%), and is better
than the national average (17.9%):
• Women’s hourly rate is 9.2% lower
(mean) and 15.5% higher (median)
• Top salary quartile has 83.6% men
and 16.4% women
• Upper middle salary quartile has
59.7% men and 40.3% women
• Lower middle salary quartile has
83.6% men and 16.4% women
• Lower salary quartile has 90.3% men
and 9.7% women
• Women’s bonus pay is 5.1% higher
(mean) and 0% lower (median)
• 9% of men and 1.5% of women received
bonus pay
The mean reflects the fact that the top
three highest paid employees are male.
The median reflects that there are
proportionally more females in the upper
middle quartile and proportionally less
females in the lower quartile.
25
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Executive Board
Andrew Wass
CEO
Chris Scott
CFO
Gareth Bevan
CCO
Operational Board
Tom Walder
Chief Technical Officer
Joined 2017
Jonathan Meager
E-commerce Director
Joined 2007
Robert Newport
Operations Director
Joined 2016
Charlotte Mahon
HR Director
Joined 2015
Senior Management
Swedish Commercial
Manager
Joined 2016
German Commercial
Manager
Joined 2017
Head of UK Buying
Joined 2018
Head of Digital
Marketing
Joined 2015
Swedish Logistics
Manager
Joined 2016
German Logistics
Manager
Joined 2016
UK Logistics Manager
Joined 2005
Head of Customer
Service
Joined 2005
StrategicReportCorporateGovernanceFinancialStatements 26
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Risks and uncertainties
The Board recognises that certain
risks and uncertainties can have
significant rewards for the prospects
of the business, and as such require
careful identification, evaluation
and management.
The Board takes overall responsibility
for risk management, with a focus on
evaluating the nature and extent of
significant risks, and formulating mitigations
around the risks required to be taken in
order to deliver the strategic objectives.
The Audit Committee has responsibility
for overseeing the effectiveness of
appropriate risk management processes
and internal control systems. More
detail of these processes is set out in
the Corporate governance section.
This section focuses on the principal
risks and uncertainties to our business
model that could impact on our
achieving our strategic objectives,
and our future performance.
FOR MORE INFORMATION
VISIT OUR WEBSITE
Operations
Risk
Description
Mitigation
UK’s decision to
leave the EU/‘Brexit’
Rapid
growth
Uncertainty in the UK and European economies
following the UK’s EU Referendum vote (Brexit)
could potentially impact on consumer
confidence and the ability of the Group to
maintain sales growth.
Governments could influence cross-border
controls, which could make it more difficult for us
to move products across borders to customers
and/or between our distribution centres.
European competitors may gain an advantage
over the Group if higher duties are imposed on
UK imports into the EU, or currencies move
adversely to the Group.
Controls on the freedom of movement of people
may impact the availability of European workers
in the UK.
The Group’s business has grown rapidly.
Operations and practices adopted at earlier stages
of the Group’s development may be inappropriate
for a business of an increased size and scale.
The Group may need to expand and enhance its
infrastructure and technology and improve its
operational and financial systems and procedures
and controls in order to be able to match its
growth. The Group may face challenges in
matching the pace of its expansion with
corresponding improvements and enhancements
in its systems, controls and procedures. The
Group will also need to expand, train and manage
its growing employee base.
Developments continue to be monitored
subsequent to the UK’s decision to leave the EU.
The Group would look to minimise cross-border
activity with our European operations fulfilling a
higher proportion of European demand, and our
UK operation focusing on the UK. The Group has
trading subsidiaries in Sweden and Germany
and, if and when appropriate, operational
arrangements could be adapted and these
entities become standalone businesses.
The Group has established teams and significant
capacity in its Swedish and German sites.
Competitor activity and offerings are reviewed
regularly to remain abreast of market developments
and identify competitive advantages.
Fluctuating exchange rates are regularly reviewed
and operational and financial mitigations
considered. Buying products and incurring
proportionally more other costs in Euros and
Krona partly mitigates the risk.
As detailed in the Corporate governance section,
the Plc and Operations Boards actively monitor
and respond, so as to maintain systems and
practices that are appropriate for the operations
and scale of the Group.
The Group continues to recruit into key
management positions.
The Group has again expanded its Finance
function, providing greater capacity and better
segregation of duties, further improving the
control environment.
27
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Operations continued
Risk
Description
Mitigation
New
jurisdictions
The Board will routinely direct Management to
seek professional input into any such major
developments.
The Group has local subsidiaries in Sweden and
Germany and has recruited local management
familiar with local laws and regulations.
Advances into Europe will continue to be in a
measured and capital efficient manner.
The Group’s expansion into new jurisdictions may
not be successful. Further expansion into markets
outside the UK would expose the Group to a variety
of risks, including different regulatory requirements,
complications with staffing and managing foreign
operations, variations in consumer behaviour,
fluctuations in currency exchange rates, potential
political and economic instability, potential
difficulties in enforcing contracts and intellectual
property rights, the potential for higher rates of
fraud and adverse tax consequences.
The Directors have limited experience of the legal
and regulatory regimes of jurisdictions outside
the UK and their consequences for the Group’s
business.
In addition, the Group will likely have to compete in
new jurisdictions with companies already operating
in the relevant market, which may understand the
local market better than the Group.
To the extent that the Group overestimates the
potential of a new geographic market, incorrectly
judges the timing of the development of a new
geographic market or fails to anticipate the
differences between a new geographic market and
the UK, the Group’s attempt to expand into new
geographic markets may be unsuccessful.
Technological
changes
Unless the Group is able to respond to
technological advances, it may not be able to
effectively build and/or maintain a competitive
advantage.
Distribution
centres
Warehousing,
onward distribution
to customers and
logistics
The Group operates three distribution centres and
as such is not completely reliant on a single site.
Any disruption to a distribution centre’s efficient
operation may have an effect on the Group’s
business.
Distribution centres may suffer prolonged power
or equipment failures, failures in their information
technology systems or networks, or damage
from fires, floods, other disasters or other
unforeseen events which may not be covered by,
or may exceed, the Group’s insurance coverage.
The supply of product to customers in a timely
manner is critical to the success of the Group.
The Group therefore operates its own
warehouses, run by senior management that
have significant experience in the sector.
Any rapid increase in revenue may require further
expansion of current warehouse space.
There is a risk that the Group may experience
interruptions to the operation of these logistics
and distribution networks that could prevent the
timely or proper delivery of products, which
could damage the Group’s reputation, deter
customers, prospective customers, suppliers and/
or prospective suppliers.
The Group continues to allocate a significant
annual budget to software development – £2.7m in
FY19 – and has plans to increase this spend in FY20.
Software development is in-house, enabling the
Group to assert greater control and drive cost
efficiency to help mitigate such risks.
The Group operates from three locations,
mitigating the risk of over-dependence on any
single location.
The Group, in conjunction with its insurance
broker, ensures sufficient and appropriate
insurance cover is in place. This includes Business
Interruption cover.
The Group has a formal disaster recovery plan in
place that details actions in specific situations.
There are regular reviews of capacity across
locations and follow-up plans developed that the
Board believes should allow the Group to fulfil an
increasing number of orders from the existing sites
and identify step-changes for consideration as and
when required.
The Group operates from three Distribution
Centres, each with their own local logistics
relationships, thereby reducing the dependency on
any single site or local network.
The Group maintains multiple delivery service
providers to reduce the dependency on any single
provider, and tracks service level agreements on an
ongoing basis. This provides system flexibility to
switch providers within a matter of days if required.
In October 2018 the Group relocated its Swedish
operation to a larger, new-build unit.
StrategicReportCorporateGovernanceFinancialStatements 28
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Risks and uncertainties continued
Operations continued
Risk
Description
Mitigation
Change to search
engines’ algorithms
Data security and IT
reliability
Changes to search engines’ algorithms or terms
of service could cause the Group’s websites to
be excluded from or ranked lower in natural
search results.
Search engines frequently modify their algorithms
and ranking criteria to prevent their natural listings
from being manipulated, which could impair the
Group’s ‘Search Engine Optimisation’ (‘SEO’)
activities. If the Group is unable to recognise and
adapt quickly to such modifications in search engine
algorithms, the Group could suffer a significant
decrease in traffic and revenue.
The Group relies heavily on its IT infrastructure
and e-commerce system, and in particular its
websites. If any one or more of its websites were
to fail or be damaged, this could impact the
Group’s ability to trade.
If the Group’s IT and data security systems do
not function properly there could be website
slowdown or unavailability, loss of data, a failure
by the Group to protect the confidential
information of its customers from security
breaches, delays in transaction processing, or
the inability to accept and fulfil customer orders,
which could affect the Group’s business.
The Group will continue to operate search engine
optimisation activities that adhere to search
engine guidelines.
The Group seeks to mitigate this risk by investing
in IT infrastructure including robust cloud-based
backup systems.
The Group has a disaster recovery plan in place
which has been designed to minimise the impact
of data loss or corruption from hardware failure,
human error, hacking or malware.
Brand and Proposition
Risk
Description
Mitigation
Market recognition
Rigorous monitoring of customer feedback helps
ensure issues are identified and rectified on a
timely basis.
Own-brand products are carefully selected and
rigorously tested prior to initial order.
Developing and maintaining the reputation of, and
value associated with, the Group’s brands is of
central importance to the success of the Group.
Brand identity is a critical factor in retaining existing
and attracting new customers. The Group is reliant
on its natural search result rankings and paid
advertising as it seeks to build market share and
attract new customers.
Any failure by the Group to offer high-quality
products across a range of instruments,
manufacturers and price points, excellent
customer service and efficient and reliable delivery
could damage its reputation and brands and could
result in the loss of customer confidence and a
reduction in purchases.
Unfavourable publicity concerning the Group
could damage the Group’s brands and its business.
If the Group fails to maintain its brands or if
excessive expenses are incurred in this effort,
the Group’s business may be affected.
Competition
The UK and European retail market for musical
instruments and music equipment is competitive.
A number of competitors may have financial
resources greater than those of the Group.
Both Amazon and eBay sell musical instruments
and music equipment.
The Group has a track record of successfully
competing on a wide range of factors, including
quality and range of products, price, product
availability, product information, convenience,
delivery options and service.
29
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Resources and Relationships
Risk
Description
Mitigation
Supply and sale of
third-party branded
products
Whilst sales of third-party branded products
accounted for approximately 70% of the Group’s
turnover in FY19 (FY18: 70%), the Directors do not
consider that the Group is significantly reliant on
any one or more major brand/brand owner.
The Directors believe that the relative size of the
Group, its purchase volumes and the strength of
its relationship with the brand owners, built over a
prolonged period in many cases, make it unlikely
that any such arrangements would be terminated.
The Group purchases products from a number
of large global musical instrument and music
equipment brand owners, and the Group’s business
depends on its ability to source a range of products
from well-recognised brands on commercially
reasonable terms.
The relationships between the Group and the
third-party brand owners are generally based on
annual contracts that the Group seeks to renew
each year. The third-party brand owners may cease
selling products to the Group on terms acceptable
to it, fail to deliver sufficient quantities of products
in a timely manner, terminate their relationship
with the Group and enter into agreements with
the Group’s competitors, or experience raw material
or labour shortages or increases in raw material or
labour costs. Any disruption to the availability or
supply of products to the Group or any deterioration
to the terms on which products are supplied to the
Group could affect its business.
Reliance on
sub-contract
manufacturers
The Group sub-contracts manufacture of its
Own-brand musical instruments and equipment
to independent third-party businesses in
South-East Asia. Any disruption to supply or issues
such as poor product quality could have an
adverse impact on the Group’s reputation.
The impact of any issues arising with sub-
contractors’ products is exacerbated by the lead
times involved (12-16 weeks).
The Group has been successfully importing for
over 16 years and has relationships with over 30
manufacturers providing re-sourcing options.
The Board believes that the Group has robust
take-on and ongoing monitoring procedures
covering areas such as quality control and delivery
performance for new and existing manufacturers
that the Group seeks to adhere to rigidly.
Dependence on key
personnel
The loss of any key individual or the inability to
attract appropriate personnel could impact upon
the Group’s future performance.
Should the Group fail to retain or attract suitably
qualified and experienced personnel, it may not be
able to compete successfully.
The Senior Management team is compensated
through a combination of market-rate salary and
longer-term share-based incentives to align their
remuneration with the continued success of
the Group.
The Board continues to recruit into key
management positions as and when positions
are identified.
An Operational Board meets on a regular basis to
focus on all trading and commercial matters.
Key man insurance is in place for Andrew Wass,
Gareth Bevan and Chris Scott.
The Strategic Report on pages 1-29 is approved by the Board of Directors and signed on behalf of the Board.
Andrew Wass
Director
2 August 2019
Chris Scott
Director
2 August 2019
StrategicReportCorporateGovernanceFinancialStatements 30
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Corporate governance report
Chairman’s introduction
It is the Board’s responsibility to ensure that Gear4music is
managed for the long-term benefit of all shareholders. A corporate
governance framework that is effective whilst dynamic is one of the
foundations of a sustainable growth strategy and identifying,
evaluating and managing risks and opportunities will underpin
long-term value creation.
In the period the Directors chose to apply the Quoted Companies
Alliance Corporate Governance Code (the ‘QCA Code’), the latest
version of which was developed by the QCA in consultation with
a working group comprising leading individuals from across the
small and mid-size quoted company ecosystem, as a pragmatic
and practical corporate governance code relevant to AIM
companies. The QCA Code is a proportionate, principles-based
approach constructed around ten broad principles with
accompanying guidance, and this Statement outlines how the
Group operates in each of these key areas.
By following the QCA Code, my Board colleagues and I seek to
ensure that the Group operates efficiently and effectively and
communicates well, to promote confidence and trust in the
Group’s Board and management. The Board aims to balance the
interests and expectations of the Group’s many shareholders and
stakeholders by observing a transparent set of rules, practices and
processes. I believe that by adhering to this clear set of guidelines,
the Group is well placed to deliver medium and long-term success.
Ken Ford
Chairman and Non-Executive Director
The Board of Directors and Committees of the Board
of Directors
The Board, which is headed by the Chairman, comprises five
Directors, of which three are Executive and two are Non-Executive,
providing a broad range of relevant skills and experiences. The
Board considers Ken Ford and Dean Murray to be ‘independent’
Non-Executives under the criteria identified in the Code. Directors’
profiles are detailed on page 34.
The Board met regularly throughout the year with ad hoc meetings
held when required.
The Role of the Board
The role of the Board is to provide leadership to the Group and to
ensure the obligations of being a public company are adhered to.
The Board bears collective responsibility for delivering ongoing
success through the development of appropriate strategies that
are aligned to the Group’s objectives, and deliverable with due
consideration of risk and the resources available. The Board is also
responsible for ensuring that a framework of effective controls is
in place.
The Group is controlled by the Board of Directors. The Board is
headed by the Chairman, comprises five Directors, of which three
are Executive and two are Non-Executive, meeting the QCA Code’s
guidance that a Board should have at least two independent
Non-Executive Directors (‘NEDs’). It is recognised that the CEO,
being a major shareholder, risks individual dominance of the Board
but the Board’s view is that the independent NEDs and committees
mitigate this risk.
The Board is satisfied that the five Directors collectively provide
a broad range of relevant skills and experiences, and that the
composition strikes a good balance between independence and
knowledge of the business, to enable it to effectively discharge
its duties and responsibilities. At an appropriate stage in the
development of the business, the Board commits to appoint
another a third Non-Executive Director to match the number of
independent Non-Executives to the number of Executives, and
gender balance will be a key criterion in this appointment.
The division of responsibilities between the Chairman and the
Chief Executive Officer is clearly defined. The Chairman is
responsible for ensuring the effectiveness of the Board and setting
its agenda. The Chairman is not involved in the day-to-day running
of the business. The Chief Executive Officer has direct charge of
the Group on a day-to-day basis, and the Executive team has
collective responsibility for the implementation of the Group’s
strategies and is accountable to the Board for the financial and
operational performance of the Group.
There are certain matters that are reserved for the Board’s
consideration and these include, but are not limited to, matters
of strategy, key commercial developments, risk management,
the consideration and approval of budgets, significant capital
expenditure and recruitment, acquisitions and disposals, and the
approval of financial statements.
The formal Board agenda includes an Executive report detailing the
commercial, operational and financial performance of the Group.
Further to formal Board meetings, the Board receives weekly key
trend information covering all trading aspects of the business.
The Board determines the fees paid to Non-Executive Directors.
A new Director, on appointment, is briefed on the activities of the
Group. Professional induction training is also given as appropriate.
The Chairman briefs Non-Executive Directors on issues arising
at Board meetings, if required, and Non-Executive Directors have
access to the Chairman at any time. Ongoing training is provided as
needed. Directors are continually updated on the Group’s business
and on insurance and on issues covering pensions, social, ethical,
environmental and health and safety by means of Board reports.
In the furtherance of his duties or in relation to acts carried out by
the Board or the Group, each Director has been informed that he
is entitled to seek independent professional advice at the expense
of the Group. The Group maintains appropriate cover under a
Directors and Officers insurance policy in the event of legal action
being taken against any Director.
The performance of the Board is evaluated informally on an
ongoing basis with reference to all aspects of its operation
including, but not limited to, the appropriateness of its skill level,
the way its meetings are conducted and administered (including
the content of those meetings), the effectiveness of the various
committees, whether Corporate governance issues are handled
in a satisfactory manner, and whether there is a clear strategy
and objectives.
Each Director is appraised through the normal appraisal process.
The Chief Executive Officer is appraised by the Chairman, the
Executive Board members by the Chief Executive Officer, and the
Non-Executive Board members by the Chairman. Each Director
has access to the services of the Company Secretary if required.
31
Gear4music (Holdings) plc
Annual Report and Accounts 2019
The Non-Executive Directors are considered by the Board to
be independent of management and are free to exercise
independence of judgement. They receive no other remuneration
from the Group other than the Directors’ fees and their
shareholdings as disclosed.
The Board receives copies of all articles relating to the Group that
are published in the financial press, via its public relations advisers.
The Annual Report and Accounts is published on the Company’s
investor website and can be accessed by shareholders.
The Board is supported by and receives recommendations from
two committees – an Audit Committee and a Remuneration
Committee.
The table below shows the number of Board meetings and Audit
Committee and Remuneration Committee meetings held in the
period from 1 March 2018 to the date of approval of the Annual
Report and Accounts. The table also show the attendance of
each Director.
Re-election
At each Annual General Meeting, one-third (or whole number less
than one-third) of the Directors retires by rotation, and in July 2018
this was Andrew Wass and Dean Murray.
In addition, Directors are subject to re-election at the Annual
General Meeting following their appointment.
Shareholder communications
The Group seeks to maintain a regular dialogue with both existing
and potential investors to ensure that its strategy, business model
and performance are clearly understood. Understanding what
investors and analysts think, and helping these audiences
understand our business, is an important part of taking our
business forward.
The Chief Executive Officer and Chief Financial Officer regularly
meet with investors and analysts to provide them with updates on
the Group’s business and to obtain feedback regarding the market’s
expectations of the Group. The Group’s NOMAD and public
relations adviser provide written feedback after these presentations
and meetings, and this feedback is shared with the Board.
The Group invites all shareholders to attend its Annual General
Meeting where they can meet and question the Directors, and
express ideas or concerns. The Notice of the Meeting is sent to
shareholders at least 21 days before the meeting and the chairs of
the Board and all committees, together with all other Directors,
routinely attend the AGM and are available to answer questions
raised by shareholders.
Where voting decisions are not in line with the Group’s
expectations, the Board will engage with those shareholders to
understand and address any issues.
Internal controls
The Board is responsible for the Group’s system of internal controls
and for reviewing its effectiveness. Such a system is designed to
manage rather than eliminate the risk of failure to achieve business
objectives and can only provide reasonable and not absolute
assurance against material misstatement or loss.
The Group highlights potential financial and non-financial
risks which may impact on the business as part of the monthly
management reporting procedures. The Board receives these
monthly management reports and monitors the position at
Board meetings.
An Operational Board comprising the three Executive Directors and
the three further Directors of the trading subsidiary, meets regularly
to analyse and discuss operational and commercial matters, and
identifies any material matters to escalate to the Plc Board. The
Operational Board met seven times in the period.
The Board confirms that there are ongoing processes for
identifying, evaluating and mitigating the significant risks faced by
the Group. The processes have been in place from 1 March 2018
to the date of approval of the Annual Report and Accounts and are
consistent with the guidance for Directors on internal control
issued by the Turnbull Committee.
The Group’s internal financial control and monitoring procedures
include:
• clear responsibility on the part of line and financial management
for the maintenance of good financial controls and the
production of accurate and timely financial management
information;
the control of key financial risks through appropriate
authorisation levels and segregation of accounting duties;
• a comprehensive budgeting process completed once a year
•
that is reviewed and approved by the Plc Board;
• detailed monthly reporting of trading results including detailed
profit and loss accounts, balance sheets and cash flows, with
supporting variance analysis;
reporting on any non-compliance with internal financial
controls and procedures; and
review of reports issued by the external auditor.
•
•
The Audit Committee, on behalf of the Board, reviews reports
from the external auditor together with management’s response
regarding proposed actions. In this manner they have reviewed
the effectiveness of the system of internal controls for the period
covered by the accounts.
Director
Ken Ford
Andrew Wass
Chris Scott
Gareth Bevan
Dean Murray
Role
Non-Executive Chairman
CEO
CFO
CCO
NED
Board
meetings
13/13
13/13
13/13
11/13
13/13
Audit
Committee
meetings
Remuneration
Committee
meetings
3/3
3/3
3/3
2/2
2/2
2/2
StrategicReportCorporateGovernanceFinancialStatements 32
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Corporate governance report continued
Audit Committee report
Overview
The Audit Committee (‘Committee’) is established by and is
responsible to the Board. It has formally delegated duties and
responsibilities and has written terms of reference. Its main
responsibilities are:
•
to monitor and be satisfied with the truth and fairness of the
Group’s financial statements before submission to the Board for
approval, ensuring their compliance with the appropriate
accounting standards, the law, and AIM Rules;
to monitor and review the effectiveness of the Group’s system
of internal controls;
to make recommendations to the Board in relation to the
appointment of the external auditor and their remuneration,
following appointment by the shareholders in general meeting,
and to review and be satisfied with the auditor’s independence,
objectivity and effectiveness on an ongoing basis; and
to implement the policy relating to any non-audit services
performed by the external auditor.
•
•
•
Membership of the Audit Committee
Dean Murray is the Chairperson of the Committee and the other
member is Ken Ford, both of whom are Non-Executive Directors
and have wide experience in regulatory and risk issues.
Role and operation of the Audit Committee
The Committee is authorised by the Board to seek and obtain any
information it requires from any officer or employee of the Group,
and to obtain external legal or other independent professional
advice as is deemed necessary by it.
Meetings of the Committee are held at least twice per year and
the auditor is invited to these meetings. The Committee meets
early in the financial period to discuss and agree the scope for
the forthcoming external audit, and again to review the findings of
the external audit in relation to internal control and the financial
statements. At this meeting, the Committee carries out a full review
of the period-end financial statements and of the audit, using as a
basis the Report to the Audit Committee prepared by the external
auditor and taking into account any significant accounting policies,
any changes to them and any significant estimates or judgements.
Questions are asked of management of any significant or unusual
transactions where the accounting treatment could be open to
different interpretations.
The Committee receives reports from management on the
effectiveness of the system of internal controls. It also receives from
the external auditor a report of matters arising during the course
of the audit which the auditor deems to be of significance for the
Committee’s attention. The statement on internal controls and the
management of risk, which is included in the Annual Report, is
approved by the Committee.
The 1998 Public Interest Disclosure Act (‘the Act’) aims to promote
greater openness in the workplace and ensures ‘whistle blowers’
are protected. The Group maintains a policy in accordance with the
Act which allows employees to raise concerns on a confidential
basis if they have reasonable grounds in believing that there is
serious malpractice within the Group. The policy is designed to
deal with concerns, which must be raised without malice and in
good faith, in relation to specific issues which are in the public
interest and which fall outside the scope of other Group policies
and procedures. There is a specific complaints procedure laid
down and action will be taken in those cases where the complaint
is shown to be justified. The individual making the disclosure will be
informed of what action is to be taken and a formal written record
will be kept of each stage of the procedure.
The external auditor is required to give the Committee information
about policies and processes for maintaining their independence
and compliance regarding the rotation of audit partners and staff.
The Committee considers all relationships between the external
auditor and the Group to ensure that they do not compromise the
auditor’s judgement or independence, particularly with the
provision of non-audit services.
External auditor and non-audit services
Fees in relation to services provided by the external auditor in FY19
and FY18 were:
Audit fee
Tax fees
Total fees
FY19
£000
75
–
75
FY18
£000
50
17
67
The Committee is satisfied with the independence and objectivity
of the auditors, KPMG LLP.
Remuneration Committee report
As an AIM-listed Company, Gear4music (Holdings) plc is not
required to comply with Schedule 8 to the Large and Medium-sized
Companies and Groups (Accounts and Reports) Regulations 2008.
Membership of the Remuneration Committee
During the year, the Remuneration Committee comprised Ken
Ford and Dean Murray. They have no personal financial interest in
the Group except for fees in relation to their holding of office and
their shareholding as disclosed, with no potential conflict of
interests and no day-to-day involvement in the Group.
The Remuneration Committee reviews the performance of the
Executive Directors and makes recommendations to the Board on
matters relating to remuneration, terms of service, granting of share
options and other equity incentives.
The Remuneration Committee meets at least twice a year.
Remuneration policy
The remuneration policy is designed to attract, retain and motivate
high calibre executives to ensure the Group is managed successfully
to the benefit of shareholders.
Share ownership is encouraged and all the Executives are interested
in the share capital.
In setting remuneration levels, the Committee takes into
consideration remuneration levels and practices in other
companies of a similar size and in similar sectors.
Non-Executive Directors
Remuneration of the Non-Executive Directors is determined by
the Executive Directors. Non-Executive Directors are not entitled
to pensions beyond the required statutory minimums, annual
bonuses or employee benefits, nor are they entitled to participate
in share option arrangements relating to the Company’s shares.
Each of the Non-Executive Directors has a letter of appointment
noting their appointment may be terminated with one month’s
notice.
Their fees are reviewed annually and set in line with prevailing
market conditions and at a level which will attract and retain
individuals with the necessary experience and expertise to make
a significant contribution to the Group’s affairs.
33
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Directors’ interests
Details of the Directors’ shareholdings are included in the Directors’
report on page 36.
•
the initial subscription cost of the new LTIP paid by bonus, with
Andrew Wass, Chris Scott and Gareth Bevan receiving bonuses
of £7,217, £7,217 and £8,350 respectively.
Directors’ remuneration
The normal remuneration arrangements for Executive Directors
consist of basic salary and private medical insurance. The CEO is
also entitled to a car allowance and a pension allowance. Four
Directors, including the CEO, are enrolled in the Group workplace
pension scheme.
All Executive Directors have service agreements terminable by the
Company with six months’ notice.
The remuneration of each of the Directors for the 13-month period
ended 31 March 2019 is set out in the table below and includes:
in accordance with the EMI scheme rules, Chris Scott and
•
Gareth Bevan each received a bonus of £24,553 to cover the
income tax, national insurance and exercise price of the EMI
option exercise;
in accordance with the Director cash plan rules, Andrew Wass
received an award of £72,041, being equivalent to the value of
the awards made to Chris Scott and Gareth Bevan under the EMI
scheme, and this was paid as a pension contribution; and
•
These values are included within the audited accounts:
Salary
£000
Benefits
£000
Pension
£000
Executive
Andrew Wass
Chris Scott
Gareth Bevan
Non-Executive
Ken Ford
Dean Murray
Total
175
207
196
38
35
651
2
1
2
–
–
5
75
3
3
–
–
81
Total
FY19
(13m)
£000
252
211
201
38
35
737
Total
FY18
(12m)
£000
200
151
135
34
32
552
On 1 May 2019, life cover policies were put in place in relation to
Gareth Bevan and Chris Scott, with their families as the
beneficiaries.
Directors’ share options
Executive
Andrew Wass
Chris Scott
Gareth Bevan
Scheme
Director Cash Plan 2016
Director Cash Plan 2017
LTIP
EMI
CSOP
LTIP
EMI
CSOP
LTIP
EMI and Director Cash Plan
An EMI share incentive plan for Chris Scott and Gareth Bevan, and
an equivalent discretionary cash bonus plan for Andrew Wass,
vested in full in June 2018.
Chris Scott received a bonus of £24,553 and Gareth Bevan a bonus
of £25,443 to cover the income tax, national insurance and exercise
price of the award. Chris Scott and Gareth Bevan both received
9,978 shares valued at £71,482 at that time. Andrew Wass exercised
his entitlement under the Director Cash Plan to an equivalent award
of £72,041, and this was settled in cash.
CSOP
There is a CSOP share incentive plan in place for Chris Scott and
Gareth Bevan and equivalent discretionary cash bonus plan for
Andrew Wass. Subject to continued employment and meeting
performance conditions, these awards are scheduled to vest on
31 May 2020.
1 March
2018
–
–
–
9,978
3,606
–
9,978
3,606
–
Awarded
during
period
Vested and
exercised during
the period
–
–
45,000
–
–
45,000
–
–
52,500
Yes
–
–
9,978
–
–
9,978
–
–
31 March
2019
–
–
45,000
–
3,606
45,000
–
3,606
52,500
Date
granted
May 2016
June 2017
Nov 2018
May 2016
June 2017
Nov 2018
May 2016
June 2017
Nov 2018
LTIP
In FY19 a new long-term incentive plan involving Andrew Wass,
Chris Scott and Gareth Bevan was put in place and involved the
issue of 210,000 ‘B’ Ordinary shares in Gear4music Limited, a
subsidiary of the Company. These ‘B’ shares vest from 2021-26
and can be exchanged on a one-for-one basis for new Ordinary
Company shares subject to meeting specified criteria, including
reaching a specified target share price for 80% of the award, and
pre-determined revenue and profitability targets for 20%.
The initial subscription cost was covered by way of bonus and
Andrew Wass, Chris Scott and Gareth Bevan received bonuses of
£7,217, £7,217 and £8,350 respectively.
StrategicReportCorporateGovernanceFinancialStatements 34
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Board of Directors
Christopher (Chris) Scott
Chief Financial Officer and
Company Secretary
Age 43
Before joining Gear4music in October
2012, Chris was the Finance Director at
Officers Club, overseeing the sale of the
business to Blue Inc. Chris joined KPMG LLP
in Leeds in 1997, qualified as a Chartered
Accountant in 2000 and went on to
spend a further nine years in their advisory
practice, including a year on secondment
at Barclays Bank. He holds an Executive
Masters in Business Administration.
Eric (Ken) Ford
Chairman and Non-Executive Director
Age 69
Andrew Wass
Chief Executive Officer
Age 48
Andrew has over 20 years’ business
management experience, having founded
Gear4music Limited (then called Soundpro
Limited) in 1995. In 1998 he began selling
IT systems for the audio recording market
before launching ‘Gear4music’ in 2003.
Since then Andrew has retained overall
responsibility for driving the Group’s growth.
Between 1992 and 1998, Andrew set
up and ran his own recording studio
business, having studied Popular Music
and Sound Recording at the University
of Salford. Andrew is a keen pianist.
Ken was previously Chief Executive of
Teather & Greenwood, the investment
bank, becoming Deputy Chairman and
Chairman of Corporate Finance. Ken brings
a strong understanding of shareholder
value, strategic planning and corporate
transactions. Ken is a former Chairman of
the Quoted Companies Alliance (QCA) and
member of the EU Advisory Committee
to the Corporation of London. Fellow
of the Chartered Securities Institute.
Ken’s previous directorships include
Aberdeen Asset Management and Morgan
Grenfell, and he was recently Chairman
of AIM-quoted companies System1
Group plc and Nakama Group plc.
Ken is currently Chairman of AIM-quoted
company Scientific Digital Imaging plc.
Ken is chairman of the Remuneration
Committee and a member of
the Audit Committee.
Gareth Bevan
Chief Commercial Officer
Age 41
Dean Murray
Non-Executive Director
Age 56
Gareth joined Gear4music in July
2012. He was previously at DV247, the
largest UK-based musical equipment
retailer at that time, where he was
responsible for purchasing, sales and
marketing. He has 20 years’ experience
in musical equipment retail.
Dean joined the Board of Gear4music
in March 2012 as a Non-Executive
Director and originally as Chairman.
Dean is a Chartered Accountant.
Dean’s previous roles include former
Chief Financial Officer and Chief
Operating Officer of Myriad Childrenswear
Group, and he was recently Chairman
of French Connection Group plc
and the Neville Johnson Group.
Dean is currently Chairman of BHID
Group Limited, Construction Materials
Online Limited, Yumi International Limited,
and Weird Fish Holdings Limited, and
is a Director of M.S. Team Limited.
Dean is chairman of the Audit
Committee and a member of the
Remuneration Committee.
35
Gear4music (Holdings) plc
Annual Report and Accounts 2019
StrategicReportCorporateGovernanceFinancialStatements 36
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Directors’ report
The Directors present their report and the audited financial
statements for the 13-month period ended 31 March 2019.
Principal activity
The principal activity of the Group is the retail of musical
instruments and equipment, through 20 Gear4music branded
websites in 15 languages, and showrooms in York, Sweden and
Germany. It retails own and other branded products.
Business review and future developments
An overview of the Group’s operations is included in the Strategic
report section of the Annual Report and Accounts on pages 1 to 29.
This report includes sections on strategy and markets and
considers key risks and key performance indicators.
A review of the Group’s current operations and future developments
is covered in the Chief Executive Officer’s report and Financial
review.
Financial results
Details of the Group’s financial results and position are set out in the
Consolidated Statement of Profit and Loss and Other Comprehensive
Income, other primary statements and notes to the accounts on
pages 45 to 81.
Dividends
The Directors do not recommend the payment of a dividend
(FY18: nil).
Going concern
After making appropriate enquiries, the Directors have confidence
that the Group has adequate resources to continue in operational
existence for the foreseeable future. For this reason, they continue
to adopt the going concern basis in preparing the Annual Report
and Accounts. This is described in more detail in Note 1.
Directors
The Directors who served on the Board and on Board committees
during the year are set out on page 25 and pages 30-34. One-third
of the Directors are required to retire at the Annual General Meeting
and can offer themselves for re-election.
Information on Directors’ remuneration and share option rights is
given in the Remuneration Committee report on pages 32-33.
Significant shareholders
The Company is informed that at 25 June 2019, individual registered
shareholdings of more than 3% of the Company’s issued share
capital were as follows:
Number
of shares
% of issued
share capital
Andrew Wass
AXA Investment Mgrs
BlackRock Investment Ltd
TB Amati Investment Funds
Octopus Investment Ltd
Cannaccord Genuity Group Inc
7,161,993
2,181,288
1,994,423
1,269,789
841,039
799,968
34.2%
10.4%
9.5%
6.1%
4.0%
3.8%
Directors’ shareholdings
The beneficial interests of the Directors in the share capital of the
Company at 28 February 2018 and 31 March 2019 were as follows:
28 February 2018
Number of
shares
31 March 2019
Number of
shares
31 March 2019
% of issued
share capital
Executive Directors
Andrew Wass
Gareth Bevan
Chris Scott
Non-Executive Directors
Dean Murray
Ken Ford
7,161,993
100,382
90,462
7,161,993
114,760
104,840
199,520
20,000
197,520
40,000
34.2%
0.5%
0.5%
0.9%
0.2%
In June 2018 both Chris Scott and Gareth Bevan exercised share
options over 9,978 shares under the Director EMI plan, and retain
options over 2,288 shares each under a CSOP scheme. Andrew
Wass exercised his entitlement to a comparable cash-settled award
of £72,041, and retains a cash-settled option to an equivalent value
of the Director CSOP awards. All options are subject to the same
performance conditions, including still being in the employment of
the Group.
On 13 November 2018 a new long-term incentive plan was
announced involving Andrew Wass, Chris Scott and Gareth Bevan
and three Directors of Gear4music Limited. The plan involved the
issue of 210,000 ‘B’ Ordinary shares in Gear4music Limited that vest
from 2021-26 and can be exchanged on a one-for-one basis for
new Ordinary Company shares subject to meeting specified
criteria, including reaching a specified target share price for 80% of
the award, and pre-determined revenue and profitability targets
for 20%.
All share option plans are outlined in the Remuneration Committee
report on page 33, and on pages 69-72.
The middle market price of the Company’s Ordinary shares on
31 March 2019 was 217.5 pence (28 February 2018: 651.0 pence),
and the range in the year was 170.0 pence to 738.0 pence, with an
average price of 530.7 pence.
Research and development
During the period the Group capitalised £2.7m (FY18: £1.7m) of
software development costs relating to the in-house e-commerce
software platform. Amortisation of the software platform totalled
£1.2m in the period (FY18: £0.8m).
Financial instruments
The Group’s policy and exposure to financial instruments is set out
in Note 17.
Qualifying third-party indemnity
The Company has provided an indemnity for the benefit of its
current Directors which is a qualifying third-party indemnity
provision for the purpose of the Companies Act 2006.
37
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Employee involvement
It is the Group’s policy to involve employees in its progress,
development and performance. Applications for employment
by disabled persons are fully considered, bearing in mind the
respective aptitudes and abilities of the applicants concerned.
The Group is a committed equal opportunities employer and has
engaged employees with broad backgrounds and skills. It is the
policy of the Group that the training, career development and
promotion of a disabled person should, as far as possible, be
identical to that of a person who is fortunate enough not to suffer
from a disability. In the event of members of staff becoming
disabled, every effort is made to ensure that their employment
with the Group continues.
Donations
During the period ended 31 March 2019, the Group made donations
totalling £nil (FY18: £250).
Supplier payment policy and practice
The Group does not operate a standard code in respect of
payments to suppliers. The Group agrees terms of payment with
suppliers at the start of business and then makes payments in
accordance with contractual and other legal obligations.
The number of creditor days outstanding at 31 March 2019 was
27 days (28 February 2018: 28 days). This is a weighted average by
invoice value, with reference to actual invoice and payment dates.
Disclosure of information to the auditor
The Directors who held office at the date of approval of this
Directors’ report confirm that, so far as they are aware, there is no
relevant audit information of which the Company’s auditor is
unaware and each Director has taken all the steps that he or she
ought to have taken to make himself or herself aware of any
relevant audit information and to establish that the Company’s
auditor is aware of that information.
Auditor
A resolution for the reappointment of KPMG LLP as auditor of
the Company is to be proposed at the forthcoming Annual
General Meeting.
By order of the Board
Chris Scott
Chief Financial Officer
2 August 2019
Registered office: Holgate Park Drive, York, YO26 4GN
StrategicReportCorporateGovernanceFinancialStatements 38
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Statement of Directors’ responsibilities in respect of the
Annual Report and the Financial Statements
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the parent
Company’s transactions and disclose with reasonable accuracy at
any time the financial position of the parent Company and enable
them to ensure that its financial statements comply with the
Companies Act 2006. They are responsible for such internal
control as they determine is necessary to enable the preparation
of financial statements that are free from material misstatement,
whether due to fraud or error, and have general responsibility for
taking such steps as are reasonably open to them to safeguard the
assets of the Group and to prevent and detect fraud and other
irregularities.
Under applicable law and regulations, the Directors are also
responsible for preparing a Strategic report and a Directors’ report
that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity of
the corporate and financial information included on the Company’s
website. Legislation in the UK governing the preparation and
dissemination of financial statements may differ from legislation in
other jurisdictions.
The Directors are responsible for preparing the Annual Report and
the Group and parent Company financial statements in accordance
with applicable law and regulations.
Company law requires the Directors to prepare Group and parent
Company financial statements for each financial year. Under the
AIM Rules of the London Stock Exchange they are required to
prepare the Group financial statements in accordance with
International Financial Reporting Standards as adopted by the
European Union (‘IFRSs as adopted by the EU’) and applicable law
and they have elected to prepare the parent Company financial
statements in accordance with UK accounting standards and
applicable law (UK Generally Accepted Accounting Practice),
including FRS 102 The Financial Reporting Standard applicable in
the UK and Republic of Ireland.
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and parent Company and of
their profit or loss for that period. In preparing each of the Group
and parent Company financial statements, the Directors are
required to:
• select suitable accounting policies and then apply them
consistently;
• make judgements and estimates that are reasonable, relevant,
•
•
reliable and prudent;
for the Group financial statements, state whether they have
been prepared in accordance with IFRSs as adopted by the EU;
for the parent Company financial statements, state whether
applicable UK accounting standards have been followed,
subject to any material departures disclosed and explained in
the financial statements;
• assess the Group and parent Company’s ability to continue as a
going concern, disclosing, as applicable, matters related to
going concern; and
• use the going concern basis of accounting unless they either
intend to liquidate the Group or the parent Company or to cease
operations, or have no realistic alternative but to do so.
39
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Independent Auditor’s Report
To the members of Gear4music (Holdings) plc
1 Our opinion is unmodified
We have audited the financial statements of Gear4music (Holdings) plc (‘the Company’) for the 13-month period ended 31 March 2019
which comprise the Consolidated Statement of Profit and Loss and Other Comprehensive Income, Consolidated Statement of
Financial Position, Consolidated Statement of Changes in Equity, Consolidated Statement of Cash Flows, Company Balance Sheet,
Company Statement of Changes in Equity and the related notes, including the accounting policies in Note 1 to the Group financial
statements and Note 1 to the Company financial statements.
In our opinion:
•
the financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 31 March 2019
and of the Group’s loss for the 13-month period then ended;
the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as
adopted by the European Union;
the parent Company financial statements have been properly prepared in accordance with UK accounting standards, including FRS
102 The Financial Reporting Standard applicable in the UK and Republic of Ireland; 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
are described below. We have fulfilled our ethical responsibilities under, and are independent of the Group in accordance with, UK
ethical requirements including the FRC Ethical Standard as applied to listed entities. We believe that the audit evidence we have
obtained is a sufficient and appropriate basis for our opinion.
Overview
Materiality: Group financial statements as a whole £82,000 (2018: £104,800)
Coverage
Key audit matters
New
Recurring risks
4.85% of normalised profit before tax (2018: 5%)
100% (2018: 100%) of Group profit before tax
The impact of uncertainties due to the UK exiting
the European Union on our audit
Going concern
Revenue recognition – returns provision
Capitalisation of internal development costs
Recoverability of parent Company’s loan to subsidiary
vs 2018
p
p
tu
tu
tu
StrategicReportCorporateGovernanceFinancialStatements 40
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Independent Auditor’s Report continued
To the members of Gear4music (Holdings) plc
Key audit matters: including our assessment of risks of material misstatement
2
Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial
statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us,
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. We summarise below the key audit matters in arriving at our audit opinion above. 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 risk
Our response
The impact of uncertainties due
to the UK exiting the European
Union on our audit
Refer to page 26 (risks and
uncertainties).
Unprecedented levels of uncertainty
All audits assess and challenge the
reasonableness of estimates, in particular as
described in the capitalisation of internal
development costs, recoverability of parent
Company’s loan to subsidiary and related
disclosures and the appropriateness of the going
concern basis of preparation of the financial
statements (see below).
All of these depend on assessments of the future
economic environment and the Group’s future
prospects and performance.
Brexit is one of the most significant economic
events for the UK and at the date of this report its
effects are subject to unprecedented levels of
uncertainty of outcomes, with the full range of
possible effects unknown.
We developed a standardised firm-wide
approach to the consideration of the
uncertainties arising from Brexit in planning and
performing our audits.
Our procedures included:
• Our Brexit knowledge: We considered the
Directors’ assessment of Brexit-related sources
of risk for the Group’s business and financial
resources compared with our own
understanding of the risks. We considered the
Directors’ plans to take action to mitigate the
risks.
• Sensitivity analysis: When addressing the
capitalisation of internal development costs,
recoverability of parent Company’s loan to
subsidiary and other areas that depend on
forecasts, we compared the Directors’ analysis
to our assessment of the full range of
reasonably possible scenarios resulting from
Brexit uncertainty and, where forecast cash
flows are required to be discounted,
considered adjustments to discount rates for
the level of remaining uncertainty.
• Assessing transparency: As well as assessing
individual disclosures as part of our procedures
on capitalisation of internal development costs
and recoverability of parent Company’s loan to
subsidiary we considered all of the Brexit-
related disclosures together, including those in
the Strategic report, comparing the overall
picture against our understanding of the risks.
However, no audit should be expected to predict
the unknowable factors or all possible future
implications for a company and this is particularly
the case in relation to Brexit.
41
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Going concern
Note 1.3 on page 50 (financial
disclosures).
Revenue recognition –
returns provision
Note 1.15 (accounting policy)
and Note 22 (financial
disclosures).
The risk
Our response
Our procedures included:
• Funding assessment: Assessed the committed
level of financing available to the Group for at
least the next 12 months through consideration
of the facility agreement. We challenged the
Directors’ assumptions by considering our own
expectations based on our knowledge of the
entity and experience of the industry in which
it operates;
• Historical comparisons: Considered the
Group’s historical budgeting accuracy, by
assessing actual performance against budget;
• Sensitivity analysis: Considered sensitivities
over the level of available financial resources
indicated by the Group’s financial forecasts
taking account of reasonably possible (but not
unrealistic) adverse effects that could arise
from these risks individually and collectively;
and
• Assessing transparency: Assessed the
completeness and accuracy of the matters
covered in the going concern disclosure by
assessing the reasonableness of risks and
uncertainties specified by the disclosure
against our findings from our evaluation of the
Directors’ assessment of going concern.
Disclosure quality
The financial statements explain how the Board
has formed a judgement that it is appropriate to
adopt the going concern basis of preparation for
the Group and the parent Company.
That judgement is based on an evaluation of the
inherent risks to the Group’s and the parent
Company’s business model and how those risks
might affect the Group’s and the parent
Company’s financial resources or ability to
continue operations over a period of at least a
year from the date of approval of the financial
statements.
The risks most likely to adversely affect the
Group’s and the parent Company’s available
financial resources over this period were:
• the level of financing and the ability of the
Group to refinance the facility in 12 months’
time;
• meeting forecasts and managing the risk
presented by Brexit regarding access to
products and the risk of a sudden fall in
consumer confidence; and
• the achievability of mitigating actions the
Directors would take to improve the position
should these other risks materialise.
The risk for our audit was whether or not those
risks were such that they amounted to a material
uncertainty that may have cast significant doubt
about the ability to continue as a going concern.
Had they been such, then that fact would have
been required to have been disclosed.
Subjective estimate
The Group generates revenue through the sale of
goods through its websites.
Customers have the right to return the goods
within 30 days of delivery. Should customers
return any goods, the Group will refund the
associated revenue relating to the returned
goods. There is a risk that judgements made by
the Directors in calculating the level of provision
recorded at the financial year end for returns
could result in a material error in reported
revenues and profits.
The effect of these matters is that, as part of our
risk assessment, we determined that returns
provision has a high degree of estimation
uncertainty, with a potential range of reasonable
outcomes greater than our materiality for the
financial statements as a whole.
Our procedures included:
• Methodology implementation: Assessed the
reasonableness of the methodology used to
calculate the returns provision based on our
understanding of the business;
• Historical comparison: Assessed the key
assumption driving the calculation above,
being historical returns rates, against actual
returns as a proportion of sales made during
the 2018/19 financial year;
• Test of detail: Compared the value of actual
returns made in the 30-day returns period post
financial year end, relating to sales recognised
in the financial year against the provision made
by the Directors; and
• Assessing transparency: Considered the
adequacy of the Group’s disclosures about the
degree of subjectivity involved in determining
the financial year end returns provision.
StrategicReportCorporateGovernanceFinancialStatements 42
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Independent Auditor’s Report continued
To the members of Gear4music (Holdings) plc
Capitalisation of internal
development costs
(£2.7m; 2018: £1.7m)
Note 1.10 (accounting policy)
and Notes 9 and 22 (financial
disclosures).
Recoverability of parent
Company’s loan to subsidiary
(£10.5m; 2018: £10.7m)
Refer to Note 1.5 (accounting
policy) and Note 6 (financial
disclosures).
The risk
Our response
Accounting treatment
The Group invests heavily in the software
platform and capitalises the associated
development costs.
The costs that are being capitalised are principally
internal staff costs and there is a significant level
of judgement involved in assessing whether the
criteria set out in accounting standards for the
capitalisation of such costs have been met.
There is also judgement involved in determining
the appropriate useful economic life of the
software platform and the costs capitalised.
The two risk factors above combine to give a risk
over the ongoing carrying amount of the
software platform as the amount of the asset
continues to increase.
The effect of these matters is that, as part of our
risk assessment, we determined that carrying
amount of the software platform of £5.8m (2018:
£4.3m) has a high degree of estimation
uncertainty, with a potential range of reasonable
outcomes greater than our materiality for the
financial statements as a whole, and possibly
many times that amount.
Low risk, high value
The carrying amount of the parent Company’s
loan to its subsidiary represents 73% (2018: 75%)
of the parent Company’s total assets of £14.3m
(2018: £14.3m). The recoverability is not at a high
risk of significant misstatement or subject to
significant judgement. However, due to their
materiality in the context of the parent Company
financial statements, this is considered to be the
area that had the greatest effect on our overall
parent Company audit.
Our procedures included:
• Accounting analysis: Assessed whether the
Group’s accounting policies are in line with
relevant accounting standards;
• Personnel interviews: We corroborated the
Directors’ judgement that all developers work
solely on the development, rather than the
maintenance of the platform, through
discussions with the Directors outside of the
finance function to understand the scope of
work performed by the development team;
• Testing application: For a sample of internal
staff costs capitalised in the financial year,
reviewed the individual’s job description for
evidence that the staff work solely on
development of the platform; and
• Benchmarking assumptions: We
benchmarked the useful economic life of the
software platform against other companies in
the online industry.
Our procedures included:
• Test of detail: We compared the carrying
amount of the total loan balance with the
relevant subsidiaries, comparing the carrying
amount of the loan with the expected value of
the business based on a suitable multiple of the
subsidiaries’ forecast profit before tax.
We continue to perform procedures over timing of revenue and associated costs in relation to warranty income. However, following a
refinement in the accounting treatment of warranty income to spread over the warranty period by the Directors, we have not assessed
this as one of the most significant risks in our current financial year’s audit and, therefore, it is not separately identified in our report this
financial year.
43
Gear4music (Holdings) plc
Annual Report and Accounts 2019
3 Our application of materiality and an overview of
the scope of our audit
Materiality for the Group financial statements as a whole was set
at £82,000 (2018: £104,800), determined in both financial years
with reference to a benchmark of profit before tax (PBT),
normalised by averaging over the last three financial years due to
fluctuations in the business cycle, of £1.7m (2018: £2.1m).
Materiality represents 4.85% of the benchmark (2018: 5%).
Materiality for the parent Company financial statements as a
whole was set at £80,000 (2018: £57,200), determined with
reference to a benchmark of parent Company total assets of
£14.3m (2018: £14.3m) which it represents 0.6% (2018: 0.4%).
We agreed to report to the Audit Committee any corrected or
uncorrected identified misstatements exceeding £4,100 (2018:
£7,040) in addition to other identified misstatements that
warranted reporting on qualitative grounds.
Of the Group’s four (2018: four) reporting components, including
the parent Company, we subjected two (2018: two) to full scope
audits for Group purposes and two (2018: two) to specified
risk-focused audit procedures. The latter were not individually
significant but were included in the scope of our Group reporting
work in order to provide further coverage over the Group’s
results. All procedures were undertaken by the Group audit team
at the Group’s Head Office based in York.
The components within the scope of our work accounted for the
percentages illustrated opposite.
4 We have nothing to report on going concern
The Directors have prepared the financial statements on the
going concern basis as they do not intend to liquidate the parent
Company or the Group or to cease their operations, and as they
have concluded that the parent Company’s and the Group’s
financial position means that this is realistic. They have also
concluded that there are no material uncertainties that could
have cast significant doubt over their ability to continue as a
going concern for at least a year from the date of approval of the
financial statements (‘the going concern period’).
Our responsibility is to conclude on the appropriateness of the
Directors’ conclusions and, had there been a material uncertainty
related to going concern, to make reference to that in this audit
report. However, as we cannot predict all future events or
conditions and as subsequent events may result in outcomes that
are inconsistent with judgements that were reasonable at the
time they were made, the absence of reference to a material
uncertainty in this auditor’s report is not a guarantee that the
Group and the parent Company will continue in operation.
We identified going concern as a key audit matter (see section 2
of this report). Based on the work described in our response to
that key audit matter, we are required to report to you if we have
concluded that the use of the going concern basis of accounting
is inappropriate or there is an undisclosed material uncertainty
that may cast significant doubt over the use of that basis for a
period of at least a year from the date of approval of the financial
statements.
We have nothing to report in these respects.
Normalised profit before tax
£1.7m (2018: reported profit
before tax £2.1m)
Normalised PBT
Group materiality
Group materiality
£82,000
(2018: £104,800)
£82,000
Whole financial
statements materiality
(2018: £104,800)
£100,000
Range of materiality at
two components
(£57,200–£100,000)
(2018: £57,200–
£100,000)
£7,040
Misstatements reported
to the Audit Committee
(2018: £7,040)
Group revenue
Group profit before tax
100%
(2018: 100%)
100
100
Group total assets
4
4
100%
(2018: 100%)
96
96
100%
(2018: 100%)
100
100
■ Full-scope for Group
audit purposes 2019
■ Specified risk-focused
audit procedures 2019
■ Full-scope for Group
audit purposes 2018
■ Specified risk-focused
audit procedures 2018
StrategicReportCorporateGovernanceFinancialStatements
44
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Independent Auditor’s Report continued
To the members of Gear4music (Holdings) plc
5 We have nothing to report on the other information in the Annual Report
The Directors are responsible for the other information presented in the Annual Report together with the financial statements. Our
opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or,
except as explicitly stated below, any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the
information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that
work we have not identified material misstatements in the other information.
Strategic report and Directors’ report
Based solely on our work on the other information:
• we have not identified material misstatements in the Strategic report and the Directors’ report;
•
•
in our opinion the information given in those reports for the financial period is consistent with the financial statements; and
in our opinion those reports have been prepared in accordance with the Companies Act 2006.
6 We have nothing to report on the other matters on which we are required to report by exception
Under the Companies Act 2006, we are required to report to you if, in our opinion:
• adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received
from branches not visited by us; or
the parent Company financial statements are not in agreement with the accounting records and returns; or
•
• certain disclosures of Directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.
We have nothing to report in these respects.
Respective responsibilities
7
Directors’ responsibilities
As explained more fully in their statement set out on page 38, the Directors are responsible for: the preparation of the financial
statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable
the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group
and 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 they 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
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 our opinion in an auditor’s report. Reasonable assurance is a high level of
assurance, but does not 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 aggregate, they could
reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.
A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities.
The purpose of our audit work and to whom we owe our responsibilities
8
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.
Katharine L’Estrange (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
1 Sovereign Square
Leeds
LS1 4DA
2 August 2019
45
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Consolidated Statement of Profit and Loss
and Other Comprehensive Income
Revenue
Cost of sales
Gross profit
Administrative expenses
Operating (loss)/profit
Financial expenses
(Loss)/profit before tax
Taxation
(Loss)/profit for the period
Other comprehensive income
Items that will not be reclassified to profit or loss:
Revaluation of property, plant and equipment
Deferred tax movements
Items that are or may be reclassified subsequently to profit or loss:
Foreign currency translation differences – foreign operations
Total comprehensive (loss)/income for the period
Basic (loss)/profit per share
Diluted (loss)/profit per share
The accompanying notes form an integral part of the financial statements.
Period ended
31 March
2019
£000
118,155
(91,239)
26,916
(26,927)
Year ended
28 February
2018
£000
80,100
(59,781)
20,319
(18,358)
(11)
(598)
(609)
446
(163)
–
(89)
(9)
(261)
(0.8p)
(0.8p)
1,961
(461)
1,500
(114)
1,386
1,716
(203)
2
2,901
6.7p
6.7p
Notes
3,4
3
6
7
8
11
5
5
StrategicReportCorporateGovernanceFinancialStatements 46
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Consolidated Statement of Financial Position
Non-current assets
Property, plant and equipment
Intangible assets
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Total assets
Current liabilities
Other interest-bearing loans and borrowings
Trade and other payables
Non-current liabilities
Other interest-bearing loans and borrowings
Other payables
Deferred tax liability
Total liabilities
Net assets
Equity
Share capital
Share premium
Foreign currency translation reserve
Revaluation reserve
Retained earnings
Total equity
Period ended
31 March
2019
£000
Year ended
28 February
2018
£000
Note
8
9
12
13
14
15
16
15
16
11
18
18
18
18
18
10,766
7,827
18,593
18,661
1,657
5,304
25,622
44,215
(8,555)
(11,533)
(20,088)
(4,272)
(263)
(885)
(5,420)
(25,508)
18,707
2,095
13,152
3
1,424
2,033
18,707
10,054
6,378
16,432
17,055
2,704
3,540
23,299
39,731
(3,914)
(10,916)
(14,830)
(4,616)
(751)
(649)
(6,016)
(20,846)
18,885
2,087
13,055
12
1,424
2,307
18,885
The Notes 1 to 22 form part of these financial statements.
These financial statements were approved by the Board of Directors on 2 August 2019 and were signed on its behalf by:
Andrew Wass
Director
2 August 2019
Chris Scott
Director
2 August 2019
Company registered number: 07786708
47
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Consolidated Statement of Changes in Equity
Balance at 1 March 2017
Profit for the year
Other comprehensive income
Issue of shares net of expenses
Freehold property revaluation
Deferred tax impact of revaluation
Share-based payments charge
Deferred tax adj. re: share-based payments
Share
capital
£000
2,016
–
–
71
–
–
–
–
Share
premium
£000
8,933
–
–
4,122
–
–
–
–
Balance at 28 February 2018
2,087
13,055
Loss for the year
Other comprehensive income
Issue of shares net of expenses
Share-based payments charge
Deferred tax adj. re: share-based payments
–
–
8
–
–
–
–
97
–
–
Balance at 31 March 2019
2,095
13,152
The accompanying notes form an integral part of the financial statements.
Foreign
currency
translation
reserve
£000
Revaluation
reserve
£000
10
–
2
–
–
–
–
–
12
–
(9)
–
–
–
3
–
–
–
–
1,716
(292)
–
–
1,424
–
–
–
–
–
Retained
earnings
£000
763
1,386
–
–
–
–
69
89
2,307
(163)
–
–
(22)
(89)
Total
equity
£000
11,722
1,386
2
4,193
1,716
(292)
69
89
18,885
(163)
(9)
105
(22)
(89)
1,424
2,033
18,707
StrategicReportCorporateGovernanceFinancialStatements 48
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Consolidated Statement of Cash Flows
Cash flows from operating activities
(Loss)/profit for the period
Adjustments for:
Depreciation and amortisation
Financial expense
Loss on sale of property, plant and equipment
Share-based payment charge
Taxation
Decrease/(increase) in trade and other receivables
Increase in inventories
Increase in trade and other payables
Tax paid
Net cash from operating activities
Cash flows from investing activities
Proceeds from sale of property, plant and equipment
Acquisition of property, plant and equipment
Capitalised development expenditure
Acquisition of a business
Net cash from investing activities
Cash flows from financing activities
Cash from share issue
Proceeds from new borrowings
Interest paid
Repayment of borrowings
Payment of finance lease liabilities
Net cash from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Foreign exchange (gains)/losses
Cash and cash equivalents at end of period
The accompanying notes form an integral part of the financial statements.
Period ended
31 March
2019
£000
Year ended
28 February
2018
£000
(163)
2,293
349
34
(22)
(446)
2,045
1,047
(1,606)
497
1,983
593
2,576
–
(1,785)
(2,703)
(400)
(4,888)
105
5,030
(352)
(593)
(105)
4,085
1,773
3,540
(9)
5,304
1,386
1,497
196
6
69
114
3,268
(1,356)
(5,369)
3,602
145
10
155
19
(7,443)
(1,693)
(400)
(9,517)
4,193
6,349
(178)
(363)
(102)
9,899
537
3,001
2
3,540
Notes
3,8,9
6
7
13
12
16
7
8
9
9
17
14
49
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Notes (forming part of the financial statements)
General information
Gear4music (Holdings) plc is a public limited company, is incorporated and domiciled in the United Kingdom, and is listed on the
Alternative Investment Market (‘AIM’) of the London Stock Exchange.
The Group financial statements consolidate those of the Company and its subsidiaries (collectively referred to as the ‘Group’). The
parent Company financial statements present information about the Company as a separate entity and not about its Group.
The principal activity of the Group is the retail of musical instruments and equipment.
In December 2018 the Group changed the registered office of Gear4music (Holdings) plc (company number: 07786708), Gear4music
Limited (company number: 03113256) and Cagney Limited (dormant subsidiary; company number: 04493300) to Holgate Park Drive,
York, YO26 4GN.
The Group has two trading European subsidiaries: Gear4music Sweden AB and Gear4music GmbH, and one dormant European
subsidiary, Gear4music Norway AS. All three are 100% subsidiaries of Gear4music Limited.
1 Accounting policies
1.1 Basis of preparation
The financial statements have been prepared in accordance with the AIM rules for Companies, and apply the recognition,
measurement and disclosure requirements of International Financial Reporting Standards as adopted by the EU (‘Adopted IFRSs’) and
make amendments where necessary in order to comply with the Companies Act 2006. The Company has elected to prepare its parent
Company financial statements in accordance with FRS 102; these are presented on pages 75 to 81.
The Group’s accounting policies are set out below and have been applied consistently in the consolidated financial statements.
Subjective judgements made by the Directors in the application of these accounting policies that could have significant effect on the
financial statements are considered in Note 22.
Accounting period
The financial statements presented cover the period ended 31 March 2019 and the year ended 28 February 2018.
Measurement convention
The financial statements have been prepared on the historical cost basis, except for Land and Buildings that are stated at their fair value.
1.2 Adoption of new and revised standards
The Group has adopted IFRS 9 ‘Financial Instruments’ and IFRS 15 ‘Revenue from contracts with customers’ from 1 March 2018. The
Group has adopted these standards using the cumulative effect method, under which the comparative information is not restated.
Neither standard has a material impact on the Group’s financial statements:
IFRS 9 ‘Financial instruments’
IFRS 9 sets out requirements for the classification and measurement of financial assets and financial liabilities, and a basis for
recognising provisions based on expected credit losses, and simplified hedge accounting. Management have reviewed the Group’s
business, its debt structure and absence of hedging and determined the new standard does not have a material impact on the income
statement or Balance sheet.
IFRS 15 ‘Revenue from contracts with customers’
IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. Management
have determined that, given the industry in which the Group operates, the significant majority of Group revenue comes from products
sales made direct to customers at standard prices, and estimates are already made of anticipated returns, the new standard does not
have a material impact on the timing or measurement of revenue recognition in comparison to the standard previously applied.
Various new or revised accounting standards have been issued which are not yet effective. The key standard affecting the Group is
IFRS 16 Leases effective from 1 January 2019, that is applicable to the Group for the year ending 31 March 2020 and has not been early
adopted by the Group.
IFRS 16 ‘Leases’
The Group has not early adopted IFRS 16 and plans to apply it for the year ending 31 March 2020, using the modified retrospective approach.
IFRS 16 will affect the presentation of the Group consolidated financial statements, introducing a single, on-balance sheet lease
accounting model for lessees. There are recognition exemptions available for short-term leases and leases of low-value items, which
the Group plans to adopt.
StrategicReportCorporateGovernanceFinancialStatements 50
Gear4music (Holdings) plc
Annual Report and Accounts 2019
1 Accounting policies continued
1.2 Adoption of new and revised standards continued
Lease agreements will give rise to both a right-of-use asset and a lease liability for future lease payables. The right-of-use asset will be
depreciated on a straight-line basis over the life of the lease. Interest will be recognised on the lease liability, resulting in a higher interest
expense in the earlier years of the lease term. The total expense recognised in the Income Statement over the life of the lease will be
unaffected by the new standard. However, IFRS 16 will result in the timing of lease expense recognition being accelerated for leases
which would be currently accounted for as operating leases.
There will be no impact on cash flows, although the presentation of the Cash Flow Statement will change significantly, with an increase
in cash flows from operating activities being offset by an increase in cash flows from financing activities.
The Group has four leased properties (in York, Manchester, Sweden and Germany). The minimum lease commitments on these at the
financial period end are disclosed in Note 20 and these leases will be recognised on balance sheet once this standard is adopted.
The impact on the Group, based on contractual arrangements in place at 31 March 2019, will be the recognition of lease liabilities of
between £10-11m along with right-of-use assets with the same value. This liability corresponds to the minimum lease payments under
operating leases disclosed in Note 20 to these consolidated financial statements, adjusted for the effect of discounting.
In the Income Statement, operating lease charges will be replaced by depreciation and interest expenses. The estimated impact on the
Group in FY20 is expected to be an increase in EBITDA of between £1.3m-£1.45m, offset by an increase in finance costs of
£0.35m-£0.5m and additional depreciation of £1.15m-£1.4m.
1.3 Going concern
The Group’s business activities and position in the market are described in the Strategic report. The Directors believe that the Group has
significant financial resources, has demonstrated continued strong revenue growth, and in FY20 can achieve a good level of profitability
from operating activities, and as such the Group is well placed to manage its business risks.
The Group’s policy is to ensure that it has sufficient facilities to cover its future funding requirements. Short-term flexibility is available
through Import loans and overdraft facilities.
As with any company placing reliance on external funding for financial support, the Directors acknowledge that there can be no
certainty that this support will continue, although, at the date of approval of these financial statements, they have no reason to believe
that it will not do so.
At 31 March 2019 the Group had £5.3m of cash and bank balances (28 February 2018: £3.5m) and on 30 May 2019 the Group’s bankers,
HSBC, confirmed that the Group’s Import loan and overdraft facilities have been renewed at £10m (FY18: £8m) for a further 12 months.
The Directors are confident that the facilities will be renewed in 2020 and this has been factored in to their going concern assessment.
Having duly considered all of these factors and having reviewed the forecasts for the coming year, including the investments outlined in
the CEO’s statement, the Directors have a reasonable expectation that the Group has adequate resources to continue trading for the
foreseeable future, and as such continue to adopt the going concern basis of accounting in preparing the financial statements.
1.4 Basis of consolidation
Subsidiaries
Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns
from its involvement with the entity and has the ability to affect those returns through its power over the entity. In assessing control, the
Group takes into consideration potential voting rights that are currently exercisable. The acquisition date is the date on which control is
transferred to the acquirer. The financial statements of subsidiaries are included in the consolidated financial statements from the date
that control commences until the date that control ceases.
Transactions eliminated on consolidation
Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated.
1.5 Foreign currency
International transactions that are denominated in foreign currencies are recorded in the respective foreign currencies, and translated
into the functional currency of the Group, Sterling, at the exchange rate ruling at the date of the transaction. Translational accounting
gains and losses are recognised in the income statement in the period they arise.
Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are retranslated to the functional currency at
the exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement.
Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange
rate at the date of the transaction.
Notes (forming part of the financial statements) continued 51
Gear4music (Holdings) plc
Annual Report and Accounts 2019
1 Accounting policies continued
1.5 Foreign currency continued
The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated to
the Group’s presentational currency, Sterling, at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of
foreign operations are translated at an average rate for the year where this rate approximates to the foreign exchange rates ruling at the
dates of the transactions. Exchange differences arising from this translation of foreign operations are reported as an item of other
comprehensive income and accumulated in the translation reserve.
Functional currency
The consolidated financial statements are presented in Sterling, which is the Group’s functional currency.
1.6 Classification of financial instruments issued by the Group
Following the adoption of IAS 32, financial instruments issued by the Group are treated as equity only to the extent that they meet the
following two conditions:
(a) they include no contractual obligations upon the Company (or Group as the case may be) to deliver cash or other financial assets or
to exchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable to the
Company (or Group); and
(b) where the instrument will or may be settled in the Company’s own equity instruments, it is either a non-derivative that includes no
obligation to deliver a variable number of the Company’s own equity instruments or is a derivative that will be settled by the
Company exchanging a fixed amount of cash or other financial assets for a fixed number of its own equity instruments.
To the extent that this definition is not met, the proceeds of issue are classified as a financial liability. Where the instrument so classified
takes the legal form of the Company’s own shares, the amounts presented in this financial information for called-up share capital and
share premium account exclude amounts in relation to those shares.
1.7 Non-derivative financial instruments
Non-derivative financial instruments comprise investments, trade and other receivables, cash and cash equivalents, loans and
borrowings, and trade and other payables.
Trade and other receivables
Trade and other receivables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost
using the effective interest method, less any impairment losses.
Trade and other payables
Trade and other payables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost
using the effective interest method.
Cash and cash equivalents
Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an
integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose only of the
cash flow statement.
Interest-bearing borrowings
Interest-bearing borrowings are recognised initially at fair value less attributed transaction costs. Subsequent to initial recognition,
interest-bearing borrowings are stated at amortised cost using the effective interest method.
1.8 Property, plant and equipment
Certain classes of property, plant and equipment as stated below are stated at cost less accumulated depreciation and accumulated
impairment losses.
Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of
property, plant and equipment.
Depreciation is charged to the income statement on either a straight-line basis or a reducing balance basis over the estimated useful
lives of each part of an item of property, plant and equipment. The estimated useful lives are as follows:
• Plant and equipment
• Fixtures and fittings
• Motor vehicles
• Computer equipment
4-5 years straight line
20-25% on reducing balance
25% on reducing balance
3-5 years straight line
Depreciation methods, useful lives and residual values are reviewed at each balance sheet date.
StrategicReportCorporateGovernanceFinancialStatements
52
Gear4music (Holdings) plc
Annual Report and Accounts 2019
1 Accounting policies continued
1.8 Property, plant and equipment continued
Leases in which the Group assumes substantially all the risks and rewards of ownership of the leased asset are classified as finance
leases. Leased assets acquired by way of a finance lease are stated at an amount equal to the lower of their fair value and the present
value of the minimum lease payments at inception of the lease, less accumulated depreciation and less accumulated impairment
losses. Lease payments are accounted for as described below in 1.16.
Land and Buildings are stated at fair value.
Revaluation
Revaluations are made with reference to independent, third-party professional inspection of the site. Independent valuations will be
sought on a regular basis such that the carrying value does not materially differ from its fair value.
Surpluses which arise from the revaluation exercise are included within other comprehensive income (in the revaluation reserve) unless
they are reversing a revaluation adjustment which has been recognised in the income statement previously; in which case an amount
equal to a maximum of that recognised in the income statement previously is recognised in income.
Where the revaluation exercise gives rise to a deficit, this is reflected directly within the income statement, unless it is reversing a
previous revaluation surplus against the same asset; in which case an amount equal to the maximum of the revaluation surplus is
recognised within other comprehensive income (in the revaluation reserve).
1.9 Business combinations
All business combinations are accounted for by applying the acquisition method. Business combinations are accounted for using the
acquisition method as at the acquisition date, which is the date on which control is transferred to the Group.
The Group measures goodwill at the acquisition date as:
the fair value of the consideration transferred; plus
•
the fair value of the existing equity interest in the acquiree; less
•
the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed.
•
Costs related to the acquisition are expensed as incurred.
Any contingent consideration payable is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the
contingent consideration are recognised in profit or loss.
Goodwill impairment testing
Goodwill is not amortised but tested annually for impairment. For the purpose of impairment testing, the goodwill is allocated to
cash-generating units, or (‘CGUs’). Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, CGUs
to which goodwill has been allocated are aggregated so that the level at which impairment is tested reflects the lowest level at which
goodwill is monitored for internal reporting purposes.
1.10 Intangible assets
Software platform
Computer software development costs that generate economic benefits beyond one year and meet the development asset
recognition criteria as laid out in IAS 38 ‘Intangible Assets’, are capitalised as Intangible assets.
These costs include the payroll costs of employees directly associated with the development of the software platform, and other direct
external material and service costs. Costs are capitalised only where there is an identifiable development that will bring future
economic benefit. All other website and maintenance costs are expensed in the statement of comprehensive income.
Capitalised software development costs are amortised over their estimated useful lives and charged to administrative expenses in the
statement of comprehensive income.
Other intangible assets
Expenditure on internally generated goodwill and brands is recognised in the income statement as an expense as incurred.
Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and less accumulated
impairment losses.
Notes (forming part of the financial statements) continued 53
Gear4music (Holdings) plc
Annual Report and Accounts 2019
1 Accounting policies continued
1.10 Intangible assets continued
Amortisation
Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets from the
date they are available for use. The estimated useful lives are as follows:
• Brand
• Software platform
10 years
3-8 years
1.11 Inventories
Inventories are stated at the lower of cost and net realisable value (‘NRV’). Cost is based on the first-in, first-out principle and includes
expenditure incurred in acquiring the inventories and other costs in bringing them to their existing location and condition. Stock is
neither fashionable nor perishable.
A provision is made in respect of inventories as follows:
• 100% against returns stock found to be faulty that is retained to be used for spare parts on the basis there is no direct NRV value; and
• a provision for the expected product loss on dealing with returns stock.
1.12 Impairment excluding inventories and deferred tax assets
Financial assets (including receivables)
A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective
evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial
recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be
estimated reliably.
An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying
amount and the present value of the estimated future cash flows. The effect of discounting is not material. When a subsequent event
causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.
Non-financial assets
The carrying amounts of the Group’s non-financial assets, other than inventories and deferred tax assets, are reviewed at each
reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable
amount is estimated. For goodwill, the recoverable amount is estimated each year at the same time.
The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In
assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects
current market assessments of the time value of money and the risks specific to the asset.
For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets
that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the
‘cash-generating unit’). The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to
cash-generating units, or (‘CGU’). Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, CGUs
to which goodwill has been allocated are aggregated so that the level at which impairment is tested reflects the lowest level at which
goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that
are expected to benefit from the synergies of the combination.
An impairment loss would be recognised if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. No
impairments have been recognised in the periods presented.
1.13 Employee benefits
Defined contribution plans
A defined contribution pension plan is a post-employment benefit plan under which the Group pays fixed contributions into a separate
entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution
pension plans are recognised as an expense in the income statement in the periods during which services are rendered by employees.
Share-based payment transactions
Share-based payment arrangements in which the Group receives goods or services as consideration for its own equity instruments
are accounted for as equity-settled share-based payment transactions, regardless of how the equity instruments are obtained by
the Group.
The grant date fair value of share-based payment awards granted to employees is recognised as an employee expense, with a
corresponding increase in equity, over the period that the employees become unconditionally entitled to the awards. The fair value of
the options granted is measured using the Black-Scholes model, taking into account the terms and conditions upon which the options
were granted. The amount recognised as an expense is adjusted to reflect the actual number of awards for which the related service
and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the
number of awards that do meet the related service and non-market performance conditions at the vesting date.
StrategicReportCorporateGovernanceFinancialStatements
54
Gear4music (Holdings) plc
Annual Report and Accounts 2019
1 Accounting policies continued
1.13 Employee benefits continued
Share-based payment transactions in which the Group receives goods or services by incurring a liability to transfer cash or other assets
that is based on the price of the Group’s equity instruments are accounted for as cash-settled share-based payments. The fair value of
the amount payable to employees is recognised as an expense, with a corresponding increase in liabilities, over the period in which the
employees become unconditionally entitled to payment. The liability is remeasured at each balance sheet date and at settlement date.
Any changes in the fair value of the liability are recognised as personnel expenses in profit or loss.
1.14 Provisions
A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event,
that can be reliably measured and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions
are determined by discounting the expected future cash flows at a pre-tax rate that reflects risks specific to the liability.
1.15 Revenue
Product sales and delivery receipts
In FY18 revenue from the sale of goods and delivery receipts was recognised upon dispatch from the warehouse.
In FY19 revenue from the sale of goods and delivery receipts are recognised when the customer receives the goods ordered, at which
point title and risk passes to third parties and revenue can be reliably measured.
Revenue is measured at the fair value of the consideration received, including freight charges and duty where applicable, excluding
discounts, rebates, VAT and other sales taxes or duty. Returns are dealt with on receipt of the product into the warehouse, which
triggers an automatic credit, and an estimate for returns is provided for at the year-end.
Other revenue
Warranty income is spread over the warranty period and, as such, the adoption of IFRS 15 has had no impact.
The Group offers retail point-of-sale credit on orders over £50, through agreements with external credit providers. The Group does not
retain any credit risk and commissions are recognised within revenue on recognition of the credit sale. In the period ended 31 March
2019, this income totalled £240,000 (FY18: £112,000). No discount is offered on any sales made through these credit providers.
1.16 Expenses
Operating lease payments
Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease.
Lease incentives received are recognised in the income statement as an integral part of the total lease expense.
Finance lease payments
Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance
charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance
of the liability.
Exceptional items
Items which are significant by virtue of their size or nature and which are considered to be non-recurring are classified as exceptional
operating items. Such items are included within the appropriate consolidated income statement category but are highlighted separately
in the notes to the financial information. Exceptional operating items are excluded from the profit measures used by the Board to
monitor and measure the underlying performance of the Group.
Government and other forms of grant
Government and other grants from third parties are recognised where there is reasonable assurance that the grant will be received and
all attached conditions will be complied with. When the grant relates to an expense item, it is recognised as a reduction in the costs
incurred, on a systematic basis over the periods that the costs, for which it is intended to compensate, are expensed. Where the grant
relates to an asset, it is recognised on a systematic basis over the UEL of the related asset.
Financing income and expenses
Financing expenses comprise interest payable and finance leases recognised in profit or loss using the effective interest method,
unwinding of the discount on provisions, and net foreign exchange losses that are recognised in the income statement (see foreign
currency accounting policy). Financing income comprises interest receivable on funds invested and net foreign exchange gains.
Interest income and interest payable is recognised in profit or loss as it accrues, using the effective interest method.
Notes (forming part of the financial statements) continued 55
Gear4music (Holdings) plc
Annual Report and Accounts 2019
1 Accounting policies continued
1.17 Taxation
Tax on the profit or loss for the period comprises current and deferred tax.
Current tax is the expected tax payable or receivable on the taxable income or loss for the period, using tax rates enacted or
substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous periods.
Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for taxation purposes. A temporary difference on the initial recognition of goodwill is not provided for.
The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amounts of assets
and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the
temporary difference can be utilised.
1.18 Segmental reporting
An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur
expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. The Group’s Chief
Operating Decision Maker has been identified as the Board of Directors.
2 Segmental reporting
The Group’s revenue and profit was derived from its principal activity, which is the sale of musical instruments and equipment.
In accordance with IFRS 8 ‘Operating segments’, the Group has made the following considerations to arrive at the disclosure made in
these financial statements. IFRS 8 requires consideration of the ‘Chief Operating Decision Maker’ (‘CODM’) within the Group. Operating
segments have been identified based on the internal reporting information and management structures within the Group. Based on
this information it has been noted that the CODM reviews the business as one segment and receives internal information on this basis.
Therefore, it has been concluded that there is only one reportable segment.
Revenue by geography
UK
Europe and Rest of the World
Administrative expenses by geography
UK
Europe
Revenue by product category
Other-brand products
Own-brand products
Warranty income
Other
Period ended
31 March
2019
£000
63,672
54,483
118,155
Period ended
31 March
2019
£000
24,113
2,814
26,927
Year ended
28 February
2018
£000
44,258
35,842
80,100
Year ended
28 February
2018
£000
16,823
1,535
18,358
Period ended
31 March
2019
£000
Year ended
28 February
2018
£000
82,125
31,289
296
4,445
118,155
56,075
20,947
302
2,776
80,100
StrategicReportCorporateGovernanceFinancialStatements 56
Gear4music (Holdings) plc
Annual Report and Accounts 2019
3 Expenses
Included in profit/loss are the following:
Depreciation of tangible fixed assets
Amortisation of intangible assets
Amortisation of government grants
Loss on disposal of property, plant and equipment
Rentals under operating leases – land and buildings
Rentals under operating leases – plant and machinery
Auditor remuneration – audit of these financial statements
Auditor remuneration – audit of financial statements of subsidiaries
Auditor remuneration – other
Release of rent accrual
Period ended
31 March
2019
£000
Year ended
28 February
2018
£000
1,039
1,254
37
34
1,425
8
30
45
–
(421)
645
852
31
6
973
11
20
30
17
–
4 Staff numbers and costs
The average number of persons employed by the Group (including Directors) during the period, analysed by category, was as follows:
Administration
Selling and distribution
The aggregate payroll costs of these persons were as follows:
Wages and salaries
Equity-settled share-based payments (see Note 19)
Cash-settled share-based payments (see Note 19)
Social security costs
Contributions to defined contribution plans
Period ended
31 March
2019
No.
Year ended
28 February
2018
No.
184
247
431
130
183
313
Period ended
31 March
2019
£000
Year ended
28 February
2018
£000
8,146
(22)
(11)
954
480
9,547
5,428
69
8
701
126
6,332
Directors’ remuneration is detailed in the Remuneration report on pages 32-33 which forms part of these financial statements, and
disclosed in Note 3 of the Notes to the Company Financial Statements on page 79.
Notes (forming part of the financial statements) continued 57
Gear4music (Holdings) plc
Annual Report and Accounts 2019
5 Earnings per share
Diluted profit per share is calculated by dividing the net profit for the period attributable to Ordinary shareholders by the weighted
average number of Ordinary shares outstanding during the period plus the weighted average number of Ordinary shares that would be
issued on the conversion of all dilutive potential Ordinary shares into Ordinary shares.
(Loss)/profit attributable to equity shareholders of the parent (£000)
Basic weighted average number of shares
Dilutive potential Ordinary shares
Diluted weighted average number of shares
Basic (loss)/profit per share
Diluted (loss)/profit per share
6 Finance income and expense
Fair value movement
Total finance income
Bank interest
Finance leases
Net foreign exchange loss
Unwinding of discount on deferred consideration
Total finance expense
Total net finance expense
7 Taxation
Recognised in the income statement
Current tax expense
UK Corporation tax
Overseas Corporation tax
Adjustments for prior periods
Current tax credit
Deferred tax expense
Origination and reversal of temporary differences
Adjustments for prior periods
Deferred tax expense
Total tax (credit)/expense
Period ended
31 March
2019
(163)
20,926,717
–
Year ended
28 February
2018
1,386
20,713,281
88,155
20,926,717
20,801,436
(0.8p)
(0.8p)
6.7p
6.7p
Period ended
31 March
2019
£000
Year ended
28 February
2018
£000
33
33
–
–
Period ended
31 March
2019
£000
Year ended
28 February
2018
£000
348
4
249
30
631
598
169
9
265
18
461
461
Period ended
31 March
2019
£000
Year ended
28 February
2018
£000
(584)
20
(29)
(593)
123
24
147
(446)
4
10
(24)
(10)
79
45
124
114
The corporation tax rate applicable to the Company was 19% for the period ended 31 March 2019 and 19.08% in the year ended
28 February 2018. A reduction to 17% (effective 1 April 2020) was substantively enacted on 6 September 2016. This will reduce the
Company’s future current tax charge accordingly. The deferred tax assets and liabilities at 31 March 2019 have been calculated based on
these rates.
StrategicReportCorporateGovernanceFinancialStatements 58
Gear4music (Holdings) plc
Annual Report and Accounts 2019
7 Taxation continued
Reconciliation of effective tax rate
(Loss)/profit for the period
Total tax charge
(Loss)/profit excluding taxation
Current tax at 19% (2018: 19.08%)
Tax using the UK corporation tax rate for the relevant period
Non-deductible expenses
Difference between current and deferred tax rates
Adjustments relating to prior year – deferred tax
Adjustments relating to prior year – current tax
R&D claim additional deduction
Impact of overseas tax rate
Deferred tax assets not recognised
Total tax (credit)/charge
8 Property, plant and equipment
Period ended
31 March
2019
£000
(163)
(446)
(609)
(116)
(1)
(15)
24
(29)
(252)
1
(58)
(446)
Plant and
equipment
£000
Fixtures and
fittings
£000
Motor
vehicles
£000
Computer
equipment
£000
Land and
buildings
£000
Cost
At 1 March 2017
Additions
Disposals
Revaluation
Balance at 28 February 2018 and 1 March 2018
Additions
Disposals
Balance at 31 March 2019
Depreciation and impairment
At 1 March 2017
Depreciation charge for the year
Disposals
Balance at 28 February 2018 and 1 March 2018
Depreciation charge for the period
Disposals
Balance at 31 March 2019
Net book value as at 31 March 2019
Net book value as at 28 February 2018
553
234
–
–
787
472
–
1,259
293
151
–
444
212
–
656
603
343
1,907
1,384
–
–
3,291
1,136
(43)
4,384
836
394
–
1,230
528
(14)
1,744
2,640
2,061
64
29
(31)
–
62
–
–
62
6
15
(6)
15
13
–
28
34
47
449
162
–
–
611
177
(10)
778
273
85
–
358
127
(5)
480
298
253
–
5,634
–
1,716
7,350
–
–
7,350
–
–
–
–
159
–
159
7,191
7,350
Year ended
28 February
2018
£000
1,386
114
1,500
286
32
(8)
45
(24)
(219)
2
–
114
Total
£000
2,973
7,443
(31)
1,716
12,101
1,785
(53)
13,833
1,408
645
(6)
2,047
1,039
(19)
3,067
10,766
10,054
Freehold property revaluation
On 30 June 2017, the Group acquired freehold office premises at Holgate Park, York for £5.30m. Total amounts capitalised on
acquisition totalled £5.63m. At 28 February 2018 the freehold property was revalued at market value using information provided by an
independent chartered surveyor. The valuation was carried out in accordance with the provisions of RICS Appraisal and Valuation
Standards (‘The Red Book’).
At 31 March 2019, the Directors remain comfortable with the valuation based on their understanding of local rental values.
Leased assets
At 31 March 2019, the net carrying amount of leased tangible fixed assets was £526,000 (28 February 2018: £98,000) and the
accumulated depreciation against these leased assets was £44,000 (28 February 2018: £286,000).
Notes (forming part of the financial statements) continued 59
Gear4music (Holdings) plc
Annual Report and Accounts 2019
8 Property, plant and equipment continued
Security
The Group’s bank borrowings are secured by fixed and floating charges over the Group’s assets.
9
Intangible assets
Cost
At 1 March 2017
Additions
Balance at 28 February 2018 and 1 March 2018
Additions
Balance at 31 March 2019
Amortisation
At 1 March 2017
Amortisation for the year
Balance at 28 February 2018 and 1 March 2018
Amortisation for the period
Balance at 31 March 2019
Net book value as at 31 March 2019
Net book value as at 28 February 2018
Goodwill
£000
1,848
–
1,848
–
1,848
–
–
–
–
–
1,848
1,848
Software
platform
£000
4,845
1,693
6,538
2,703
9,241
1,438
796
2,234
1,193
3,427
5,814
4,304
Brand
£000
Total
£000
564
–
564
–
564
282
56
338
61
399
165
226
7,257
1,693
8,950
2,703
11,653
1,720
852
2,572
1,254
3,826
7,827
6,378
The amortisation charge is recognised in Administrative expenses in the profit and loss account.
Goodwill
On 19 March 2012, goodwill arose on the acquisition of the entire share capital of Gear4music Limited (formerly known as Red
Submarine Limited).
On 1 January 2017, goodwill arose on the acquisition of a software development business from Venditan Limited, which effectively
brought development of the Group’s proprietary software platform in-house. This transaction is detailed in the FY17 Annual Report.
Goodwill balances are denominated in Sterling:
Gear4music Limited
Software development business
Period ended
31 March
2019
£000
417
1,431
1,848
Year ended
28 February
2018
£000
417
1,431
1,848
Impairment testing
In accordance with IAS 36 ‘Impairment of Assets’, the Group reviews the carrying value of its intangible assets. A detailed review was
undertaken at 31 March 2019 to assess whether the carrying value of assets was supported by the net present value-in-use calculations
based on cash flow projections from formally approved budgets and longer-term forecasts.
Intangible assets comprise goodwill, the Gear4music brand name, and the proprietary software platform.
StrategicReportCorporateGovernanceFinancialStatements 60
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Intangible assets continued
9
A ‘cash-generating unit’ (‘CGU’) is defined as the smallest group of assets that generate cash inflows from continuing use that are
largely independent of the cash inflows of other assets or groups thereof. The Group is deemed to have a single CGU to which the
goodwill, the software platform and the brand are allocated. An impairment review has been performed on this CGU. The recoverable
amount of this CGU has been determined based on value-in-use calculations. In assessing value in use, a five-year forecast to 31 March
2024 was used to provide cash flow projections that have been discounted at a pre-tax discount rate of 10% (FY18: 10%). The cash flow
projections are subject to key assumptions in respect of revenue growth, gross margin performance, overhead expenditure, and capital
expenditure. Management have reviewed and approved the assumptions inherent in the model:
•
revenue forecasts based on growth by geographical market, at a range of growth levels based on market size and estimate of
opportunity, trends, specific projects underway, and Management’s experience and expectation;
• product costs are assumed to be broadly flat and gross margins are forecast to improve from FY19 toward historic levels; and
• wage increases are a function of recruitment and a person-by-person review of current staff, with a range of percentage increases.
No impairment loss was identified in the current year (FY18: £nil). The valuation indicates significant headroom and therefore a terminal
growth rate assumption has not been needed to be applied in order to support the valuation of this CGU. Any reasonably possible
change in other key assumptions, including the discount rate, would not result in an impairment of the related goodwill or other
intangible assets.
10 Investments in subsidiaries
The Company has the following investments in subsidiaries which are included in the consolidated results of the Group:
Subsidiaries
Registered office address
Registered number
Class of
shares held
Ownership
Gear4music Limited
Cagney Limited
Gear4music Sweden AB Metallvägen 45a, 195 72 Rosersberg, Stockholm County,
Holgate Park Drive, York, YO26 4GN
Holgate Park Drive, York, YO26 4GN
03113256 Ordinary
04493300 Ordinary
559070-4762 Ordinary
100%
100% via G4M Ltd
100% via G4M Ltd
Gear4music GmbH
Gear4music Norway AS
Lahnstraße 27, 45478 Mülheim an der Ruhr, Germany
PO Box 2734, Solli, 0204 Oslo, Norway
HRB 29067 Ordinary
917 313 210 Ordinary
100% via G4M Ltd
100% via G4M Ltd
Sweden
Investment in share capital is £4,550 in Sweden, £21,660 in Germany and £2,806 in Norway.
All Group companies have 31 March financial year-ends (FY18: 28 February year-ends).
Cagney Limited and Gear4music Norway AS are dormant companies.
11 Deferred tax assets and liabilities
Movement in deferred tax during the year
Property, plant and equipment
Short-term timing differences
Share-based payments
Movement in deferred tax during the prior year
Temporary differences on Intangibles, Property, plant and equipment
Carried forward tax losses
Share-based payments
At
1 March
2018
£000
(783)
32
102
(649)
At
1 March
2017
£000
(352)
30
–
(322)
Recognised
in other
comprehensive
income
£000
Recognised in
income
£000
–
–
(89)
(89)
(125)
(9)
(13)
(147)
At
31 March
2019
£000
(908)
23
–
(885)
Recognised
in other
comprehensive
income
£000
Recognised in
income
£000
At
28 February
2018
£000
(292)
–
89
(203)
(139)
2
13
(124)
(783)
32
102
(649)
A deferred tax asset is not recognised with respect to historic losses in Gear4Music (Holdings) plc (consistent basis to the prior year).
There are no losses carried forward in Gear4music Limited.
Losses of £688,000 are carried forward at 31 March 2019, equating to an unrecognised asset of £130,000.
Notes (forming part of the financial statements) continued 61
Gear4music (Holdings) plc
Annual Report and Accounts 2019
12 Inventories
Finished goods
Period ended
31 March
2019
£000
Year ended
28 February
2018
£000
18,661
17,055
The cost of inventories recognised as an expense and included in cost of sales in the period amounted to £83.4m (£55.7m in the year
ended 28 February 2018).
Management have included a provision of £107,245 (28 February 2018: £79,879), representing a 100% provision against returns stock
subsequently found to be faulty, that is retained to be used for spare parts on the basis there is no direct NRV value, and a provision
based on the expected product loss on dealing with returns stock.
13 Trade and other receivables
Trade receivables
Prepayments
Period ended
31 March
2019
£000
856
801
1,657
Year ended
28 February
2018
£000
1,645
1,059
2,704
Credit risk and impairment
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual
obligations. The carrying amount of trade receivables represents the maximum credit exposure. The Group does not take collateral in
respect of trade receivables.
Trade receivables comprise balances due from schools and colleges and funds lodged with payment providers.
Customer receivables
The Group faces low credit risk as customers typically pay for their orders in full on shipment of the product, with the only exceptions
being:
– a small number of education accounts with schools and colleges that have 30-day terms (1.8% of 2019 and 2018 revenues); and
– trade sales that accounted for 1.2% of 2019 revenue (2018: 2.0%), although credit terms are rarely offered.
Funds lodged with payment providers
Funds lodged with Amazon, Digital River, Klarna and V12 Retail Finance totalled £128,000 on 31 March 2019 (28 February 2018:
£557,000) and are included in Trade debtors. Credit risk in relation to cash held with financial institutions is considered low risk, given
the credit rating of these organisations.
14 Cash and cash equivalents
Cash and cash equivalents per balance sheet
Cash and cash equivalents per cash flow statements
Period ended
31 March
2019
£000
5,304
5,304
Year ended
28 February
2018
£000
3,540
3,540
StrategicReportCorporateGovernanceFinancialStatements 62
Gear4music (Holdings) plc
Annual Report and Accounts 2019
15 Other interest-bearing loans and borrowings
This note contains information about the Group’s interest-bearing loans and borrowings which are carried at amortised cost.
Non-current liabilities
Bank loans
Finance lease liabilities
Current liabilities
Bank loans
Finance lease liabilities
Total liabilities
Bank loans
Finance lease liabilities
Period ended
31 March
2019
£000
Year ended
28 February
2018
£000
3,990
282
4,272
8,384
171
8,555
12,374
453
12,827
4,616
–
4,616
3,890
23
3,913
8,506
23
8,529
Bank loans comprise an Import Loan facility and term loans, all provided by the Group’s bankers, HSBC, and are secured by fixed and
floating charges over the Group’s assets.
The interest rate on 160-day Import loans drawn under the Import Loan agreement is 2.45% per annum over HSBC’s Sterling base rate,
and on an overdraft, if and when drawn, is 3.25% over base. Interest on Import loans is paid at the maturity of the relevant loan. Interest
on an overdraft would be paid monthly in arrears. Import Loan and overdraft facilities were approved for renewal on 30 May 2019 for a
12-month period.
There are two term loans that were drawn around the time of the freehold property acquisition in June 2017:
•
the first loan was for £3,727,500 and is a five-year loan with capital repayments scheduled over 20 years, and interest is 2.04% over
LIBOR; and
the second loan was for £1,797,500 and is a five-year loan with interest of 2.85% over LIBOR.
•
As at 31 March 2019 there was £4.6m capital outstanding across these two loans.
All borrowings are denominated in Sterling.
Finance lease liabilities
Finance lease liabilities are payable as follows:
Less than one year
Between one and five years
Less than one year
Between one and five years
Minimum lease
payments
At 31 March
2019
£000
179
295
474
Minimum lease
payments
At 28 February
2018
£000
24
–
24
Interest
At 31 March
2019
£000
Principal
At 31 March
2019
£000
8
13
21
171
282
453
Interest
At 28 February
2018
£000
Principal
At 28 February
2018
£000
1
–
1
23
–
23
Finance leases relate to assets located at the Distribution Centre in York, with net book values of £526,000 (28 February 2018: £98,000).
Notes (forming part of the financial statements) continued 63
Gear4music (Holdings) plc
Annual Report and Accounts 2019
15 Other interest-bearing loans and borrowings continued
Changes in liabilities from financing activities
Balance at 1 March 2018
Changes from financing cash flows
Proceeds from loans and borrowings
Repayment of borrowings
Payment of finance lease liabilities
Total changes from financing cash flows
Other changes
New finance leases
Interest expense (Note 6)
Interest paid
Movement in interest accrual (included in accruals and deferred income – Note 16)
Fair value movement on loans
Total other changes
Balance at 31 March 2019
Balance at 1 March 2017
Changes from financing cash flows
Proceeds from loans and borrowings
Repayment of borrowings
Payment of finance lease liabilities
Total changes from financing cash flows
Other changes
Interest expense (Note 6)
Interest paid
Movement in interest accrual (included in accruals and deferred income – Note 16)
Total other changes
Balance at 28 February 2018
16 Trade and other payables
Current
Trade payables
Accruals and deferred income
Deferred consideration
Government grants
Other taxation and social security
Non-current
Accruals and deferred income
Deferred consideration
Government grants
Loans and
borrowings
£000
8,506
4,495
(593)
–
3,902
–
348
(309)
(39)
(34)
(34)
12,374
Loans and
borrowings
£000
2,520
6,349
(363)
–
5,986
169
(155)
(14)
–
8,506
Finance lease
liabilities
£000
23
–
–
(105)
(105)
535
4
(3)
(1)
–
535
453
Finance lease
liabilities
£000
125
–
–
(102)
(102)
9
(8)
(1)
–
23
Total
£000
8,529
4,495
(593)
(105)
3,797
535
352
(312)
(40)
(34)
501
12,827
Total
£000
2,645
6,349
(363)
(102)
5,884
178
(163)
(15)
–
8,529
Period ended
31 March
2019
£000
Year ended
28 February
2018
£000
7,464
1,915
393
8
1,753
7,325
1,456
393
35
1,707
11,533
10,916
61
186
16
263
169
555
27
751
StrategicReportCorporateGovernanceFinancialStatements
64
Gear4music (Holdings) plc
Annual Report and Accounts 2019
16 Trade and other payables continued
Accruals at 28 February 2018 included £446,000 of rent accrued but not paid, being the difference in cash paid and the average rent
charge as expensed, as per the commercial agreement reached with the landlord of the leasehold distribution centre at Clifton Moor,
York. On 21 March 2018, the Group entered into a new 15-year lease with a 10-year clean break clause and this accrual was released in
full, resulting in a £421,000 credit that is included in administrative expenses.
Accruals at 31 March 2019 include £62,000 (2018: £161,000) relating to the estimated cash bonuses accrued relating to the CSOP
scheme, and Director Cash Plan (see Note 19).
Deferred consideration is due in relation to the acquisition of a software business in January 2017 and comprises six quarterly
instalments of £100,000 payable on 1st of January/April/July/October. These amounts are valued in the accounts at fair value and
subsequently amortised.
Government grants are being spread over the useful economic life of the associated asset, and relate to Regional Growth Fund and
Leeds City Enterprise Partnership grants towards the acquisition of various capital items. Grant conditions exist and are linked to job
creation, and these criteria have been satisfied.
Deferred consideration is valued at fair value. The Directors consider the carrying amount of other ‘trade and other payables’ to
approximate their fair value. The interest expense of £30,000 in relation to the unwinding of the discount is disclosed in Note 6.
17 Financial instruments
Financial risk management
The Group’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk and interest rate risk), credit risk
and liquidity risk. The Group’s policies on the management of liquidity, credit, interest rate and foreign currency risks are set out below.
The main purpose of the Group’s financial instruments, which comprise of term loans, hire purchase, finance leases, cash and liquid
resources and various items arising directly from its operations, such as trade receivables and trade payables, is to finance the Group’s
operations.
Risk management framework
Regular reviews of strategic risks are performed by the Board.
Exposure to foreign currency exchange rates is considered during the budgeting and forecasting processes, and throughout the year.
General commercial risk is considered at an annual insurance review in conjunction with an independent broker, and the appropriate
insurance policies put in place.
(a) Liquidity risk
Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due.
The Group’s policy is to ensure that it has sufficient and appropriately structured facilities to cover its future funding requirements.
Short-term flexibility is available through Import loans and overdraft facilities and the netting off of surplus funds. The carrying amounts
are the amounts due if settled at the period end date. The contractual undiscounted cash flows include estimated interest payments
over the life of these facilities.
At 31 March 2019 the Group had £5.3m of cash and bank balances (28 February 2018: £3.5m).
Secured loans
Trade payables
Effective
interest rate
%
2.99
–
Carrying amount
Period ended
31 March
2019
£000
Face value
Period ended
31 March
2019
£000
12,374
7,464
19,838
12,408
7,464
19,872
Within
1 year
£000
8,384
7,464
15,848
Contractual cash flows
1-2 years
£000
2-5 years
£000
546
–
546
727
–
727
Over
5 years
£000
2,751
–
2,751
Notes (forming part of the financial statements) continued 65
Gear4music (Holdings) plc
Annual Report and Accounts 2019
17 Financial instruments continued
Risk management framework continued
(a) Liquidity risk continued
Secured loans
Trade payables
Effective
interest rate
%
3.03
–
Carrying amount
Year ended
28 February
2018
£000
8,490
7,325
15,815
Face value
Year ended
28 February
2018
£000
8,506
7,325
15,831
Within
1 year
£000
3,890
7,325
11,215
Contractual cash flows
1-2 years
£000
546
–
546
2-5 years
£000
1,320
–
1,320
Over
5 years
£000
2,750
–
2,750
(b) Credit risk
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual
obligations.
The Group faces low credit risk as customers typically pay for their orders in full on shipment of the product. Trade sales accounted for
1.2% of 2019 revenue (2018: 2.0%) and credit terms are rarely offered.
There are a small number of education accounts with schools and colleges that have 30-day terms (1.8% of 2019 and 2018 revenues).
Funds lodged with Amazon, Digital River, Klarna and V12 Retail Finance totalled £128,000 on 31 March 2019 (28 February 2018:
£557,000) and are included in Trade debtors. Credit risk in relation to cash held with financial institutions is considered low risk, given
the credit rating of these organisations.
(c) Interest rate risk
The Group’s bank borrowings incur interest at variables rates of between 2.45% and 3.25% above the bank’s base rate or LIBOR, which
exposes the Group to interest rate risk. Loans are with UK-based institutions and denominated in Sterling.
At 31 March 2019, the Group had cash reserves of £5.3m and could utilise these funds to part settle debts and mitigate any associated
interest risk.
The Group’s policy, with regard to interest rate risk, is to monitor actual and anticipated changes in base rates, and if deemed
appropriate seek out alternative financing proposals to ensure retaining a competitive rate.
Profile
At the balance sheet date, the interest rate profile of the Group’s interest-bearing financial instruments was:
Variable rate instruments
Cash
Bank loans
Fixed rate instruments
Finance leases
Total net financial liabilities
Period ended
31 March
2019
£000
Year ended
28 February
2018
£000
(5,304)
12,374
7,070
453
7,523
(3,540)
8,506
4,966
23
4,989
Sensitivity analysis
The calculations below assume that the change occurred at the balance sheet date and had been applied to risk exposures existing at
that date. This analysis assumes that all other variables, in particular foreign currency rates, remain constant and considers the effect of
financial instruments with variable interest rates.
Increase of 50 basis points
Decrease of 50 basis points
Impact on closing
equity/profit
and loss
Period ended
31 March
2019
£000
Impact on closing
equity/profit
and loss
Year ended
28 February
2018
£000
(38)
38
(29)
29
StrategicReportCorporateGovernanceFinancialStatements 66
Gear4music (Holdings) plc
Annual Report and Accounts 2019
17 Financial instruments continued
Risk management framework continued
(d) Foreign exchange risk
All borrowings are denominated in Sterling.
The Group sells into Europe and the Rest of the World in nine currencies including Sterling, Euros and, more recently, US Dollars. In the
period ended 31 March 2019, 44% (2018: 43%) of total revenues were in non-Sterling currencies, of which 48% (2018: 46%) were in
Euros. Where costs (including local tax liabilities) are incurred in these respective currencies, currency balances are retained and
payments made in these currencies, thereby mitigating any associated currency loss. The scaling up of the Group’s operations in
Sweden and Germany has increased the proportion of liabilities denominated in Swedish Krona and Euros (see Note 2), further
extending the natural hedge. Surplus foreign currency holdings are reviewed on a daily basis and balances in excess of known liabilities
are converted into Sterling, restricting the period between the transaction and the point of conversion, thereby reducing the
transactional risk.
The Group purchases own-branded instruments and equipment from the Far East, transacting in US Dollars. The lead time from
committed order to receipt of stock is typically 12-16 weeks, during which time the Group bears currency risk. The Group also trades
with one supplier (2018: one supplier) on a trade credit basis with terms of 60 days. The Group has the trading platform ability and
sufficient price flexibility to be able to pass on some adverse currency variances should it choose, and the Group generates enhanced
margins on these products such that a proportion of these losses could be absorbed. The Group does not currently enter into forward
contracts but reviews the situation and would consider committing to such a position should it make commercial sense to do so.
The strength of the US Dollar impacts on stock intake prices of the Group, directly on own-branded products and indirectly on
other-branded products as whilst the majority of stock had been purchased in Sterling, the branded manufacturers faced similar price
inflation. The Group looks to mitigate such events by re-negotiating orders and investing in larger volumes to leverage increasing
purchasing economies of scale.
Trade and other receivables
Sterling
US Dollar
Euro
Other European currencies
Cash and cash equivalents
Sterling
US Dollar
Euro
Other European currencies
Trade payables
Sterling
US Dollar
Euro
Other European currencies
Local sales tax
Sterling
Euro
Other European currencies
Period ended
31 March
2019
£000
Year ended
28 February
2018
£000
309
88
356
103
856
4,355
2
409
538
5,304
6,634
213
255
362
7,464
522
690
899
2,111
312
740
88
505
1,645
2,746
–
309
485
3,540
5,781
1,200
160
184
7,325
(171)
617
842
1,288
The Group’s cash and cash equivalents are not sensitive to foreign exchange variations as currencies held are held to the extent they
are required to settle a liability in that currency, or they are converted into Sterling.
Non-Sterling trade receivables include cash lodged with payment providers that is promptly settled. International trade debtors
represent an immaterial amount such that the Group is not sensitive to associated foreign exchange variations.
Euro funds are retained to settle Euro-denominated payables. US Dollar-denominated trade payables are not currently bought forward
against, but only represent a small exposure that can be otherwise managed, and the Group has started selling in US Dollars.
Notes (forming part of the financial statements) continued 67
Gear4music (Holdings) plc
Annual Report and Accounts 2019
17 Financial instruments continued
Risk management framework continued
(e) Debt and capital management
The Group’s objective when managing capital, which is deemed to be share capital, is to maximise the return on net invested capital
while maintaining its ongoing ability to operate and guarantee adequate returns for shareholders and benefits for other stakeholders,
within a sustainable financial structure.
The Group monitors its gearing ratio on a regular basis and makes appropriate decisions in light of the current economic conditions
and strategic objectives of the Group.
There were no changes in the Group’s approach to capital management during the period. The Group does not have any externally
imposed capital requirements. The funding requirements of the Group are met by cash generation from trading, the utilisation of
external borrowings, and the cash raised on placing of Ordinary shares.
Fair values and carrying values of financial instruments
A comparison by category of the book values and fair values of the financial assets and liabilities of the Group at 31 March 2019 and
28 February 2018:
Trade and other receivables
Cash and cash equivalents
Bank loans
Finance lease liabilities
Trade and other payables
Deferred consideration
31 March 2019
28 February 2018
Book value
£000
1,657
5,304
(12,408)
(453)
(12,115)
(600)
(18,615)
Fair value
£000
1,657
5,304
(12,374)
(474)
(12,115)
(579)
(18,581)
Book value
£000
2,704
3,540
(8,506)
(23)
(10,719)
(1,000)
(14,004)
Fair value
£000
2,704
3,540
(8,490)
(24)
(10,719)
(948)
(13,937)
The following summarises the major methods and assumptions used in estimating the fair values of financial instruments reflected in
the table.
Trade and other payables and receivables
The fair values of these items are considered to be their carrying value as the impact of discounting future cash flows has been
assessed as not material.
Cash and cash equivalents
The fair value of cash and cash equivalents is estimated as its carrying amount where the cash is repayable on demand. The fair value of
short-term deposits is considered to be the carrying value as the balances are held in floating rate accounts where the interest rate is
reset to market rates.
Long-term and short-term borrowings
Bank loans are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing
borrowings are stated at amortised cost using the effective interest method.
Derivative financial instruments
The Group does not routinely enter into forward exchange contracts. The Fair Value of any material forward exchange contracts held
would be calculated by Management based on external valuations received from the Group’s bankers.
Deferred consideration
The deferred consideration is assumed to be 100% payable. The consideration has been discounted to present value at 2.7%, being
equivalent to the prevailing market rate of interest for a similar financial instrument.
StrategicReportCorporateGovernanceFinancialStatements 68
Gear4music (Holdings) plc
Annual Report and Accounts 2019
17 Financial instruments continued
Fair values and carrying values of financial instruments continued
Fair value hierarchy
The table below analyses financial instruments, measured at fair value, into a fair value hierarchy based on the valuation techniques
used to determine fair value.
– Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.
– Level 2: inputs other than quoted priced included within Level 1 that are observable for the asset or liability, either directly (i.e. as
prices) or indirectly (i.e. derived from prices).
– Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
31 March 2019
Bank loans
Deferred consideration
28 February 2018
Bank loans
Deferred consideration
Reconciliation of Level 2 fair value:
Bank loans
Reconciliation of Level 3 fair value:
Deferred consideration
18 Share capital and reserves
Share capital
Authorised, called up and fully paid:
Ordinary shares of 10p each
Level 1
£000
Level 2
£000
–
–
–
–
–
–
(12,374)
–
(12,374)
(8,490)
–
(8,490)
Level 3
£000
–
(579)
(579)
–
(948)
(948)
At 1 March
2018
£000
(8,490)
Net increase in
bank debt
£000
At 31 March
2019
£000
(3,884)
(12,374)
At 1 March
2018
£000
(948)
Payment less
unwound
discount
£000
At 31 March
2019
£000
369
(579)
Period ended
31 March
2019
Number
Year ended
28 February
2018
Number
20,945,328
20,867,121
The Company has one class of Ordinary share and each share carries one vote and ranks equally with the other Ordinary shares in all
respects, including as to dividends and other distributions.
On 3 June 2018, the Company issued and allotted 78,207 new Ordinary shares of 10p each on exercise of options under the
Company’s EMI schemes (see Note 19). This took the number of Ordinary shares in issue from 20,867,121 to 20,945,328, representing
dilution of 0.4%.
Share premium
Opening
Issue of shares
Share issue costs
Closing
Period ended
31 March
2019
£000
13,055
97
–
13,152
Year ended
28 February
2018
£000
8,933
4,278
(156)
13,055
Notes (forming part of the financial statements) continued
69
Gear4music (Holdings) plc
Annual Report and Accounts 2019
18 Share capital and reserves continued
Foreign currency translation reserve
Opening
Translation (loss)/gain
Closing
Revaluation reserve
Opening
Freehold property revaluation
Deferred tax
Closing
Period ended
31 March
2019
£000
Year ended
28 February
2018
£000
12
(9)
3
10
2
12
Period ended
31 March
2019
£000
Year ended
28 February
2018
£000
1,424
–
–
1,424
–
1,716
(292)
1,424
The revaluation reserve represents the unrealised gain generated on revaluation of the freehold office property on 28 February 2018. It
represents the excess of the fair value over deemed cost.
Retained earnings
Opening
Share-based payment charge
Deferred tax
(Loss)/profit for the period
Closing
Period ended
31 March
2019
£000
Year ended
28 February
2018
£000
2,307
(22)
(89)
(163)
2,033
763
69
89
1,386
2,307
Reserve
Retained earnings.
Description and purpose
Cumulative net profits recognised in the consolidated income statement.
19 Share-based payments
The Group operates share option plans for qualifying employees of the Group. Options in the plans are settled in equity in the
Company and are subject to vesting conditions.
At the start of the period there were four incentive schemes in place and in the period the options granted under two of these schemes
were exercised and settled in full, and one new long-term management incentive plan was put in place:
• an Employees’ EMI scheme (all options exercised in the period);
• a Directors’ EMI scheme relevant to Chris Scott and Gareth Bevan (all options exercised in the period);
•
two Directors’ cash bonus plans relevant to Andrew Wass who, by virtue of his 34% shareholding, is cash rather than equity
rewarded. One of these plans was settled in the period and one remains in place;
• a CSOP scheme; and
• an LTIP set up in the financial period relevant to six senior employees including Andrew Wass, Chris Scott and Gareth Bevan.
All equity-settled share options have an exercise price equal to the nominal value of the shares (10p) that the Company has or will
subsidise by way of a bonus, provided there are sufficient distributable reserves and, subject to certain conditions, will vest on a
specified anniversary of the date of grant.
The fair value of the cash-settled liability is remeasured at each balance sheet date and settlement date.
Employee EMI Plan
The Board had responsibility for the operation of the Employee EMI Plan. Awards under the Employee EMI Plan were only subject to
service conditions. Subject to continued employment, awards were deemed exercised at the end of the relevant vesting period.
On or before 3 June 2018, awards over all 58,251 shares under this plan were satisfied by the issue of new shares and the Company
paid a cash bonus to option holders, the net value of which was equivalent to the income tax, employee national insurance and the
exercise price arising in relation to the awards. All options have been exercised in full.
StrategicReportCorporateGovernanceFinancialStatements
70
Gear4music (Holdings) plc
Annual Report and Accounts 2019
19 Share-based payments continued
Director EMI Plan
The Remuneration Committee had responsibility for the operation of the Director EMI Plan. Awards under the Director EMI Plan were
exercisable at the end of the vesting period subject to meeting EPS-based targets between the date of grant and vest, and subject to
service conditions. These conditions were met.
On 3 June 2018, awards over all 19,956 shares under this plan were satisfied by the issue of new shares and the Company paid a cash
bonus to option holders, the net value of which was equivalent to the income tax, employee national insurance and the exercise price
arising in relation to the awards. All options have been exercised in full.
Director Cash Plans
The Remuneration Committee has responsibility for the operation of the Director Cash Plan and may grant cash bonus awards over
shares to eligible employees and retains discretion as to the operation of the plan.
Executive Directors of the Company are eligible to participate in the Director EMI Plan and CSOP plan. An Executive Director who
participates in the Director EMI Plan or the CSOP is not eligible to participate in the Director Cash Plan. Participation is at the discretion
of the Remuneration Committee.
Awards under the Director Cash Plan are subject to performance conditions. Awards will be exercisable at the end of the relevant
vesting period subject to EPS-based performance conditions and continued employment.
Awards will be settled in cash.
On 3 June 2018, Andrew Wass (Chief Executive Officer) exercised his entitlement under the plan to an award of £72,041 that was settled
in cash.
CSOP
The Board has responsibility for matters relating to employee members of the plan and may grant share options over shares to eligible
employees. Eligible employees will generally have been employed by the Group for more than three years at the time of award, but
could be a shorter period at the discretion of the Board. The Board has discretion to select participants from eligible employees of
the Group.
The Remuneration Committee has responsibility for matters relating to Director members of the plan and may grant share options over
shares to eligible employees and retains discretion as to the operation of the plan. Executive Directors of the Company are eligible to
participate in the plan. Participation is at the discretion of the Remuneration Committee.
Employee awards under the CSOP plan are only subject to service conditions. Directors’ awards are subject to meeting EPS-based
targets between the date of grant and vest, and subject to service conditions.
Subject to continued employment, awards will normally be deemed to have been exercised at the end of the relevant three-year
vesting period.
Awards will be satisfied by the issue of new shares. The Company will grant a cash bonus to option holders in the month of exercise,
the net value of which will be equivalent to the income tax, employee national insurance and the exercise price arising in relation to the
awards.
An initial award of 14,460 shares under option was made in June 2017.
In June 2018, a further award over 7,403 shares was made, and the total number of shares under option under the CSOP scheme at
31 March 2019 was 19,102.
LTIP
On 13 November 2018, the Group announced a new long-term management incentive plan to incentivise senior employees in a
manner aligned with the interests of the Company’s shareholders.
The plan involved the issue of 210,000 ‘B’ Ordinary shares in Gear4music Limited, a subsidiary of the Company. These ‘B’ shares vest
from 2021-26 and can be exchanged on a one-for-one basis for new Ordinary Company shares subject to meeting specified criteria,
including reaching a specified target share price for 80% of the award (see below), and pre-determined revenue and profitability targets
for 20%.
Notes (forming part of the financial statements) continued 71
Gear4music (Holdings) plc
Annual Report and Accounts 2019
19 Share-based payments continued
LTIP continued
The ‘B’ shares are non-voting, non-dividend restricted shares. The initial subscription cost was paid by way of a cash bonus that has
been expensed in FY19.
Financial year ending:
31 March 2021
31 March 2022
31 March 2023
31 March 2024
31 March 2025
31 March 2026
Share
price hurdle
Maximum number
of shares vesting
£13
£16
£20
£24
£29
£35
27,300
29,400
33,600
35,700
39,900
44,100
The share price hurdle being the average closing mid-price in the 30-day period following announcement of preliminary results.
The Remuneration Committee has responsibility for matters relating to members of the plan. The Executive Directors of Gear4music
Limited are participants in the plan.
The terms and conditions of specific grants are as follows:
Grant date/employees entitled
Employee EMI Award 1 – Equity-settled award to
eight key employees on IPO, granted by parent on
3 June 2015
Method of
settlement
accounting
Equity
Number of instruments
Vesting conditions
Contractual life
of options
23,383
Continued employment
Settled
Employee EMI Award 2 – Equity-settled award to one key
Equity
1,845
Continued employment
Settled
employee, granted by parent on 17 February 2016
Employee EMI Award 3 – Equity-settled award to two key
Equity
9,433
Continued employment
Settled
employees, granted by parent on 26 May 2016
Employee EMI Award 4 – Equity-settled award to 44
employees, granted by parent on 31 May 2016
Equity Initially 27,406; 23,590
at 28 Feb 2018
Continued employment
Settled
Director EMI Award 1a – Equity-settled award to
Equity
19,956
Chris Scott and Gareth Bevan, granted by parent on
31 May 2016
Director Award 1b – Cash-settled award to Andrew Wass,
Cash
granted by parent on 31 May 2016
EPS-based performance
criteria and continued
employment
Settled
Settled
Cash equivalent to
monetary result for
the other Directors
EPS-based performance
criteria and continued
employment
Employee CSOP Award 5 – Equity-settled award to 75
employees, granted by parent on 30 June 2017
Equity Initially 7,248; 6,858 at
28 Feb 2018
Continued employment
30 June 2020
Senior Management. CSOP Award 2a – Equity-settled
Equity
7,212
1,521 forfeit in period;
now 5,337
award to Chris Scott and Gareth Bevan and two others,
granted by parent on 30 June 2017
Director Award 2b – Cash-settled award to Andrew Wass,
Cash
granted by parent on 30 June 2017
EPS-based performance
criteria and continued
employment
30 June 2020
30 June 2020
Cash equivalent to
monetary result for
the other Directors
EPS-based performance
criteria and continued
employment
Employee CSOP Award 6 – Equity-settled award to
73 employees granted by parent on 30 June 2018
LTIP – Equity-settled award to the six Directors of
Gear4music Limited
Equity
Equity
7,403 granted; 850
forfeit; now 6,553
210,000
Continued employment
30 June 2021
80% linked to share price
20% linked to revenue and
profitability improvements
From August
2021 to August
2026
All subject to continued
employment
StrategicReportCorporateGovernanceFinancialStatements 72
Gear4music (Holdings) plc
Annual Report and Accounts 2019
19 Share-based payments continued
LTIP continued
The number and weighted average exercise prices of share options are as follows:
Outstanding at the beginning of the period
Forfeited during the period
Exercised during the period
Granted during the period
Lapsed during the period
Outstanding at the end of the period
Exercisable at the end of the period
Weighted
average
exercise price
2019
–
–
–
–
–
–
–
Number of
options
2019
92,277
(2,371)
(78,207)
217,403
–
229,102
–
Weighted
average
exercise price
2018
–
–
–
–
–
–
–
Number of
options
2018
79,226
(1,409)
–
14,460
–
92,277
1,845
Options over 78,207 shares were exercised in the year. The options outstanding at the year end have a nil exercise price and a weighted
average contractual life of 4.83 years (28 February 2018: 0.57 years).
The fair values of employee share options were calculated using a Black-Scholes model along with the assumptions detailed below:
Date of grant
3 Jun 2015
17 Feb 2016
26 May 2016
31 May 2016
31 May 2016
30 June 2017
30 June 2017
30 June 2018
8 Nov 2018
Share price on
date of grant
(pence)
Exercise price
(pence)
Volatility
(%)
Vesting period
(years)
Dividend yield
(%)
Risk-free rate of
interest
(%)
143.0
135.0
132.5
132.5
132.5
720.0
720.0
719.5
563.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
1%
1%
11.8%
11.8%
11.8%
52.6%
52.6%
30.6%
44.5%
3
2
2
2
2
3
3
3
2-7
0%
0%
0%
0%
0%
0%
0%
0%
0%
0.70%
0.70%
0.45%
0.43%
0.43%
0.43%
0.43%
0.73%
0.92%
Fair value
(pence)
143.0
135.0
132.5
132.5
132.5
720.0
720.0
719.5
555.0
The expected volatility is wholly based on the historic volatility (calculated based on the weighted average remaining life of the share
options).
The total expenses recognised for the period and the total liabilities recognised at the end of the period arising from share-based
payments are as follows:
Equity-settled share-based payment expense
Cash-settled share-based payment expense
Opening
Recognised in equity
Recognised as a liability
Closing
2019
£000
(22)
(11)
(33)
181
148
86
62
148
2018
£000
69
8
77
104
181
116
65
181
Notes (forming part of the financial statements) continued 73
Gear4music (Holdings) plc
Annual Report and Accounts 2019
20 Commitments
Operating lease commitment
Non-cancellable operating lease rentals are payable as follows:
Less than one year
Between one and five years
More than five years
Period ended
31 March
2019
£000
Year ended
28 February
2018
£000
1,446
5,629
5,673
12,748
1,112
4,635
–
5,747
Operating lease commitments relate to property leases of the Distribution Centre in York, the Software Development office in
Manchester, and Distribution Centres in Sweden and Germany.
On 21 March 2018 the Group entered into a new 15-year lease with a 10-year clean break clause at the York Distribution Centre.
21 Related parties
Transactions with key management personnel
The compensation of key management personnel is as follows:
Key management emoluments including social security costs
Company contributions to money purchase pension plans
Period ended
31 March
2019
£000
Year ended
28 February
2018
£000
621
82
703
503
17
520
Key management personnel comprise the Chairman, CEO, CFO and CCO. All transactions with key management personnel have been
made on an arms-length basis.
Four Directors are accruing retirement benefits under a money purchase scheme (2018: four).
Share-based payments
EMI and Director Cash Plan
An EMI share incentive plan for Chris Scott and Gareth Bevan, and equivalent discretionary cash bonus plan for Andrew Wass, vested in
full in June 2018.
Chris Scott received a bonus of £24,553 and Gareth Bevan a bonus of £25,443 to cover the income tax, national insurance and exercise
price of the award. Chris Scott and Gareth Bevan both received 9,978 shares. Andrew Wass exercised his entitlement under the Director
Cash Plan to an equivalent award of £72,041, and this was settled in cash.
LTIP
In FY19 a new long-term incentive plan involving Andrew Wass, Chris Scott and Gareth Bevan was put in place and involved the issue of
210,000 ‘B’ Ordinary shares in Gear4music Limited, a subsidiary of the Company. These ‘B’ shares vest from 2021-26 and can be
exchanged on a one-for-one basis for new Ordinary Company shares subject to meeting specified criteria, including reaching a
specified target share price for 80% of the award, and pre-determined revenue and profitability targets for 20%.
The initial subscription cost was covered by way of bonus and Andrew Wass, Chris Scott and Gareth Bevan received bonuses of £7,217,
£7,217 and £8,350 respectively.
StrategicReportCorporateGovernanceFinancialStatements 74
Gear4music (Holdings) plc
Annual Report and Accounts 2019
22 Accounting estimates and judgements
The preparation of consolidated financial information in conformity with IFRSs requires Management to make judgements, estimates
and assumptions concerning the future, that affect the application of accounting policies and the reported amounts of assets, liabilities,
income and expenses. These judgements are based on historical experience and Management’s best knowledge at the time and the
actual results may ultimately differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis and
revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.
The estimates and assumptions that have significant risk of causing a material adjustment to the carrying value of assets and liabilities
are discussed below:
Judgements
• Direct software development costs are capitalised as intangible assets. Judgement is applied in assessing the flow of future
economic benefit, and in identifying which costs are capitalised and which are written off as an expense. Alternative judgement
could result in certain costs being expensed.
• The useful life of tangible and intangible fixed assets – Management selected depreciation and amortisation periods appropriate to
the assets held, and consistent with industry and accounting norm. Amortisation periods were independently reviewed as part of an
intangible asset valuation exercise on IPO. Different UELs could be applied that would change the P&L charge and Balance sheet
carrying value.
Estimates
• An accrual for sales returns in the 30-day money-back guarantee period is made based on historical returns and actual returns could
vary from this estimate.
• The basis for stock provision and by association the carrying value – given the nature of the products sold, product margins earned,
and trading terms with suppliers, Management currently provide for faulty returns retained for spare parts, and an estimate of the
product loss to deal with problem stock. At 31 March 2019 the provision is £107,245 on gross stock of £18.8m (FY18: £79,879 on
£17.1m). There are no other provisions made.
Notes (forming part of the financial statements) continued 75
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Company Balance Sheet
Fixed assets
Investments
Current assets
Cash in hand and at bank
Debtors (including £10.47m (2018: £10.74m) due after more
than one year)
Creditors: amounts falling due within one year
Net current assets
Total assets less current liabilities
Net assets
Capital and reserves
Called-up share capital
Share premium account
Profit and loss account
Shareholders’ funds
2019
2018
Notes
£000
£000
£000
£000
4
7
5,6
8
9
9
9
3,852
3,517
19
10,488
10,507
(46)
17
10,766
10,783
(39)
10,461
14,313
14,313
2,095
13,152
(934)
14,313
10,744
14,261
14,261
2,087
13,055
(881)
14,261
The Notes 1 to 10 form part of these financial statements.
These financial statements were approved by the Board of Directors on 2 August 2019 and were signed on its behalf by:
Andrew Wass
Director
2 August 2019
Chris Scott
Director
2 August 2019
Company registered number: 07786708
StrategicReportCorporateGovernanceFinancialStatements 76
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Company Statement of Changes in Equity
Balance at 1 March 2017
Loss for the year
Issue of shares net of expenses
Share-based payment charge
Balance at 28 February 2018
Loss for the year
Issue of shares net of expenses
Share-based payment charge
Balance at 31 March 2019
The accompanying notes form an integral part of the financial statements.
Share
capital
£000
2,016
–
71
–
Share
premium
£000
8,933
–
4,122
–
Retained
earnings
£000
(868)
(82)
–
69
Total
equity
£000
10,081
(82)
4,193
69
2,087
13,055
(881)
14,261
–
8
–
–
97
–
(30)
–
(23)
(30)
105
(23)
2,095
13,152
(934)
14,313
77
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Notes to the Company Financial Statements
(forming part of the financial statements)
1 Accounting policies
The Company’s principal activity is to act as the holding company for the Group, whose principal activity is retailing musical
instruments and equipment.
1.1 Basis of preparation
These financial statements were prepared in accordance with Financial Reporting Standard 102, The Financial Reporting Standard
applicable in the UK and Republic of Ireland (‘FRS 102’) as issued in August 2014. The amendments to FRS 102 issued in July 2015 and
effective immediately have been applied. The presentation currency of these financial statements is Sterling. All amounts in the financial
statements have been rounded to the nearest £1,000.
Under section s408 of the Companies Act 2006 the Company is exempt from the requirement to present its own profit and loss
account.
In these financial statements, the Company is considered to be a qualifying entity (for the purposes of this FRS) and has applied the
exemptions available under FRS 102 in respect of the following disclosures:
•
• cash flow statement and related notes; and
• key management personnel compensation.
reconciliation of the number of shares outstanding from the beginning to end of the period;
As the consolidated financial statements of the Company include the equivalent disclosures, the Company has also taken the
exemptions under FRS 102 available in respect of the following disclosures:
• certain disclosures required by FRS 102.26 Share-based payments; and,
•
the disclosures required by FRS 102.11 Basic financial instruments and FRS 102.12 Other Financial Instrument Issues in respect of
financial instruments not falling within the fair value accounting rules of Paragraph 36(4) of Schedule 1.
The Company proposed to continue to adopt the reduced disclosure framework FRS 102 in future periods.
Accounting period
The financial statements presented cover the period ended 31 March 2019 and year ended 28 February 2018.
Measurement convention
The financial statements have been prepared on the historical cost basis.
Functional currency
The financial statements are presented in Sterling, which is the Company’s functional currency.
1.2 Going concern
These financial statements are prepared on a going concern basis as explained on page 50.
Investment in subsidiaries
1.3
These are separate financial statements of the Company. Investments in subsidiaries are carried at cost less impairment.
1.4 Classification of financial instruments issued by the Company
In accordance with FRS 102.22, financial instruments issued by the Company are treated as equity only to the extent that they meet the
following two conditions:
(a) they include no contractual obligations upon the Company to deliver cash or other financial assets or to exchange financial assets
or financial liabilities with another party under conditions that are potentially unfavourable to the Company; and
(b) where the instrument will or may be settled in the Company’s own equity instruments, it is either a non-derivative that includes no
obligation to deliver a variable number of the Company’s own equity instruments or is a derivative that will be settled by the
Company exchanging a fixed amount of cash or other financial assets for a fixed number of its own equity instruments.
To the extent that this definition is not met, the proceeds of issue are classified as a financial liability. Where the instrument so classified
takes the legal form of the Company’s own shares, the amounts presented in this financial information for called-up share capital and
share premium account exclude amounts in relation to those shares.
1.5 Basic financial instruments
Basic financial instruments comprise investments other receivables, cash and cash equivalents, loans and borrowings, and trade and
other payables.
Trade and other debtors
Other receivables are recognised initially at fair value. Subsequent to initial recognition, they are measured at amortised cost using the
effective interest method, less any impairment losses.
StrategicReportCorporateGovernanceFinancialStatements 78
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Notes to the Company Financial Statements
(forming part of the financial statements) continued
1 Accounting policies continued
1.5 Basic financial instruments continued
Trade and other creditors
Trade and other payables are recognised initially at fair value. Subsequent to initial recognition, they are measured at amortised cost
using the effective interest method.
Cash and cash equivalents
Cash and cash equivalents comprise cash balances and call deposits.
Interest-bearing borrowings
Interest-bearing borrowings are recognised initially at fair value less attributed transaction costs. Subsequent to initial recognition,
interest-bearing borrowings are stated at amortised cost using the effective interest method.
Inter-company loans
Amounts owed by Group undertakings are initially recognised at fair value. Subsequently, they are measured at amortised cost using
the effective interest rate method less provision for impairment. If the arrangement constitutes a financing transaction, then it is
measured at the present value of future payments discounted at a market rate of interest for a similar debt instrument.
Impairment
1.6
Financial assets (including debtors)
A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective
evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial
recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be
estimated reliably.
An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying
amount and the present value of the estimated future cash flows. The effect of discounting is not material. When a subsequent event
causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.
Non-financial assets
The carrying amounts of the Company’s non-financial assets, other than inventories and deferred tax assets, are reviewed at each
reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable
amount is estimated.
The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In
assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects
current market assessments of the time value of money and the risks specific to the asset.
For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets
that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the
‘cash-generating unit’).
An impairment loss would be recognised if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. No
impairments have been recognised in the periods presented.
1.7 Provisions
A provision is recognised in the balance sheet when the Company has a present legal or constructive obligation as a result of a past
event, that can be reliably measured and it is probable that an outflow of economic benefits will be required to settle the obligation.
Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects risks specific to the liability.
1.8 Employee benefits
Defined contribution plans
A defined contribution pension plan is a post-employment benefit plan under which the Group pays fixed contributions into a separate
entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution
pension plans are recognised as an expense in the income statement in the periods during which services are rendered by employees.
79
Gear4music (Holdings) plc
Annual Report and Accounts 2019
1 Accounting policies continued
1.8 Employee benefits continued
Share-based payment transactions
Share-based payment arrangements in which the Group receives goods or services as consideration for its own equity instruments are
accounted for as equity-settled share-based payment transactions, regardless of how the equity instruments are obtained by the Group.
The grant date fair value of share-based payment awards granted to employees is recognised as an employee expense, with a
corresponding increase in equity, over the period that the employees become unconditionally entitled to the awards. The fair value of
the options granted is measured using the Black-Scholes model, taking into account the terms and conditions upon which the options
were granted. The amount recognised as an expense is adjusted to reflect the actual number of awards for which the related service
and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the
number of awards that do meet the related service and non-market performance conditions at the vesting date.
Share-based payment transactions in which the Group receives goods or services by incurring a liability to transfer cash or other assets
that is based on the price of the Group’s equity instruments are accounted for as cash-settled share-based payments. The fair value of
the amount payable to employees is recognised as an expense, with a corresponding increase in liabilities, over the period in which the
employees become unconditionally entitled to payment. The liability is remeasured at each balance sheet date and at settlement date.
Any changes in the fair value of the liability are recognised as personnel expense in profit or loss.
1.9 Financial income and expenses
Financing expenses comprise interest payable and finance leases recognised in profit or loss using the effective interest method,
unwinding of the discount on provisions, and net foreign exchange losses that are recognised in the income statement (see foreign
currency accounting policy). Financing income comprises interest receivable on funds invested and net foreign exchange gains.
Interest income and interest payable is recognised in profit or loss as it accrues, using the effective interest method.
Dividend income is recognised in profit and loss on the date the Company’s right to receive payment is established.
1.10 Taxation
Tax on the profit or loss for the year comprises current and deferred tax.
Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively
enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or
settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the
temporary difference can be utilised.
2 Expenses
Included in profit/loss are the following:
Auditor remuneration – audit of financial statements
Auditor remuneration – other
3 Directors’ remuneration
Directors’ remuneration
Company contributions to money purchase pension schemes
Period ended
31 March
2019
£000
30
–
Year ended
28 February
2018
£000
20
17
Period ended
31 March
2019
£000
Year ended
28 February
2018
£000
656
81
737
535
17
552
There are four Directors (2018: four) for whom retirement benefits are accruing under a money purchase pension scheme.
The aggregate remuneration of the highest paid Director was £252,000 during the 13-month period (2018: £200,000), including
Company pension contributions of £75,000 (2018: £3,000) that were made to a money purchase scheme on their behalf.
StrategicReportCorporateGovernanceFinancialStatements 80
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Notes to the Company Financial Statements
(forming part of the financial statements) continued
4 Fixed asset investments
Cost
At 1 March 2018
Capital contribution
At 31 March 2019
Subsidiary
undertakings
£000
3,517
335
3,852
Investments in subsidiaries are carried at fair value, with changes recognised in other comprehensive income (‘OCI’) in accordance with
FRS 102.17.15E-F, Property, plant and equipment, with net revaluation gains recognised in OCI and net revaluation losses in profit or loss.
The Company has the following investments in subsidiaries:
Subsidiaries
Registered office address
Gear4music Limited
Cagney Limited
Gear4music Sweden AB Metallvägen 45a, 195 72 Rosersberg, Stockholm County,
Holgate Park Drive, York, YO26 4GN
Holgate Park Drive, York, YO26 4GN
Sweden
Registered number
03113256
04493300
559070-4762
Class of
shares held
Ordinary
Ordinary
Ordinary
Ownership
100%
100% via G4M Ltd
100% via G4M Ltd
Gear4music GmbH
Gear4music Norway AS
Lahnstraße 27, 45478 Mülheim an der Ruhr, Germany
PO Box 2734, Solli, 0204 Oslo, Norway
HRB 29067
917 313 210
Ordinary
Ordinary
100% via G4M Ltd
100% via G4M Ltd
Cagney Limited and Gear4music Norway AS are dormant companies.
5 Deferred tax assets
Movement in deferred tax during the period
Unused tax losses
Movement in deferred tax during the previous year
Unused tax losses
6 Debtors
Due within one year:
Other debtors
Due after more than one year:
Amounts owed by Group undertakings
At 1 March
2018
£000
–
–
At 1 March
2017
£000
–
–
Recognised
in income
statement
£000
–
–
Recognised
in income
statement
£000
–
–
At
31 March
2019
£000
–
–
At
31 March
2018
£000
–
–
Period ended
31 March
2019
£000
Year ended
28 February
2018
£000
16
16
22
22
Period ended
31 March
2019
£000
10,472
10,472
Year ended
28 February
2018
£000
10,744
10,744
The loan to Group undertakings is repayable in 12 months and 1 day from the year end. No interest is charged on the balance.
As at 31 March 2019, receivables from subsidiary undertakings were unimpaired and considered by management to be fully recoverable.
81
Gear4music (Holdings) plc
Annual Report and Accounts 2019
7 Cash and cash equivalents
Cash and cash equivalents per balance sheet
8 Creditors: amounts falling due within one year
Trade creditors
Accruals and deferred income
9 Share capital and reserves
Share capital
Authorised, called up and fully paid:
Ordinary shares of 10p each
Period ended
31 March
2019
£000
Year ended
28 February
2018
£000
19
17
Period ended
31 March
2019
£000
Year ended
28 February
2018
£000
1
45
46
6
33
39
Period ended
31 March
2019
Number
Year ended
28 February
2018
Number
20,945,328
20,867,121
The Company has one class of Ordinary share and each share carries one vote and ranks equally with the other Ordinary shares in all
respects, including as to dividends and other distributions.
On 3 June 2018, the Company issued and allotted 78,207 new Ordinary shares of 10p each on exercise of options under the Company’s
EMI schemes (see Note 19). This took the number of Ordinary shares in issue from 20,867,121 to 20,945,328, representing dilution of 0.4%.
Share premium
Opening
Issue of shares
Share issue costs
Closing
Retained earnings
Opening
Share-based payment charge
Loss for the year
Closing
Period ended
31 March
2019
£000
13,055
97
–
13,152
Year ended
28 February
2018
£000
8,933
4,278
(156)
13,055
Period ended
31 March
2019
£000
Year ended
28 February
2018
£000
(881)
(23)
(30)
(934)
(868)
69
(82)
(881)
10 Related parties
In FY18 Chris Scott and Gareth Bevan were granted 2,288 equity-settled share options each, and Andrew Wass was awarded an
equivalent cash-settled option to result in the same monetary value being returned on vest.
In FY19 an EMI share incentive plan for Chris Scott and Gareth Bevan vested in full, with the exercise total of 9,978 equity-settled share
options each. An equivalent discretionary cash bonus plan for Andrew Wass vested in full with payment of £72,041.
Also, in FY19 a new long-term incentive plan involving Andrew Wass, Chris Scott and Gareth Bevan was put in place and involved the
issue of 210,000 ‘B’ Ordinary shares in Gear4music Limited, a subsidiary of the Company. These ‘B’ shares vest from 2021-26 and can
be exchanged on a one-for-one basis for new Ordinary Company shares subject to meeting specified criteria, including reaching a
specified target share price for 80% of the award, and pre-determined revenue and profitability targets for 20%.
StrategicReportCorporateGovernanceFinancialStatements 82
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Notes
83
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Notes
StrategicReportCorporateGovernanceFinancialStatements 84
Gear4music (Holdings) plc
Annual Report and Accounts 2019
Notes
Gear4music (Holdings) plc
Holgate Park Drive
York YO26 4GN
UK
Kettlestring Lane
Clifton Moor
York YO30 4XF
UK
0330 365 4444
ir@gear4music.com
www.gear4music.com
www.gear4musicplc.com
Nominated Adviser
and Broker
Nplus1 Singer Advisory LLP
1 Bartholomew Lane
London
EC2N 2AX
Investor Relations
Alma PR
71-73 Carter Lane
London
EC4V 5EQ
Registrars
Link Asset Services
34 Beckenham Road
Beckenham
Kent
BR3 4TU
Solicitors
Walker Morris
Kings Court
12 King Street
Leeds
LS1 2HL
Auditors
KPMG LLP
1 Sovereign Square
Sovereign Street
Leeds
LS1 4DA