Hotel Chocolat
Annual Report 2016

Plain-text annual report

H O T E L C H O C O L A T G R O U P P L C A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 6 ANNUAL REPORT AND ACCOUNTS 2016 Not all chocolates are created equal R E G I S T E R E D O F F I C E Hotel Chocolat Group plc Mint House Newark Close Royston Hertfordshire SG8 5HL The leading UK premium chocolate company, making innovative and affordable luxury chocolates. We sell our chocolate direct to our customers via subscription, online and our 83 stores. Our strong British brand is based on an ethos of: Originality  ·  Authenticity  ·  Ethics Highlights £91.1m R E V E N U E ( 2 015 : £ 81.1m) ( P rofor m a £ 92 . 6 m , 2015: £ 82 . 6 m) +12% S A L E S G ROW T H D i g i t a l G r o w t h +2 0 % R E V E N U E £91.1m £81.1m £75.7m +57% E B I T DA G ROW T H £12.3m E B I T DA ( p r e - e xc e p t i o n a l ) ( 2 015 : £ 7. 8 m) £8.2m PROFIT BEFORE TAX (pre-exceptional) (Profit before tax £5.6m, 2015: £2.9m) £4.1m P RO F I T A F T E R TA X ( 2 015 : £ 2 . 0 m) £8.3m capital investments completed I N C LU D I N G N E W S TO R E S A N D FAC TO RY U P G R A D E S 14 15 16 E B I T DA (pre-exceptional) £12.3m £7.8m 14 15 16 18 Academy of Chocolate Awards £(1.6)m WO N ‘Hotel Chocolat is the nation’s favourite premium chocolate brand’ Allegra 2015 Contents COMPANY OVERVIEW Highlights At a glance STRATEGIC REPORT Chairman’s statement What sets us apart? Our business model Our markets Our strategy Chief Executive’s statement Financial review Risk management 01 08 10 12 14 16 18 20 24 26 GOVERNANCE Corporate social responsibility Board of Directors Corporate governance statement Audit Committee report Remuneration report Directors’ report Statement of Directors’ responsibilities 28 30 32 35 36 38 40 FINANCIAL STATEMENTS Independent auditor’s report Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Cash Flow Consolidated Statement of Changes in Equity Notes to the financial statements Company Statement of Financial Position Company Statement of Cash Flow Company Statement of Changes in Equity Notes to the Company financial statements Company information 41 42 43 44 45 46 77 78 78 79 81 COMPANY OVERVIEW Highlights 01 Company overviewStrategic reportGovernanceFinancial statementsOriginality Company overview We believe in being fresh, creative and innovative, doing things in a different way A STRONG DESIGN ETHOS For our new Rare & Vintage range, we took inspiration from pleated fabric to sculpt a beautiful look which is also perfect for breaking into thin pieces. 02 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts COMPANY OVERVIEW Originality 03 Strategic reportGovernanceFinancial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and Accounts Authenticity Company overview We are the real thing, our focus on “more cocoa, less sugar” results in a superior taste TREE TO BAR CHOCOLATE MAKING Visitors to our beautiful Saint Lucian plantation hotel, called Boucan, can make their own chocolate bar from beans grown on the estate. 04 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts COMPANY OVERVIEW Authenticity 05 05 Strategic reportGovernanceFinancial statementsCompany overview Ethics We focus on ensuring that we deliver sustainable outcomes for all our stakeholders; our Engaged Ethics programme aims to unite cocoa growers and lovers of fine chocolate, being fair to both A BLUEPRINT FOR SUSTAINABLE COCOA GROWING We partner with more than 150 Saint Lucian growers, committing to pay a fair price and support productivity improvements, including the supply of high quality cocoa seedlings. We are now applying the same techniques to the higher volume Ghanaian cocoa used in our house blends. 06 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts COMPANY OVERVIEW Ethics 07 Strategic reportGovernanceFinancial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and AccountsAt a glance The leading UK premium chocolate brand, manufacturing innovative and accessibly priced luxury chocolates. We sell our chocolate direct to customers via subscription, online and our 83 stores. Key product ranges Company overview Strategic report Governance Financial statements The story so far The IPO in May 2016 represents just one milestone in a journey that began in 1997 with the launch of our first consumer facing website. 1990s First website launched under ‘ChocExpress’ brand 2003 Hotel Chocolat brand created 2008 Factory opens in Huntingdon, Cambridge 22 stores 2014 New Shop+Cafe format 77 stores S E L F P U RC H A S E G I F T & O CC A S I O N R A R E & V I N TAG E OT H E R Selectors Over 120 flavours Boxed chocolates Seasonal specials Connoisseur’s choice Provenance & tasting notes Impulse & children’s gifts Drinking chocolate Unique wine and spirits 1998 Tasting Club subscriptions launched 2004 First store opens in Watford Geographic footprint The business began in the 1990s with online and subscription, and our first physical store followed in 2004. Our store roll-out plan is informed and supported by a database showing the buying patterns of our loyal multi- channel customers. Our store formats range from 100 sq ft to 6,000 sq ft and trade profitably across the UK. We are also developing our international retail knowledge with three stores in Copenhagen. 80 3 1 U K S TO R E S DA N I S H S TO R E S B O U T I Q U E H OT E L 2016 IPO Sales £91.1m EBITDA £12.3m 83 stores 2012 Boucan Hotel opens in Saint Lucia 60 stores Our growth strategy Open new stores I N C LU D I N G S H O P + C A F E F O R M AT Upgrade digital platform A N D I M P ROV E G I F T I N G O P T I O N S Increase capacity & capability I N P RO D U C T I O N A N D S U P P LY C H A I N Our business model has evolved and grown by making natural extensions to our existing products and services, testing them and once proven investing in roll-out. There is significant growth headroom in the UK and we will continue to open new stores. Our current website is successful with digital revenues growing +20% in FY16, but there remains opportunity to add new features and services. We design and make our own chocolates; investing in manufacturing capacity and capability will allow us to keep pace with sales growth, improve product margins and develop innovative new products. 08 COMPANY OVERVIEW At a glance 09 Company overviewStrategic reportGovernanceFinancial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and AccountsChairman’s statement In the year we have cemented the foundations for future growth. OV E RV I E W D I V I D E N D S “ Our combination of strong brand and vertically integrated business model is starting to deliver strong results.” A N D R E W G E R R I E Independent Non-executive Chairman The Group remains in a growth phase and is presented with many strong investment opportunities, each of which is assessed using a disciplined approach to capital allocation and risk. The Board intends to invest the IPO proceeds to support the business strategy, with the goal of accelerating the growth of the business and a target of improving returns. The Board therefore is not recommending a dividend for FY16 but is committed to adopting a progressive dividend policy in future as the business grows. FY16 represented a landmark year in the history of Hotel Chocolat (HC). The IPO in May 2016 marked the next stage of the development and growth of the business and provides the capital to accelerate our growth strategy whilst raising the profile of the business. R E S U LT S The Group achieved a pleasing result in FY16 with revenue of £91.1m and growth of 12% versus FY15. Strong control of costs meant that operating margins improved with pre-exceptional EBITDA margin rising from 9.7% to 13.5%. P E O P L E The Group continues to be led by a strong founder-led executive management team that have built a successful business. In April, we welcomed Sophie Tomkins to the Board as a Non- executive Director. She has already made a valuable contribution to the Board and brings excellent experience to her role as Chair of the Audit Committee. I would also like to extend my thanks to the whole Hotel Chocolat team for their hard work, commitment and for a job well done. Strategic report Originality · Authenticity · Ethics The Tasting Club Tasting Club members taste our newest recipes every month. They score the chocolates and only the best make it into our retail ranges. Club members are strong supporters of our Engaged Ethics programme; some have also supported our growth by investing in chocolate bonds. 10 STR ATEGIC REPORT Chairman’s statement 11 Company overviewGovernanceFinancial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and AccountsWhat sets us apart? A strong differentiated brand underpinned by vertical integration. Strategic report Strong & distinctive brand The Hotel Chocolat brand evokes escapism and offers a contemporary take on luxury chocolate. An in-house design team carefully curates the look and feel – from chocolate casting mould creation to packaging, from recipes to marketing communications and store fit-outs. Premium differentiated product Rather than copying continental chocolate traditions, Hotel Chocolat has carved out a modern British take on luxury chocolate. aspects of the product Many range have successfully overturned traditional approaches: for example our ‘Selector’ wall of chocolates glass replaces cabinet of loose chocolates, offering wider choice, fresher product and faster service. traditional the Product innovation Innovation is in our DNA, from the Tasting Club to chocolate bonds, from award winning new chocolate recipes, to cocoa gin and the use of cocoa as a savoury ingredient. We ensure that strong innovation is balanced by a disciplined range architecture, ensuring only the edited best of the best feature in our product ranges. Vertically integrated Being vertically integrated means we can apply our expertise at every stage of the process to create superior and innovative products at improved margins, and gives the flexibility to trade each season responsively. Owning the sales channels also allows our teams to pass on their knowledge and enthusiasm to our guests. Omni-channel retail distribution Progressive digital marketing Investing in digital and physical store distribution channels means we know more about our customers than would be possible by following a traditional FMCG distribution route, so we can give better service and create products and services that our customers want. We have our origins in e-commerce. Not only has this informed our store roll-out, it means that digital is always at the centre of our customer strategies. 12 STR ATEGIC REPORT What sets us apar t? 13 Company overviewGovernanceFinancial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and AccountsOur business model We believe that growth and re-investment can benefit all of Hotel Chocolat’s stakeholders. Strategic report We seek out the best partners to supply premium ingredients to ensure that our products set us apart from the competition. All of our products are developed and designed in-house and are exclusive to the brand. With the goal of being the true sector specialist, we have created a broad product range. We strive for continual innovation in a disciplined range framework. In 2008 we established a dedicated production facility near Cambridge where we now make over 95% of our products. In-house production increases control over quality, allows faster innovation and improves gross margins. We own a cocoa plantation in Saint Lucia called the Rabot Estate. This is the source of the exclusive beans used in our Rare & Vintage range and of our deep understanding of the cocoa growing process. This knowledge will enable us to continuously improve our relationship with all of our cocoa growers worldwide. Everything we do is guided by the three basic values that we started with and will always retain: Originality Authenticity Ethics Our Engaged Ethics programme drives investment in sustainability both in the UK and worldwide. We Deliver – Customer happiness – Employee engagement – Supply sustainability – Shareholder value Our main Distribution Centre is near Cambridge. The majority of our products are packaged here and then distributed to stores using our own fleet of vehicles. Owning the supply chain improves responsiveness and enables high levels of product availability. We reach our customers through an omni-channel model. Our focus is on great service to ensure 100% happiness. DIGITAL & SUBSCRIPTION RETAIL COCOA ESTATE PREMIUM WHOLESALE PARTNERS 14 STR ATEGIC REPORT Our business model 15 Company overviewStrategic reportGovernanceFinancial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and AccountsOur markets We operate in four large and growing markets, all offering significant headroom. Our differentiated product offer is well placed and has the potential to increase market share. The Board believes that approximately half of products are purchased as gifts and considers that both our competitor set and growth opportunity are wider than just traditional chocolate retailing. UK gifting UK chocolate UK cafes International £2 0 BN M A R K E T1 £6 BN M A R K E T 2 £8 BN M A R K E T 3 >£7 0 BN M A R K E T H C H A S <0 . 5 % S H A R E H C H A S <2 . 0 % S H A R E H C H A S <0 .1% S H A R E H C H A S <0 . 0 2 % S H A R E S T R AT E GY S T R AT E GY S T R AT E GY S T R AT E GY • Improve gift products for stores and online • Increase range of hampers and gift packs • Grow customer database • Open more stores across the UK • Apply Shop+Cafe model to selected new sites • Prove store economics in Denmark • Digital upgrades improve loyalty and acquisition, conversion and tablet optimised site. • Extend dietary luxury (vegan, gluten free, “more cocoa, less sugar”) • Test takeaway-only Hot Chocolat and ice cream in smaller stores • Gain international know- how to be equipped for larger markets later • New website brings international expansion opportunity 1) Mintel, 2007 2) Canadean, 2014 3) Allegra, 2016 16 Company overview Company overview Strategic report Strategic report Governance Governance Financial statements Financial statements In consumer research UK shoppers named Hotel Chocolat as their favourite premium chocolate brand, they also cited the main reasons for not buying as “lack of access” and “lack of awareness”. Opening more stores and improving digital will address this opportunity and capitalise on the significant market headroom. STR ATEGIC REPORT Our markets 17 HOTEL CHOCOLAT GROUP PLC Annual Report and AccountsOur strategy We maintain a disciplined approach to capital investment to deliver returns and contain risk. Strategic report Originality · Authenticity · Ethics Open new stores I N C LU D I N G S H O P + C A F E F O R M AT Continue roll-out of Shop-only format Continue roll-out of Shop+Cafe format Our property strategy is targeting new sites across the UK. Our latest shopfits have achieved significant reductions in cost per sq ft. Refit existing sites, resite key stores to larger, prime sites and add cafe offer We will continue to innovate, adding new ranges and services. Upgrade digital platform A N D I M P ROV E G I F T I N G P RO P O S I T I O N New website in 2017 Responsive design across all devices including tablet/mobile International website capability at marginal cost Trial a gift-sending app Increase capacity & capability I N P RO D U C T I O N A N D S U P P LY C H A I N Investment in new technology to increase factory capacity Redesign products to reduce packaging cost Improve gross margins Our current website launched in 2013 and has delivered strong growth, with digital revenue up +20% year-on-year in FY16. However there are significant opportunities to further enhance the ease of navigation and increase the number of gift-sending options. The new website will launch in 2017 and will also bring the ability to add international websites more rapidly and at a lower marginal cost. Our production facility at Huntingdon opened in 2008 and has evolved continuously to keep pace whilst sales have more than doubled. To accommodate projected future growth we are investing £10m in a three-year programme of works that will reduce cost of production without any compromise in quality and will allow us to further innovate with new products. Investing in our store roll-out We have profitable store formats from 100 sq ft to 6,000 sq ft. Our new Shop+Cafe format adds a premium drinks range to our full retail range, giving customers more reasons to visit, and offers a counter-seasonal sales profile. This allows us to increase sales and profitability in mature catchments and to open in smaller catchments where a Shop-only format might not be viable. 18 STR ATEGIC REPORT Our strategy 19 Company overviewStrategic reportGovernanceFinancial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and AccountsChief Executive’s statement Our results continue to improve and we see significant opportunity for future growth. In my first Chief Executive’s statement I am pleased to report a year of significant progress for the Group. Revenue grew by 12% to £91.1m and profit before tax increased by 91% to £5.6m. We further refined our business model and all channels achieved growth, whilst a focus on cost efficiency resulted in an improved EBITDA margin. I would like to thank the whole team for their enthusiasm and tireless commitment, without which these results would not have been possible. “ The brand has continued S A L E S C H A N N E L R E V I E W to gain in strength, meaning we are well positioned for growth in all of our markets.” A N G U S T H I R LW E L L Co-founder and Chief Executive Officer Our multi-channel model continues to work well: each channel supports the others and all channels are in growth. Digital growth of +20% was particularly strong. Our stores continued to perform well and the opening of our fifth Shop+Cafe site in Worcester represented an encouraging step as we continue to hone this new format. We will continue to open both pure chocolate shops and Shop+Cafe formats to best match the opportunity in each location. In the year we opened seven new stores in Regent Street and Tottenham Court Road in London, Birmingham New Street Station, Glasgow Braehead, Manchester Market Street, Manchester Piccadilly Station and Sheffield Fargate. In the year we also closed three stores that had reached the end of their leases and weren’t meeting our returns hurdles, thus improving the overall profitability of the retail estate. Since the end of the financial period we have opened three stores in Worcester, Peterborough and Chelmsford, and have signed leases on a further five including our first Designer Outlet store at Cheshire Oaks, all of which we expect to be trading before Christmas 2016. Our international operations remain at the exploratory stage and highlights have included a refit of our Shop+Cafe site in Copenhagen city centre and the opening of a new franchised store in Gibraltar, with our partner Sandpiper, who already operate Hotel Chocolat franchise stores in Jersey and Guernsey. O P E R AT I O N A L R E V I E W A major focus for the period was on improving availability to ensure customers can always find their favourite Hotel Chocolat products which helped increase sales growth rates across all channels. The key seasonal ranges have also traded strongly. Strategic report Originality · Authenticity · Ethics From ‘bean to bar’ For our Rare & Vintage range we carefully source beans from all around the world to complement those we grow ourselves. Each type of bean is selected to showcase the variety of flavours that fine cocoa can achieve. We ensure that the growers are accredited as sustainable, and we commit that our team will conduct visits to every site. Our development team then experiments to find the best roasting temperatures and conching (grinding) times to bring out the delicate flavour of the different beans. This results in a unique range of some of the best cacao on the planet, priced at an accessible luxury level. 20 HOTEL CHOCOL AT STR ATEGIC REPORT Chief Executive’s statement 21 Company overviewGovernanceFinancial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and AccountsB R A N D R E V I E W CO N S U M E R T R E N D S Mobile Chief Executive’s statement continued Further investments are planned for summer 2017 to improve capacity and efficiency. M A N U FAC T U R I N G I N V E S T M E N T Following the end of Easter and preceding the build-up for the winter peak, each summer presents our annual ‘window’ to undertake infrastructure investment. In summer 2015 we completed a £1.0m investment to relocate the packing of our finished products from our factory in Huntingdon to our nearby Distribution Centre in St Neots. This change increased the factory’s capacity by freeing up space, allowing more efficient and responsive supply of product and reducing the amount of miles travelled moving product between our sites. In summer 2016 we completed a £3.7m investment installing a mezzanine floor in the factory and significantly upgrading one of our three key production lines. This has resulted in an increase in factory capacity of over 20% as well as improved efficiency and the ability to conjure up more exciting recipes. We also invested to increase our ‘bean to bar’ manufacturing capacity, enabling us to produce more of our super-premium Rare & Vintage product range. Further investments are planned for summer 2017 to improve capacity and efficiency. As a result of our continued nurturing the Hotel Chocolat brand continues to strengthen. At the beginning of FY16 we relaunched our key boxed chocolate ranges, improving the packaging and adding new recipes to increase choice. Over the Christmas gifting season, redesigned boxed chocolates proved a particular success. We won an impressive 18 awards from the Academy of Chocolate including for our new Teaolat infusion drinks, our Saint Lucian Buffalo Milk 65% Chocolate and our new ‘Banana Bread’ chocolate. We also launched new gift sleeves which allow guests to quickly personalise a product for a gift recipient, with early signs being very encouraging. This is part of our strategy to become a leading one-stop destination for gifts, both digitally and in-store. Wellness We see an increasing trend that consumers want uncompromisingly delicious and hedonistic chocolate that’s also made with responsible amounts of sugar. Hotel Chocolat’s 12-year track record of “more cocoa, less sugar” is applied to every grade of chocolate, from our whites, through milks and darks. We carry a very wide range of darks with cocoa percentages ranging from 70% all the way up to 100%. Our new supermilk genre means we can offer a milky and mellow taste, but with less sugar than most dark chocolates on the market. Our award-winning vegan darks also continue to see significant sales growth. Experiences Experiences are becoming increasingly popular as a new luxury and consumers are seeking to go beyond the purely transactional. We are well positioned to take advantage of this trend. Whilst a stay at our Boucan Hotel in Saint Lucia remains the pinnacle, great experiences are available throughout the UK. We offer School of Chocolate customer experiences nationwide, priced from £20 to £120 and we introduced new brunches and afternoon teas at our London and Leeds flagships. Our amazing Hot Chocolat is now available in more locations as we expand our new Shop+Cafe format. We intend to continue to develop the range of experiences we can offer, showcasing the brand specialisation from farm to finished product and aspire to turn customers into advocates. Living an increasingly mobile and flexible life is a clear trend. Plans are underway to make it easier to send an HC gift whilst on the move with our new digital capability coming on stream in H1 2017. This will deliver improved content optimised for smartphones and tablets. O U T LO O K I am confident that our plan for the coming year is robust. Our capital plans are based on proven store formats and digital channels, and on making greater use of existing production methods and technology. Our strategy remains on track and our continued innovation and focus on customer happiness aim to deliver increased sales, combined with disciplined capex and a tight control on costs with the goal of improving returns. The market and wider economy may not be without challenges, but we still have significant addressable market headroom and benefit from having distribution and manufacturing directly under our control, which supports the resilience of our business. Ensuring that we maintain the strong relationship we enjoy with our customers will always be our top priority. R E V E N U E Physical Digital Wholesale Cocoa estate 66% 24% 8% 2% 2% 8% 66% 24% 22 STR ATEGIC REPORT Chief Executive’s statement 23 Company overviewStrategic reportGovernanceFinancial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and Accounts Financial review Strong sales growth coupled with improving margins and cost control have resulted in an improvement in profitability. “ Investments in proven formats and in increasing production capacity have supported growth. A focus on costs has improved operating leverage and profit margins.” M AT T P R I TC H A R D Chief Financial Officer Revenue Gross profit Operating expenses Pre-exceptional EBITDA Depreciation & amortisation Exceptional costs Operating profit Finance income Finance expense Profit before tax Tax expense Profit for the period Period ended 26 June 2016 £000 Period ended 28 June 2015 £000 91,090 60,853 (48,522) 12,331 (3,194) (2,642) 6,366 172 (947) 5,591 (1,507) 4,084 81,068 53,982 (46,148) 7,834 (4,239) – 3,463 188 (720) 2,931 (884) 2,047 R E V E N U E E XC E P T I O N A L CO S T S Revenue grew by 12% from £81.1m to £91.1m. An overview of revenue is included in the Chief Executive’s statement. G RO S S M A RG I N A N D O P E R AT I N G E X P E N S E Gross profit margin improved from 66.6% to 66.8%, as a result of a focus on efficiency and better buying, partially offset by ongoing investment in product quality. A focus on cost control meant that operating expenses as a percentage of sales reduced from 56.9% to 53.3%. The exceptional costs of £2.6m relate to the costs of flotation of the Group in May 2016 and to the acquisition of Hotel Chocolat Estates Limited, Saint Lucia by the Group at the time of IPO. F I N A N C E E X P E N S E A £5.6m loan was taken out with Lloyds bank in July 2015 and was repaid in full from operating cash flow prior to the IPO. In addition the Group made use of an overdraft facility provided by Lloyds bank. This was replaced with an £18m 2-year RCF facility in April 2016. TA X AT I O N C A S H P O S I T I O N P E R F O R M A N C E I N D I C ATO R S The effective rate of taxation is 27%. This is higher than the standard rate primarily as a result of costs relating to the IPO, which are not allowable for tax purposes. E A R N I N G S P E R S H A R E ( E P S ) A N D D I V I D E N D S The capital reorganisation in conjunction with the IPO increased the number of shares in issue to 112,837,828 resulting in an FY16 EPS of 3.9p. The business continues to be in a growth phase and has recently raised new capital to finance investment activity with the goal of increasing returns. Therefore the Board does not propose a dividend, but intends to adopt a progressive dividend policy in future years as the business grows. The Group had £6.5m of cash at year end and £6.7m of borrowings in the form of chocolate bonds where bondholders receive boxes of chocolate or gift cards in lieu of interest. The Group monitors its performance using a number of key indicators which are agreed at Board meetings and monitored at operational and Board level. WO R K I N G C A P I TA L R E V E N U E G ROW T H Closing inventories increased by £2.1m driven by an investment in inventory to improve availability for customers which has supported sales growth, and by a requirement to build additional inventory in advance of a temporary factory shutdown to complete capital investment in July and August 2016. +12% Revenue grew 12% year-on-year C A P I TA L E X P E N D I T U R E G RO S S M A RG I N Capital expenditure of £8.3m comprised investments in new stores and re-sites, IT projects and in operational projects including upgrades to factory capacity and capability. 66.8% Gross margin improved from 66.6% to 66.8% P R E - E XC E P T I O N A L E B I T DA M A RG I N 13.5% EBITDA margin before exceptional costs improved from 9.7% to 13.5%. ACQ U I S I T I O N O F H OT E L C H O CO L AT E S TAT E S L I M I T E D, S A I N T LU C I A ( H C E S L) Hotel Chocolat Group Limited acquired HCESL on 24 April 2016. As such the audited financial statements are required by the Companies Act to include the activities, assets and liabilities of HCESL from the date of acquisition. The admission document published prior to the IPO was required to include the results of HCESL as if the Company had always been a member of the Group. The proforma numbers below are therefore provided for comparative purposes. Hotel Chocolat Group plc proforma basis Revenue Pre-exceptional EBITDA Period ended 26 June 2016 £000 Period ended 28 June 2015 £000 92,636 12,270 82,614 8,106 24 STR ATEGIC REPORT Financial review 25 Company overviewStrategic reportGovernanceFinancial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and Accounts Risk management The Board sets out below the principal risks that the Directors consider could impact the business. The Board continually reviews the risks facing the Group, the controls in place to mitigate any potential adverse impacts and assurance sought to check that the controls are working effectively. The Board recognises that the nature and scope of risks can change and there may be other risks to which the Group is exposed so the list is not intended to be exhaustive. Risk category Potential impact Mitigation Change to residual risk in FY 2016 Commentary I N C R E A S E D CO M P E T I T I O N A N D C H A N G E S I N CO N S U M E R TA S T E S Changes to competition and/or consumer preferences may reduce demand for the Group’s products. Increased competition could make it more difficult or more costly to acquire new store leases. E CO N O M I C A N D P O L I T I C A L FAC TO R S B E YO N D T H E G RO U P ’ S D I R E C T CO N T RO L F O R E I G N E XC H A N G E A downturn in the macro-economy may reduce consumer demand generally. Costs may be increased by changes to government policy, including tax changes or other legislation. The Group purchases many of its ingredients and capital items in currencies other than sterling. A fall in the value of sterling would increase the cost of imports. Revenues from the hotel in Saint Lucia are denominated in US dollars. K E Y M A N AG E M E N T Loss of key personnel could impact the Group’s ability to implement strategy and the intended pace of growth. • The business adheres to core values of originality, authenticity and ethics which result in a strong brand. • The Board strives for continuous improvement to products and services to increase sales. • The Board seeks to ensure the brand retains its position as affordable luxury in order to appeal to a broad range of consumers and at price points that are appropriate. • Ongoing focus on cost efficiency assists in mitigating individual cost increases. • The Group forecasts its requirement for foreign exchange purchases and hedges these purchases 18 months ahead. The Brexit vote has increased macro- economic uncertainty, however trading since period-end has remained in line with the Board’s expectations. Whilst sterling has fallen, the Group extends its currency hedges on a quarterly basis and is currently hedged for the whole of FY17. • Business plans and initiatives are documented and prepared with cross-functional input to reduce reliance on single individuals. • The Remuneration Committee seeks to ensure rewards are commensurate with performance and aid retention. The IPO has enabled the business to launch share-based incentives to assist in retaining key personnel. D I S RU P T I O N TO S U P P LY O R P RO D U C T I O N O F G O O D S , O R TO I T S YS T E M S Disruption to supply or production of goods, or to IT systems, could limit availability of products and consequently reduce sales. • The Group maintains a business continuity plan which is updated annually and tested quarterly with the incident management team. The business has extended its risk assessments to include external as well as internal supply chain disruption. I N CO N S I S T E N T Q UA L I T Y O R CO N TA M I N AT I O N O F T H E G RO U P ’ S P RO D U C T S Inconsistent quality or contamination of the Group’s products could reduce demand for the Group’s products. • The business applies strict quality controls and seeks independent validation of these controls by the British Retail Consortium (BRC). Production facilities achieved ‘A grade’ accreditation from the BRC in 2016. N E G AT I V E P U B L I C I T Y A F F E C T I N G T H E B R A N D Negative publicity affecting the brand could reduce consumer demand for the Group’s products. • The business adheres to core values of originality, authenticity and ethics which result in a strong brand. 26 STR ATEGIC REPORT Risk management 27 This strategic report and information referred to herein was approved on behalf of the Board on 18 October 2016. Matt Pritchard Chief Financial Officer Company overviewStrategic reportGovernanceFinancial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and Accounts Corporate social responsibility Originality · Authenticity · Ethics Company overview Strategic report Governance Financial statements The Board believes that the company has a duty to many groups in society: customers, growers and suppliers, employees, shareholders and local communities. C U S TO M E R S E N V I RO N M E N T Initiatives are underway to reduce CO2 emissions, including reducing the number of vehicle miles travelled and improving energy efficiency in factories. A new delivery fleet has significantly reduced vehicle NO2 and reduced vehicle CO2 by 10% year-on-year. Targeting inefficient processes also reduces environmental wastage; smarter use of packaging in our Distribution Centre will reduce cardboard consumption in FY17. CO M M U N I T I E S We have partnered with Drive Forward Foundation, an organisation which supports young people leaving care by assisting them with the transition to the world of work. Drive Forward Foundation helps young people select the right career and provides support, giving them confidence to succeed in the workplace. The collaboration will target those with the skills and appetite to succeed in a retail career. The business is committed to a philosophy of “more cocoa, less sugar”, designed to ensure that the product offers a differentiated cocoa-rich taste, and with lower sugar content than many premium chocolate products. Customer confidence in pricing is also important. We never go ‘on sale’ before the end of a season, so the customers know they are paying a fair price for their purchase. E M P LOY E E S The business measures employee engagement in every team with a focus on ensuring that all team members are listened to and any concerns are addressed. We believe that an engaged team will feel greater job satisfaction and deliver a better experience for customers. The Group operates an all-employee annual performance bonus and a share- save scheme which launched in August 2016. Career progression is supported and targets are set to ensure as high a proportion of vacancies as possible are filled via internal promotions. The School of Chocolate diploma is available to all employees and provides a detailed understanding of all aspects of cocoa growing and chocolate making. The Group strives to ensure that the business’s activities positively benefit all stakeholders. E N G AG E D E T H I C S – u n i t i n g c o c o a g rowe r s a n d l ove r s o f f i n e c h o c o l at e a n d b e i n g f a i r t o b o t h . The experience gained by revitalising our cocoa estate in Saint Lucia has shown us that there are a number of ways to assist in ensuring cocoa growing is sustainable: 1) Pay a premium for cocoa grown to sustainable standards of stewardship. Hotel Chocolat Group plc is working with suppliers and is committed to ensuring that 100% of its cocoa is certified sustainable by 2020. 2) Help farmers to increase crop yields by providing knowledge, techniques, tools and materials to improve productivity and where possible grow ‘fine’ cocoa which can fetch a higher price. Hotel Chocolat (HC) has partnered with an NGO, Green Tropic Group, for 14 years to support higher productivity in Ghana. HC has committed to more than doubling the level of financial support in FY17 in order to increase the number of farmers that benefit from training and resources to improve productivity and farm incomes. 3) Providing support to local communities. HC and the Tasting Club members have funded the construction of a health centre in Osuben, Ghana and intend to continue to invest in similar projects. “more cocoa, less sugar” We believe cocoa is the most important ingredient in great chocolate so it will always be the main ingredient listed first on the back of our packs, even for milk and white chocolate. For many of our competitors, sugar will be listed as the main ingredient. We believe customers can taste the difference. 28 GOVERNANCE Corporate social responsibility 29 HOTEL CHOCOLAT GROUP PLC Annual Report and AccountsBoard of Directors Experienced founder-led team A N D R E W G E R R I E (53) A N G U S T H I R LW E L L (53) P E T E R H A R R I S (61) M AT T P R I TC H A R D (42) M AT T M A RG E R E S O N (4 5) S O P H I E TO M K I N S (47 ) Independent Non-executive Chairman Co-founder and Chief Executive Officer Co-founder and Development Director Chief Financial Officer Chief Operating Officer Independent Non-executive Director Audit Committee Chair Remuneration Committee member Remuneration Committee Chair Audit Committee member Andrew Joined HC as Non-executive Chairman in June 2015 and has extensive retail experience, having served as CEO of Lush Cosmetics from 1994 to 2014. During this period Lush grew to over 900 stores across 49 countries, with sales in excess of £450m. Andrew holds a B.Com degree from Auckland University Angus co-founded HC with Peter Harris in 1993 and has a particular focus on brand strategy, product and channel models, marketing and creative. Angus attended Cranfield School of Management and is a committee member for The Academy of Chocolate. Peter Harris co-founded HC with Angus Thirlwell in 1993 and is responsible for real estate, legal and intellectual property. Peter qualified as a Chartered Accountant in 1979. Matt joined HC as Chief Financial Officer in 2014 and is responsible for the finance function and retail operations. Matt joined HC in 2006 and is responsible for product development, manufacturing, supply chain, HR and IT. He has over 20 years of experience of finance gained in blue chip retail organisations. Matt qualified as a Certified Accountant in 1998. Matt has 23 years’ experience in operations and supply chain management. Matt completed an MBA in 2013 and is a member of the Chartered Institute of Logistics and Transport. Sophie has considerable public markets experience gained through a 17-year career in the City with several investment banks. Sophie is currently Non-executive Director and Chair of the Audit Committee at CloudCall Group plc. Sophie qualified as a Chartered Accountant in 1994 and is a fellow of the Chartered Institute for Securities and Investment. FAVO U R I T E P RO D U C T: FAVO U R I T E P RO D U C T: FAVO U R I T E P RO D U C T: FAVO U R I T E P RO D U C T: FAVO U R I T E P RO D U C T: FAVO U R I T E P RO D U C T: Fruit & Nut Frenzy Giant Slab to share Breakfast at our restaurant: avocado on toast with cocoa nibs – and a 100% Hot Chocolat Chocolate-covered almonds Saint Lucia 70% “La Pepineire” Grown on a single grove within the Rabot Estate Pistachio Praline with a cocoa infusion Peanut Butter Selector 30 GOVERNANCE Board of Directors 31 Company overviewStrategic reportGovernanceFinancial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and Accounts Company overview Strategic report Governance Financial statements Corporate governance statement AN INTRODUCTION FROM OUR CHAIRMAN In this section of our report we have set out our approach to governance and provided further information on how the Board and its committees operate. This is our first annual report as an AIM-listed entity. As an AIM-listed entity, the Group is not subject to and does not comply with the requirements of the UK Corporate Governance Code. However, the Directors recognise the value and importance of good corporate governance and are fully accountable to the Group’s stakeholders including shareholders, customers, suppliers and employees. We are also mindful of the recommendations of the QCA Corporate Governance Code for Small and Mid-Size Quoted Companies (“QCA guidelines”). The corporate governance framework which the Group operates, including Board leadership and effectiveness, Board remuneration, and internal control, is set out below. T H E CO M P O S I T I O N O F T H E B OA R D The Board is responsible to the shareholders and sets the Group’s strategy for achieving long-term success. It is also ultimately responsible for the management, governance, controls, risk management, direction and performance of the Group. From flotation the Board comprised two Non-executive Directors and four Executive Directors. The two Non-executive Directors are fully independent. H OW T H E B OA R D O P E R AT E S The Board is responsible for the Group’s strategy and for its overall management. The operation of the Board is documented in a formal schedule of matters reserved for its approval, which is reviewed annually. These include matters relating to: • The Group’s strategic aims and objectives • The structure and capital of the Group • Financial reporting, financial controls and dividend policy • Setting budgets and forecasts • Internal control, risk and the Group’s risk appetite • The approval of significant contracts and expenditure • Effective communication with shareholders • Any changes to Board membership or structure B OA R D M E E T I N G S B OA R D CO M M I T T E E S Nominations Committee Non-executive Directors communicate directly with Executive Directors and senior management between formal Board meetings. The Board as now constituted first met collectively in April 2016 and in total met five times in the period. In addition the Board held a strategy day on 1 August 2016 specifically focused on digital growth. Directors are expected to attend all meetings of the Board, and of the Committees on which they sit, and to devote sufficient time to the Group’s affairs to enable them to fulfil their duties as Directors. In the event that Directors are unable to attend a meeting, their comments on papers to be considered at the meeting will be discussed in advance with the Chairman so that their contribution can be included in the wider Board discussion. The following table shows Directors’ attendance at scheduled Board and Committee meetings during the year: Board Remuneration Audit Andrew Gerrie Sophie Tomkins Angus Thirlwell Peter Harris Matt Pritchard Matt Margereson 5/5 5/5 4/5 5/5 5/5 5/5 1/1 1/1 – – – – 1/1 1/1 – – (Guest 1/1) – B OA R D D E C I S I O N S A N D AC T I V I T Y D U R I N G T H E P E R I O D The Board has a schedule of regular business, financial and operational matters, and each Board Committee has compiled a schedule of work to ensure that all areas for which the Board has responsibility are addressed and reviewed during the course of the year. The Chairman, aided by the Company Secretary, is responsible for ensuring that the Directors receive accurate and timely information. The Company Secretary compiles the Board and Committee papers which are circulated to Directors prior to meetings. The Company Secretary also ensures that any feedback or suggestions for improvement on Board papers is fed back to management. The Company Secretary provides minutes of each meeting and every Director is aware of the right to have any concerns minuted. The Board has delegated specific responsibilities to the Audit and Remuneration Committees, details of which are set out below. Each Committee has written terms of reference setting out its duties, authority and reporting responsibilities. Copies of all the Committee terms of reference are available on the Group’s website. It is intended that these terms of reference will be kept under continuous review to ensure they remain appropriate and reflect any changes in legislation, regulation or best practice. Each Committee comprises Non- executive Directors of the Group. Audit Committee The Audit Committee is chaired by Sophie Tomkins and its other member is Andrew Gerrie; both are fully independent. The Audit Committee has primary responsibility for monitoring the quality of internal controls and ensuring that the financial performance of the Group is properly measured and reported on. It receives and reviews reports from the Group’s management and auditor relating to the annual accounts and the accounting and internal control systems in use throughout the Group. It also advises the Board on the appointment of the auditor, reviews their fees and discusses the nature, scope and results of the audit with the auditor. The Audit Committee meets at least twice a year and has unrestricted access to the Group’s auditor. The Chief Financial Officer attends the Committee meetings by invitation. Remuneration Committee The Remuneration Committee is chaired by Andrew Gerrie. Its other member is Sophie Tomkins. The Remuneration Committee reviews the performance of the Executive Directors and makes recommendations to the Board on matters relating to their remuneration and terms of employment. The Remuneration Committee also makes recommendations to the Board on proposals for the granting of share options and other equity incentives pursuant to any share option scheme or equity incentive scheme in operation from time to time. The remuneration and terms and conditions of appointment of the Non-executive Directors of the Group are set by the Board. The Chief Executive Officer and Chief Financial Officer are invited to attend for some parts of the Committee meetings where their input is required although they do not take part in any discussion on their own benefits and remuneration. The Remuneration report on pages 36 to 37 contains more detailed information on the Committee’s role and the Directors’ remuneration and fees. The Board is newly formed and is considered by its members to be appropriately sized for the needs of the business. As such it is the view of the Board that a separate Nominations Committee is not required at present. In the event that the needs of the business change, a Nominations Committee will be formed. It has been agreed that the main Board will undertake the activities of Board appointments, re-election and succession, with a view to ensuring that the Board is composed of individuals with the necessary skills and to promote a culture that fosters diversity. B OA R D E F F E C T I V E N E S S The skills and experience of the Board are set out in their biographical details on pages 30 to 31. The experience and knowledge of each of the Directors gives them the ability to constructively challenge strategy and to scrutinise performance. All the Directors have been members of the Board since the Group’s listing on AIM in May 2016 and took part in a thorough induction process prior to joining the Board. It is intended that, in the future, on joining the Board, new Directors will undergo a formal programme which will be tailored to the existing knowledge and experience of the Director concerned. T I M E CO M M I T M E N T S All Directors have been advised of the time required to fulfil the role prior to appointment and were asked to confirm that they can make the required commitment before they were appointed. This requirement is also included in their letters of appointment. The Board is satisfied that the Chairman and Non-executive Directors are able to devote sufficient time to the Group’s business. There has been no significant change in the Chairman’s other time commitments since his appointment. D E V E LO P M E N T The Company Secretary ensures that all Directors are kept abreast of changes in relevant legislation and regulations, with the assistance of the Group’s advisers where appropriate. Executive Directors are subject to the Group’s performance review process through which their performance against predetermined objectives is reviewed and their personal and professional development needs considered. It is intended that an annual performance appraisal of Non-executive Directors will be undertaken by the Chairman as part of the Board evaluation process, at which time any training or development needs will be addressed. 32 GOVERNANCE Corporate governance statement 33 Company overviewStrategic reportGovernanceFinancial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and AccountsCorporate governance statement continued Audit Committee report E X T E R N A L A P P O I N T M E N T S R E L AT I O N S W I T H S H A R E H O L D E R S The Group maintains communication with institutional shareholders through individual meetings with Executive Directors, particularly following publication of the Group’s interim and full period results. Private shareholders are encouraged to attend the Annual General Meeting at which the Group’s activities are considered and questions answered. General information about the Group is also available on the Group’s website (www.hotelchocolat.com). The Non-executive Directors are available to discuss any matter stakeholders might wish to raise, and the Chairman and independent Non-executive Directors will attend meetings with investors and analysts as required. Investor relations activity and a review of the share register are standing items on the Board’s agenda. A N N UA L G E N E R A L M E E T I N G (AG M ) The Annual General Meeting of the Group will take place on 1 December 2016. The Notice of Annual General Meeting and the ordinary and special resolutions to be put to the meeting are included at the end of this Annual Report and financial statements. As appropriate, the Board may authorise Executive Directors to take Non-executive positions in other companies and organisations, provided the time commitment does not conflict with the Director’s duties to the Group, since such appointments should broaden their experience. The acceptance of appointment to such positions is subject to the approval of the Chairman. CO N F L I C T S O F I N T E R E S T At each meeting the Board considers Directors’ conflicts of interest. The Group’s Articles of Association provide for the Board to authorise any actual or potential conflicts of interest. D I R E C TO R S ’ A N D O F F I C E R S ’ L I A B I L I T Y I N S U R A N C E The Group has purchased Directors’ and Officers’ liability insurance during the period as allowed by the Group’s articles. E L E C T I O N O F D I R E C TO R S All continuing Directors of the Group will offer themselves for election or re-election at the Annual General Meeting (see note below). I N T E R N A L CO N T RO L S The Board has ultimate responsibility for the Group’s system of internal control and for reviewing its effectiveness. However, any such system of internal control can provide only reasonable, but not absolute, assurance against material misstatement or loss. The Board considers that the internal controls in place are appropriate for the size, complexity and risk profile of the Group. The principal elements of the Group’s internal control system include: • close management of the day-to-day activities of the Group by the Executive Directors; • an organisational structure with defined levels of responsibility, which promotes entrepreneurial decision making and rapid implementation whilst mitigating risks; • a comprehensive annual budgeting process producing a detailed integrated profit and loss, balance sheet and cash flow, which is approved by the Board; • detailed monthly reporting of performance against budget; and • central control over key areas such as capital expenditure authorisation and banking facilities. The Group continues to review its system of internal control to ensure adherence to best practice, whilst also having regard to its size and the resources available. The Board considers that the introduction of an internal audit function is not appropriate at this juncture. On behalf of the Board, I am pleased to present the Audit Committee report for the period ended 26 June 2016. The Audit Committee is responsible for ensuring that the financial performance of the Group is properly reported and reviewed. Its role includes monitoring the integrity of the financial statements (including annual and interim accounts and results announcements), reviewing internal control and risk management systems, reviewing any changes to accounting policies, reviewing and monitoring the extent of the non- audit services undertaken by external auditors and advising on the appointment of external auditors. M E M B E R S O F T H E AU D I T CO M M I T T E E The Committee consists of two independent Non-executive Directors: me (as Chair) and Andrew Gerrie. Matt Pritchard may attend Committee meetings by invitation. The Committee met once in the period. The Board is satisfied that I, as Chair of the Committee, have recent and relevant financial experience. I am a Chartered Accountant and I am currently Chair of the Audit Committee at CloudCall Group plc. A representative from Chadwick Corporate Consulting acts as Secretary to the Committee. I report the Committee’s deliberations at the next Board meeting and the minutes of each meeting are made available to all members of the Board. D U T I E S The main duties of the Audit Committee are set out in its terms of reference, which are available on the Group’s website (www.hotelchocolat.com). The main items of business considered by the Audit Committee during the year included: also assesses the auditor’s performance. Having reviewed the auditor’s independence and performance, the Audit Committee recommends that BDO LLP be reappointed as the Group’s auditor at the next AGM. AU D I T P RO C E S S The auditor prepares an audit plan for the review of the full period financial statements. The audit plan sets out the scope of the audit, areas to be targeted and audit timetable. This plan is reviewed and agreed in advance by the Audit Committee. Following the audit, the auditor presented its findings to the Audit Committee for discussion. No major areas of concern were highlighted by the auditor during the period, however areas of significant risk and other matters of audit relevance are regularly communicated. I N T E R N A L AU D I T At present the Group does not have an internal audit function and the Committee believes that management is able to derive assurance as to the adequacy and effectiveness of internal controls and risk management procedures without one. RISK MANAGEMENT AND INTERNAL CONTROLS As described on page 34 of the corporate governance report, the Group has established a framework of risk management and internal control systems, policies and procedures. The Audit Committee is responsible for reviewing the risk management and internal control framework and ensuring that it operates effectively. During the period, the Committee has reviewed the framework and the Committee is satisfied that the internal control systems in place are currently operating effectively. • review of the FY16 audit plan and audit engagement letter; W H I S T L E B LOW I N G • review of suitability of the external auditor; • review of the financial statements and Annual Report; • consideration of the external audit report and management representation letter; • going concern review; • review of the risk management and internal control systems; and • meeting with the external auditor without management present. RO L E O F T H E E X T E R N A L AU D I TO R The Audit Committee monitors the relationship with the external auditor, BDO LLP, to ensure that auditor independence and objectivity are maintained. Noting the tenure of BDO LLP (since FY12), the Committee will keep under review the need for external tender. As part of its review the Committee monitors the provision of non-audit services by the external auditor. The breakdown of fees between audit and non-audit services is provided in Note 6 of the Group’s financial statements. The non-audit fees relate to tax advice for the Group and transaction services in support of the flotation. The Audit Committee The Group has in place a whistleblowing policy which sets out the formal process by which an employee of the Group may, in confidence, raise concerns about possible improprieties in financial reporting or other matters. Whistleblowing is a standing item on the Committee’s agenda and updates are provided at each meeting. During the period, there were no incidents for consideration. A N T I - B R I B E RY The Group has in place an anti-bribery and anti-corruption policy which sets out its zero-tolerance position and provides information and guidance to those working for the Group on how to recognise and deal with bribery and corruption issues. During the period, there were no incidents for consideration. Sophie Tomkins Chair of the Audit Committee 34 GOVERNANCE Audit Commit tee repor t 35 Company overviewStrategic reportGovernanceFinancial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and Accounts Remuneration report I am pleased to present this remuneration report, which sets out the remuneration policy and the remuneration paid to the Directors for the period. Hotel Chocolat Group plc is listed on the Alternative Investment Market (AIM) and, as such, the following disclosures are prepared on a voluntary basis for the Group. CO M P O S I T I O N A N D RO L E The Remuneration Committee’s members are Andrew Gerrie, who is the Chairman of the Committee, and Sophie Tomkins. The Committee operates under the Group’s agreed terms of reference and is responsible for reviewing all senior executive appointments and determining the Group’s policy in respect of the terms of employment, including remuneration packages of Executive Directors. The Remuneration Committee met once during the period and plans to meet at least twice a year going forward. R E M U N E R AT I O N P O L I C Y The objective of the Group’s remuneration policy is to attract, motivate and retain high quality individuals who will contribute fully to the success of the Group. To achieve this objective, the Group provides competitive salaries and benefits to all employees. Executive Directors’ remuneration is set to create an appropriate balance between both fixed and performance-related elements. Remuneration is reviewed each year in light of the Group’s business objectives. It is the Remuneration Committee’s intention that remuneration should reward achievement of objectives and that these are aligned with shareholders’ interests over the medium term. Remuneration consists of the following elements: • Basic salary; • Performance-related annual bonus; • Long-Term Incentive Plan; and • Pension contribution. E X E C U T I V E D I R E C TO R S ’ S E RV I C E CO N T R AC T S The Executive Directors signed new service contracts with the Group on admission to AIM. These are not of fixed duration. Angus Thirlwell and Peter Harris’ contracts are terminable by either party giving twelve months’ written notice. Matt Pritchard and Matt Margereson’s contracts are terminable by either party giving six months’ written notice. N O N - E X E C U T I V E D I R E C TO R S The remuneration policy for 2017 will operate as follows: Executive Angus Thirlwell Peter Harris Matt Pritchard Matt Margereson Non-executive Andrew Gerrie Sophie Tomkins Basic salary/fee Maximum bonus Pension £235,000 £215,000 £215,000 £215,000 £50,000 £35,000 40% 40% 40% 40% – – £5,350 £3,000 £2,150 – – – Maximum bonus opportunities for the 2017 financial year are disclosed in the table above. The 2017 bonus will be assessed against Group profit and against personal performance objectives. The profit element of the bonus will adjust from zero at a threshold profit level, up to 40% for a stretch profit growth. Personal performance against pre-determined objectives will be appraised by the Remuneration Committee. If a Director does not achieve one or more of their personal objectives their profit-related bonus payment will reduce on a pre-determined sliding scale. Challenging performance targets have been set. The actual performance targets are not disclosed as they are considered to be commercially sensitive. LO N G -T E R M I N C E N T I V E P L A N Annual awards to Executive Directors under this plan are underpinned by financial performance measures. Angus Thirlwell and Peter Harris are not part of the Long-Term Incentive Plan. Matt Pritchard and Matt Margereson have been granted options under the Group’s Long-Term Incentive Plan. The proportion of the total option shares vesting is subject to testing against a performance condition, being the audited net profit after tax for the financial period ended 30 June 2019. The performance thresholds are not disclosed as they are considered to be commercially sensitive. Date of grant Number of ordinary shares under option Exercise price Exercise period 04.05.16 04.05.16 800,000 800,000 148p 04.05.19–03.05.26 148p 04.05.19–03.05.26 The Non-executive Directors signed letters of appointment with the Group on admission to AIM for the provision of Non-executive Directors’ services, which may be terminated by either party giving three months’ written notice. The Non-executive Directors’ fees are determined by the Board. Matt Pritchard Matt Margereson D I R E C TO R S ’ R E M U N E R AT I O N The following table summarises the total gross remuneration of the Directors who served during the period to 26 June 2016. If you have any comments or questions on anything contained within this remuneration report, I will be available at the AGM. 2016 Basic 2015 Basic salary/fee Bonus Pension Total salary/fee Bonus Pension Total Andrew Gerrie Chair of the Remuneration Committee Executive Angus Thirlwell Peter Harris Matt Pritchard Matt Margereson Non-executive Andrew Gerrie Sophie Tomkins 235,840 232,634 202,404 202,404 7,820 6,641 47,200 47,200 40,250 40,250 – – 5,358 3,000 2,024 – – 29 288,398 282,834 244,678 242,654 7,820 6,670 236,000 236,000 182,500 185,417 – – 47,200 47,200 38,100 37,083 – – 5,360 3,000 1,825 – – – 288,560 286,200 222,425 222,500 – – 36 GOVERNANCE Remuneration repor t 37 Company overviewStrategic reportGovernanceFinancial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and AccountsCompany overview Strategic report Governance Financial statements Directors’ report The Directors present their report together with the audited financial statements for the period ended 26 June 2016. P O L I T I C A L D O N AT I O N S The corporate governance statement on pages 32 to 34 also forms part of this Directors’ report. R E V I E W O F B U S I N E S S The Chairman’s statement on page 10 and the strategic report on pages 10 to 27 provide a review of the business, the Group’s trading for the period ended 26 June 2016, key performance indicators and an indication of future developments. R E S U LT A N D D I V I D E N D The Group made no political donations in the financial period. D I S C LO S U R E O F I N F O R M AT I O N TO AU D I TO R As far as the Directors are aware, there is no relevant audit information (that is, information needed by the Group’s auditor in connection with preparing their report) of which the Group’s auditors are unaware, and each Director has taken all reasonable steps that he or she ought to have taken as a Director in order to make himself or herself aware of any relevant audit information and to establish that the Group’s auditors are aware of that information. The Group has reported its Consolidated Financial Statements in accordance with International Financial Reporting Standards as adopted by the European Union. F I N A N C I A L I N S T RU M E N T S The Group’s results for the period are set out in the Consolidated Statement of Comprehensive Income on page 42. The Group has applied FRS 101: Reduced Disclosure Framework to the Company accounts for the period ended 26 June 2016. Hotel Chocolat Group plc acquired Hotel Chocolat Estates Limited, Saint Lucia (HCESL) on 24 April 2016. As such the audited financial statements are required by the Companies Act to include the activities, assets and liabilities of HCESL from the date of acquisition. The Group’s IFRS profit after tax for FY16 was £4.1m (FY15: £2.0m). The Group’s FY16 revenue of £91.1m (FY15: £81.1m), gross margin of 66.8% (FY15: 66.6%) and FY16 adjusted EBITDA of £12.3m (FY15: £7.8m) represent a successful period for the business. The Group continued to strengthen its position. Proforma basis IFRS (acquisition basis) 26 June 2016 £000 92,636 67.0% 12,270 3,561 28 June 2015 £000 82,614 65.9% 8,106 1,887 26 June 2016 £000 91,090 66.8% 12,331 4,084 28 June 2015 £000 81,068 66.6% 7,834 2,047 Period ended Revenue Gross margin % Adjusted EBITDA Profit after tax The Board is not recommending a dividend. D I R E C TO R S The Directors of the Group during the period were: Executive Angus Thirlwell Peter Harris Matt Pritchard Matt Margereson Non-executive Andrew Gerrie Sophie Tomkins The names of the Directors, along with their brief biographical details are given on pages 30 to 31. D I R E C TO R S ’ I N T E R E S T S The Directors’ interests in the Group’s shares and options over ordinary shares are shown in the remuneration report on page 37. No Director has any beneficial interest in the share capital of any subsidiary or associate undertaking. The Group also purchased and maintained throughout the financial period Directors’ and Officers’ liability insurance in respect of itself and its Directors. The financial risk management objectives of the Group, including credit risk, interest rate risk and foreign exchange risk, are provided in Note 31 to the Consolidated Financial Statements on pages 72 to 74. S H A R E C A P I TA L S T RU C T U R E At 26 June 2016, the Group’s issued share capital was £112,838 divided into 112,837,828 ordinary shares of 0.1p each. The holders of ordinary shares are entitled to one vote per share at the meetings of the Group. S H A R E O P T I O N S C H E M E S Details of employee share schemes are set out in Note 9 to the Consolidated Financial Statements. P U RC H A S E O F OW N S H A R E S Details of shares purchased by the Group are set out in Note 24 to the Consolidated Financial Statements. G O I N G CO N C E R N After making enquiries, the Directors have a reasonable expectation 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 financial statements. P O S T B A L A N C E S H E E T E V E N T S The Board considers that no material post balance sheet events occurred between the end of the period and the date of publication of this report. F U T U R E D E V E LO P M E N T S The Board intends to continue to pursue the business strategy as outlined in the strategic report on pages 10 to 27. E M P LOY E E I N VO LV E M E N T P O L I C I E S The Directors believe that the involvement of employees is an important part of the business culture and contributes to the successes achieved to date (view our corporate social responsibility statement on page 28). AU D I TO R BDO LLP has expressed its willingness to continue in office as auditor and a resolution to reappoint them will be proposed at the forthcoming Annual General Meeting. A N N UA L G E N E R A L M E E T I N G The Annual General Meeting will be held on 1 December 2016. The ordinary business comprises receipt of the Directors’ report and audited financial statements for the period ended 26 June 2016, the re-election of Directors, the reappointment of BDO LLP as auditor and authorisation of the Directors to determine the auditor’s remuneration. The Notice of Annual General Meeting and the ordinary and special resolutions to be put to the meeting are included at the end of this Annual Report and financial statements. A P P ROVA L This Directors’ report was approved on behalf of the Board on 18 October 2016. Matt Pritchard Chief Financial Officer 38 GOVERNANCE Directors’ repor t 39 Company overviewStrategic reportGovernanceFinancial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and AccountsStatement of Directors’ responsibilities Independent auditor’s report To the members of Hotel Chocolat Group plc Company overview Strategic report Governance Financial statements The Directors are responsible for preparing the strategic report, the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial period. Under that law the Directors have elected to prepare the Group’s Consolidated Financial Statements in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union, and the Company Financial Statements in accordance with FRS 101: Reduced Disclosure Framework. 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 Company and of the profit or loss of the Group for that period. The Directors are also required to prepare financial statements in accordance with the rules of the London Stock Exchange for companies trading securities on the Alternative Investment Market. In preparing these financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and accounting estimates that are reasonable and prudent; • state whether they have been prepared in accordance with IFRSs as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Group will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and Company and enable them to ensure that the financial statements comply with the requirements of the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. W E B S I T E P U B L I C AT I O N The Directors are responsible for ensuring the Annual Report and the financial statements are made available on a website. Financial statements are published on the Group’s website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Group’s website is the responsibility of the Directors. The Directors’ responsibility also extends to the ongoing integrity of the financial statements contained therein. We have audited the financial statements of Hotel Chocolat Group plc for the period ended 26 June 2016 which comprise the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Financial Position and Company Statement of Financial Position, the Consolidated Statement of Cash Flow and Company Statement of Cash Flow, the Consolidated Statement of Changes in Equity and Company Statement of Changes in Equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been applied in preparation of the Parent Company financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). 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. R E S P E C T I V E R E S P O N S I B I L I T I E S O F D I R E C TO R S A N D AU D I TO R S As explained more fully in the statement of Directors’ responsibilities, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Financial Reporting Council’s (FRC’s) Ethical Standards for Auditors. S CO P E O F T H E AU D I T O F T H E F I N A N C I A L S TAT E M E N T S A description of the scope of an audit of financial statements is provided on the FRC’s website at www.frc.org.uk/auditscopeukprivate. O P I N I O N O N F I N A N C I A L S TAT E M E N T S In our opinion: • the financial statements give a true and fair view of the state of the Group’s and the Parent Company’s affairs as at 26 June 2016 and of the Group’s profit for the period then ended; • the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; • the Parent Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. O P I N I O N O N OT H E R M AT T E R S P R E S C R I B E D BY T H E CO M PA N I E S AC T 2 0 0 6 In our opinion the information given in the strategic report and Directors’ report for the financial period for which the financial statements are prepared is consistent with the financial statements. M AT T E R S O N W H I C H W E A R E R E Q U I R E D TO R E P O RT BY E XC E P T I O N We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or • the Parent Company financial statements are not in agreement with the accounting records and returns; or • certain disclosures of Directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Mark RA Edwards (senior statutory auditor) For and on behalf of BDO LLP, statutory auditor London United Kingdom 18 October 2016 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). 40 FINANCIAL STATEMENTS Independent auditor¹s repor t HOTEL CHOCOLAT GROUP PLC Annual Report and AccountsConsolidated Statement of Comprehensive Income Consolidated Statement of Financial Position For the period ended 26 June 2016 As at 26 June 2016 Revenue Cost of sales Administrative expenses Finance income Finance expenses Profit before tax for the period Tax expense Profit for the period Other comprehensive income: Derivative financial liabilities Deferred tax charge on derivative financial liabilities Currency translation differences arising from consolidation Total comprehensive income for the period Earnings per share – Basic and Diluted 52 weeks ended 26 June 2016 £ 52 weeks ended 28 June 2015 £ Notes 4 5 10 10 11 21 11 12 91,089,824 81,068,364 (30,237,009) (27,086,522) 60,852,815 53,981,842 (54,486,943) (50,519,091) 6,365,872 172,106 (946,884) 5,591,094 (1,507,290) 4,083,804 (581,959) 114,446 896,053 4,512,344 3,462,751 188,489 (719,808) 2,931,432 (884,209) 2,047,223 – – (380,039) 1,667,184 3.9p 20.1p ASSETS Non-current assets Intangible assets Property, plant and equipment Prepayments Deferred tax asset Current assets Inventories Trade and other receivables Corporation tax recoverable Cash and cash equivalents Total assets LIABILITIES Current liabilities Trade and other payables Corporation tax payable Derivative financial liabilities Bank overdraft Borrowings Non-current liabilities Other payables and accruals Derivative financial liabilities Borrowings Provisions Total liabilities NET ASSETS EQUITY Share capital Share premium Retained earnings Translation reserve Merger reserve Capital redemption reserve Other reserves Total equity attributable to shareholders As at 26 June 2016 £ As at 28 June 2015 £ As at 29 June 2014 £ Notes 13 14 17 15 16 17 19 20 21 19 22 20 21 22 23 24 25 25 25 25 25 1,856,800 26,111,111 7,461 149,903 28,125,275 6,604,104 5,534,835 – 6,475,446 18,614,385 46,739,660 16,334,191 611,051 554,529 – 432,544 17,932,315 1,485,090 85,075 6,643,212 464,486 8,677,863 26,610,178 1,553,433 12,294,264 – 215,993 14,063,690 4,493,841 13,672,466 166,709 4,939,924 23,272,940 37,336,630 12,210,082 – – 10,637,314 954,521 23,801,917 1,774,731 – 7,298,718 668,898 9,742,347 33,544,264 1,512,191 14,030,984 – 240,019 15,783,194 3,926,952 15,131,549 952,873 4,796,735 24,808,109 40,591,303 14,006,130 – – 13,931,197 723,613 28,660,940 1,143,491 – 7,723,393 939,715 9,806,599 38,467,539 20,129,482 3,792,366 2,123,764 112,838 11,749,487 8,087,350 353,126 223,251 6,301 (402,871) 20,129,482 103,418 – 4,003,546 (542,927) 223,251 5,078 – 3,792,366 107,078 – 1,956,323 (162,888) 223,251 – – 2,123,764 The financial statements of Hotel Chocolat Group plc, registered number 08612206 were approved by the Board of Directors and authorised for issue on 18 October 2016. They were signed on its behalf by: Matt Pritchard Chief Financial Officer 18 October 2016 42 FINANCIAL STATEMENTS Consolidated Statement of Financial Position 43 HOTEL CHOCOLAT GROUP PLC Annual Report and AccountsCompany overviewStrategic reportGovernanceFinancial statementsConsolidated Statement of Cash Flow For the period ended 26 June 2016 Consolidated Statement of Changes in Equity For the period ended 26 June 2016 Share capital £ Share Premium £ Retained earnings £ Translation reserve £ Merger reserve £ Capital redemption reserve £ Other reserves £ As at 30 June 2014 Profit for the period Capital redemption Shares issued in the period Other comprehensive expense for the period 107,078 – (5,078) 1,418 – Equity as at 28 June 2015 103,418 Profit for the period Capital redemption – (1,223) – – – – – – – – Shares issued in the period 10,643 11,989,487 Costs of issue of equity shares Share-based payments Derivative financial liabilities Deferred tax charge on derivative financial liabilities Other comprehensive income for the period – – – – – (240,000) – – – – 1,956,323 (162,888) 223,251 2,047,223 – – – – – – (380,039) – – – – 4,003,546 (542,927) 223,251 4,083,804 – – – – – – – – – – – – – – 896,053 353,126 – – – – – – – – – – 5,078 – – 5,078 – 1,223 – – – – – – – – Total £ 2,123,764 2,047,223 – 1,418 (380,039) 3,792,366 4,083,804 – – – – – – – – 12,000,130 – (240,000) 64,642 64,642 (581,959) (581,959) 114,446 114,446 – 896,053 Equity as at 26 June 2016 112,838 11,749,487 8,087,350 223,251 6,301 (402,871) 20,129,482 Profit before tax for the period Adjusted by: Depreciation of property, plant and equipment Impairment of property, plant and equipment Amortisation of intangible assets Net interest expense Share-based payments Loss on disposal of property, plant and equipment and intangible assets Operating cash flows before movements in working capital Increase in inventories (Increase)/decrease in trade and other receivables Increase/(decrease) in trade and other payables and provisions Cash inflow generated from operations Interest received Income tax paid Interest paid on: – finance leases and hire purchase loans – bank loans and overdraft Cash flows from operating activities Purchase of property, plant and equipment Proceeds from disposal of property, plant and equipment Purchase of intangible assets Acquisition of subsidiary Cash flows used in investing activities (Buy back)/issue of Chocolate bonds Capital element of hire purchase and finance leases repaid Repayment of bank loans Cost of issue of new equity Issue/(buy-back) of shares Cash flows from/(used in) financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of period Foreign currency movements Cash and cash equivalents at end of period 52 weeks ended 26 June 2016 £ 52 weeks ended 28 June 2015 £ Notes 5,591,094 2,931,432 14 14 13 10 9 5 29 19 19 2,516,632 4,044,602 – 676,977 774,778 64,642 128,874 9,752,997 (2,294,585) (309,174) 1,516,121 8,665,359 109 (548,994) (30,020) (660,663) 7,425,791 131,998 194,542 531,319 – – 7,833,893 (566,890) 1,252,819 (1,001,379) 7,518,443 – (74,019) (31,654) (593,801) 6,818,969 (5,625,076) (2,889,611) 200,000 (760,224) 228,006 – (235,784) – (5,957,294) (3,125,395) (145,000) (378,462) (654,021) (240,000) 12,000,130 10,582,647 12,051,144 (5,697,390) 121,692 6,475,446 406,500 (439,850) (160,416) – (3,660) (197,426) 3,496,148 (9,134,462) (59,076) (5,697,390) 44 FINANCIAL STATEMENTS Consolidated Statement of Changes in Equity 45 HOTEL CHOCOLAT GROUP PLC Annual Report and AccountsCompany overviewStrategic reportGovernanceFinancial statements Notes to the financial statements For the period ended 26 June 2016 1. G E N E R A L I N F O R M AT I O N Hotel Chocolat Group plc (the Company, and together with its subsidiaries, the Group) is a company incorporated in the United Kingdom under the Companies Act. The registered office of the Company is Mint House, Newark Close, Royston, Hertfordshire, SG8 5HL, United Kingdom. The registered company number is 08612206. A list of all of the Company’s subsidiaries is presented in Note 18. The Group’s principal activities are that of the manufacture and retail of chocolate in the United Kingdom and overseas. 2 . ACCO U N T I N G P O L I C I E S The principal accounting policies applied in the preparation of the consolidated financial information are set out below. These policies have been consistently applied to all periods presented, unless otherwise stated. Basis of preparation The consolidated financial information has been prepared in accordance with International Financial Reporting Standards, International Accounting Standards and Interpretations (collectively IFRSs), as adopted by the European Union. For all periods up to and including the period ended 28 June 2015, the Group prepared its financial statements in accordance with United Kingdom Generally Accepted Accounting Principles (UK GAAP). These financial statements for the period ended 26 June 2016 are the first the Group has prepared in accordance with IFRS. Refer to Note 34 for information on how the Group adopted IFRS. At the date of authorisation of this financial information, certain new standards, amendments and interpretations to existing standards applicable to the Group have been published but are not yet effective, and have not been adopted early by the Group. These are listed below: Standard/ interpretation IFRS 9 Financial Instruments (2009) and amendment IFRS 15 Revenue from Contracts with Customers IFRS 16 Leases Content IFRS 9 ‘Financial instruments’ is effective for periods commencing on or after 1 January 2018 subject to endorsement by the EU. IFRS 9 is a replacement for IAS 39 ‘Financial Instruments’ and covers three distinct areas. Phase 1 contains new requirements for the classification and measurement of financial assets and liabilities. Phase 2 relates to the impairment of financial assets and requires the calculation of impairment on an expected loss basis rather than the current incurred loss basis. Phase 3 relates to less stringent requirements for general hedge accounting. IFRS 15, ‘Revenues from Contracts with Customers’, replaces IAS 18, ‘Revenues’, and introduces a five step approach to revenue recognition based on performance obligations in customer contracts. The International Accounting Standards Board (‘IASB’) has proposed to issue some clarifications and to defer the standard’s effective date of 1 January 2017 to 1 January 2018. The effective date for the Group is also subject to EU endorsement. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, i.e. the customer (‘lessee’) and the supplier (‘lessor’). IFRS 16 completes the IASB’s project to improve the financial reporting of leases and replaces the previous leases Standard, IAS 17 Leases, and related Interpretations. The impact of the adoption of the Standards listed above, has not yet been assessed. Applicable for financial years beginning on/after 1 January 2018 1 January 2018 1 January 2019 2 . ACCO U N T I N G P O L I C I E S CONTINUED Basis of consolidation The consolidated financial information incorporates the financial statements of the Group and all of its subsidiary undertakings. The financial statements of all Group companies are adjusted, where necessary, to ensure the use of consistent accounting policies. Acquisitions are accounted for under the acquisition method from the date control passes to the Group. On acquisition, the assets and liabilities of a subsidiary are measured at their fair values. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. As allowed under IFRS 1, any acquisitions or group reorganisations which occurred after the transition date to IFRS have not been restated but instead the previous accounting treatment has been adopted. During the period ended 29 June 2014, Hotel Chocolat Group Limited (now plc) was incorporated and undertook a share for share exchange with the direct subsidiaries listed in Note 18. This has been accounted for under the basis of merger accounting given that the ultimate ownership before and after the transaction remained the same. Merged subsidiaries undertakings are treated as if they had always been a member of the group. Any difference between the nominal value of the shares acquired by the Company and those issued by the Company to acquire them is taken to the merger reserve. Going concern The Directors have prepared a cash flow forecast covering a period extending beyond 18 months from the financial information presented as at 26 June 2016. The Directors have taken into account the historic positive cash flows, growth in business and the inherent risks and uncertainties facing the business, and have derived forecast assumptions that are the Directors’ best estimate of the future development of the business. The forecasts and projections, which take into account the projected trading performance of companies within the Group’s combined bank facilities, show that the Group will be able to operate within the level of its current facilities. On this basis, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis of accounting in preparing the consolidated financial information. The financial information does not include any adjustments that would result from the going concern basis of preparation being inappropriate. Revenue recognition Revenue is the total amount receivable by the Group for goods and services supplied, excluding VAT and trade discounts. Revenue arising from the sale of goods is recognised when the risks and rewards of owning the product has been transferred to the buyer at the point of sale, which is generally on delivery. Revenue is recognised when the amount of revenue can be reliably measured and it is probable that the future economic benefit will flow to the entity. Operating profit Operating profit is stated after all expenses, including those considered to be exceptional, but before finance income or expenses. Exceptional items are items of income or expense which because of their nature or size require separate presentation to allow shareholders to better understand the financial performance of the year and allow comparison with prior periods. 46 47 Company overviewStrategic reportGovernanceFinancial statementsFINANCIAL STATEMENTS Notes to the financial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and Accounts2 . ACCO U N T I N G P O L I C I E S CONTINUED Foreign currency translation 2 . ACCO U N T I N G P O L I C I E S CONTINUED Leases The Group’s consolidated financial information is presented in sterling, which is also the parent company’s functional currency. a) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions are recognised in the Consolidated Statement of Comprehensive Income. Foreign exchange gains and losses resulting from the translation of monetary assets and liabilities denominated in foreign currencies at the reporting period end exchange rates are also recognised in the Consolidated Statement of Comprehensive Income. b) Group companies The results and financial position of Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • assets and liabilities at each period end are translated at the prevailing closing rate at the date of the Consolidated Statement of Financial Position; • income and expenses for each period within the Consolidated Statement of Comprehensive Income are translated at the rate of exchange at the transaction date. Where this is not possible, the average rate for the period is used; and • on consolidation, exchange differences arising from the translation of the net investment in foreign entities are recognised in other comprehensive income and accumulated in the translation reserve as a separate component of equity. Employee benefits a) Short-term benefits Wages, salaries, paid annual leave and sick leave, bonuses and non-monetary benefits are accrued in the period in which the associated services are rendered by employees of the Group. b) Defined contribution plans The Group operates a defined contribution pension scheme for employees. The assets of the scheme are held separately from those of the Group. The annual contributions payable are charged to the Consolidated Statement of Comprehensive Income. The Group also contributes to the personal pension plans of some Directors at the Group’s discretion. Share-based payments A transaction is accounted for as a share-based payment where the Group receives services from employees, Directors or third parties and pays for these in shares or similar equity instruments. The Group makes equity-settled share-based payments to certain employees and Directors. Equity-settled share-based schemes are measured at fair value (excluding the effect of non-market-based vesting conditions) at the date of grant, measured by use of an appropriate valuation model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non- transferability, exercise restrictions and behavioural considerations. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the period services are received, based on the Group’s estimate of shares that will eventually vest. The Company is not liable for employer’s National Insurance on the difference between the market value at date of exercise and exercise price and therefore this expense is not accrued for. Operating leases Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Rentals applicable to operating leases are charged against profits on a straight line basis over the period of the lease. Onerous lease provisions relate to the present value of the obligation under a lease where the unavoidable costs of the lease exceed the economic benefit expected to be received from it. Dilapidation provisions relate to potential rectification costs expected should the Group vacate any of its retail locations. Hire purchase agreements and finance leases Leases where the lessee retains substantially all the risks and benefits of ownership of the asset are classified as finance leases. Assets held under hire purchase agreements and finance leases are capitalised and disclosed under property, plant and equipment at cost. The capital element of the future payments is treated as a liability and the interest element is charged to the Consolidated Statement of Comprehensive Income on a straight line basis. Property, plant and equipment Property, plant and equipment is stated at historic cost, including expenditure that is directly attributable to the acquired item, less accumulated depreciation and impairment losses. For the period ended 28 June 2015, depreciation was provided to write off cost, less estimated residual values, of all property, plant and equipment, except for investment properties and freehold land, evenly over their expected useful lives, calculated at the following rates: Leasehold property Plant and machinery – Over the remaining lease term – 20% straight line Fixtures, fittings, equipment, computer software and hardware – 20% straight line Freehold property – 2% straight line As no finite useful life for land can be determined, related carrying amounts are not depreciated. The useful life, the residual value and the depreciation method is assessed annually. During the accounting period ended 26 June 2016, management reviewed its estimates of the useful economic life of tangible assets. Management now estimates that the useful life of assets is as follows: Leasehold property Plant and machinery – Over the remaining lease term – 5 to 10 years on a straight line basis Fixtures, fittings, equipment, computer software and hardware – 5 to 10 years on a straight line basis Freehold property – 50 years on a straight line basis The application of this change is from 29 June 2015 and has not been retrospectively applied. The impact of these changes in the accounting period to 26 June 2016 is a reduction in the depreciation charge of £1,222,091. The carrying value of the property, plant and equipment is compared to the higher of value in use and the fair value less costs to sell on an annual basis. If the carrying value exceeds the higher of the value in use and fair value less the costs to sell the asset then the asset is impaired and its value reduced by recognising an impairment provision. 48 49 Notes to the financial statements continuedFor the period ended 26 June 2016Company overviewStrategic reportGovernanceFinancial statementsFINANCIAL STATEMENTS Notes to the financial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and Accounts 2 . ACCO U N T I N G P O L I C I E S CONTINUED Intangible assets 2 . ACCO U N T I N G P O L I C I E S CONTINUED Impairment Goodwill arising on the acquisition of a subsidiary undertaking is the difference between the fair value of the consideration paid and the fair value of the assets and liabilities acquired. Positive goodwill is capitalised. Impairment tests on the carrying value of goodwill are undertaken: • at the end of the first full financial period following acquisition and at the end of every subsequent financial period; and • in other periods if events or changes in circumstances indicate that the carrying value may not be recoverable. Website development costs where Group companies’ websites are expected to generate future revenues in excess of the costs of developing those websites, together with expenditure on the functionality of the website is capitalised and treated as an intangible asset. Expenditure incurred on maintaining websites and expenditure incurred on developing websites used only for advertising and promotional purposes is written off as incurred. Software which is not an integral part of hardware assets is stated at historic cost, including expenditure that is directly attributable to the acquired item, less accumulated amortisation and impairment losses. For the period ended 28 June 2015, amortisation was provided to write off cost, less estimated residual values, of all intangible assets, except for goodwill, evenly over their expected useful lives, calculated at the following rates: Software Website development costs – 20% straight line – 20% straight line During the accounting period ended 26 June 2016, management reviewed its estimates on the useful economic life of intangible assets. Management now estimates that the useful life of assets is as follows: Software Website development costs – 3 years on a straight line basis – 3 years on a straight line basis The application of this change is from 29 June 2015 and has not been retrospectively applied. The impact of these changes in the accounting period to 26 June 2016 is an increase in the amortisation charge of £361,910. Inventories Inventories are carried at the lower of cost or net realisable value. The costs of raw materials, consumables, work in progress and finished goods are measured by means of weighted average cost using standard costing techniques. The cost of finished goods comprises direct production costs such as raw materials, consumables, utilities and labour, and production overheads such as employee costs, maintenance and indirect factory costs. Standard costs are reviewed regularly in order to ensure relevant measures of utilisation, production lead-time and appropriate levels of manufacturing expense are reflected in the standards. Net realisable value is calculated based on the revenue from sale in the normal course of business less any costs to sell. Due allowance is made for obsolete and slow moving items. a) Impairment of financial assets All financial assets (other than those categorised at fair value charged through the Consolidated Statement of Comprehensive Income), are assessed at the end of each reporting period as to whether there is any objective evidence of impairment as a result of one or more events having an impact on the estimated future cash flows of the asset. An impairment loss in respect of loans and receivables financial assets is recognised in the Consolidated Statement of Comprehensive Income and is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate. In a subsequent period, if the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through the Consolidated Statement of Comprehensive Income to the extent that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised. b) Impairment of non-financial assets The carrying values of intangible assets are reviewed at the end of each reporting period for impairment when there is an indication that the assets might be impaired. Impairment is measured by comparing the carrying values of the assets with their recoverable amounts. The recoverable amount of the assets is the higher of the assets’ fair value less costs to sell and their value in use, which is measured by reference to discounted future cash flow. An impairment loss is recognised in the Consolidated Statement of Comprehensive Income immediately. In respect of assets other than goodwill, and when there is a change in the estimates used to determine the recoverable amount, a subsequent increase in the recoverable amount of an asset is treated as a reversal of the previous impairment loss and is recognised to the extent of the carrying amount of the asset that would have been determined (net of amortisation and depreciation) had no impairment loss been recognised. The reversal is recognised in the Consolidated Statement of Comprehensive Income immediately. Deferred taxation Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the Consolidated Statement of Financial Position differs from its tax base, except for differences arising on: • the initial recognition of goodwill; • the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting or taxable profit; and • investments in subsidiaries where the Group is able to control the timing of the reversal of the difference and it is probable that the difference will not reverse in the foreseeable future. Recognition of deferred tax assets is restricted to those instances where it is probable that taxable profit will be available against which the difference can be utilised. The amount of the asset or liability is determined using tax rates that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the deferred tax liabilities or assets are settled or recovered. Deferred tax balances are not discounted. Deferred tax assets and liabilities are offset when the Group has a legally enforceable right to offset current tax assets and liabilities and the deferred tax assets and liabilities relate to taxes levied by the same tax authority on either: • the same taxable Group company; or • different entities which intend either to settle current tax assets and liabilities on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets and liabilities are expected to be settled or recovered. 50 51 Notes to the financial statements continuedFor the period ended 26 June 2016Company overviewStrategic reportGovernanceFinancial statementsFINANCIAL STATEMENTS Notes to the financial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and Accounts 2 . ACCO U N T I N G P O L I C I E S CONTINUED Operating segments 2 . ACCO U N T I N G P O L I C I E S CONTINUED Financial instruments Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision maker has been identified as the management team including the Chief Executive Officer and Chief Financial Officer. Financial instruments are classified according to the substance of the contractual arrangements into which the Group enters. An equity instrument is any contract that evidences a residual interest in the assets of the entity after deducting all of its financial liabilities. Financial assets The Board considers that the Group’s activity constitutes one operating and one reporting segment, as defined under IFRS 8. Management reviews the performance of the Group by reference to total results against budget. On initial recognition, financial assets are classified as either financial assets at fair value through income statement, held-to-maturity investments, loans and receivables financial assets, or available-for-sale financial assets, as appropriate. The total profit measures are operating profit and profit for the period, both disclosed on the face of the Consolidated Statement of Comprehensive Income. No differences exist between the basis of preparation of the performance measures used by management and the figures in the Group financial information. Cash and cash equivalents Cash and cash equivalents include cash in hand and deposits held on call, together with other short-term highly liquid investments which are not subject to significant changes in value and have original maturities of less than three months. The Group’s bank facilities are provided under a group facility. Equity Equity comprises the following: • Share capital: the nominal value of equity shares • Share premium • Retained earnings • Translation reserve • Merger reserve • Capital redemption reserve • Other reserves Chocolate bonds The Chocolate Tasting Club plc, a subsidiary of the Group, has issued two chocolate bonds which pay a return in boxes of luxury chocolates or, for one of the bonds a Hotel Chocolat gift card. For the bonds with a return in the form of luxury chocolates, the coupon is fixed by number of boxes and can only be settled by the delivery of chocolate. At inception, the net cash proceeds received for the bond are recognised as a liability. Each year, the cost value of the chocolates is recognised as an interest expense. The classification depends on the purpose for which the financial assets were acquired. The Group classifies all its financial assets as loans and receivables. Trade receivables and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as loans and receivables financial assets. Loans and receivables financial assets are measured at amortised cost using the effective interest method, less any impairment loss. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial. The Group’s loans and receivables financial assets comprise trade and other receivables and cash and cash equivalents as included in the Consolidated Statement of Financial Position. Financial liabilities Financial liabilities are recognised when, and only when, the Group becomes a party to the contractual provisions of the financial instrument. All financial liabilities are recognised initially at fair value plus directly attributable transaction costs and subsequently measured at amortised cost using the effective interest method other than those categorised as fair value through income statement. Fair value through the income statement category comprises financial liabilities that are either held for trading or are designated to eliminate or significantly reduce a measurement or recognition inconsistency that would otherwise arise. Derivatives are also classified as held for trading unless they are designated as hedges. Foreign currency forward contracts were designated as hedges and are included in the Group’s financial statements at fair value. A financial liability is de-recognised when the obligation under the liability is discharged, cancelled or expires. When an existing financial liability is replaced by another from the same party on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a de-recognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the income statement. Hedge accounting Hedge accounting is applied to financial assets and financial liabilities only where all of the following criteria are met: For the bond where there is a return paid by way of a Hotel Chocolat gift card which can be redeemed at Hotel Chocolat stores, cafes, restaurants and online, there is a fixed rate of interest. At inception, the net cash proceeds received for the chocolate bonds are recognised as a liability. Each year the fixed interest rate paid is recognised as an interest expense. • At the inception of the hedge there is formal designation and documentation of the hedging relationship and the Group’s risk management objective and strategy for undertaking the hedge. • For cash flow hedges, the hedged item in a forecast transaction is highly probable and presents an exposure to variations in cash flows that could ultimately affect profit or loss. • The cumulative change in the fair value of the hedging instrument is expected to be between 80-125% of the cumulative change in the fair value or cash flows of the hedged item attributable to the risk hedged (i.e. it is expected to be highly effective). • The effectiveness of the hedge can be reliably measured. • The hedge remains highly effective on each date tested. Effectiveness is tested on a six-monthly basis. 52 53 Notes to the financial statements continuedFor the period ended 26 June 2016Company overviewStrategic reportGovernanceFinancial statementsFINANCIAL STATEMENTS Notes to the financial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and Accounts2 . ACCO U N T I N G P O L I C I E S CONTINUED Cash flow hedges The effective part of forward contracts designated as a hedge of the variability in cash flows of foreign currency risk arising from firm commitments, and highly probable forecast transactions, are measured at fair value with changes in fair value recognised in other comprehensive income and accumulated in other reserves. The Group uses such contracts to fix the cost of foreign currency transactions in the functional currency of the Group entity concerned. If a highly probable forecast transaction results in the recognition of a non-monetary asset, the cumulative loss/(gain) is added to/(subtracted from) the cost of the asset acquired (“basis adjustment”). Otherwise the cumulative gain or loss recognised in other comprehensive income is reclassified from the cash flow hedge reserve to profit or loss at the same time as the hedged transaction affects profit or loss. The two transactions are recognised in the same line item. If a forecast transaction is no longer considered highly probable but the forecast transaction is still expected to occur, the cumulative gain or loss recognised in other comprehensive income is frozen and recognised in profit or loss in accordance with the policy set out in the paragraph above. Subsequent changes in the fair value of the derivative are recognised in profit or loss. If the Group closes out its position before the transaction takes place (even though it is still expected to take place) the cumulative gain or loss on changes in fair value of the derivative is similarly recognised in accordance with the policy set out in the paragraph above. If, at any point, the hedged transaction is no longer expected to occur, the cumulative gain or loss is reclassified from the cash flow hedge reserve to profit or loss immediately. Equity instruments Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from proceeds. Dividends on ordinary shares are recognised as liabilities when approved for distribution. 3 . S U M M A RY O F C R I T I C A L ACCO U N T I N G E S T I M AT E S A N D J U D G E M E N T S The preparation of financial information in conformity with IFRS requires the use of certain critical accounting estimates. It also requires the Directors to exercise their judgement in the process of applying the accounting policies which are detailed above. These judgements are continually evaluated by the Directors and management and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The key estimates and underlying assumptions concerning the future and other key sources of estimation uncertainty at the statement of financial position date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial period are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The estimates and judgements which have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities are discussed below: 3 . S U M M A RY O F C R I T I C A L ACCO U N T I N G E S T I M AT E S A N D J U D G E M E N T S CONTINUED Impairment testing is an area involving management judgement, requiring assessment as to whether the carrying value of assets can be supported by the net present value of future cash flows derived from such assets using cash flow projections which have been discounted at an appropriate rate. In calculating the net present value of the future cash flows, certain assumptions are required to be made in respect of highly uncertain matters including management’s expectations of: • growth in EBITDA, calculated as adjusted operating profit before depreciation and amortisation; • long-term growth rates; and • the selection of discount rates to reflect the risks involved. The Group prepares financial budgets on an annual basis, and monitors predicted financial performance and cash flow on a rolling monthly basis. These budgets and analyses are used in the calculations. Changing the assumptions selected by management, in particular the discount rate and growth rate assumptions used in the cash flow projections, could significantly affect the Group’s impairment evaluation and hence results. • Valuation of intangible assets The determination of the fair value of assets and liabilities including goodwill arising on the acquisition of businesses, website development expenditure and software, which is expected to generate future economic benefits, is based, to a considerable extent, on management’s judgement. The fair value of these assets is determined by discounting estimated future net cash flows generated by the asset where no active market for the assets exists. The use of different assumptions for the expectations of future cash flows and the discount rate would change the valuation of the intangible assets. Allocation of the purchase price affects the results of the Group as finite life intangible assets are amortised, whereas indefinite life intangible assets, including goodwill, are not amortised and could result in differing amortisation charges based on the allocation to indefinite life and finite life intangible assets. 4 . R E V E N U E Sale of goods Total revenue Segmental analysis 52 weeks ended 26 June 2016 £ 91,089,824 91,089,824 52 weeks ended 28 June 2015 £ 81,068,364 81,068,364 The Group operates in three main geographic areas: UK, Europe and Rest of World. The Board of Directors monitors revenue on this basis. • Useful lives of depreciable assets Revenue for each of the geographical areas is as follows: Management reviews the useful lives of depreciable assets at each reporting date to ensure that the useful lives represent a reasonable estimate of likely period of benefit to the Group. Actual useful lives however, may vary due to unforeseen events. • Impairment IFRS requires management to undertake an annual test for impairment of indefinite life assets and, for finite life assets, to test for impairment if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Revenue by location United Kingdom Europe Rest of World Total revenue 52 weeks ended 26 June 2016 £ 52 weeks ended 28 June 2015 £ 88,915,149 1,879,240 295,435 91,089,824 78,621,649 2,040,081 406,634 81,068,364 The geographical allocation of revenue has been updated to reflect the current basis monitored by the Board. Non-current assets not held in the United Kingdom amount to £9,409,036 in the period ended 26 June 2016 (28 June 2015: £160,603). 54 55 Notes to the financial statements continuedFor the period ended 26 June 2016Company overviewStrategic reportGovernanceFinancial statementsFINANCIAL STATEMENTS Notes to the financial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and Accounts 5 . P RO F I T F RO M O P E R AT I O N S Profit from operations is arrived at after charging/(crediting): 7. S TA F F CO S T S The average number of employees (including directors) during the period was made up as follows: Staff cost (see Note 7) Depreciation of property, plant and equipment Impairment of property, plant and equipment Amortisation of intangible assets Loss on disposal of property, plant and equipment and intangible assets Operating leases: – Property – Plant and equipment Exchange differences Exceptional costs Bad debt expense 52 weeks ended 26 June 2016 £ 52 weeks ended 28 June 2015 £ 24,835,020 2,516,632 – 676,977 128,874 8,189,509 145,185 48,725 2,642,177 126,967 22,444,632 4,044,602 131,998 194,542 – 7,865,974 185,133 (281,005) – 43,016 Production staff Administrative staff Total The cost of employees (including Directors) during the period was made up as follows: Wages and salaries Share-based payments Social security costs Pension costs Total 52 weeks ended 26 June 2016 52 weeks ended 28 June 2015 195 737 932 158 671 829 52 weeks ended 26 June 2016 £ 52 weeks ended 28 June 2015 £ 22,842,934 20,603,231 64,642 1,778,662 148,782 – 1,704,244 137,157 24,835,020 22,444,632 Exceptional costs for the period ended 26 June 2016 relate solely to the acquisition of Hotel Chocolat Estates Limited and the admission to trading on AIM. 6 . AU D I T A N D N O N - AU D I T F E E S An analysis of auditors’ remuneration is as follows: 8 . R E M U N E R AT I O N O F K E Y M A N AG E M E N T P E R S O N N E L Key management personnel represent those personnel which hold a statutory directorship of a company within the Group. Directors’ emoluments and benefits include: Audit fees Audit related assurance services Taxation compliance services Other taxation advisory services Corporate finance services Other services Non-audit fees 52 weeks ended 26 June 2016 £ 52 weeks ended 28 June 2015 £ 117,900 45,212 185,560 126,336 308,500 39,828 705,436 76,200 – 111,494 71,283 – – 182,777 Short-term employee benefits Share-based payments Post-employments benefits Total The above fees for the period ended 26 June 2016 include exceptional costs totaling £389,172 (28 June 2015: £ nil). 52 weeks ended 26 June 2016 £ 52 weeks ended 28 June 2015 £ 1,206,628 1,418,122 38,715 10,383 1,255,726 – 12,018 1,430,140 56 57 Notes to the financial statements continuedFor the period ended 26 June 2016Company overviewStrategic reportGovernanceFinancial statementsFINANCIAL STATEMENTS Notes to the financial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and Accounts9. S H A R E - B A S E D PAY M E N T S The Hotel Chocolat Group plc 2016 Long-Term Incentive Plan Under the Hotel Chocolat Group plc 2016 Long-Term Incentive Plan, the Group gives awards to Directors and staff subject to the achievement of a pre-agreed net profit figure for the financial year of the Company ending 30 June 2019. These shares vest after the delivery of the audited net profit figure for financial year ending 30 June 2019 has been announced. Awards are forfeited if the employee leaves the Group before the awards vest, except under circumstances where the employee is considered a ‘Good Leaver’. Details of the share awards outstanding are as follows: Outstanding at beginning of the period Granted during the period Exercised during the period Forfeited during the period Outstanding at the end of the period Exercisable at the end of the period 52 weeks ended 26 June 2016 52 weeks ended 28 June 2015 Number of share options Weighted average exercise price £ Number of share options Weighted average exercise price £ – 2,972,000 – – 2,972,000 – – 1.48 – – 1.48 1.48 – – – – – – – – – – – – The awards outstanding at the end of 26 June 2016 have a weighted average remaining contractual life of 3.25 years (28 June 2015: nil) and an exercise price of £1.48 (28 June 2015: £ nil). The Group recognised total expenses related to the above equity-settled share-based payment transactions in the form of options during the period ended 26 June 2016 of £64,642 (28 June 2015: £ nil). The aggregate of the fair value of the options granted during the period ended 26 June 2016 was £1,292,820 (28 June 2015: £ nil). The fair values were calculated using a Black Scholes model. The inputs used for fair valuing awards granted during the period was as follows: Weighted average share price (£) Exercise price (£) Expected volatility (%) Option life (years) Risk free interest rate (%) 52 weeks ended 26 June 2016 52 weeks ended 28 June 2015 1.48 1.48 32.0% 10.0 0.8% – – – – – In the absence of any historical volatility data for Hotel Chocolat Group plc, the expected volatility was determined by reviewing the volatility of the share price of similar entities which are currently traded on AIM. 10 . F I N A N C E I N CO M E A N D E X P E N S E S Interest from related party Interest on bank deposits Other income Finance income Interest on bank borrowings and overdraft Interest on derivative financial liabilities Finance leases and hire purchase contracts Finance charges on Chocolate bonds Finance expenses 11. TA X AT I O N UK corporation tax Adjustment in respect of previous periods Overseas corporation tax Total current tax charge Deferred tax: Adjustment in respect of prior periods Origination and reversal of timing differences Total tax expense Tax on derivative financial liabilities Deferred tax 52 weeks ended 26 June 2016 £ 52 weeks ended 28 June 2015 £ 171,997 188,336 109 – 172,106 572,150 57,645 30,020 287,069 946,884 – 153 188,489 400,902 – 31,654 287,252 719,808 52 weeks ended 26 June 2016 £ 52 weeks ended 28 June 2015 £ 1,409,454 (93,207) 10,507 1,326,754 (2,518) 183,054 1,507,290 114,446 114,446 887,114 (26,931) – 860,183 – 24,026 884,209 – – 58 59 Notes to the financial statements continuedFor the period ended 26 June 2016Company overviewStrategic reportGovernanceFinancial statementsFINANCIAL STATEMENTS Notes to the financial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and Accounts11. TA X AT I O N CONTINUED Factors affecting current tax charge: The tax assessed on the profit for the period is different to the standard rate of corporation tax in the UK. The differences are explained below: Profit on ordinary operations before income tax Weighted average standard rate of corporation tax Profit for the period multiplied by the standard rate of corporation tax Effects of: Expenses not deductible for tax purposes Permanent depreciation Adjustment in respect of prior periods Adjust closing deferred tax in respect of change in future rate of taxation Adjust opening deferred tax in respect of change in future rate of taxation Movement to unrecognised deferred tax Tax expense 52 weeks ended 26 June 2016 £ 52 weeks ended 28 June 2015 £ 5,591,094 20.00% 1,118,219 338,860 200,852 (95,725) 10,878 2,359 (68,153) 1,507,290 2,931,432 20.75% 608,272 50,438 229,908 (27,381) 7,073 (9,033) 24,932 884,209 The Group’s effective tax rate for the period ended 26 June 2016 was 27.0% (28 June 2015: 30.2%). The effective rate is an amalgamation of UK and European rates for the periods reported. The change from year to year has been particularly affected by the costs incurred by the Group in relation to the admission to trading on AIM. The majority of the costs are considered to be capital for tax purposes and therefore not deductible. At 26 June 2016 the Group has tax losses to carry forward against future profits of £21,000 (28 June 2015: £217,000). The tax value of such losses amounted to approximately £4,000, have no expiry date and have not been recognised as a deferred tax asset. 12 . E A R N I N G S P E R S H A R E Profit for the period used in the calculation of the basic and diluted earnings per share: Profit after tax for the period 52 weeks ended 26 June 2016 £ 52 weeks ended 28 June 2015 £ 4,083,804 2,047,223 The weighted average number of shares for the purposes of diluted earnings per share reconciles to the weighted average number of shares used in the calculation of basic earnings per share as follows: Weighted average number of shares in issue used in the calculation of basic earnings per share (number) Earnings per share – Basic and Diluted (pence) 52 weeks ended 26 June 2016 £ 52 weeks ended 28 June 2015 £ 103,411,610 10,200,040 3.9 20.1 Due to the nature of the options granted under the Hotel Chocolat Group plc 2016 Long-Term Incentive Plan, they are considered to be contingently issuable shares and therefore have no dilutive effect. For further information on the movements in the share capital, please refer to Note 24. 13 . I N TA N G I B L E A S S E T S Goodwill arising on consolidation (Note (a)) Computer software and website costs (Note (b)) (a) Goodwill arising on consolidation At beginning of period Acquired on business combinations (see Note 29) At end of period 52 weeks ended 26 June 2016 £ 52 weeks ended 28 June 2015 £ 914,098 942,702 1,856,800 683,534 869,899 1,553,433 52 weeks ended 26 June 2016 £ 52 weeks ended 28 June 2015 £ 683,534 230,564 914,098 683,534 – 683,534 The recoverable amount of the goodwill has been determined on a value in use basis. This has been based on the performance of the business and management’s forecasts, which assume that the business will perform at least as well as the market generally. The forecasts take into account management’s experience and are discounted at a pre-tax rate of 10%. (b) Computer software and website costs Cost: At beginning of period Additions Disposals At end of period Amortisation: At beginning of period Amortisation charge Disposals At end of period Net book value 52 weeks ended 26 June 2016 £ 52 weeks ended 28 June 2015 £ 1,652,098 760,224 (18,987) 1,416,314 235,784 – 2,393,335 1,652,098 782,199 676,977 (8,543) 1,450,633 942,702 587,657 194,542 – 782,199 869,899 60 61 Notes to the financial statements continuedFor the period ended 26 June 2016Company overviewStrategic reportGovernanceFinancial statementsFINANCIAL STATEMENTS Notes to the financial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and Accounts14 . P RO P E RT Y, P L A N T A N D E Q U I P M E N T 15 . D E F E R R E D I N CO M E TA X A S S E T 52 weeks ended 28 June 2015 Cost: As at 29 June 2014 Additions Translation differences As at 28 June 2015 Accumulated depreciation: As at 29 June 2014 Depreciation charge Impairments Translation differences As at 28 June 2015 Net book value As at 28 June 2015 52 weeks ended 26 June 2016 Cost: As at 29 June 2015 Acquisition on business combinations Additions Disposals Translation differences As at 26 June 2016 Accumulated depreciation: As at 29 June 2015 Depreciation charge Disposal Translation differences As at 26 June 2016 Net book value As at 26 June 2016 Freehold property £ Leasehold property £ Furniture & fittings, Equipment, Computer software & hardware £ Plant & machinery £ Total £ 2,840,841 734,999 – – – – 19,110,012 2,268,415 (59,341) 9,343,245 32,029,097 169,390 2,437,805 – (59,341) 2,840,841 734,999 21,319,086 9,512,635 34,407,561 251,082 28,409 – – 730,406 950 – – 10,510,017 2,841,888 131,998 (61,416) 6,506,608 1,173,355 – – 17,998,113 4,044,602 131,998 (61,416) 279,491 731,356 13,422,487 7,679,963 22,113,297 2,561,350 3,643 7,896,599 1,832,672 12,294,264 2,840,841 8,244,800 35,009 – 348,805 11,469,455 279,491 51,943 – 77,178 408,612 734,999 – – – – 21,319,086 505,625 2,342,334 (1,425,415) 157,562 9,512,635 34,407,561 – 5,191,022 8,750,425 7,568,365 (41,069) (1,466,484) – 506,367 734,999 22,899,192 14,662,588 49,766,234 731,356 950 – – 13,422,487 1,601,429 (1,106,985) 96,070 7,679,963 862,310 (41,069) – 22,113,297 2,516,632 (1,148,054) 173,248 732,306 14,013,001 8,501,204 23,655,123 11,060,843 2,693 8,886,191 6,161,384 26,111,111 Included above are assets held under finance leases and hire purchase agreements which, as at 26 June 2016 had a net book value of £557,454 (28 June 2015: £869,845). Deferred taxation asset Reconciliation of deferred tax balances: Balance at beginning of period Deferred tax charge for the period through Statement of Comprehensive Income Deferred tax credit for the period through Statement of Changes in Equity Balance at end of period The provision for deferred taxation consists of the tax effect of timing differences in respect of: Fixed asset differences Short-term differences Derivative financial liabilities Share-based payments 52 weeks ended 26 June 2016 £ 149,903 149,903 52 weeks ended 28 June 2015 £ 215,993 215,993 52 weeks ended 26 June 2016 £ 215,993 (180,536) 114,446 149,903 52 weeks ended 28 June 2015 £ 240,019 (24,026) – 215,993 52 weeks ended 26 June 2016 £ (28,015) 51,733 114,446 11,739 149,903 52 weeks ended 28 June 2015 £ 154,765 61,228 – – 215,993 At 26 June 2016, the Group has unrecognised deferred tax assets amounting to £42,000 (28 June 2015: £128,000). 16 . I N V E N TO R I E S Raw materials Finished goods 52 weeks ended 26 June 2016 £ 1,906,706 4,697,398 6,604,104 52 weeks ended 28 June 2015 £ 1,025,109 3,468,732 4,493,841 17. T R A D E A N D OT H E R R E C E I VA B L E S There were no material receivables which were past due but not impaired at the end of any period. Current Trade receivables Other receivables Prepayments Related parties Non-current Prepayments 52 weeks ended 26 June 2016 £ 52 weeks ended 28 June 2015 £ 839,304 128,324 4,567,207 – 5,534,835 7,461 7,461 584,863 93,959 4,425,220 8,568,424 13,672,466 – – 62 63 Notes to the financial statements continuedFor the period ended 26 June 2016Company overviewStrategic reportGovernanceFinancial statementsFINANCIAL STATEMENTS Notes to the financial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and Accounts18 . I N V E S T M E N T I N S U B S I D I A R I E S The Group’s operating subsidiaries as at 26 June 2016 are as follows: Name Direct Holding HOTC Limited Hotel Chocolat Limited The Chocolate Tasting Club plc HC International Limited Hotel Chocolat USA Inc Hotel Chocolat (St Lucia) Holdings Limited Indirect Holdings Hotel Chocolat Retail Limited Hotel Chocolat Stores Limited Rabot Estate UK Limited Hotel Chocolat Europe Limited Hotel Chocolat Corporate Limited HCIP Limited HC Sales Limited CTC Distribution GmbH Chocolate Tasting Club Inc Hotel Chocolat Inc Hotel Chocolat Estates Limited HCRF Inc Almondhill Properties Limited Applehill Properties Limited Apricothill Properties Limited Bananahill Properties Limited Braeburnhill Properties Limited Bramleyhill Properties Limited Brazilnuthill Properties Limited Cashewhill Properties Limited Chestnuthill Properties Limited Colanuthill Properties Limited Crispinhill Properties Limited Croftonhill Properties Limited Datehill Properties Limited Dulcethill Properties Limited Gingerhill Properties Limited Grapehill Properties Limited Principal activities Holding Company Manufacturer and Distributor of chocolates Chocolate Retailer Holding Company Holding Company Holding Company Country of business / incorporation England & Wales England & Wales England & Wales Malta USA St Lucia England & Wales Chocolate Retailer Property Holding Company England & Wales Chocolate Retailer and Restaurateur England & Wales England & Wales Chocolate Retailer England & Wales Dormant Malta Trademark Holder Malta Chocolate Distributor Switzerland Chocolate Distributor USA Dormant USA Dormant St Lucia Hotel & Cocoa Plantation USA Dormant England & Wales Property Holding Company England & Wales Property Holding Company England & Wales Property Holding Company England & Wales Property Holding Company England & Wales Property Holding Company England & Wales Property Holding Company England & Wales Property Holding Company England & Wales Property Holding Company England & Wales Property Holding Company England & Wales Property Holding Company England & Wales Property Holding Company England & Wales Property Holding Company England & Wales Property Holding Company England & Wales Property Holding Company England & Wales Property Holding Company England & Wales Property Holding Company 18 . I N V E S T M E N T I N S U B S I D I A R I E S CONTINUED Proportion of ordinary shares directly held by parent Proportion of ordinary shares held by the Group Name Principal activities Indirect Holdings cont inued Country of business / incorporation Proportion of ordinary shares directly held by parent Proportion of ordinary shares held by the Group Groundnuthill Properties Limited Property Holding Company England & Wales Guavahill Properties Limited Property Holding Company England & Wales Hazelnuthill Properties Limited Property Holding Company England & Wales Hotel Chocolat DK Limited Property Holding Company England & Wales Hotel Chocolat NL Limited Property Holding Company England & Wales Kiwihill Properties Limited Property Holding Company England & Wales Lemonhill Properties Limited Property Holding Company England & Wales Limehill Properties Limited Property Holding Company England & Wales Macadamiahill Properties Limited Property Holding Company England & Wales Mandarinhill Properties Limited Property Holding Company England & Wales Mangohill Properties Limited Property Holding Company England & Wales Melonhill Properties Limited Property Holding Company England & Wales Olivehill Properties Limited Property Holding Company England & Wales Orangehill Properties Limited Property Holding Company England & Wales Papayahill Properties Limited Property Holding Company England & Wales Peachhill Properties Limited Property Holding Company England & Wales Peanuthill Properties Limited Property Holding Company England & Wales Pearhill Properties Limited Property Holding Company England & Wales Pearmainhill Properties Limited Property Holding Company England & Wales Pecanhill Properties Limited Property Holding Company England & Wales Pinenuthill Properties Limited Property Holding Company England & Wales Pippinhill Properties Limited Property Holding Company England & Wales Plumhill Properties Limited Property Holding Company England & Wales Raisinhill Properties Limited Property Holding Company England & Wales Russethill Properties Limited Property Holding Company England & Wales Satsumahill Properties Limited Property Holding Company England & Wales Sloehill Properties Limited Property Holding Company England & Wales Walnuthill Properties Limited Property Holding Company England & Wales 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 64 65 Notes to the financial statements continuedFor the period ended 26 June 2016Company overviewStrategic reportGovernanceFinancial statementsFINANCIAL STATEMENTS Notes to the financial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and Accounts19. C A S H A N D C A S H E Q U I VA L E N T S For the purpose of the statements of cash flows, cash and cash equivalents comprise the following: Cash and cash equivalents Bank overdraft 52 weeks ended 26 June 2016 £ 6,475,446 – 6,475,446 52 weeks ended 28 June 2015 £ 4,939,924 (10,637,314) (5,697,390) In April 2016, the Group negotiated a two-year, bilateral revolving credit facility (RCF), which replaces the overdraft facility. In the previous financial periods, the bank overdraft was secured by a charge over the Group’s assets and cross guarantees. The interest rate charged until 4 October 2014 was 2.0% over base rate. On 5 October 2014, the interest rate was increased to 3.9% over base rate and subsequently reduced to 3.2% over base rate on 1 July 2015. Following the repayment of the loan in March 2016, the interest rate on the overdraft facility was reduced to 2.0% over base rate. 2 0 . T R A D E A N D OT H E R PAYA B L E S Current Trade payables Other payables Other taxes payable Accruals Non-current Other payables and accruals 21. D E R I VAT I V E F I N A N C I A L L I A B I L I T I E S Current Foreign currency forward contracts Non-current Foreign currency forward contracts 52 weeks ended 26 June 2016 £ 52 weeks ended 28 June 2015 £ 5,439,251 3,416,370 810,114 6,668,456 16,334,191 1,485,090 1,485,090 4,631,750 1,629,735 1,418,345 4,530,252 12,210,082 1,774,731 1,774,731 52 weeks ended 26 June 2016 £ 52 weeks ended 28 June 2015 £ 554,529 554,529 85,075 85,075 – – – – The fair value of the derivative financial liabilities are split between current and non-current depending on the remaining maturity of the derivative contract and its contractual cash flows. The fair value of foreign currency forward contracts are based on observable information on exchange and interest rates. The hedged forecast transactions denominated in foreign currency are expected to occur at various dates within the next 18 months. Gains and losses on foreign currency forward contracts which have been recognised in the hedging reserve in equity as at 26 June 2016, will be recognised in the Consolidated Statement of Comprehensive Income in the periods during which the hedged forecast transaction occurs. The maximum exposure to credit risk at the reporting date is the fair value of the derivative liabilities in the Consolidated Statement of Financial Position. 21. D E R I VAT I V E F I N A N C I A L L I A B I L I T I E S CONTINUED The movement in the fair value on forward contracts in the period of £581,959 (28 June 2015: £ nil) has been included within other comprehensive income in the Consolidated Statement of Comprehensive Income. There are no forecast transactions for which hedge accounting had previously been used, but which are no longer expected to occur. 2 2 . B O R ROW I N G S Current Finance and lease hire purchase liabilities Chocolate bonds Bank loans Unamortised costs of issue Total current borrowings Non-current Finance and lease hire purchase liabilities Chocolate bonds Unamortised costs of issue Total non-current borrowings Total borrowings 52 weeks ended 26 June 2016 £ 52 weeks ended 28 June 2015 £ 425,544 102,000 – 527,544 (95,000) 432,544 35,462 6,610,000 6,645,462 (2,250) 6,643,212 397,750 – 556,771 954,521 – 954,521 441,718 6,857,000 7,298,718 – 7,298,718 7,075,756 8,253,239 Finance and lease hire purchase liabilities £ Chocolate bonds £ Bank loans £ Total £ Maturity of debt 52 weeks ended 28 June 2015 In one year or less or on demand In more than two years but not more than five years In more than five years Total non-current borrowings 397,750 441,718 – 441,718 – 556,771 954,521 6,857,000 – 6,857,000 – – – 7,298,718 – 7,298,718 Total borrowings 839,468 6,857,000 556,771 8,253,239 52 weeks ended 26 June 2016 In one year or less or on demand In more than one year but not more than two years In more than two years but not more than five years In more than five years Total non-current borrowings Unamortised costs of issue Total borrowings 425,544 102,000 35,462 – – 35,462 – – 6,610,000 – 6,610,000 – 461,006 6,712,000 – – – – – (97,250) (97,250) 527,544 35,462 6,610,000 – 6,645,462 (97,250) 7,075,756 66 67 Notes to the financial statements continuedFor the period ended 26 June 2016Company overviewStrategic reportGovernanceFinancial statementsFINANCIAL STATEMENTS Notes to the financial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and Accounts2 2 . B O R ROW I N G S CONTINUED 2 3 . P ROV I S I O N S CONTINUED Chocolate bonds pay a return either in boxes of luxury chocolates or by way of a Hotel Chocolat gift card. For those bonds with a return in the form of chocolate, the coupon is fixed by number of boxes. For bonds where there is a return paid by way of a Hotel Chocolat gift card, there is a fixed rate of interest. The interest as stated on issue of the bonds ranged between 6.7% and 7.3%. Provisions for onerous leases and dilapidations are inherently uncertain in terms of quantum and timing, not least because they involve negotiations with landlords at future dates. The figures provided in the financial statements represents management’s best estimate of the likely outflows to the Group. Chocolate bonds are repayable subject to formal notice given six months prior to a redemption note. In order to redeem the bond, notice must be given by January and payment is made in July of the same year. For the chocolate bonds issued in June 2010, where notice has been given the amount repayable is shown within current liabilities. The remaining bonds for which notice has not yet been given are shown within non-current liabilities. The first notice date for the chocolate bonds issued in June 2014, will be January 2017 and therefore all amounts are shown within non-current liabilities. Both bonds are unsecured. On 27 April 2016, the Group negotiated a two-year, bilateral revolving credit facility (RCF). Interest is charged at 1.9% over base rate and a commitment fee of 0.8% is due on the available commitment not yet drawn down. In the previous financial period, interest on the bank loan was charged at 3.9% over base rate. The bank loan was repaid in March 2016 and was secured by a charge over the Group’s assets and cross guarantees. The hire purchase and finance leases are secured by a charge over the related fixed assets and have incurred interest at an effective annual rate of 2.0%. 2 3 . P ROV I S I O N S Non-current Onerous lease provision Lease dilapidations provision 52 weeks ended 26 June 2016 £ 52 weeks ended 28 June 2015 £ – 464,486 464,486 192,143 476,755 668,898 The onerous lease provision relates to the present value of the obligation under a lease where the unavoidable costs of the lease exceed the economic benefit expected to be received from it. 24 . S H A R E C A P I TA L Allotted, called up and fully paid: Ordinary shares of £0.01 each Ordinary shares of £0.001 each GS1 shares of £0.0001 each GS2 shares of £0.0001 each Period ending 26 June 2016: As at 26 June 2016 As at 28 June 2015 Shares – £ – Shares £ 10,200,040 102,000 112,837,828 112,838 – – – – 112,837,828 112,838 – 3,298,500 10,880,000 24,378,540 – 330 1,088 103,418 On 3 May 2016, 10,200,040 Ordinary shares of £0.01 each were sub-divided into 102,000,400 Ordinary shares of £0.001 each. On 4 May 2016, 3,248,620 GS1 shares were converted to 324,862 Interim Shares of £0.001 each and on 10 May 2016, 2,569,156 Interim shares of £0.001 each were converted to Ordinary shares of £0.001 each. On 3 May 2016, 49,880 GS1 shares of £0.0001 and 240,000 GS2 shares of £0.0001 were cancelled and on 10 May 2016, the remaining 11,940,000 GS2 shares were purchased by Hotel Chocolat Group plc and cancelled. On 12 August 2015, 1,300,000 GS2 shares were allotted and issued at par, for cash. On 10 May 2016, 8,108,108 new Ordinary shares were issued at £1.48 per share, for cash, pursuant to the admission of Hotel Chocolat Group plc to AIM. On 4 May 2016, a bonus issue of 160,164 Ordinary shares of £0.001 each were allotted and issued. On 10 May 2016, a bonus issue of 2,244,294 Interim shares of £0.001 was allotted and issued. Period ending 28 June 2015: The dilapidations provision relates to potential rectification costs expected should the Group vacate its retail locations. On 6 May 2015, 3,298,500 GS1 shares of £0.0001 and 10,880,000 GS2 shares of £0.0001 were allotted and issued at par, for cash. The movements in onerous lease provisions and dilapidations provisions are summarised below: 52 weeks ended 28 June 2015 At beginning of period Released through profit and loss Amounts capitalised during the period At end of period 52 weeks ended 26 June 2016 At beginning of period Released through profit and loss Utilised during the period Amounts capitalised during the period At end of period Onerous lease provision £ Lease dilapidation provision £ 339,750 (147,607) – 192,143 192,143 - (192,143) - – 599,965 (295,245) 172,035 476,755 476,755 (57,269) - 45,000 464,486 Total £ 939,715 (442,852) 172,035 668,898 668,898 (57,269) (192,143) 45,000 464,486 On 25 November 2014, 110,949 ‘B’ shares of £0.01, 110,946 ‘C’ shares of £0.01, 142,955 ‘D’ shares of £0.01 and 142,952 ‘E’ shares of £0.01 were repurchased and cancelled on 4 December 2014. 68 69 Notes to the financial statements continuedFor the period ended 26 June 2016Company overviewStrategic reportGovernanceFinancial statementsFINANCIAL STATEMENTS Notes to the financial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and Accounts2 5 . R E S E RV E S This note explains material movements recorded in shareholders’ equity that are not explained elsewhere in the financial statements. The movements in equity and the balance sheet at 26 June 2016 are presented in the Consolidated Statement of Changes in Equity. 52 weeks ended 28 June 2015 At beginning of period Capital redemption Issued during the period for cash At end of period 52 weeks ended 26 June 2016 At beginning of period Capital redemption Issued during the period for cash Bonus issue during the period Costs of issue of new equity At end of period Share capital £ 107,078 (5,078) 1,418 103,418 103,418 (1,223) 8,238 2,405 – 112,838 Share premium £ Capital redemption reserve £ – – – – – – 11,991,892 (2,405) (240,000) 11,749,487 – 5,078 – 5,078 5,078 1,223 – – – 6,301 The capital redemption reserve represented the aggregate nominal value of all the ordinary shares repurchased and cancelled by the Group. The merger reserve arose when the Company undertook a share for share exchange with the companies listed in Note 18 and is not distributable by way of dividends. The translation reserve represents cumulative foreign exchange differences arising from the translation of the financial statements of foreign subsidiaries and is not distributable by way of dividends. Other reserves includes the movements in share-based payments and derivative financial liabilities. For further details, refer to Notes 9 and 21 respectively. 27. C A P I TA L CO M M I T M E N T S There were no amounts contracted for but not provided for as at 26 June 2016 (28 June 2015: £ nil). 2 8 . R E L AT E D PA RT Y T R A N S AC T I O N S Remuneration of Directors and other transactions The remuneration of the key management personnel of the company are disclosed in Note 8. Interests and related party transactions are disclosed below. The Group rents property in the ordinary course of business on an arm’s length basis from Harwell Management Limited, a company in which P M Harris and A Thirlwell have a material interest. The rentals totalled £180,000 in the period ended 26 June 2016 (28 June 2015: £40,000). In the prior period, the rent for three quarters’ was waived. There were no amounts due at either period end. No other amounts were due to directors (28 June 2015: £nil). Trading transactions As explained in Note 29, Hotel Chocolat Group plc completed the acquisition of Hotel Chocolat Estates Limited during the period and loans to the value of £8,901,181 were capitalised as part of the transaction. Prior to the acquisition, Hotel Chocolat Estates Limited was considered a related party as the entity was jointly controlled by P M Harris and A Thirlwell. 29. ACQ U I S I T I O N O F H OT E L C H O CO L AT E S TAT E S L I M I T E D On 24 April 2016, the Group completed the acquisition of Hotel Chocolat Estates Limited. The acquisition comprised of the 136 acre Rabot Estate in Saint Lucia, which currently includes a working cocoa plantation with propagation nurseries, a ‘tree to bar’ chocolate making experience for paying visitors, and a luxury boutique hotel called Boucan, which comprises 14 guest rooms, a spa and a 60-cover restaurant; and the 85 acre Delcer Estate in Saint Lucia which comprises largely undeveloped land. Hotel Chocolat Group plc capitalised a loan due from Hotel Chocolat Estates Limited to the value of £8,901,181 and paid £54,921 in return for 100% of the issued share capital. The book values of identifiable assets and liabilities acquired and their fair value to the Group was as follows: Book Value £ Adjustment £ Fair Value £ 2 6 . L E A S E CO M M I T M E N T S Identifiable assets and liabilities acquired: At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows: Land and buildings Operating leases which expire: Within one year In two to five years In over five years Other Operating leases which expire: Within one year In two to five years 52 weeks ended 26 June 2016 £ 52 weeks ended 28 June 2015 £ 7,177,794 20,184,525 12,273,996 39,636,315 115,080 133,518 248,598 5,506,791 12,755,081 5,961,877 24,223,749 – – – Property, plant & equipment Trade and other receivables Cash Trade and other payables Total net assets Fair value of consideration paid: Cash Capitalisation of loan receivable from Hotel Chocolat Estates Limited Total consideration Goodwill arising (Note 13) 5,996,413 129,082 282,927 (436,896) 5,971,526 2,754,012 – – – 2,754,012 8,750,425 129,082 282,927 (436,896) 8,725,538 54,921 8,901,181 8,956,102 230,564 On acquisition, Hotel Chocolat Estates Limited held trade and other receivables with a book and fair value of £129,082 representing contractual receivables of £129,082. The Group therefore expects to collect all contractual receivables. The goodwill arising on the Hotel Chocolat Estates Limited acquisition is not deductible for tax purposes. 70 71 Notes to the financial statements continuedFor the period ended 26 June 2016Company overviewStrategic reportGovernanceFinancial statementsFINANCIAL STATEMENTS Notes to the financial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and Accounts29. ACQ U I S I T I O N O F H OT E L C H O CO L AT E S TAT E S L I M I T E D CONTINUED 31. F I N A N C I A L R I S K M A N AG E M E N T CONTINUED Since the acquisition date, Hotel Chocolat Estates Limited has contributed £295,435 to Group revenues and a loss of £71,191 to Group profit. If the acquisition had completed on 29 June 2015, the total Group revenues for financial year ending 26 June 2016 would have been £92,636,086. The total Group profit for the same period would have been £3,561,008. This proforma information is for illustrative purposes only and is not necessarily an indication of the revenues and results of the Group that actually would have been achieved had the acquisition been completed on 29 June 2015, nor is it intended to be a projection of future results. 3 0 . C AT E G O R I E S O F F I N A N C I A L I N S T RU M E N T S Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. In order to minimise this risk the Group endeavours only to deal with companies which are demonstrably creditworthy. In addition, a significant proportion of revenue results from cash transactions. The aggregate financial exposure is continuously monitored. The maximum exposure to credit risk is the value of the outstanding amount of trade receivables. The management do not consider that there is any concentration of risk within trade receivables. Financial assets At amortised cost Trade and other receivables (excluding prepayments) Cash and cash equivalents Financial liabilities At amortised cost Trade and other payables Total borrowings Accruals Bank overdraft At fair value Derivative financial liabilities 52 weeks ended 26 June 2016 £ 52 weeks ended 28 June 2015 £ 975,089 6,475,445 7,450,534 8,785,864 7,075,756 6,668,456 – 22,530,076 9,247,246 4,939,924 14,187,170 7,099,035 8,253,239 4,530,252 10,637,317 30,519,843 581,959 – In the Directors’ view, the fair value of the Group’s borrowings is considered to be equal to their carrying value. 31. F I N A N C I A L R I S K M A N AG E M E N T The Group’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk, fair value interest rate risk and price risk), credit risk and liquidity risk. Market risk Foreign exchange risk The Group enters into foreign currency forward contracts in order to manage the exposure to foreign exchange risk which arises on transactions denominated in foreign currencies. Refer to Note 21 for further information about the Group’s foreign currency forward contracts. Interest Risk The Group is exposed to interest rate risk from its RCF, which carries interest at variable rates on amounts which are drawn down. Drawdowns are typically short-term and used to fund working capital. Price risk Price risk is the risk that oscillation in the price of key input costs will affect the profitability of the business. The Group manages this risk by agreeing long–term prices with suppliers where possible. Ageing analysis: Trade receivables Up to three months Three to six months Above six months Impairment provision Total These receivables are not secured by any collateral or credit enhancement. The exposure of credit risk for trade receivables by geographical region is as follows: United Kingdom Europe Rest of World Total Liquidity risk 52 weeks ended 26 June 2016 £ 52 weeks ended 28 June 2015 £ 843,137 91,093 – (94,926) 839,304 618,632 9,847 159,983 (203,599) 584,863 52 weeks ended 26 June 2016 £ 52 weeks ended 28 June 2015 £ 821,902 4,486 12,916 839,304 533,975 50,888 – 584,863 The Group currently holds cash balances to provide funding for normal trading activity. The Group also has access to both short-term and long- term borrowings to finance individual projects. Trade and other payables are monitored as part of normal management routine. Borrowings and other liabilities mature according to the following schedule: 52 weeks ended 28 June 2015 Trade and other payables Borrowings Bank overdraft 52 weeks ended 26 June 2016 Trade and other payables Borrowings Within one year £ One to two years £ Two to five years £ 10,791,737 979,060 10,637,314 22,408,111 15,524,077 583,215 16,107,292 1,774,731 – – – 8,067,913 – 1,774,731 8,067,913 1,485,090 102,311 1,587,401 – 7,328,692 7,328,692 72 73 Notes to the financial statements continuedFor the period ended 26 June 2016Company overviewStrategic reportGovernanceFinancial statementsFINANCIAL STATEMENTS Notes to the financial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and AccountsNotes to the financial statements continued For the period ended 26 June 2016 31. F I N A N C I A L R I S K M A N AG E M E N T CONTINUED 3 4 . T R A N S I T I O N TO I F R S CONTINUED Capital risk management The Group’s capital management objectives are: • to ensure the Group’s ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for other stakeholders; and • to provide an adequate return to shareholders by pricing products and services commensurate with the level of risk. To meet these objectives, the Group reviews the budgets and forecasts on a regular basis to ensure there is sufficient capital to meet the needs of the Group. The capital structure of the Group consists of shareholders’ equity as set out in the Consolidated Statement of Changes in Equity. All working capital requirements are financed from existing cash resources and borrowings. Fair value hierarchy The financial instruments on the Hotel Chocolat Group plc Consolidated Statement of Financial Position are measured at either fair value or amortised cost. Cash and cash equivalents, trade and other receivables, trade and other payables, accruals and borrowings have been excluded from this analysis as they are recognised in the financial statements at their carrying value which also approximates the fair values of those financial instruments; therefore, no separate disclosure for fair value hierarchy is required. The financial instruments are grouped into Levels based on the degree to which the inputs used to calculate the fair value are observable. – Level 1 fair value measurements are those derived from quoted process (adjusted) in active markets for identical assets and liabilities. – Level 2 fair value measurements are those derived from inputs other that quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from process). The Group measures its derivative financial liabilities relating to foreign currency forward contracts at fair value and these are grouped as Level 2 instruments. Movements on the underlying value of financial instruments of foreign exchange contracts have been measured versus market rates and therefore are easily identifiable. Refer to Note 21 for further information. There have been no transfers between levels in the period. 32 . E V E N T S S U B S E Q U E N T TO T H E R E P O RT I N G DAT E – G RO U P A N D CO M PA N Y There have been no material events subsequent to the period end and up to 18 October 2016, the date of approval of the financial statements by the Board. 33 . U LT I M AT E CO N T RO L L I N G PA RT Y The Directors believe that there is no ultimate controlling party of the Group. 3 4 . T R A N S I T I O N TO I F R S In preparing the financial statements, the Group’s opening Consolidated Statement of Financial Position was prepared as at 30 June 2014, the Group’s date of transition to IFRS. The historical financial information for the period ended 28 June 2015 has therefore been prepared in accordance with IFRS. Previously, the Group prepared its financial statements for this period in accordance with Generally Accepted Accounting Principles in the United Kingdom (UK GAAP). Accordingly, the Group has prepared financial information which complies with IFRS applicable for periods ended on or after 28 June 2015, as described in the summary of significant accounting policies. In restating its UK GAAP financial statements, the Group has made provision for additional lease incentives and reversed a charge for the amortisation of goodwill in accordance with accounting policies described below. The Group has also recognised certain non-current assets as intangible rather than tangible assets. A summary of the impact of transition to the Consolidated Statement of Financial Position is as follows: ASSETS Non-current assets Intangible assets Property, plant and equipment Deferred tax asset Current assets Inventories Trade and other receivables Corporation tax recoverable Cash and cash equivalents Total assets LIABILITIES Current liabilities Trade and other payables Bank overdraft Borrowings Non-current liabilities Other payables and accruals Borrowings Provisions Total liabilities NET ASSETS EQUITY Share capital Retained earnings Translation reserve Merger reserve Capital redemption reserve Total equity attributable to shareholders Notes: 52 weeks ended 28 June 2015 52 weeks ended 28 June 2015 As previously reported under UK GAAP £ As reported under IFRS £ 478,469 13,164,163 215,993 13,858,625 4,493,841 13,672,466 166,709 4,939,924 23,272,940 37,131,565 12,210,082 10,637,314 954,521 23,801,917 1,495,306 7,298,718 668,898 9,462,922 33,264,839 1,553,433 12,294,264 215,993 14,063,690 4,493,841 13,672,466 166,709 4,939,924 23,272,940 37,336,630 12,210,082 10,637,314 954,521 23,801,917 1,774,731 7,298,718 668,898 9,742,347 33,544,264 3,866,726 3,792,366 103,418 3,534,979 – 223,251 5,078 3,866,726 103,418 4,003,546 (542,927) 223,251 5,078 3,792,366 Website development costs and software which are not an integral part of hardware assets have been reclassified to intangible assets under IFRS. Under UK GAAP, these costs were included as part of property, plant and equipment. Goodwill is not amortised but is subject to annual impairment review under IFRS. Under UK GAAP, goodwill is amortised. Lease incentives are recognised over the lease term, on a straight line basis under IFRS. Under UK GAAP, lease incentives are recognised over the shorter of the lease term and the period ending on a date from which it is expected the prevailing market rental will be payable, on a straight line basis. 74 FINANCIAL STATEMENTS Notes to the f inancial statements 75 Company overviewStrategic reportGovernanceFinancial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and AccountsNotes to the financial statements continued For the period ended 26 June 2016 Company Statement of Financial Position As at 26 June 2016 3 4 . T R A N S I T I O N TO I F R S CONTINUED A summary of the impact of transition to the Consolidated Statement of Financial Position is as follows: Equity reported in accordance with UK GAAP Transition adjustments: Amortisation of goodwill Lease incentives Equity reported in accordance with IFRS 52 weeks ended 28 June 2015 £ 52 weeks ended 29 June 2014 £ 3,866,726 2,117,521 205,065 (279,425) 3,792,366 170,888 (164,645) 2,123,764 A summary of the impact of transition to the Consolidated Statement of Comprehensive Income is as follows: Profit reported in accordance with UK GAAP Foreign exchange translation differences Total recognised gains and losses for the financial period in accordance with UK GAAP Transition adjustments: Amortisation of goodwill Lease incentives Total comprehensive income in accordance with IFRS 52 weeks ended 28 June 2015 £ 2,127,826 (380,039) 1,747,787 34,177 (114,780) 1,667,184 ASSETS Non-current assets Investments Current assets Trade and other receivables Cash and cash equivalents Total assets LIABILITIES Current liabilities Trade and other payables Total liabilities NET ASSETS EQUITY Share capital Share premium Retained earnings Capital redemption reserve Total equity attributable to shareholders As at 26 June 2016 £ As at 28 June 2015 £ Notes 37 38 39 40 41 41 41 9,064,727 9,064,727 1,498,362 1,224,248 2,722,610 11,787,337 108,496 108,496 – – – 108,496 482,420 482,420 – – 11,304,917 108,496 112,838 11,749,487 (563,709) 6,301 11,304,917 103,418 – – 5,078 108,496 The financial statements of Hotel Chocolat Group plc, registered number 08612206 were approved by the Board of Directors and authorised for issue on 18 October 2016. They were signed on its behalf by: Matt Pritchard Chief Financial Officer 18 October 2016 76 FINANCIAL STATEMENTS Company Statement of Financial Position 77 Company overviewStrategic reportGovernanceFinancial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and AccountsCompany Statement of Cash Flow For the period ended 26 June 2016 Notes to the Company financial statements For the period ended 26 June 2016 52 weeks ended 26 June 2016 £ 52 weeks ended 28 June 2015 £ Notes 35 . CO M PA N Y F I N A N C I A L S TAT E M E N T S As permitted by section 408(3) of the Companies Act 2006, a separate Statement of Comprehensive Income, dealing with the results of the Parent Company, has not been presented. The Parent Company profit for the period ended 26 June 2016 is £563,709 (28 June 2015: £ nil). Loss for the period Operating cash flows before movements in working capital Increase in other receivables Increase in accruals Interest paid – borrowings Cash flows used in operating activities Acquisition of subsidiary Settlement of intercompany balances Cash flows used in investing activities Cost of issue of new equity Proceeds from issue of shares Cash flows from financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period (563,709) (563,709) (124,226) 146,229 (113,000) (654,706) (54,921) (9,826,125) (9,881,046) (240,000) 12,000,000 11,760,000 1,224,248 – 1,224,248 39 39 – – – – – – – – – – – – – Company Statement of Changes in Equity For the period ended 26 June 2016 As at 30 June 2014 Capital redemption Shares issued in the period Equity as at 28 June 2015 Loss for the period Capital redemption Shares issued in the period Costs of issue of new equity Equity as at 26 June 2016 Share capital £ 107,078 (5,078) 1,418 103,418 – (1,223) 10,643 – 112,838 Share premium £ Retained earnings £ Capital redemption reserve £ – – – – – – 11,989,487 (240,000) 11,749,487 – – – – (563,709) – – – (563,709) – 5,078 – 5,078 – 1,223 – – 6,301 Total £ 107,078 – 1,418 108,496 (563,709) – 12,000,130 (240,000) 11,304,917 3 6 . ACCO U N T I N G P O L I C I E S To the extent that an accounting policy is relevant to both Hotel Chocolat Group and Company financial statements, refer to the Group financial statements for disclosure of the accounting policy. Basis of preparation The financial statements have been prepared in accordance with Financial Reporting Standard 100 (FRS 100): Application of Financial Reporting Requirements and Financial Reporting Standard 101 (FRS 101): Reduced Disclosure Framework. The principal accounting policies adopted in the preparation of the financial statements are set out below. The policies have been consistently applied to all the periods presented, unless otherwise stated. The financial statements have been prepared on a historical cost basis, except for the revaluation of certain properties and financial instruments. The presentation currency used is sterling. Disclosure exemptions adopted in preparing these financial statements the Company has taken advantage of all disclosure exemptions conferred by FRS 101. Therefore these financial statements do not include: • certain comparative information as otherwise required by EU-endorsed IFRS; • the effect of future accounting standards not yet adopted; and • disclosure of related party transactions with other wholly owned members of the Group headed by Hotel Chocolat Group plc. In addition, and in accordance with FRS 101 further disclosure exemptions have been adopted because equivalent disclosures are included in the company’s consolidated financial statements. These financial statements do not include certain disclosures in respect of: • share-based payments; • financial instruments (other than certain disclosures required as a result of recording financial instruments at fair value); or • fair value measurement other than certain disclosures required as a result of recording financial instruments at fair value). The Company has adopted a change in reporting GAAP during the current period to FRS 100 and FRS 101. In previous years the financial statements were prepared in accordance with applicable UK accounting standards. This change has not resulted in any amendments to the presentation or measurement to any balances and as such no transition disclosures have been provided. 37. S U B S I D I A RY U N D E RTA K I N G S Investments in subsidiaries held by the Company as non-current assets are stated at cost less any provision for impairment. Cost At beginning of period Additions At end of period Carrying amount 52 weeks ended 26 June 2016 £ 52 weeks ended 28 June 2015 £ 108,496 8,956,231 9,064,727 9,064,727 108,496 – 108,496 108,496 A list of the significant investments in subsidiaries, including the name, proportion of ownership interest, country of operation and country of registration can be found in Note 18. 78 FINANCIAL STATEMENTS Notes to the Company f inancial statements 79 Company overviewStrategic reportGovernanceFinancial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and AccountsNotes to the Company financial statements continued Company information For the period ended 26 June 2016 3 8 . T R A D E A N D OT H E R R E C E I VA B L E S There were no material receivables which were past due but not impaired at the end of any period. Other receivables Prepayments Amounts due from related parties 52 weeks ended 26 June 2016 £ 52 weeks ended 28 June 2015 £ 124,226 5,000 1,369,136 1,498,362 – – – 39. C A S H A N D C A S H E Q U I VA L E N T S The cash flow statement on page 78 gives a breakdown of cash movements in the year. To the extent a disclosure is relevant to both the Hotel Chocolat Group and Company financial statements, refer to the Group financial statements. 4 0 . T R A D E A N D OT H E R PAYA B L E S Accruals Amounts due to related parties Total trade and other payables 41. S H A R E C A P I TA L A N D R E S E RV E S 52 weeks ended 26 June 2016 £ 52 weeks ended 28 June 2015 £ 146,229 336,191 482,420 – – – The share capital, share premium and the capital redemption reserve are consistent with Hotel Chocolat Group financial statements. Refer to Notes 24 and 25 of the Group financial statements. 42 . C A P I TA L CO M M I T M E N T S There were no amounts contracted for but not provided for as at 26 June 2016 (28 June 2015: £nil). 43 . R E L AT E D PA RT Y T R A N S AC T I O N S Amounts owed by and to subsidiaries are disclosed in Notes 38 and 40 respectively, of the Company financial statements. The remuneration of the key management personnel of the company are disclosed in Note 8 of the Group financial statements. Interests and related party transactions are disclosed in Note 28 of the Group financial statements. R E G I S T E R E D O F F I C E Mint House Newark Close Royston Hertfordshire SG8 5HL CO M PA N Y W E B S I T E www.hotelchocolat.com CO M PA N Y S E C R E TA RY Peter M Harris A DV I S E R S Nominated Adviser and Broker Liberum Capital Limited Ropemaker Place 25 Ropemaker Street London EC2Y 9LY Legal Advisers to the Company Stephenson Harwood LLP 1 Finsbury Circus London EC2M 7SH AU D I TO R S BDO LLP 55 Baker Street London W1U 7EU R E G I S T R A R S Capita Registrars Limited The Registry 34 Beckenham Road Beckenham Kent BR3 4TU 80 FINANCIAL STATEMENTS Company information 81 Company overviewStrategic reportGovernanceFinancial statementsHOTEL CHOCOLAT GROUP PLC Annual Report and AccountsH O T E L C H O C O L A T G R O U P P L C A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 6 ANNUAL REPORT AND ACCOUNTS 2016 Not all chocolates are created equal R E G I S T E R E D O F F I C E Hotel Chocolat Group plc Mint House Newark Close Royston Hertfordshire SG8 5HL 

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