More annual reports from Purplebricks Group plc:
2021 ReportPurplebricks Group plc Annual Report 2019 A leading hybrid real estate agent focused on becoming the only place customers go to buy, sell and let their homes. Based in the UK, we also operate in Canada and are invested in homeday.de in Germany. Purplebricks Annual Report 2019 3 INDEX Strategic report Chairman’s statement Business model Chief Executive’s statement Financial review Principal risks and uncertainties Governance Directors’ report Our board Corporate governance statement Financial statements Independent auditor’s report Consolidated statement of comprehensive income Consolidated statement of f inancial position Company statement of f inancial position Consolidated statement of changes in equity Company statement of changes in equity Consolidated statement of cash flows Company statement of cash flows Notes to the f inancial statements Company information 6 8 10 14 20 22 24 27 29 36 37 38 39 40 41 42 43 86 4 4 Purplebricks Annual Report 2019 Purplebricks Annual Report 2019 HIGHLIGHTS FINANCIAL Revenue £136.5 million (FY 2018: £87.8 million1) Revenue growth 55% (FY 2018: 101%1) Gross margin up by 200 bps to 58.5% (FY 2018: 56.5%1) Operating loss of £(52.3) million (FY 2018: £(27.8) million1) Adjusted EBITDA2 £(43.1) million (FY 2018: (£22.6)million1) Cash at end of year £62.8 million (FY 2018: £152.8m) OPERATIONAL UK hybrid market share3 of 76% (April 2018: 73%) Completed £10.4 billion of UK property, (FY 2018: £9.7 billion) STRATEGIC 3.5x more sales than the number two UK estate agent4 (FY 2018: 3.1x) UK average revenue per instruction6 up 6% Saving customers £77 million5 in commission Canadian business acquired in July 2018, contributed revenue of £23.7 million In May 2019, the Company announced the closure of its Australian business and in July 2019 the withdrawal f rom the US following a strategic review. On 7 May 2019, Michael Bruce stepped down, and Vic Darvey was appointed CEO. 1 FY 2018 numbers have been restated under IFRS 15 throughout. 2 The underlying performance of the Group is monitored internally using a variety of statutory and alternative performance measures (“APMs”), which are not def ined within IFRS. Such measures should be considered alongside the equivalent IFRS measures. For full def initions and reconciliations of APMs, please refer to note 5 to the f inancial statements. 3 Source: Rightmove 4 Source: TwentyCi data 5 Fees paid to Purplebricks vs typical commission of 1.3% plus VAT 6 Average revenue per instruction equates to total sales revenue divided by the number of published instructions Purplebricks Annual Report 2019 5 Strategic Report CHAIRMAN’S STATEMENT A year of strong revenue growth despite operational challenges. Having recently celebrated our fifth anniversary since launching in the UK, there are many things as true today as they were then – that the provision of good customer service, greater transparency, better technology and a low, fair, fixed fee underpinned by operational efficiency will enable us to build a sustainable, profitable business. Going forward, there is considerable headroom to further disrupt the traditional real estate agency markets in both the UK and Canada. Building on our brand and operational strengths, we will make targeted investments that enable us to better exceed the needs and demands of sellers, buyers and renters across our business. In FY 2019, Group revenue was up by 55% to £136.5 million (FY 2018: £87.8 million). Despite the soft property market and consumer uncertainty caused by Brexit, the UK performed well with revenue up 21% year-on- year. Canada contributed £23.7 million of revenue in its f irst nine months of ownership. Our Australian and US businesses contributed £22.7 million of revenue in aggregate (FY 2018: £13.4 million). As discussed below, both the Australian and US businesses will be closed in FY 2020. Despite this strong revenue performance, operating losses increased to £52.3 million (FY 2028: £27.8 million), driven by £52.9 million of operating losses incurred in Australia and the US. Cash at the year-end was £62.8 million (30 April 2018: £152.8 million) giving signif icant f irepower to execute our strategy and improve our customer offering over the medium term. Our decision to exit the Australian and US markets is expected to signif icantly reduce cash burn going forward. For further discussion of f inancial performance and the position of the Group, please refer to the Chief Financial Off icer’s report. 6 Purplebricks Annual Report 2019 Strategic Report Board Governance overview The Board is focused on driving the Group’s mission to The Company has been through a number of signif icant deliver an excellent customer experience through world-class strategic and management changes during the last f inancial technology and service. Our focus going forward is to ensure year and progress on the Corporate Governance agenda has that the Group’s ambitions are managed against risks, with therefore been slower than hoped, but the Board remains sustainable growth at the heart of our business. committed to achieving high standards in this area, and expects that the current simplif ication of the Group will In May 2019, Michael Bruce announced he was stepping down help to focus efforts. As a fast-growing and relatively young as Chief Executive Off icer and as a Director. As well as being a business, we are aware that as we grow we need to maintain a co-founder of the business, Michael’s vision, passion and energy governance inf rastructure that is appropriate for our increasing were the driving forces behind our success and the Company size and prof ile. The Company has adopted the Quoted becoming the UK’s leading hybrid estate agent. Michael leaves Companies Alliance Corporate Governance Code (“QCA Code”) with our thanks and best wishes for the future. Subsequent and is accordingly committed to complying with the QCA to Michael stepping down, the Bruce family disposed of its Code or providing a clear explanation of any areas in which the remaining 14% stake in the Company to Axel Springer, giving Company’s governance structures and practices differ f rom the that business a 26.6% holding in Purplebricks. expectations set by the QCA Code. The Board appointed Vic Darvey as Chief Executive Off icer Distribution policy in May 2019 to lead the business for the next phase of development. Vic had joined the business in January Due to the evolution of our business, the Board has concluded 2019 as Chief Operating Off icer and brings more than that it would be premature to consider returning capital to 20 years’ experience of leading successful high growth, investors at this time as we continue to focus our f inancial customer-focused disruptive technology and data driven resources on exploiting the many opportunities we see to businesses. Vic has a clear vision of the priorities we need to realise our potential. As our strategy and f inancial performance address to take the Company forward, and this is laid out in his develop, we will look to move to a progressive dividend policy in statement below. Strategy future years. The Company has retained losses of £85.7m within its reserves, and in order to make a distribution it may be possible in future to make an application to convert non- distributable reserves to distributable reserves. After the end of the f inancial year, the Board made the diff icult but important decisions to close the Group’s operations in Australia and to withdraw f rom the US. The rationale for these decisions is discussed in the Chief Executive’s statement, with an estimate of closing costs included in the Chief Financial Off icer’s review. Our focus going forward is on our prof itable UK business and well-established Canadian operations to drive Paul Pindar Chairman their full potential. 29 August 2019 Purplebricks Annual Report 2019 7 Strategic Report BUSINESS MODEL A hybrid estate agent, such as Purplebricks, has a differentiated, technology-led proposition supported by a team of highly-skilled and knowledgeable home-based Local Property Experts. This allows us to deliver an exceptionally personalised experience to customers looking to buy, sell or let a property, while also offering pricing transparency and low, fixed fees. We are the most positively reviewed estate agent in the UK with nearly 67,000 independent reviews on Trustpilot and have also recently been awarded the Gold Service Standard Award by Feefo. We offer our customers an unrivalled service experience in both the UK and Canada by: building on our market-leading technology that enables Local Property Experts to be more productive and deliver a more convenient, transparent and cost-effective service for our customers; selecting and training LPEs who embrace our culture and core values and who have the desire and motivation to build their own business alongside ours; creating marketing and advertising that engages and drives consumers to want to book a f ree valuation f rom Purplebricks and ensures that our messaging is clear, transparent and consistent; building on our customer service and product offering by introducing new features, products and services that are relevant to our customers’ needs throughout their journey; focusing on attracting and retaining the best talent in the industry to provide a great customer experience; and building a strong and sustainable business, which is respected by all stakeholders for its professional conduct and delivering on its commitments to customers. Local Property Experts (“LPEs”) Our business model offers LPEs, who are typically experienced real estate agents, the opportunity of operating and growing their own independent business under the Purplebricks brand. In the UK, the most experienced LPEs are designated as Territory Owners (“TOs”), who have a direct contractual relationship with Purplebricks and are licensed to use Purplebricks’ intellectual property and are responsible for the activity of a number of LPEs in their territory. 8 Purplebricks Annual Report 2019 Strategic Report LPEs play a key role in the Purplebricks model as they are a f ree valuation f rom Purplebricks and ensure that our responsible for providing services to customers on behalf of messaging is clear and transparent. We work hard to develop the Group, including valuing the property, preparing an online and grow our brand and have made good progress, with our UK advertisement including photographs of the property, and prompted brand awareness at 96% and 24% where we operate attending viewings if required by the customer. Our LPEs aren’t outside of Quebec in only seven months since introducing the based in branches which means they can be on hand 7 days a Purplebricks brand into Canada. week, outside of the 9 to 5, to help at every step of the process f rom the initial valuation of the property all the way through to In FY 2019, we continued to evolve our “Commisery” campaign completion. focussing on the misery a person feels when they have paid signif icant commission and have got nothing more for it, One of the key factors in delivering our business model is taking the message further across more channels. Going getting the footprint of LPEs right in each of our markets, forward, we will focus more on customer service outcomes to so that they and the Purplebricks business as a whole can demonstrate greater social proof of our offering. maximise productivity. We continue to tier our LPEs in the UK which has enabled us to better identify training needs and Our above the line marketing is complemented by brand and where necessary make changes to the balance of LPEs. generic pay-per-click activity which is predominantly provided We are proud to have secured some of the best people in our way to drive more activity amongst sellers and to test and industry who are entrepreneurial and ambitious to grow their ref ine marketing campaigns with digital platforms such as local market and to be part of a business that is changing Rightmove in the UK and YouTube, which is expected to drive by Google and Bing. We use social media in a targeted the way people think about real estate agents and estate further brand consideration. agency. They are passionate about providing great customer experiences, selling their homes and saving them money. In addition to paid marketing activities, we focus on eff iciencies In Canada, Representatives in Quebec (where we operate a our key messages are resonating with consumers. Our User for-sale-by-owner model providing home owners with the best Experience (‘UX’) specialists have proved invaluable at helping visibility and support to sell their home) and Local Realtors us achieve greater conversions across our website and through in our valuation conversion funnel and we adapt to ensure that in Alberta, Manitoba and Ontario are equally as dedicated to the “book a valuation” funnel. supporting our customers through their property transaction and gaining successful customer outcomes. Central Property Teams Build on our market leading technology Our Central Property Teams are based in each of our markets and play an important part in generating sales opportunities, Our technology enables us to convert consumer interest providing post-instruction support and ensuring great generated by our marketing-driven brand awareness into customer outcomes at every opportunity. valuations and a decision to instruct. Bringing together talented LPEs and industry-leading Ancillary services technology is the foundation on which the Purplebricks During our interactions we are able to offer customers relevant business was created. We are proud of our technology and additional products and services that complement their the work we are doing to introduce new and innovative journey of selling, buying or letting. We develop and test new features that set us apart f rom the industry. We strive to make and smarter ways of supporting our customers with much our processes more integrated, convenient, effective and more convenient, easy, accessible, stress f ree and cost-effective transparent. We have already revolutionised the way sellers products and services. and buyers communicate throughout the sales process and are building on developing real time solutions that bring more People and culture information to customers and ever more transparency to the home buying process. We continue to build an industry-leading culture at Purplebricks and focus on attracting and retaining the best We also look to drive LPE productivity. Technology talent in the market. Moving forward, we need to make sure developments also enable us to integrate with carefully that we have the right mix of capabilities in the business with selected partners so that we can provide our customers with an appropriate balance of real estate and digital talent. products relevant to them at the right time in their sales journey and at the same time drive additional revenue streams We have created a strong brand advocacy within our growing through cross-sell opportunities. business and amongst our customers. Despite a strong desire to grow their business, our people have a tremendous degree Create engaging marketing and advertising of camaraderie, togetherness and a collective brand advocacy that is extremely hard to replicate. The foundations begin Marketing has always been a central element of the for everyone with the recruitment programme and training Purplebricks strategy. We are committed to creating marketing methodology and continue through the heart of the business. programmes that engage with consumers to want to book Purplebricks Annual Report 2019 9 Strategic Report CHIEF EXECUTIVE’S STATEMENT We have a strong and differentiated business model, clear brand leadership, and have set out a clear path to becoming the only place customers go to buy, sell and let their homes - unlocking further prof itable market share. Purplebricks has grown rapidly over the last five years to become the largest UK estate agent, with clear brand leadership, an innovative business model and disruptive economics. Whilst the last 12 months have seen challenging trading conditions what’s become really clear is that we have a strong and differentiated business model that is hard to replicate. 10 Purplebricks Annual Report 2019 Strategic Report Brand leadership great rating of 9.5 out of 10. To further reinforce our feedback capabilities, we have also launched a second review service We have clear brand leadership in the UK, with awareness with Feefo and I am pleased to say that we have achieved a currently at 96%7 and a brand that is more familiar to UK consistently high score of 4.7/5 and also winning their coveted consumers than any other estate agent brand. Our brand ‘Gold Trusted Service’ award in 2019 for maintaining a score of strength has been further validated this year with Purplebricks more than 4.5/5 over the previous 12 months. being named the 13th most relevant brand in the UK in the annual Superbrands® insight survey. This is an incredible Technology achievement for such a nascent brand, being considered alongside other leading consumer brands including Google, We have a differentiated, technology-led proposition driving Amazon, Netflix and PayPal. Customer value proposition clear business model advantages and we believe there are signif icant opportunities for us to scale. As consumer expectations continue to evolve, fuelled by the adoption of 5G, we anticipate that the hybrid model will continue to displace Purplebricks has an effective model which is a clear “category traditional agents. Our aim being to drive higher attachment killer” and we remain hugely focused on becoming “the only rates of products in basket, higher engagement through the place customers go to buy, sell and let their homes”. We have My Purplebricks app and opportunities to create longer lifetime an unrivalled value proposition in the marketplace that offers value through Purplebricks Plus. consumers the opportunity to sell their homes for a fair, f ixed fee. We are always available, when most high street agents As we unlock the next wave of growth, we will be focusing still stick to off ice hours. Our technology provides complete on three areas of product development that will continue to transparency to the entire buying and selling experience extend our market leadership while using data and technology enabling viewings to be booked instantly online and offers to reset the service standards of the industry: to be made and accepted f rom the palm of your hand around the clock. Re-accelerate core growth by delivering rapid innovation of the customer journey; Purplebricks’ revolutionary process of buying and selling has enabled a market-leading position in the UK in terms of the Increase LPE productivity by delivering greater automation total properties we represent on the market and the speed and eff iciency; and at which we sell them. We also enjoy signif icant market share in Quebec. Moving forward, we are fully focused on creating a more Start building the foundations of a real-time, mobile-enabled estate agent of the future. dynamic customer experience based on real-time analytics, Rapid expansion into international markets over the last few artif icial intelligence and Smart CRM delivering a best-in-class years has been distracting and the product and technology experience. This will enable end-to-end service excellence for teams have been stretched to the limit. However, recent customers and greater automation and eff iciency for our Local decisions to exit both the Australian and US markets have given Property Experts (“LPEs”). People and culture us the opportunity to refocus on our flagship markets of the UK and Canada. There is a huge focus on continuing to take share f rom incumbent traditional operators and extend our market leadership. However, there is also a recognition that we need We have a stand-out culture at Purplebricks and, as we have to do things differently, none more so than in product and grown, we have distilled the best elements of our customer technology. service ethos into our Purple Promises: We focus on people, not just property; We go the extra mile for every customer, every time; We treat everybody fairly and with respect; and If we say we will do something, we do it. We continue to focus on attracting and retaining the best talent in the category and moving forward, we need to make sure that we have the right mix of capabilities in the business with an appropriate balance of real estate and digital talent. Our sharp focus on talent is reflected in the feedback we receive f rom customers, and we are proud that we remain the most positively reviewed estate agent in the UK with nearly 67,000 independent reviews on Trustpilot with an excellent or 7 Source: The Nursery, March 2019 We will be moving to more agile ways of working, instilling strong product principles and an enduring product vision that lays strong foundations for a data-enabled and digitally- enhanced estate agent of the future. Strength of balance sheet Following our f ifth anniversary since launch in April 2019, we are now beginning our second phase of growth, and it will be characterised by a more optimal allocation of capital and a laser focus on operational excellence. Withdrawing f rom the Australian and US markets will signif icantly reduce operational losses and we expect to remain in a position of positive cash generation across the UK and Canada combined this year. This will be supported by clear, consistent, operational metrics. Purplebricks Annual Report 2019 11 Strategic Report UK Canada In the UK, we grew the number of instructions and revenue On 6 July 2018, we completed the acquisition of DuProprio, a generated despite the market slowing and a number of leading hybrid real estate business in Canada with a signif icant traditional estate agents reporting a reduction in activity and a market share in Quebec and impressive revenue growth in decrease in their revenues. the other provinces in which it operates. The acquisition by Purplebricks is expected to accelerate these opportunities We were delighted that once again independent analysis f rom by enhancing the customer experience through its market- the leading, whole of market, industry data specialists TwentyCi leading model and technology, capitalising on an extensive resulted in a number of positive conclusions about our key buy-side revenue opportunity and introducing aspects of the customer performance metrics for the year ending April 2019: Purplebricks business model to operate alongside the highly We sold more homes: Purplebricks sold Subject to Contract (“SSTC”) 3.5x more properties than the next largest UK estate We will be disciplined in building on the momentum of this agent (FY 2018: 3.1 times) established business with three initial areas of focus: successful digital service offered by DuProprio. Highest conversion: Purplebricks had the highest level of Continue to automate the experience through technology conversion to SSTC and the lowest withdrawn level of the top and process improvements; 20 estate agency brands in the UK Sold faster: Purplebricks sold (SSTC) properties faster than Maintain 20% market share in Quebec; and the top 10 largest estate agency brands in the UK – at an Increase brand awareness and market penetration in the average of 52 days remainder of Canada having rebranded to Purplebricks f rom Secure best price: compared to the top 50 largest traditional estate agency brands whose average instruction price is The business continues to be led by the existing, highly between £250,000-£300,000, Purplebricks achieved sales experienced, management team in place at the time of the ComFree in early 2019. that are £9,000 higher on average Number one at selling houses: 77% of listings sold (completed, exchanged or SSTC) within 12 months to April acquisition. Australia 2019; 56% of listings are sold within two months During the two and a half years that Purplebricks operated in Australia, market conditions became increasingly Largest market share: Purplebricks lists more properties challenging. Despite changes to the business model and the than any other agent brand on homes up to £1 million, which continued hard work and dedication of the team there, we represents 96.5% of the entire market failed to gain the scale needed to succeed. Given the market outlook, and size of the ultimate opportunity, the Board took In FY 2019, our average revenue per instruction increased to the decision in May 2019 to run down and close the business, £1,243 (FY 2018: £1,168), and we expect that to be higher in which will be completed by 31 December 2019. A reduced team the next f inancial year as we continue to look at optimising is in place to ensure a professional wind down of the business attachment rates for ancillary products and other adjacency and to ensure we continue to deliver great outcomes for our opportunities. remaining customers. We remain optimistic about the potential of our UK business US and we believe that there are signif icant opportunities to extend our market leadership. 12 Purplebricks Annual Report 2019 Having launched in the US in September 2017, we expanded rapidly into a total of seven states within a year. Each state required a signif icant investment in marketing to underpin the brand. Having not seen the revenue growth we had expected, in early May 2019 we put the US business under strategic review, to examine the feasibility of delivering growth in a more effective and cost-eff icient manner. Having reviewed a number of alternative business models, the outcome of the strategic review was that while there remains a signif icant opportunity to disrupt the US market, it would take substantially more management time and resources than the Company is able to commit at this time. Therefore, a decision was taken to withdraw f rom the US and either sell or close the business. Strategic Report Most importantly, our people I would like to take this opportunity to thank all of our incredibly talented people across all our markets in what has been a challenging year – f rom the external macro environment to a number of signif icant internal changes. My thanks in particular to our colleagues in Australia and the US, who have remained highly professional and, without exception, always focused on delivering great outcomes for our customers throughout a very diff icult period for the business. GENDER BREAKDOWN OF OUR BOARD, SENIOR MANAGEMENT AND ALL EMPLOYEES AT 30 APRIL 2019 Vic Darvey Chief Executive Off icer 29 August 2019 Board membership 0% female FY 2019: 0 | 7 Senior management 22% female FY 2019: 2 | 7 All employees 46% female FY 2019: 198 | 233 Female Male Purplebricks Annual Report 2019 13 Strategic Report FINANCIAL REVIEW Despite market headwinds, our teams have driven increasingly prof itable growth in the UK market. Year-end cash of £62.8m provides flexibility and strength to generate signif icant shareholder value going forward. The 2019 financial year provided further confirmation of the strength of the increasingly profitable UK business, where revenue increased by 21% to £90.1 million and adjusted EBITDA by 65% to £10.2 million. This is against a backdrop of declining new listings coming to market and a competitive landscape where key traditional players are experiencing a notable shrinkage in their sales businesses. Group operating losses increased from £27.8m to £52.3m, arising entirely from non-UK operations. 14 Purplebricks Annual Report 2019 Strategic Report Last year was a year of contrasting halves f rom an international though IFRS 15 had been applied at the time. A reconciliation perspective. The year started with signif icant investment across between IFRS 15 and IAS 18 is given in note 31 to the f inancial our international markets to drive awareness and consideration statements. in what were challenging market conditions in both Australia and the US. The effectiveness and returns obtained f rom this During the year, revenue for the Group increased by 55% to marketing spend was challenged as the second half progressed £136.5 million (FY 2018: £87.8 million). Stripping out revenue and led to decisions taken post year-end to close our Australian f rom the Canadian acquisition would have resulted in growth business and more recently our US operations following an of 29%. Gross prof it increased by 61% to £79.9 million (FY in-depth strategic review. In total, our operating losses in those 2018: £49.6 million), giving a gross prof it margin of 58.5%, an markets were £52.9 million. In contrast, Canada, acquired in improvement of 200bps. Investment in building our brand in July 2018, progressed in line with management expectations the US and establishing the Australian business led to a Group including the launch in January 2019 of an enhanced marketing operating loss of £52.3 million (FY 2018 loss: £27.8 million). programme, along with a rebranding to Purplebricks outside of Quebec. The business is supported by a robust balance sheet with a strong cash position. As funding has been raised f rom The Group adopted IFRS 15 Revenue f rom Contracts with shareholders, to date the Group has f inanced its expansion Customers in the current year, and has applied the fully without taking on debt. The Group had a cash balance at 30 retrospective approach permissible under the accounting April 2019 of £62.8 million (30 April 2018: £152.8 million). standard, which required us to restate comparatives as GROUP Extract of Consolidated statement of Comprehensive Income Revenue Cost of sales Gross profit Gross profit margin (%) Administrative expenses Marketing costs Share of results of Joint Venture Operating loss Group Alternative Performance Measures2 Adjusted EBITDA Adjusted operating loss Adjusted operating costs UK Extract of consolidated statement of comprehensive income Revenue Cost of sales Gross profit Gross profit margin (%) Administrative expenses Marketing costs Operating loss FY 2019 £m 136.5 (56.6) 79.9 58.5% (61.0) (70.7) (0.5) (52.3) FY 2019 £m (43.1) (48.0) (51.7) FY 2019 £m 90.1 (33.3) 56.8 63.0% (24.8) (26.7) 5.3 Restated1 FY 2018 £m 87.8 (38.2) 49.6 56.5% (35.3) (42.1) - (27.8) Restated1 FY 2018 £m (22.6) (24.3) (30.0) Restated1 FY 2018 £m 74.4 (31.3) 43.1 57.9% (19.5) (21.4) 2.2 1 See note 31 2 The underlying performance of the Group is monitored internally using a variety of statutory and alternative performance measures (“APMs”), which are not def ined within IFRS. Such measures should be considered alongside the equivalent IFRS measures. For full def initions and reconciliations of APMs, please refer to note 5 to the f inancial statements. Purplebricks Annual Report 2019 15 Strategic Report KPIs The Directors use key performance indicators (KPIs) to assess performance of the business against the Group’s strategy. The strategy is built around: eff iciently attracting good quality customers to our website; gaining market share; and providing customers with choice to enable revenue per instruction to increase. Cost-effective marketing and a controllable operating cost base are the ingredients to a sustainably prof itable business. NEW USERS AVERAGE REVENUE PER INSTRUCTION COST PER INSTRUCTION MARKETING AS A PERCENTAGE OF SALES represents the number of represents total marketing new unique visitors to the equates to total sales revenue costs, including portal costs, represents the total website in the year. divided by the number of divided by instructions. marketing costs, including published instructions portal costs, as a percentage of total revenue. UK alternative performance measures2 Adjusted EBITDA Adjusted operating profit Adjusted operating costs UK KPIs New users Instructions Average revenue per instruction Cost per instruction Marketing as a % sales FY 2019 £m 10.2 7.4 (19.8) Restated1 FY 2018 £m 6.2 4.6 (15.5) FY 2019 FY 2018 Change (%) 13,488,000 13,820,000 69,892 £1,243 £382 29.6% 64,376 £1,168 £332 28.8% (2.4)% 8.6% 6.4% 15.1% 80bps UK revenue increased by 21% during the year, driven by a 9% Adjusted operating costs (see def inition above) were up 28% increase in the number of instructions and a 6% increase in to £19.8 million (FY 2018: £15.5 million). At this time last year, average revenue per instruction to £1,243 (FY 2018: £1,168). we noted an increased level of inf rastructure investment to meet the demands of a higher volume, regulatory changes Revenue was split 56:44 between instruction and ancillary and technology enhancements. The £4.3 million year-on-year revenue respectively (FY 2018: 57:43). We have seen a further increase being as a result of the full year costs of additional shift towards a greater proportion of ancillary revenue as we headcount added over the previous year across key value- successfully sell more products to our customers. driving areas of the business such as technology, marketing and customer service along with continued investment in The majority of cost of sales is represented by the earnings of those areas as well as in compliance functions. self-employed LPEs. UK Gross prof it margin for the year was 63.0% up 510bps f rom the prior year. 230bps of the increase Marketing costs were £26.7 million (FY 2018: £21.4 million), can be attributable to a change in November 2017 of the UK an increase of 24.8% over the prior year, reflecting deferred payment provider, resulting in costs of £1.7 million continued investment in the UK brand and customer being recognised within f inance costs, rather than within cost acquisition. Marketing cost per instruction (“CPI”) was £382 up of sales as was previously the case. A further 210bps of the f rom £332, which reflected an unsustainable level of marketing increase is attributable to £1.6 million of outsourced property spend f rom several online competitors along with substantial management fees being recorded in cost of sales in FY 2018, reductions in commission f rom traditional f irms necessitating whereas the work is now being undertaken in house so the cost a higher than normal level of communication of our value is recorded in administrative expenses. proposition in a shrinking market. Overall marketing costs are expected to fall in FY 2020. 1 See note 31 2 The underlying performance of the Group is monitored internally using a variety of statutory and alternative performance measures (“APMs”), which are not def ined within IFRS. Such measures should be considered alongside the equivalent IFRS measures. For full def initions and reconciliations of APMs, please refer to note 5 to the f inancial statements 16 Purplebricks Annual Report 2019 Adjusted EBITDA for the year (see def inition above) was up by 65% to £10.2 million (FY 2018: £6.2 million). Depreciation and amortisation was £2.3 million up f rom £1.6 million, predominantly reflecting a function of the increase in capitalised development costs f rom prior years. Despite these cost increases, operating prof it has improved strongly in the year. Share-based payment charge was £2.1 million down £0.3 million on the prior year. Options have been granted historically to align the objectives of key employees with the performance of the Group. Strategic Report Canada from 6 July 2018 Canada alternative performance measures2 Adjusted EBITDA Adjusted operating loss Canada KPIs8 Instructions Average revenue per instruction Cost per instruction Marketing as a % sales FY 2019 £m (2.1) (2.8) FY 2019 FY 2018 Change (%) From 6.7.18 6.7.17 - 30.4.18 29,112 £776 £253 31.1% 31,020 £671 £132 18.5% (6.2)% 15.6% 91.7% 12.6ppt For the period of ownership f rom 6 July 2018, our Canadian businesses performed in line with management expectations and generated revenue of £23.7 million and a gross prof it of £12.6 million, giving a gross prof it margin of 53.2%. Although the number of instructions won in the period of ownership were 6% down on the equivalent period in the prior year, average revenue per instruction was 16% higher. Cost per instruction increased f rom £132 to £253 as marketing spend was increased signif icantly, including to support a rebrand to Purplebricks outside of Quebec. Marketing costs were £7.4 million as we increased the typical level of spend to support faster growth and the rebranding in January to Purplebricks outside of Quebec. While it is too early to conclude on the results and effectiveness of the exercise, early data points show an improving trajectory. Further detail will be provided when our f irst half results for FY 2020 are released. Overall marketing spend in FY 2019 increased f rom the prior year when the business was under previous ownership. Over the short to medium term, it is expected that marketing costs will moderate as a percentage of revenue as the new brand identity is established. The operating loss was £3.2 million. Australia Extract of consolidated statement of comprehensive income Revenue Cost of sales Gross profit Gross profit margin (%) Administrative expenses Marketing costs Operating loss Australia alternative performance measures2 Adjusted EBITDA Adjusted operating loss 1 See note 31 FY 2019 £m 11.4 (7.4) 4.0 35.1% (10.7) (12.1) (18.8) FY 2019 £m (17.9) (17.9) Restated1 FY 2018 £m 11.9 (6.4) 5.5 46.2% (7.3) (11.4) (13.2) Restated1 FY 2018 £m (12.5) (12.6) 2 The underlying performance of the Group is monitored internally using a variety of statutory and alternative performance measures (“APMs”), which are not def ined within IFRS. Such measures should be considered alongside the equivalent IFRS measures. For full def initions and reconciliations of APMs, please refer to note 5 to the f inancial statements 8. The FY 2018 KPI information is for a period before the business was acquired by the Group, however has been included for comparability. Purplebricks Annual Report 2019 17 Strategic Report Australia KPIs New users Instructions Average revenue per instruction Cost per instruction Marketing as a % sales FY 2019 831,000 3,648 £3,026 £3,309 106% FY 2018 851,000 4,544 £3,170 £2,533 96% Change (%) (2.4)% (19.7)% (4.5)% 30.6% 10ppt In the face of increasingly diff icult market conditions as the year progressed, we changed the management team and business model. Post year-end, the Board concluded that the prospective returns f rom Australia were no longer suff icient to justify continued investment and took the decision to exit the market in May 2019. A focused, results-orientated team are on the ground implementing our exit strategy, which is based around an orderly process where we stand by our key obligations and help customers successfully sell their properties. Investments and loans made to the end of FY 2019 were £40.8 million, and with the decision to close our Australian business, we expect total losses and closure costs of between £6 million to £8 million in FY 2020. US Extract of consolidated statement of comprehensive income Revenue Cost of sales Gross profit Gross profit margin (%) Administrative expenses Marketing costs Operating loss US alternative performance measures2 Adjusted EBITDA Adjusted operating profit US KPIs Instructions Average revenue per instruction Cost per instruction Marketing as a % sales FY 2019 £m 11.3 (4.8) 6.5 57.5% (16.1) (24.5) (34.1) FY 2019 £m (33.1) (33.2) Restated1 FY 2018 £m 1.6 (0.6) 1.0 62.5% (8.4) (9.4) (16.8) Restated1 FY 2018 £m (16.3) (16.3) FY 2019 FY 2018 Change (%) 2,987 £3,956 £8,201 217% 724 £2,851 £8,917 588% 313% 38.8% 8.0% (371)ppt While US revenue for the year grew more than 600%, operating losses increased to £34.1 million, more than doubling over the year reflecting a substantial increase in marketing spend and the establishment of an East Coast off ice. Post year-end, following a period under strategic review to examine the feasibility of delivering the next phase of growth in a more effective and cost-eff icient manner, a decision to withdraw f rom the US was made in July 2019. Investments and loans made to the end of FY 2019 were £53.1 million, and while it is a very recent decision, we expect total losses and closure costs of between £4 million to £6 million in FY 2020. 1 See note 31 2 The underlying performance of the Group is monitored internally using a variety of statutory and alternative performance measures (“APMs”), which are not def ined within IFRS. Such measures should be considered alongside the equivalent IFRS measures. For full def initions and reconciliations of APMs, please refer to note 5 to the f inancial statements 18 Purplebricks Annual Report 2019 Strategic Report Material transactions and exceptional items rate. As the UK and Canadian businesses move to prof itability in the future this effective tax rate is expected to move to a Given the outlook in those markets, investments made to more normalised rate. date in both Australia and the US, including intercompany receivable balances, £93.9 million in aggregate, were fully impaired as at 30 April 2019. This is reflected in the Statement of financial position stand-alone parent company and does not impact Group The Group has a strong f inancial position to support its results. No exceptional items were identif ied for the year to 30 continued growth, including a cash balance of £62.8 million April 2018. (30 April 2018: £152.8 million) and no debt. As funding has been raised f rom shareholders to date, the Group has no debt. Net In January 2019, the Company invested £11.3 million for a assets of £103.7 million were £46.5 million lower than the 12.9% stake in Homeday.de in Germany as part of a strategic comparable f igure (30 April 2018: £150.2 million) mostly as a investment alongside Axel Springer. result of a lower year end cash balance partially mitigated by higher levels of goodwill and intangible assets arising f rom The acquisition of the Canadian businesses in July 2018 and acquisitions. the agreed minority investment in Homeday.de in Germany mark new milestones for the Group. Both deals back existing Cash flow management teams, with local knowledge and proven track records. Discontinued operations Operating cash flow, which represents cash generated f rom, or consumed by operations, after marketing expenditure but before f ixed asset expenditure was an outflow of £49.1 million (FY 2018: £16.3 million), of which £51.0 million All of the Group’s activities were continuing throughout FY 2019 was consumed in funding adjusted EBITDA losses in Australia and FY 2018, although post year end the Group announced it and the US. Technology expenditure that is eligible for was closing its Australian business and more recently its US capitalisation, other capital expenditure and f inance income/ operations. Tax The Group reports a net tax credit of £1.1 million (FY 2018: £0.9 million charge). The tax credit includes a £1.0 million expenditure accounted for a further outflow of £3.7 million (FY 2018: £3.5 million). Cash spent on acquiring our Canadian business and share of Homeday.de was £38.5 million (FY 2018: £nil). Total cash outflow for the year was £90.3 million (FY 2018: £82.0 million inflow, benef iting f rom £102 million share issues). deferred tax credit relating to the recognition of previously Approved and signed on behalf of the Board unrecognised UK deferred tax assets, as the UK business now expects to make suff icient taxable prof its to utilise these deductions; and deferred tax assets arising during the year in Canada. The overall credit position is also enhanced by a current tax credit of £0.3 million for repayable research and development tax credits. No tax impact is recognised in relation to the losses in the US and Australia and therefore the Group’s effective tax rate differs signif icantly f rom the statutory tax James Davies Chief Financial Off icer 29 August 2019 Purplebricks Annual Report 2019 19 Strategic Report PRINCIPAL RISKS AND UNCERTAINTIES Risk management is an important part of the management process for the Group. Assessing the nature of risks faced, the magnitude of the risk presented to business performance and the manner in which the risk may be mitigated is critical for the business for the long term. The most signif icant risks facing the business are set out below: Risk Potential impact Mitigation Change Economic People As an estate agency the Group’s fortunes are closely linked with those of the housing market and the The Group closely monitors market conditions and the broader economies in which we operate, and believes broader economy as a whole in the countries in which we operate. Economic uncertainty, such as that the outlook for the UK property market remains positive, despite the continuing uncertainties stemming f rom created in the UK by Brexit, can adversely affect the Group’s performance. . the result of the EU referendum. Our cost base is relatively flexible and able to react quickly and effectively to changes in market conditions. An experienced and knowledgeable workforce (including our network of independent Local Property Providing our people with relevant training, great rewards, effective marketing and an effective software Experts) is required to service customer’s needs and drive forward the business. The market for skilled staff platform is a key priority for the business. Recruiting and developing new employees, when required, is and independent contractors remains competitive and a failure to recruit and retain the right people could undertaken by experienced staff to ensure the correct calibre of individual is identif ied. impact on the Group’s ability to succeed. Reputation for a potential customer seeking to instruct the Group. As such, a failure to either deliver a professional fair price and monitors its customer feedback, both direct and through third party providers, on a real time Reading positive references f rom existing customers is an important part of the decision-making process The Group strives to maintain its reputation for being a trusted estate agency service provided at a f ixed service to existing customers or elicit positive reviews could impact our ability to grow. daily basis. Financial Competition Cyber security and data protection International risk Legal/ regulatory Inaccurate f inancial information may result in sub-optimal decisions being taken by management and The systems of internal controls deployed within the Group are designed to prevent f inancial loss. Controls staff. Inadequate internal controls may fail to prevent the Group suffering a f inancial loss. are strongest in areas where management considers the potential exposure to the Group of material loss or misstatement to be at its greatest, such as revenue recognition and cash collection. Processes to improve internal controls and reviews are in place to improve as the business develops. The success of The Group is dependent on maintaining scale through market share whilst operating in a To counter the threat of competitors seeking to win business f rom us, the Group aims to invest in technology competitive sector where there are many alternatives for the customer and the potential for new entrants. and marketing to ensure that the Group maintains its position as the market leader in the estate agency sector. A security breach could cause signif icant operational disruption and/or data loss. A loss of control over The Group monitors the resilience of its information systems and other facilities on an ongoing basis introducing data could result in private or commercially sensitive data being made available to unauthorised parties updates and upgrades as appropriate. A GDPR working group operates closely with our operational business and the subsequent reputational impacts could cause a f inancial loss. GDPR legislation prescribes teams in order to embed compliance into all relevant processes. External advice is sought as appropriate. strict requirements regarding the safeguarding of the personal data of customers and other individuals with whom the Group operates. Non-compliance with GDPR legislation can lead to signif icant f inancial penalties. In order for The Group to deliver its strategy in international markets we require appropriate knowledge and The Group continues to provide control and support as we wind down our operations in the US and Australia, a relevant, affordable business model. and external advisers have been engaged as necessary. Our Canadian operations are well established and are overseen by the Group management team. As a disruptive business with prominence in its sector, the Group faces the challenge of an evolving legal The Group reviews upcoming legislation and compliance and has constituted a Compliance SteerCo to oversee and regulatory environment and failure to ensure legal, regulatory and ethical compliance would impact and prioritise compliance requirements. The Audit Committee and the Board are regularly appraised of the the reputation and operations of the Group. Regulators may impose signif icant f ines for non-compliance. Group’s legal and regulatory challenges. Change course of the last calendar year. As a result the Group faces an increased risk of loss of talent, knowledge needed to deliver that strategy. The Group has experienced signif icant change in leadership, structure and geographical footprint over the The Group continues to focus on both the appropriate strategy for its new model and the key roles that are and experience, and also potentially litigation. Risks which have been assessed as more signif icant year on year Risks which have been assessed as less signif icant year on year Risks where signif icance is unchanged year on year 20 Purplebricks Annual Report 2019 Strategic Report Environmental risk As a digital business, the impact of our owned operations on society and the environment is small in comparison to that of other businesses of similar size. With respect specif ically to Greenhouse gas emissions, for FY 2019 the Company was below the size required to report its emissions, but will do so in time as it continues to grow. Economic People Financial Competition Cyber security and data protection International risk Legal/ regulatory Risk Potential impact Mitigation Change As an estate agency the Group’s fortunes are closely linked with those of the housing market and the The Group closely monitors market conditions and the broader economies in which we operate, and believes broader economy as a whole in the countries in which we operate. Economic uncertainty, such as that the outlook for the UK property market remains positive, despite the continuing uncertainties stemming f rom created in the UK by Brexit, can adversely affect the Group’s performance. . the result of the EU referendum. Our cost base is relatively flexible and able to react quickly and effectively to changes in market conditions. An experienced and knowledgeable workforce (including our network of independent Local Property Providing our people with relevant training, great rewards, effective marketing and an effective software Experts) is required to service customer’s needs and drive forward the business. The market for skilled staff platform is a key priority for the business. Recruiting and developing new employees, when required, is and independent contractors remains competitive and a failure to recruit and retain the right people could undertaken by experienced staff to ensure the correct calibre of individual is identif ied. impact on the Group’s ability to succeed. Reputation for a potential customer seeking to instruct the Group. As such, a failure to either deliver a professional fair price and monitors its customer feedback, both direct and through third party providers, on a real time Reading positive references f rom existing customers is an important part of the decision-making process The Group strives to maintain its reputation for being a trusted estate agency service provided at a f ixed service to existing customers or elicit positive reviews could impact our ability to grow. daily basis. Inaccurate f inancial information may result in sub-optimal decisions being taken by management and The systems of internal controls deployed within the Group are designed to prevent f inancial loss. Controls staff. Inadequate internal controls may fail to prevent the Group suffering a f inancial loss. are strongest in areas where management considers the potential exposure to the Group of material loss or misstatement to be at its greatest, such as revenue recognition and cash collection. Processes to improve internal controls and reviews are in place to improve as the business develops. The success of The Group is dependent on maintaining scale through market share whilst operating in a To counter the threat of competitors seeking to win business f rom us, the Group aims to invest in technology competitive sector where there are many alternatives for the customer and the potential for new entrants. and marketing to ensure that the Group maintains its position as the market leader in the estate agency sector. A security breach could cause signif icant operational disruption and/or data loss. A loss of control over The Group monitors the resilience of its information systems and other facilities on an ongoing basis introducing data could result in private or commercially sensitive data being made available to unauthorised parties updates and upgrades as appropriate. A GDPR working group operates closely with our operational business and the subsequent reputational impacts could cause a f inancial loss. GDPR legislation prescribes teams in order to embed compliance into all relevant processes. External advice is sought as appropriate. strict requirements regarding the safeguarding of the personal data of customers and other individuals with whom the Group operates. Non-compliance with GDPR legislation can lead to signif icant f inancial penalties. In order for The Group to deliver its strategy in international markets we require appropriate knowledge and The Group continues to provide control and support as we wind down our operations in the US and Australia, a relevant, affordable business model. and external advisers have been engaged as necessary. Our Canadian operations are well established and are overseen by the Group management team. As a disruptive business with prominence in its sector, the Group faces the challenge of an evolving legal The Group reviews upcoming legislation and compliance and has constituted a Compliance SteerCo to oversee and regulatory environment and failure to ensure legal, regulatory and ethical compliance would impact and prioritise compliance requirements. The Audit Committee and the Board are regularly appraised of the the reputation and operations of the Group. Regulators may impose signif icant f ines for non-compliance. Group’s legal and regulatory challenges. Change course of the last calendar year. As a result the Group faces an increased risk of loss of talent, knowledge needed to deliver that strategy. The Group has experienced signif icant change in leadership, structure and geographical footprint over the The Group continues to focus on both the appropriate strategy for its new model and the key roles that are and experience, and also potentially litigation. The strategic report on pages 6 to 21 was authorised by the Board of Directors and signed on its behalf by: Vic Darvey Chief Executive Off icer James Davies Chief Financial Off icer 29 August 2019 29 August 2019 Purplebricks Annual Report 2019 21 Governance DIRECTORS’ REPORT The future funding arrangements in respect of the Group’s joint venture Homeday have been amended post year end. See note 19 for further details. The directors present their annual Research and development report on the affairs of the Group, together with the financial statements and auditor’s report for the year ended 30 April 2019. The corporate governance statement set out on page 27 forms part of this report. Business review During FY19 the Groups development of its web based IT platform continued in order to increase the services available to customers. Total expenditure in the period recognised in the income statement was £3,455,000 with a further £2,606,000 capitalised (2018: expenditure of £759,000 and capitalisation of £2,292,000). Dividend No dividends were paid in the year and there are none recommended (FY 2018: £nil). Matters included in the strategic report and Chief Financial Officer’s report Political donations A comprehensive analysis of the Group’s future developments The Company and Group made no political donations during is contained in the strategic report and Chief Executive’s the year and proposes to maintain this policy. statement. The business review, details of the Group’s performance and KPIs are set out in the Chief Executive’s Employees statement and Chief Financial Off icer’s report. Principal risks and uncertainties are presented on pages 20 and 21. The Group’s policy of providing employees with information about the Group has continued and regular meetings are held Financial risk management objectives and policies between management and employees to allow exchanges of information and ideas. As the Group grows, the Group The Group uses f inancial instruments, comprising cash, invoice continues to consider ways to encourage the involvement of factoring and various items such as trade debtors and trade employees in the Group’s performance. creditors that arise directly f rom operations. The main risks arising f rom the Group’s f inancial instruments are liquidity risk, The Group gives every consideration to applications for interest rate risk, credit risk and foreign currency risk. Detailed employment by disabled persons where the requirements of information regarding the Group’s exposure to f inancial risks the job may be adequately f illed by a disabled person. Where as well as the f inancial risk management strategy employed in existing employees become disabled, it is the Group’s policy order to reduce these risks is set out in note 26 to the f inancial wherever practicable to provide continuing employment under statements. Going concern similar terms and conditions and to provide training, career development and promotion wherever appropriate. In adopting a going concern basis for the preparation of the Subsidiaries f inancial statements, the Directors have made appropriate Information about the subsidiaries is provided at note 18 to the enquiries and have considered the Group’s business activities, f inancial statements. cash flows and liquidity position as set out on pages 8 and 9 and in note 26 to the f inancial statements, and the Group’s Investor relations principal risks and uncertainties as set out on pages 20 and 21. Based on the Group’s forecasts, the Directors are satisf ied shareholders lies with the Chairman, while the Board as a that the Company, and the Group as a whole, have adequate whole is committed to maintaining good communications resources to continue in operational existence for the with the market based on the mutual understanding of foreseeable future. Accordingly, the f inancial statements have objectives. To cement that commitment, during the year been prepared on the going concern basis. the company appointed its f irst Head of Investor Relations, Primary responsibility for effective communication with Please see further detail in note 2.3 Post balance sheet events On 7 May 2019, Vic Darvey was appointed Chief Executive Off icer following the resignation of Michael Bruce. On the same date, Purplebricks announced that it was closing its Australian business, and on 3 July 2019, it was announced that the Company was withdrawing f rom the US market. Further details of these actions are provided in the Chief Executive’s statement and in note 30. with a view to establishing a structured programme of communications with existing and potential investors and analysts. The Chairman, Chief Executive Off icer and Chief Financial Off icer have regular dialogue with institutional shareholders in order to develop an understanding of their views, which is communicated back to, and discussed with, the Board. The Head of Investor Relations also provides regular reports to the Board on related matters, issues of concern to investors, and analyst’s views and opinions. The company endeavours to answer all queries raised by shareholders promptly. 22 Purplebricks Annual Report 2019 Governance Presentations given to analysts and investors covering the point of contact for shareholders should they feel that annual and interim results, along with all results and other any concerns are not being addressed properly through regulatory announcements as well as further information for the normal channels. He may be contacted through the investors, are included on the investor relations section of the Company Secretary. Company’s website at www.purplebricksplc.com. Additional shareholder information is also set out on page 84. Shareholders are also encouraged to participate in the Company’s annual general meeting, at which the Chairman Shareholders are able to contact the Company through the will present the key highlights of the Group’s performance. The Company Secretary or Head of Investor Relations. Mike Wroe, Board will be available at the annual general meeting to our Senior Independent Director, serves as an additional answer questions f rom shareholders. Substantial shareholdings At 9 July 2019, the Company had been notif ied in accordance with the Disclosure and Transparency Rules of the FCA, or was aware, that the following held, or were benef icially interested in, 3% or more of the voting rights in the Company’s shares at that date: Shareholder name Axel Springer SE Woodford Investment Management Ltd Merian Global Investors* Toscafund Asset Management Paul Pindar and wife *Formerly known as Old Mutual Global Investors (UK) Ltd Number of shares % shareholding 81,384,638 59,002,549 50,862,083 31, 960,727 10,827,227 26.57% 19.26% 16.60% 10.43% 3.53% Following his resignation as a director on 7 May 2019, Michael Bruce disposed of his shareholding in full to Axel Springer SE. Directors and directors’ interests The directors who held off ice during the f inancial year are Vic Darvey was appointed as Chief Executive Off icer and as a director of the Company on 7 May 2019. set out below: Adrian Blair1 Michael Bruce (resigned 7 May 2019) James Davies Nick Discombe1 (resigned 31 May 2018) Simon Downing1 Paul Pindar1 William Whitehorn* (resigned 30 June 2018) Andreas Wiele1 Michael Wroe1 Shares held and outstanding share awards Details of shares held and options to purchase Ordinary shares in the Company granted to the executive directors are set out below. Details of share-based payments are included in note 10 to the f inancial statements. The share price was 133.4p on 30 April 2019. Director Name Description Outstanding Interest at 1 May 2018 Options Granted During the year Options Exercised During the year Outstanding interest at 30 April 2019 Shares held Adrian Blair - - Michael Bruce2 EMI unapproved options James Davies CSOP Simon Downing Paul Pindar3 - - 2,430,551 1,000,000 - - - - 500,000 - - - - - - - - 33,675 2,430,551 33,386,072 1,500,000 - - - 133,500 10,827,227 Vic Darvey was granted an award over 700,000 shares under the Companies Employee Share Option Plan on 7 January 2019 whilst he was the Group’s Chief Operating Off icer. 1 Denotes non-executive directors 2 Michael Bruce’s shareholding includes those of his wife. 3 Paul Pindar’s shareholding includes those of his wife. Purplebricks Annual Report 2019 23 Governance OUR BOARD Non-executive Chairman Paul Pindar Paul joined Capita plc in 1987, initially as Finance Director, then Managing Director in 1991 and Chief Executive in 1999. He was the third-longest serving FTSE 100 CEO when he stood down in 2014. He joined Capita after advising on the £0.3 million management buyout (MBO) while working for 3i Group plc. When he joined Capita, it had 33 employees and annual revenue of £1.3 million. When he left the business in February 2014, Capita had more than 62,000 employees and a market capitalisation of £7.5 billion. Since June 2014 he has served as Chairman of Independent Clinical Services following its acquisition by TowerBrook. Since September 2017, Paul has been non-executive Chairman of Literacy Capital plc and is also Chairman of Bookmark Reading Charity’s Corporate Partnership Board. Paul was also an early investor in Purplebricks. Chief Executive Officer Vic Darvey Vic is a digital leader with more than 20 years’ experience successfully scaling a number of international consumer brands, most recently as Managing Director of MoneySupermarket.com. He has held leadership roles across a number of highly competitive and disruptive businesses, including LastMinute.com. Vic joined Purplebricks in January 2019 as Group Chief Operating Off icer and brings a proven record of technology delivery and leadership of cutting-edge data-led, customer-focused, commercial innovation. Vic was appointed Group Chief Executive Off icer on 7 May 2019. Chief Financial Officer James Davies James joined Purplebricks in May 2017 f rom William Hill plc, having been Chief Financial Off icer of its digital business since 2015. Prior to this, James was a divisional Chief Financial Off icer at Kingf isher plc and was deputy to the Group Finance Director of UBM plc for three years. Before this, James spent f ive years in the UK M&A team at Deutsche Bank and eight years in the technology team at Close Brothers Corporate Finance. James started his career within the TMT team at Deloitte in London where he qualif ied as a chartered accountant. 24 Purplebricks Annual Report 2019 Governance Senior Independent Non-Executive Director Michael Wroe Adrian joined Just Eat f rom Spotify, where as Director of European Business Development his team forged pioneering partnerships between the music streaming and mobile device Mike Wroe is the former Group Chief Financial Off icer of Just industries. Prior to that he spent six years at Google Inc. in a Eat plc and was part of the team that led the transformation of number of senior commercial roles across California and Just Eat f rom a 40-person, venture-backed start-up, through London including Head of eCommerce Partnerships, where its IPO and transition into becoming a highly successful his team helped thousands of businesses improve their ROI public business. After qualifying as a Chartered Accountant f rom AdWords. Before that, Adrian was Head of Business with Deloitte & Touche, Mike has held over 20 years’ Senior Development at Ask Jeeves Inc., where he developed a Executive experience across a range of both listed and private network of over 10,000 aff iliate websites, helping Ask become a ecommerce, services and technology businesses with a track household name in the UK prior to its $1.85bn sale to IAC. record of delivering results in both high growth and rapid change environments. Adrian chairs the Nomination Committee and is a member of the Audit and Remuneration Committees. Mike is the Company’s senior independent non-executive director and chairs the Audit Committee and is a member of the Nomination and Remuneration Committees. Independent Non-Executive Director Simon Downing Independent Non-Executive Director Adrian Blair Simon joined the Board in April 2018 and is the founder and Executive Chairman of Civica Group Limited, a leading international provider of specialist software and digital Adrian joined the Board in April 2018 and is CEO of Receipt solutions. Simon led the business through its flotation on Bank, a high growth global Fintech business backed by Insight AIM in 2004, and its subsequent growth and international Ventures. Until 2018, he was Global Chief Operating Off icer expansion, completing 25 acquisitions as part of the group at Just Eat plc, where he was responsible for all commercial expansion. In July 2017, Civica was sold to Partners Group operations in the UK and 12 international markets. He was for £1.06 billion and had grown to over 4,000 employees and instrumental over seven years in building Just Eat into one of operations in nine countries. the most successful technology companies in Europe. He was part of the team that led Just Eat through its listing on the Simon is currently Chairman of Edenhouse Solutions, a London Stock Exchange in 2014, since when the company has specialist SAP support and consultancy business, and is a created c.£1bn of shareholder value per year, culminating in Non-executive Director at AdvisorPlus Business Solutions and promotion to the FTSE 100 in December 2017. Datum Datacentres. In addition to his role at Civica and other board appointments, Simon is a Senior Adviser to OMERS Private Equity, which has in excess of CAD $11 billion of private equity assets under management. He is also a past winner of the EY UK Technology and IT Services Entrepreneur of the Year award. Simon chairs the Remuneration Committee and is a member of the Audit and Nomination Committees. Non-Executive Director Andreas Wiele Dr Andreas Wiele studied law at Dijon, Salzburg and Munich Universities. He worked f irst of all as an editor at “Hamburger Morgenpost”, before he became assistant to the chairman of the Gruner + Jahr management board in 1988. In 1990 he took over responsibility for the “Capital” project at the Prisma Presse publishing company in Paris, where he became publishing manager of “Capital” and “Geo” in 1991. In 1994, he moved to New York to join Gruner + Jahr USA Publishing, initially as senior vice-president and general manager of “Family Circle” and “McCall’s” and f rom 1997 onwards as executive vice-president and chief operating off icer for the publishing company as a whole. In 2000, Dr Andreas Wiele was appointed member of the Executive Board of Axel Springer SE as President of the BILD Group and Magazines, in 2014 President Classif ieds Media and CEO Axel Springer Digital and Axel Springer Digital Ventures. Purplebricks Annual Report 2019 25 Governance Attendance at Board meetings Participation of Board and Committee members at meetings (and calls) as compared with the number of meetings held: Board Audit3 Remuneration3, 4 Nomination3, 5 Attendance Paul Pindar Michael Bruce James Davies Mike Wroe Adrian Blair Simon Downing Andreas Wiele Nick Discombe1 Will Whitehorn2 Key Board (10 meetings) Audit Committee (2 meetings) Remuneration Committee (10 meeting) Nomination Committee (1 meeting) 90%6 100% 100% 90% 7 100% 100% 80% 100% - 3. Committee memberships were ref reshed on 19 September 2018. 4. There were 10 remuneration committee meetings held during the year, seven of which were convened to grant options. It is anticipated that there will be fewer meetings held in FY 2020. 5. Given that four new directors were appointed in FY 2018, it was felt that only one nomination committee meeting was necessary in FY 2019. Board or committee member not present 6. Paul Pindar was prevented f rom attending a Board Meeting due to Non-Committee member invited to attend part or all of a meeting (although no part of a Remuneration Committee meeting during which time their remuneration was discussed) Notes 1. Stepped down f rom the Board on 31 May 2018. 2. Stepped down f rom the Board on 30 June 2018. an urgent family matter. Full Board materials were issued to him and he briefed other Board members before the meeting and received a debrief shortly after the Board meeting. 7. Mike Wroe was unable to attend a Board meeting as he was out of the country at the time. Full Board materials were issued to him and he passed on his comments to the Chairman ahead of the meeting. Research and development The Group undertakes a continuous programme of they are satisf ied that they give a true and fair view of the state of affairs and prof it or loss of the Company and Group for that period. In preparing these f inancial statements, the directors development as part of its commitment to lead change in the are required to: real estate industry. Development expenditure is capitalised only when the end product is technically and commercially select suitable accounting policies and then apply them feasible and when suff icient resource is available to complete consistently; the development, as disclosed in note 2.17 to the f inancial statements. All other research and development expenditure make judgements and accounting estimates that are is recognised in the statement of comprehensive income as an reasonable and prudent; expense as disclosed in note 8 to the f inancial statements. D&O insurance provisions state whether applicable IFRSs have been followed, subject to any material departures disclosed and explained in the f inancial statements; and The Company has a qualifying indemnity insurance policy in respect of Directors’ and Off icers’ liability insurance policy, prepare the f inancial statements on the going concern basis which covers Directors and off icers of the Company defending unless it is inappropriate to presume that the company will civil proceedings brought against them in their capacity as continue in business. Directors or off icers of the Company. Statement of directors’ responsibilities The directors are responsible for keeping adequate accounting records that are suff icient to show and explain the company’s transactions and disclose with reasonable accuracy at any The directors are responsible for preparing the strategic time the f inancial position of the company and enable them report and directors’ report and the f inancial statements in to ensure that the f inancial statements comply with the accordance with applicable law and regulations. Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable Company law requires the directors to prepare f inancial steps for the prevention and detection of f raud and other statements for each f inancial year. Under that law the directors irregularities. have elected to prepare the f inancial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the directors must not approve the f inancial statements unless 26 Purplebricks Annual Report 2019 The directors are responsible for the maintenance and integrity of the corporate and f inancial information included Auditor on the Company’s website. Legislation in the United Kingdom Following a formal tender process concluded in September governing the preparation and dissemination of f inancial 2018, Deloitte LLP was appointed by shareholders as the statements may differ f rom legislation in other jurisdictions. Group’s statutory auditor at the Company’s Annual General Governance Meeting in October 2018. Deloitte LLP have expressed their willingness to continue in off ice as auditor and a resolution to reappoint them will be proposed at the forthcoming Annual General Meeting. Disclosure of information to auditor The directors conf irm that: so far as each director is aware, there is no relevant audit information of which the Company’s auditor is unaware; and the directors have taken all the steps that they ought to have taken as directors in order to make themselves aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. CORPORATE GOVERNANCE STATEMENT While the Company is going through a period of signif icant Nomination Committee challenge and change, the Board is committed to achieving high standards of corporate governance, integrity and The Nomination Committee is chaired by Adrian Blair and business ethics. its other members are Mike Wroe and Simon Downing. The Nomination Committee assists the Board in discharging its The Company has adopted the Quoted Companies Alliance responsibilities relating to the composition of the Board, Corporate Governance Code and is accordingly committed to performance of Board members, induction of new directors, complying with the QCA Code or providing a clear explanation appointment of committee members and succession planning of any areas in which the Company’s governance structures for senior management. The Nomination Committee is and practices differ f rom the expectations set by the QCA Code. responsible for evaluating the balance of skills, knowledge, In accordance with best practice, the Board has established composition of the Board, retirements and appointments of an audit committee, a remuneration committee and a additional and replacement directors and makes appropriate diversity and experience on the Board, the size, structure and nomination committee. recommendations to the Board on such matters. The Nomination Committee prepares a description of the role The control environment of the company has developed and capabilities required for a particular appointment. The as the business has grown over the last 5 years. The Nomination Committee meets at least twice a year and effectiveness of the control environment is monitored otherwise as required. as the business evolves including in respect of overseas operations. The Board is committed to continuous monitoring Remuneration Committee of the effectiveness of this environment, and to make further investment where required in order to target a best practice The Remuneration Committee is chaired by Simon Downing control environment. Information regarding the Company’s and its other members are Mike Wroe and Adrian Blair. The compliance with the 10 principles of the QCA code is set out on Remuneration Committee reviews the performance of the our investor website purplebricksplc.com Executive Directors and senior management and makes Audit Committee recommendations to the Board on matters relating to their remuneration and terms of employment. The Remuneration Committee also makes recommendations to the Board The Audit Committee is chaired by Mike Wroe, and its other on proposals for the granting of share options and other members are Simon Downing and Adrian Blair. The Audit equity incentives pursuant to any share option scheme or Committee has primary responsibility for monitoring the equity incentive scheme in operation f rom time to time. The quality of internal controls and ensuring that the f inancial remuneration and terms and conditions of appointment of the performance of the Company is properly measured and Non-executive Directors of the Company are set by the Board. reported on. It receives and reviews reports f rom the Company’s management relating to the interim and annual The Non-Executive directors do not have any personal interest accounts and the accounting and internal control systems in in the matters to be decided by the committee, or any potential use throughout the Company. The Audit Committee meets conflicts of interest arising f rom cross-directorships or day to at least three times a year and has unrestricted access to the day involvement in the running of the Company. The Executive Company’s auditor. directors and other senior personnel may be invited to attend meetings when appropriate to provide advice. However, no director will be present or take part in discussions concerning their remuneration. Purplebricks Annual Report 2019 27 Financial statements Remuneration policy criteria. Whilst the Company does not have a specif ic human rights policy, it does have statements on Equal Opportunities, The Company’s policy is that the remuneration package of Modern Slavery and Anti-bribery that adhere to internationally the Executive Directors should be suff iciently competitive agreed human rights principles. to attract, retain and motivate those directors to achieve the Company’s objectives without making excessive payments. Environment Basic salary and benef its Purplebricks Group plc is committed to minimising the environmental impact of its business operations and seeks to Base salaries will be reviewed annually by the Remuneration actively manage its carbon footprint. As an online business with Committee, and adjusted where appropriate to reflect performance, changed responsibilities and/or market conditions. Service contracts and letters of appointment very limited physical inf rastructure and a marketing model that is largely paperless, the Company has a much-reduced environmental impact as compared to traditional real estate agencies. As a relatively new and fast-growing company we will be constantly reviewing our business model and operations to limit the impact we and our customers make in the course The Company’s policy is for all of the Executive Directors of our business in areas such as energy eff iciency, waste, to have twelve month rolling service contracts. All Non- recycling, emissions, transport and printing. Executive Directors are salaried. They are not eligible for bonuses, pension benef its, share options or other benef its, Health and safety save where compulsory by law. The Directors are indemnif ied to the full extent permitted by statute. Executive and Non- The effective management of health and safety across Executive Directors Remuneration is detailed in note 9 to the our business is an integral part of our broader business f inancial statements. Long term equity incentive plan administration requirements. As the business grows we are committed to ensuring appropriate assessment and suitable control of the health and safety risks arising f rom our work activities for our employees, our customers and our partners. During the year, grants of options were made to senior management (including Executive Directors), staff, and a Charitable and philanthropic activity number of LPEs’ companies to align their interests ever more closely with those of shareholders. Corporate Social Responsibility Equality, diversity and rights An important part of the Company’s culture and ethos is to give back to the public and local communities in which we operate through the commitment of time, resources and fundraising activities. Our employees are active in raising money or supporting fundraising activities for a wide range of causes both local and national. Purplebricks Group plc maintains a strong commitment to equality and opportunity in our employment policies and Any member of staff can nominate a local project for support practices in the workplace. Through our recruitment and by the Purplebricks Foundation Committee. The f inal selection processes we seek to attract and retain a diverse projects are chosen by the Foundation Committee, made and talented workforce. As prescribed by law, we commit that up of members of the management team. The Foundation no existing or potential employee will receive less favourable Committee meets periodically. treatment due to their race, creed, nationality, colour, ethnic origin, sexual orientation, gender, gender reassignment, marital This directors’ report was approved and signed on behalf status, membership of a trade union, disability, or any other of the Board Vic Darvey Director James Davies Director 29 August 2019 29 August 2019 28 Purplebricks Annual Report 2019 Auditor’s report Independent auditor’s report to the members of Purplebricks Group Plc Report on the audit of the financial statements OPINION In our opinion: the f inancial statements of Purplebricks Group plc (the ‘parent company’) and its subsidiaries (the ‘Group’) give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 30 April 2019 and of the BASIS FOR OPINION We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the f inancial statements section of our report. Group’s loss for the year then ended; We are independent of the Group and the parent company in accordance with the ethical requirements that are relevant the Group f inancial statements have been properly to our audit of the f inancial statements in the UK, including prepared in accordance with International Financial the Financial Reporting Council’s (the ‘FRC’s’) Ethical Reporting Standards (IFRSs) as adopted by the Standard as applied to listed entities, and we have fulf illed European Union; our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have the parent company f inancial statements have been obtained is suff icient and appropriate to provide a basis for properly prepared in accordance with IFRSs as adopted by our opinion. the European Union and as applied in accordance with the provisions of the Companies Act 2006; and the f inancial statements have been prepared in accordance with the requirements of the Companies Act 2006. We have audited the f inancial statements which comprise: the consolidated statement of comprehensive income; the consolidated and parent company balance sheets; the consolidated and parent company statements of changes in equity; the consolidated and parent company cash flow statements; the statement of accounting policies; and the related notes 1 to 31. The f inancial reporting f ramework that has been applied in their preparation is applicable law and IFRSs as adopted by the European Union and, as regards the parent company f inancial statements, as applied in accordance with the provisions of the Companies Act 2006. Purplebricks Annual Report 2019 29 Auditor’s Report SUMMARY OF OUR AUDIT APPROACH Key audit matters The key audit matters that we identif ied in the current year were: Valuation of deferred income relating to instruction revenue in the UK and Australia; Accounting for the acquisition of DuProprio; and Impairment of investments and intercompany receivables held by the parent company. Materiality The materiality that we used for the Group f inancial statements was £2,025,000 which was determined on the basis of 1.5% of Group revenue. Scoping The group audit team performed a full scope audit of the parent company and an audit of specif ied account balances for US based operations, which together represented 73% of Group revenue, 57% of Group loss before tax and 64% of Group net assets. We also requested component auditors perform specif ied audit procedures on certain account balances and transactions for the Australian and Canadian operations which represented 25% of Group revenue, 40% of Group loss before tax, and 33% of Group net assets. The remaining components were subject to analytical procedures by the group audit team. The overall scope of our audit resulted in us performing audit procedures over 98% of Group revenue, 97% of Group loss before tax, and 97% of Group net assets. First year audit transition The year ended 30 April 2019 is our f irst as auditor of the Group. We were appointed as auditors on 19 October 2018, having been independent since prior to 1 May 2018, and commenced our transition f rom the date of appointment. The transition has included: establishing a detailed audit transition plan; holding a Group audit planning meeting with our component audit teams; performing Group audit team oversight, including visits where considered necessary, to components throughout the transition process; reviewing the previous Group auditor’s audit f ile; and reviewing historic accounting policies and accounting judgements through discussion with management and review and challenge of management’s papers and supporting documentation. This process built our understanding of the Group which informed our risk assessment process, f rom which we identif ied the risks of material misstatement to the Group’s f inancial statements. We presented our audit plan and transition observations to the Group’s senior management and to the Audit Committee throughout the transition process, including issuing a transition update report in December 2018 and a transition report and audit plan in April 2019. CONCLUSIONS RELATING TO GOING CONCERN We are required by ISAs (UK) to report in respect of the following matters where: the directors’ use of the going concern basis of accounting in preparation of the f inancial statements is not appropriate; or We have nothing to report in respect of the directors have not disclosed in the f inancial statements any identif ied material uncertainties that these matters. may cast signif icant doubt about the Group’s or the parent company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months f rom the date when the f inancial statements are authorised for issue. KEY AUDIT MATTERS Key audit matters are those matters that, in our professional judgement, were of most signif icance in our audit of the f inancial statements of the current period and include the most signif icant assessed risks of material misstatement (whether or not due to f raud) that we identif ied. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the f inancial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 30 Purplebricks Annual Report 2019 Auditor’s report Last year the previous auditor’s report contained three key audit matters which are not included in our report this year: valuation of intangible assets, recoverability of deferred tax assets and completeness of equity transactions. We have assessed each of these items during the course of the audit, and concluded that these were not key audit matters in the current period. The other key audit matter in the previous auditor’s report was revenue recognition. We have included a revenue recognition key audit matter in the current year, and this is focussed on the valuation of deferred income. Valuation of deferred income relating to instruction revenue in the UK and Australia Key audit Following the adoption of IFRS 15 in the period, the Group was required to reassess how revenue for matter description instruction services should be recognised. This has resulted in instruction revenue being recognised using a measure of performance under IFRS 15, compared to primarily being recognised at a point in time under IAS 18. The impact of this is disclosed in note 2.4.1 and note 31 to the f inancial statements. There are two key judgements made in determining the revenue recognition for instruction revenue, being the period over which to recognise revenue and the measure of performance used to determine when the performance obligations have been met. Judgement has been used to determine the period over which to recognise instruction revenue, which has been disclosed as a key source of estimation uncertainty in note 3.4 to the f inancial statements. The performance measure over which revenue is recognised is based on the expected time taken f rom instruction of a new property until the point at which a sale completes. This expectation is set with reference to historical experience. The measure of performance used has been determined on a portfolio basis, using the average time taken for a property sale to complete, which is described in the accounting policies section in pages 44 to 47. The methodology employed for UK instruction revenues assumes that the housing market will continue to operate in a steady state. Given the uncertainty created by the decision for the UK to exit the European Union, industry analysts are concerned that this may lead to a slow down in the UK housing market, which could increase the time it takes for properties to sell. An increase in the time it takes for properties to sell would lead to a reduction in instruction revenues recognised as the fees would be spread over a longer period, resulting in more revenue deferred into the next f inancial year. Refer to notes 2.4.1, 6 and 21 for the Group accounting policy, management’s consideration of critical accounting judgements and disclosure note respectively. How the scope of our audit For the UK component, our procedures involved: assessing the design, implementation and testing of operating effectiveness of key IT controls over key responded to the systems used to retain sales information; key audit matter using internal data analytics specialists who analysed the underlying data used to calculate the average period taken to sell a property in the UK; and developing an independent expectation of the value of deferred income, and using this to recalculate the value of revenue to be deferred at 30 April 2019. For the other components, our procedures involved: assessing the design and implementation of management review controls used in relation to the judgement taken in determining the period over which to defer revenue, and the appropriateness of the measure of the performance used; working with internal data analytics specialists who analysed the underlying data used to calculate the average period taken to sell a property in the US and Australia; Challenging the appropriateness of the measure of performance used in Canada by comparing this to alternative measures of performance; and Recalculating the value of the deferred income balance. Key observations Based on our work we are satisf ied that the accounting for deferred income is in line with accounting standards and is materially appropriate. Purplebricks Annual Report 2019 31 Auditor’s Report Accounting for the acquisition of DuProprio Key audit This is a new key audit matter for 2019 following the acquisition of DuProprio, an established Canadian matter description business, which completed in July 2018. The Purchase Price Allocation (“PPA”) in respect of an acquisition is inherently judgemental. There is a risk that if management use inappropriate methodologies or assumptions within the PPA exercise, the intangible assets will be misstated. We have included the key audit matter in our audit report due to the quantum of the balance, its highly judgemental nature, and the fact that it had a substantial impact on our overall audit strategy. DuProprio was acquired for £30.9 million in cash. The excess of consideration over the fair value of net assets acquired has resulted in the recognition of £1.7 million customer contract intangibles, £13.6 million for the DuProprio brand, £2.9 million in relation to internally generated IT intangibles and £13.0m of goodwill being recognised on the Group balance sheet. Refer to the notes 2.18, 3.1 and 15a for the Group accounting policy, management’s consideration of critical accounting judgements and disclosure note respectively. How the scope of our audit responded to the Our procedures involved: assessing the design and implementation of the key controls over acquisition accounting; using internal specialists to review the methodology and assumptions employed by management’s key audit matter experts in calculating the fair value of the intangibles and considering the completeness of intangibles identif ied; obtaining the underlying cash flow forecasts, discussing them with management, and challenging the reasonableness and consistency of the underlying forecasts; agreeing the value of consideration payable to contractual agreements and to bank statements; and reviewing the associated disclosures to ensure that they are in accordance with IFRS 3. In addition to the above, during the measurement period, we considered whether the Group’s retrospective adjustments to the provisional amounts recognised at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date were reflected in the valuation. We also challenged the appropriateness of any change to goodwill or the income statement. Key observations We concur that the acquisition has been appropriately accounted for under IFRS 3 and that the assumptions and methodology used in valuing the identif ied intangible assets are reasonable. Impairment of investments and intercompany receivables held by the parent company Key audit In February 2019, the Group issued a trading update that stated that the performance of the Australian and matter description US businesses performance was behind expectations. Subsequent to this, on the 7 May 2019, the Group conf irmed it was to close its operations in Australia and scale back its operations in the US. This represents an indicator of impairment under IAS 36. At 30 April 2019, before recognising any impairment, the parent company held investments in and loans receivable f rom its Australian subsidiary of £40.8 million and its US subsidiary of £53.1 million. Of these balances, impairment charges of £40.8 million and £53.1 million were recorded for Australia and the US respectively following the completion of management’s assessment of the recoverable amount of each business. As a result of the performance of the Australian and US businesses, and the level of additional funding that would have been required had the decision not been made to close each component, management fully impaired the investment and receivable balances. This judgement was made because insuff icient future cash flows are expected in order to recover the carrying value of these investments in and receivables f rom these entities. The Board took the decision to close the Australian business on 7 May 2019, and to close the US business on 2 July 2019. The indicators of impairment existed at the balance sheet date, therefore no changes were required to the conclusions reached above following the completion of the strategic reviews of both the Australian and US operations on the basis that the receivable and investments balances were fully impaired. Refer to notes 2.12, 3.2 and 16 for the Group accounting policy, management’s consideration of critical accounting judgements and disclosure note respectively. 32 Purplebricks Annual Report 2019 Auditor’s report How the scope of our audit Our procedures involved: assessing the design and implementation of the controls around the impairment review process and responded to the management’s forecasting process; key audit matter auditing the clerical accuracy of management’s impairment model; considering the appropriateness of the key inputs to the model, including long term growth rates, discount rates and period over which future cash flows will be generated; assessing whether any additional provisions are required as part of the assessment of expected credit losses on intercompany receivables in line with the requirements of IFRS 9; and reviewing the disclosures made in relation to key sources of estimation uncertainty (IAS 1) and assessing whether the relevant disclosure requirements of IAS 36 have been complied with. Key observations Based on the work performed, we concur with the Directors’ conclusions that the carrying value of the investments in and receivables f rom the US and Australian business should be impaired in full. We concur that the disclosures made in the f inancial statements are appropriate. OUR APPLICATION OF MATERIALITY We def ine materiality as the magnitude of misstatement in the f inancial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. Based on our professional judgement, we determined materiality for the f inancial statements as a whole as follows: Group f inancial statements Parent company f inancial statements Materiality Materiality has been set at £2,025,000 for the Materiality has been set at £1,570,000 for the current current year. In 2018, the previous auditor used a year. In 2018, the previous auditor used a materiality materiality of £1,395,000. of £1,046,000. Basis for determining materiality We set materiality for the current year at The materiality for the Purplebricks Group plc (the 1.5% of revenue. partner company) audit was capped at 78% of group materiality on the basis of the relative size of this In 2018 the previous auditor set materiality on the component to the group as a whole. This represents same basis. 1.8% of revenues generated by the company. Rationale for We consider revenue to be the most appropriate The UK business is the largest trading component the benchmark benchmark. The Group remains loss making due of the Group. We consider revenue to be the most applied the ongoing investments in new markets and appropriate benchmark due to the high levels of therefore revenue was considered to be the most growth achieved in the period. The Directors also representative benchmark to use. The Directors deem revenue growth to be their key indicator also deem revenue growth to be one of their when assessing the performance of the company key indicator when assessing the performance and the components of the Group. of the Group. We set performance materiality for the Group at £1,215,000 which represents 60% of our materiality. We use performance materiality to determine the extent of our testing; it is lower than materiality to reflect our assessment of the risk of errors remaining undetected by our sample testing and uncorrected in the f inancial statements. In determining performance materiality we considered the quality of the control environment and whether we were able to rely on controls; the market announcements amending revenue expectations that have been issued in the last 12 months; and the signif icant changes in the Group as they focus on simplifying the strategy. We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £101,000, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. In 2018, the previous auditor communicated all audit differences above £69,750. We also report to the Audit Committee on disclosure matters that we identif ied when assessing the overall presentation of the f inancial statements. AN OVERVIEW OF THE SCOPE OF OUR AUDIT Our group audit was scoped by obtaining an understanding of the Group and its environment, including group-wide controls, and assessing the risks of material misstatement at the group level. Based on that assessment, we focused our group audit scope on the consolidation at the parent company level (it being the main trading business in the UK) and the Group’s overseas business segments in the US, Australia and Canada. The overall scope of our audit resulted in us performing audit procedures over 98% of Group revenue, 97% of Group loss before tax, and 97% of Group net assets. Purplebricks Annual Report 2019 33 Auditor’s Report Canada The Canadian component accounts for over 17% of the Group’s revenue and was subject to an audit of specif ied account balances and transactions determined by the group audit team using a component materiality of £1.1 million. The component auditor in Canada, who was directed and supervised by the group audit team, performed the audit of the Canada component. Australia The Australian component accounts for over 8% of the Group’s revenue and was subject to specif ied audit procedures determined by the group audit team using a component materiality of £0.8 million. The component auditor in Australia, who were directed and supervised by the group audit team, performed the audit of the Australian component. US The US component accounts for over 8% of the Group’s revenue and was subject to an audit of specif ied account balances and transactions determined by the group audit team using a component materiality of £0.8 million. The audit work on the US component was performed by the group audit team. Parent company and consolidation The parent company accounts for over 65% of the Group’s revenue and was subject to a full scope audit using component materiality of £1.57 million, which was performed by the group audit team. At the parent company level we also tested the consolidation process and carried out analytical procedures to conf irm our conclusion that there were no signif icant risks of material misstatement in the aggregated f inancial information of the remaining components not subject to audit or audit of specif ied account balances. The group audit team follows a programme of planned visits to the auditors of each of the signif icant components of the Group not audited by the group audit team. In years when we do not visit a signif icant component, we will include the component audit team in our team brief ing, discuss their risk assessment and review documentation of the f indings f rom their work and joining the component audit close meetings by telephone. In the current year, the group audit partner visited the Canadian component auditor. OTHER INFORMATION The directors are responsible for the other information. The other information comprises the information We have nothing included in the annual report, other than the f inancial statements and our auditor’s report thereon. Our opinion on the f inancial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. to report in respect of these matters. In connection with our audit of the f inancial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the f inancial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the f inancial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. RESPONSIBILITIES OF DIRECTORS As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the f inancial statements and for being satisf ied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of f inancial statements that are f ree f rom material misstatement, whether due to f raud or error. In preparing the f inancial statements, the directors are responsible for assessing the Group’s and the parent company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so. AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS Our objectives are to obtain reasonable assurance about whether the f inancial statements as a whole are f ree f rom material misstatement, whether due to f raud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise f rom f raud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these f inancial statements. A further description of our responsibilities for the audit of the f inancial statements is located on the FRC’s website at: www.f rc.org. uk/auditorsresponsibilities. This description forms part of our auditor’s report. 34 Purplebricks Annual Report 2019 Auditor’s report Report on other legal and regulatory requirements OPINIONS ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006 In our opinion, based on the work undertaken in the course of the audit: the information given in the strategic report and the directors’ report for the f inancial year for which the f inancial statements are prepared is consistent with the f inancial statements; and the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements. In the light of the knowledge and understanding of the Group and of the parent company and their environment obtained in the course of the audit, we have not identif ied any material misstatements in the strategic report or the directors’ report. MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION Adequacy of explanations received and accounting records Under the Companies Act 2006 we are required to report to you if, in our opinion: we have not received all the information and explanations we require for our audit; or adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received f rom branches not visited by us; or the parent company f inancial statements are not in agreement with the accounting records and returns. Directors’ remuneration Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’ remuneration have not been made. We have nothing to report in respect of these matters. We have nothing to report in respect of these matters. USE OF OUR REPORT This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Andrew Halls FCA (Senior statutory auditor) For and on behalf of Deloitte LLP Statutory Auditor Birmingham, UK 29 August 2019 Purplebricks Annual Report 2019 35 Financial statements CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 APRIL 2019 Revenue Cost of Sales Gross profit Administrative and establishment expenses Marketing costs Share of results of joint venture Loss from operating activities Finance income Finance expense Loss on ordinary activities before taxation Taxation on loss on ordinary activities Loss for the year Items that may be reclassified subsequently to profit and loss: Exchange differences on translation of foreign operations Total other comprehensive income Total comprehensive loss Earnings per share Basic and diluted loss per share Note 6 8 13 14 11 2019 £000 136,513 (56,626) 79,887 (61,016) (70,650) (536) (52,315) 817 (4,456) (55,954) Restated1 2018 £000 87,787 (38,208) 49,579 (35,195) (42,142) - (27,758) 292 (1,724) (29,190) 1,093 (887) (54,861) (30,077) (95) (95) (54,956) (490) (490) (30,567) 12 (18p) (11p) The accompanying accounting policies and notes form an integral part of these f inancial statements. All losses and other comprehensive income relate to continuing operations and are attributable to equity shareholders of the parent. 1 See note 2.2 36 Purplebricks Annual Report 2019 CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 30 APRIL 2019 Non-current assets Goodwill Intangible assets Property, plant and equipment Investment in joint venture Deferred tax asset Current assets Tax receivable Trade and other receivables Derivative financial instruments Cash and cash equivalents Total Assets Current liabilities Trade and other payables Deferred income Derivative financial instruments Net current assets Total assets less current liabilities Non-current liabilities Deferred tax liabilities Net assets Equity Share Capital Share premium Share-based payments reserve Foreign exchange reserve Retained earnings Total Equity Note 15 16 17 19 11 20 22 21 21 22 11 23 24 25 25 Financial statements Restated1 2018 £000 Restated1 2017 £000 2019 £000 19,486 21,887 1,960 10,713 7,120 61,166 1,163 27,446 10 62,767 91,386 2,606 4,434 1,054 - 3,068 11,162 306 19,192 - 152,846 172,344 152,552 183,506 (24,960) (19,348) - (44,308) (16,300) (16,842) (44) (33,186) 47,078 139,158 108,244 150,320 (4,519) 103,725 3,031 177,352 8,605 (469) (84,794) 103,725 (142) 150,178 3,019 176,400 4,545 (374) (33,412) 150,178 2,606 2,757 718 - 3,087 9,168 - 11,258 - 71,330 82,588 91,756 (7,859) (9,370) (104) (17,333) 65,255 74,423 (244) 74,179 2,705 74,901 1,669 116 (5,212) 74,179 These f inancial statements were approved and authorised for issue by the Board of Directors on 29 August 2019 and were signed on its behalf by: Vic Darvey Director James Davies Director Company registration number 08047368 The accompanying accounting policies and notes form an integral part of these f inancial statements. 1 See note 2.2 Purplebricks Annual Report 2019 37 Financial statements COMPANY STATEMENT OF FINANCIAL POSITION AT 30 APRIL 2019 Non-current assets Intangible assets Property, plant and equipment Investment in subsidiaries Investment in jointly controlled entities Deferred tax asset Current assets Tax receivable Trade and other receivables Derivative financial instruments Cash and other cash equivalents Total Assets Current liabilities Trade and other payables Deferred income Derivative financial instruments Net current assets Total assets less current liabilities, being net assets Equity Share Capital Share premium Share-based payments reserve Retained earnings Total Equity Note 16 17 18 19 11 20 22 21 21 22 23 24 25 2019 £000 4,362 812 31,874 11,249 6,139 54,436 296 19,178 10 57,617 77,101 Restated1 2018 £000 Restated1 2017 £000 3,565 743 22,150 - 2,893 29,351 306 30,931 - 149,684 180,921 1,614 564 3,574 - 2,893 8,645 - 17,419 - 69,941 87,360 131,537 210,272 96,005 (13,582) (14,702) - (28,284) (9,427) (13,498) (44) (22,969) 48,817 157,952 103,253 187,303 3,031 177,352 8,605 (85,735) 103,253 3,019 176,400 4,545 3,339 187,303 (6,996) (8,470) (104) (15,570) 71,790 80,435 2,705 74,901 1,669 1,160 80,435 The Company reported a loss for the f inancial year ended 30 April 2019 of £92,554,000 (2018: prof it of £302,000 (restated1)) These f inancial statements were approved and authorised for issue by the Board of Directors on 29 August 2019 and were signed on its behalf by: Company registration number 08047368 The accompanying accounting policies and notes form an integral part of these f inancial statements. Vic Darvey Director James Davies Director 1 See note 2.2 38 Purplebricks Annual Report 2019 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 APRIL 2019 Financial statements Share-based payment reserve Foreign exchange reserve Retained Earnings £000 £000 Total Equity £000 At 1 May 2018 - Restated1 Exercise of options Tax in respect of share options Share-based payment charge Transactions with owners Loss for the year Exchange differences on translation of foreign operations Total comprehensive loss Share Capital £000 Share Premium £000 3,019 176,400 12 - - 12 - - - 952 - - 952 - - - £000 4,545 (203) - 4,263 4,060 - - - (374) (33,412) 150,178 - - - - - 203 3,276 - 3,479 964 3,276 4,263 8,503 (54,861) (54,861) (95) - (95) (95) (54,861) (54,956) At 30 April 2019 3,031 177,352 8,605 (469) (84,794) 103,725 FOR THE YEAR ENDED 30 APRIL 2018 At 1 May 2017 as previously reported Effect of initial adoption of IFRS 152 At 1 May 2017 restated Issue of shares Cost of share issue charged to share premium account Exercise of options Tax in respect of share options Share-based payment charge Transactions with owners Loss for the year Exchange differences on translation of foreign operations Total comprehensive loss Share Capital Share Premium Share-based payment reserve £000 2,705 - 2,705 278 - 36 - - 314 - - - £000 74,901 - 74,901 99,722 (650) 2,427 - - 101,499 - - - £000 1,669 - 1,669 - - (582) - 3,458 2,876 - - - Foreign exchange reserve £000 116 - 116 - - - - - - - Restated1 Retained Earnings Restated1 Total Equity £000 (3,984) (1,228) (5,212) - - 582 1,295 - 1,877 £000 75,407 (1,228) 74,179 100,000 (650) 2,463 1,295 3,458 106,566 (30,077) (30,077) (490) - (490) (490) (30,077) (30,567) At 30 April 2018 - Restated 3,019 176,400 4,545 (374) (33,412) 150,178 1 See note 2.2 2 See note 31 Purplebricks Annual Report 2019 39 Financial statements COMPANY STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 APRIL 2019 At 1 May 2018 Exercise of options Tax in respect of share options Share-based payment charge Transactions with owners Loss for the year Total comprehensive loss Share Capital Share Premium £000 3,019 £000 176,400 12 - - 12 - - 952 - - 952 - - Share-based payment reserve Retained Earnings £000 4,545 (203) - 4,263 4,060 £000 3,339 203 3,277 - 3,480 Total Equity £000 187,303 964 3,277 4,263 8,504 - - (92,554) (92,554) (92,554) (92,554) At 30 April 2019 3,031 177,352 8,605 (85,735) 103,253 FOR THE YEAR ENDED 30 APRIL 2018 At 1 May 2017 as previously reported Effect of initial adoption of IFRS 152 At 1 May 2017 restated Issue of shares Cost of share issue charged to share premium account Exercise of options Tax in respect of share options Share-based payment charge Transactions with owners Profit for the year Total comprehensive loss Share-based payment reserve Restated1 Retained Earnings Restated1 Total Equity Share Capital Share Premium £000 2,705 £000 74,901 £000 1,669 2,705 74,901 1,669 278 - 36 - - 99,722 (650) 2,427 - - 314 101,499 - - - - - - (582) - 3,458 2,876 - - £000 2,194 (1,034) 1,160 - - 582 1,295 - 1,877 302 302 £000 81,469 (1,034) 80,435 100,000 (650) 2,463 1,295 3,458 106,566 302 302 At 30 April 2018 3,019 176,400 4,545 3,339 187,303 1 See note 2.2 2 See note 31 40 Purplebricks Annual Report 2019 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 APRIL 2019 Note 16 17 10 13 14 22 11 Loss for the year after taxation Adjustments for: Amortisation of intangible assets Depreciation Share-based payment charge Interest income Interest expense Fair value movement in respect of derivatives Share of result of joint venture Taxation Operating cash outflow before changes in working capital Movement in trade and other receivables Movement in trade and other payables Movement in deferred income Cash utilised in operations Taxation paid Interest paid Financial statements 2019 £000 (54,861) 3,704 822 4,263 (763) 50 (54) 536 (1,093) (47,396) (6,573) 4,944 1,024 (48,001) (1,036) (50) Restated1 2018 £000 (30,077) 1,256 425 3,458 (232) - (60) - 906 (24,324) (7,934) 8,441 7,473 (16,344) - - Net cash outflow from operating activities (49,087) (16,344) Investing activities Purchase of property, plant and equipment Development expenditure capitalised Purchase of intangible assets Interest income Investment in joint venture Acquisition of subsidiary net of cash acquired Net cash outflow from investing activities Financing activities Proceeds from issue of shares Costs of issue of shares Net cash inflow from financing activities Net (decrease)/increase in cash and cash equivalents Effect of foreign exchange rates Cash and cash equivalents at beginning of year 17 16 16 19 15a 23 (1,146) (2,606) (671) 763 (11,249) (27,290) (761) (2,292) (641) 232 - - (42,199) (3,462) 964 - 964 (90,322) 243 152,846 102,462 (650) 101,812 82,006 (490) 71,330 Cash and cash equivalents at the end of the year 62,767 152,846 The accompanying accounting policies and notes form an integral part of these f inancial statements. 1 See note 2.2 Purplebricks Annual Report 2019 41 Financial statements COMPANY STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 APRIL 2019 (Loss) / profit for the year after taxation Adjustments for: Amortisation of intangible assets Impairment of investments in subsidiaries and intercompany receivables Depreciation Share-based payment charge Interest income Fair value movement in respect of derivatives Taxation Operating cash inflow before changes in working capital Movement in trade and other receivables Movement in trade and other payables Movement in deferred income Cash inflow from operations Taxation received Net cash inflow from operating activities Investing activities Purchase of property, plant and equipment Development expenditure capitalised Purchase of intangible assets Acquisition of jointly controlled entity Loans to subsidiaries Interest income Investment in subsidiaries Acquisition of subsidiary Net cash outflow from investing activities Financing activities Proceeds from issue of shares Costs of issue of shares Net cash inflow from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of year Note 16 18 17 22 17 16 16 19 18 18 23 2019 £000 (92,554) 1,903 96,919 399 2,830 (760) (54) (182) 8,501 (3,262) 4,154 1,203 10,596 223 10,819 (468) (2,606) (94) (11,249) (59,251) 760 - (30,942) Restated1 2018 £000 302 975 - 313 2,369 (235) (60) 989 4,653 (3,190) 6,538 922 8,923 - 8,923 (491) (2,292) (633) - (9,793) 235 (18,018) - (103,850) (30,992) 964 - 964 (92,067) 149,684 102,462 (650) 101,812 79,743 69,941 Cash and cash equivalents at the end of the year 57,617 149,684 1 See note 2.2 42 Purplebricks Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS Financial statements The consolidated f inancial statements incorporate the results and f inancial position of the Company and entities controlled by the Company (its subsidiaries) made up to 30 April each year. Control is achieved when the Company: 1. General information has the power over the investee; Purplebricks Group plc (the Company) is a public company limited by shares which is listed on the Alternative Investment Market of the London Stock Exchange. The company is incorporated in the United Kingdom and registered in England and Wales. The address of the Company’s registered off ice is Suite 7, First Floor, Cranmore Place, Cranmore Drive, Shirley, Solihull, West Midlands, B90 4RZ. The Company is primarily involved in the estate agency business. On 2 July 2018 the Group acquired 100% of the share capital of 9059-2114 Quebec Inc., which heads a group of companies operating one of Canada’s leading commission-f ree real estate brands, DuProprio, giving the Group an established presence in a new market. For the year ending 30 April 2019 the following subsidiaries of the Company were entitled to exemption f rom audit under s479A of the Companies Act 2006 relating to subsidiary companies. Subsidiary Name: BFL Property Management Limited Companies House Registration Number: 06734084 The principal activities of the Company and its subsidiaries (the Group) and the nature of the Group’s operations are set out in the strategic report on pages 6 to 21. These f inancial statements are presented in British Pounds, which is the currency of the primary economic environment in which the Company operates and are rounded to the nearest £000. Foreign operations are included in accordance with the policies set out in note 2. 2. Summary of significant accounting policies 2.1 BASIS OF PREPARATION AND CONSOLIDATION is exposed, or has rights, to variable returns f rom its involvement with the investee; and has the ability to use its power to affects its returns. The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Specif ically, the results of subsidiaries acquired or disposed of during the year are included in prof it or loss f rom the date the Company gains control until the date when the Company ceases to control the subsidiary. Prof it or loss and each component of other comprehensive income are attributed to the owners of the Company and to the non-controlling interests. Total comprehensive income of the subsidiaries is attributed to the owners of the Company and to the non-controlling interests even if this results in the non- controlling interests having a def icit balance. Where necessary, adjustments are made to the f inancial statements of subsidiaries to bring the accounting policies used into line with the Group’s accounting policies. All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between the members of the Group are eliminated on consolidation. Prof it or loss and each component of other comprehensive income are attributable to the owners of the Company. Total comprehensive income of the subsidiaries is attributable to the owners of the Company. Accounting policies of subsidiaries which differ f rom Group accounting policies are adjusted on consolidation. All intra- group transactions, balances, income and expenses are The Group and Company f inancial statements have been eliminated on consolidation. prepared in accordance with International Financial Reporting Standards (IFRS Standards). The f inancial statements have also 2.2 RESTATEMENT been prepared in accordance with IFRS Standards adopted by the European Union and therefore the Group f inancial statements comply with Article 4 of the EU IAS Regulation. The Company has taken advantage of section 408 of the Companies Act and not included its own income statement in Following the adoption of IFRS 15 Revenue f rom Contracts with Customers, the Group has restated the statement of comprehensive income, the statement of f inancial position, the statement of cash flows and the statement of changes in equity. More information of the impact of this are set out in these f inancial statements. notes 2.4.1 and note 31. The consolidated f inancial statements have been prepared Prior period error under the historical cost convention as modif ied by f inancial instruments recognised at fair value. In the current period, the Group and Company has reclassif ied cash flows relating to interest income in the statement of cash flows. In the prior period, this cash flow was reflected within Purplebricks Annual Report 2019 43 Financial statements cash flow f rom f inancing activities. As interest income arises on on a net basis, after deducting fees. As no cash flows arise f rom funds held on deposit, this is presented within cash flow f rom these transactions, because the costs charged by the factor are investing activities. deducted f rom the gross payment, the cash flows have been removed f rom the statement of cash flows. In addition to this, the Group and Company has reclassif ied cash flows relating to debt factoring f inance costs in the In the current period the company has reclassif ied cash flows statement of cash flows. In the prior period, these cash in respect of loans to subsidiaries in the statement of cash flows had been presented within cash flows f rom f inancing flows. In the prior period, these cash flows were presented activities. Receivables are sold at a discount to face value on within cash flows resulting f rom movements in trade and other non-recourse terms, with the discount representing the costs receivables and payables. charged by the factor. The factor settles the debt to the Group Extract from statements of cash flows GROUP 2018 COMPANY 2018 Operating cash (outflow)/inflow before changes in working capital previously reported Increase in the loss before tax due to adoption of IFRS 15 (see note 31) Decrease due to removing the adjustment for debt factoring finance costs Operating cash (outflow)/inflow before changes in working capital (restated) Cash flows from investing activities previously reported Reclassification of interest income from cash flows from financing activities Reclassification of loans to subsidiaries Cash flows from investing activities (restated) Cash flows from financing activities previously reported Increase due to removal of cash outflows from debt factoring finance costs Reclassification of interest income to cash flows from investing activities Cash Flows from financing activities (restated) £000 (19,589) (3,011) (1,724) (24,324) (3,694) 232 - (3,462) 100,320 1,724 (232) 101,812 £000 8,351 (1,974) (1,724) 4,653 (21,434) 235 (9,793) (30,992) 100,323 1,724 (235) 101,812 2.3 GOING CONCERN An explanation of how the Group has applied IFRS 15, including the judgements taken in the application of the standard, is The f inancial statements have been prepared on the going set out below. concern basis. The directors have prepared a monthly forecast to August 2020, which on the basis of the assumptions made, IFRS 15 establishes a comprehensive f ramework for shows that the Group and parent company can operate with determining whether, how much and when revenue is its existing resources. The Group’s forecasts and projections, recognised. It has replaced IAS 18 Revenue. As the overall taking account of reasonably possible changes in trading value of the adjustments on adoption of IFRS 15 to the Group’s performance that may arise as a result of current economic previously reported results is signif icant, in order to ensure conditions and other risks faced by the Group show that the comparability of current period reported results against the parent is likely to continue being cash generative during the restated results of comparative periods, the Group has adopted year ending April 2020 and to August 2020, partially offsetting the standard using the fully retrospective method, with the net cash consumption by the Group’s international operations effect of initially applying the standard recognised at the and by the costs of closing the Group’s US and Australia beginning of the comparative period, ie 1 May 2017. business as set out in note 30. Accordingly, the information presented for the year to 30 April Accordingly, the directors believe that it is appropriate to 2018 has been restated. adopt the going concern basis of accounting in preparing the f inancial statements. The effect of initially applying this standard mainly 2.4 NEW ACCOUNTING STANDARDS ADOPTED IN THE YEAR 2.4.1 Implementation of IFRS 15 Revenue from Contracts with Customers Revenue recognition arises f rom: later recognition of instruction fee revenue, and associated cost of sales, following identif ication of the relevant performance obligations and when and how revenue relating to these is allocated and recognised, earlier recognition of revenue f rom Conveyancing referrals and Brokerage activities, and associated cost of The Group has adopted IFRS 15 Revenue f rom Contracts with sales, following assessment of the relevant performance Customers in these f inancial statements. obligations and when and how revenue relating to these is recognised. Please see the tables set out at note 31 for further information. 44 Purplebricks Annual Report 2019 Financial statements Table 1 summarises the impact of transition to IFRS 15 on The Group has taken the judgement that all of the services retained earnings at 1 May 2017. which are provided in exchange for the instruction fee and, where relevant, fees for additional services, represent a single Tables 2a and 2b summarise the impact of adopting IFRS 15 on Performance Obligation which is the provision of estate agency the Group’s previously reported statement of comprehensive services. The reason for this is that the service of listing for income for the year ended 30 April 2018. sale and these additional services are highly interrelated, are dependent on each other and cannot be purchased separately Tables 3a, 3b and 3c summarise the impact of adopting IFRS by customers, or purchased at all unless those customers have 15 on the Group’s previously reported statement of f inancial instructed the Group to list their property for sale. position for the years ended 30 April 2018 and 30 April 2017. Table 4 summarises the impact of adopting IFRS 15 on the for each contract of this type is attributable to this single Group’s previously reported earnings per share for the year Performance Obligation and is recognised as the services as a Although the services are priced separately, the overall revenue ended 30 April 2018. whole are provided. Revenue is recognised on an output basis over time, as the estate agency services are performed. This Table 5 summarises the impact of adopting IFRS 15 on the method reflects the fact that the customer receives benef it Group’s previously reported brokerage and lettings revenue for f rom the Group’s performance as the service is provided to the the year ended 30 April 2018. customer. The Group has assessed that the starting point for provision of service is the customer’s instruction to the Group, Table 6 summarises the impact of adopting IFRS 15 on the and the ending point is either the completion of sale or the Group’s previously reported consolidated statement of cash customer’s decision to withdraw f rom sale. flows for the year ended 30 April 2018. Tables 7a and 7b summarise the impact of transition to IFRS 15 revenue f rom instructions is the length of the period over on the Company statement of f inancial position as at 30 April which estate agency services are performed. The Group utilises A key estimate within the Group’s accounting policy for 2018 and 30 April 2017. analysis of historical data to ascertain the length this period, which covers both a marketing period and a post sales support The details of the new signif icant accounting policies and period. If the length of the average service period increased by the nature of the changes to previous accounting policies in 5%, then there would be a corresponding decrease in revenue relation to the Group’s various services are set out below. Under of £0.7 million for the year to 30 April 2019. IFRS 15, revenue is recognised when control of the services passes to the customer. The Group is required to use Costs associated with Instructions revenue include judgement in determining the timing of the transfer of control commissions paid to the Group’s LPEs. This commission is due – at a point in time or over time – for each service type. at listing of the advertisement for sale. Therefore, these costs are prepaid over the average service period. These costs are Contracts with customers reported within prepayments. The Group has identif ied the following signif icant categories of Australian Model contracts with customers: Instructions (“a”) Conveyancing (“b”) Brokerage (“c”) Lettings – landlord setup services (“d”) Lettings – monthly management services (“e”) The adjustments arising on the adoption of IFRS 15 in respect of categories “a” and “b” are set out in the tables at the end of this note. As the adjustments arising on categories “c”, “d” and “e” are not material, they have been presented together in an “Other” category in these tables. Instructions (“a”) The Group is entitled to an instruction fee at the point at which a property is listed for sale. The Group offers a number of additional services to customers who list their properties for sale, including accompanied viewings and premium portal listings, which are typically charged for at the same time as the instruction. Most services (for example, advice on property sales strategy) are provided before the listing of the property advertisement. Some services (for example post sales support) are only provided to those customers who accept an offer for their property. During the year ended 30 April 2019, the Group’s Australian business has introduced a revised business model under which the instruction fee is split into two elements. These elements are (i) an upf ront fee, which is non-refundable and which is recognised over time on an input basis, and (ii) a success fee, which is due only on settlement of a successful sale of the property. Each fee is in respect of the performance obligation to provide estate agency services. Variable consideration in respect of the success fee is recognised over time on an input basis as the Group fulf ils its performance obligation, over the expected service period, at the fair value of expected consideration receivable. The expected fair value of consideration received is estimated based on historical experience. The Group monitors the rate of sales of properties marketed at each reporting date, in order to restrict the revenue recognised under this method to an amount at which it is highly probable that reversal will not occur. Purplebricks Annual Report 2019 45 Financial statements US Model for the Group to recognise as revenue only the referral fee earned f rom the third party partner, which is the customer During the year ended 30 April 2019, the Group US business of the Group. introduced a revised business model under which the up f ront instruction fee is no longer required, with payment due only on settlement of a successful sale of the property. The success fee is recognised when a sale is unconditionally agreed. Previous accounting policy and impact of adoption of IFRS 15 Under the Group’s previous accounting policy, conveyancing referral fees were recognised at the completion of the property Previous accounting policy and impact of adoption of IFRS 15 sales that would give rise to them, ie when the receipt of each individual fee due became certain. Under the Group’s previous accounting policy, instruction fees were recognised as the Group’s obligations were Therefore, on adoption of IFRS 15, the amount of reported completed. Instruction fee revenue was allocated to accrued income has increased, and the amount of reported obligations occurring before listing and obligations after revenue has also increased. The amount of accrued cost listing. A signif icant proportion of the obligations, based on an of sales, which will become payable on completion of the assessment using an input method occurred prior to listing, transaction and which are reported within accruals, has and therefore a signif icant portion of the total transaction price increased. The impact of the relevant adjustments is shown was recognised at or before listing. within the tables below. Therefore, on adoption of IFRS 15, the amount of reported The impact on reported revenue for the year ended 30 April deferred income in respect of instruction fees has increased, 2018 is show in the table below. and the amount of reported revenue has decreased. The amount of prepaid cost of sales recognised as an asset in the statement of f inancial position has increased, and the amount of reported costs of sales has decreased. The impact of the relevant adjustments is shown within the tables below. The impact on reported revenue the year ended 30 April 2018 is show in the table below. Year ended 30 April 2018 Instruction revenue as previously reported Impact of adoption of IFRS 15 Instruction revenue as restated Conveyancing (“b”) £000 66,597 (6,301) 60,296 Year ended 30 April 2018 Conveyancing revenue as previously reported Impact of adoption of IFRS 15 Instruction revenue as restated £000 15,414 152 15,566 Brokerage (“c”) The Group also provides, in the US and in parts of Canada, Buyside brokerage and Escrow services. These services are provided to customers who are both sellers and buyers of residential properties, with the performance obligation in each case being to assist the customer in bringing the transition to a successful conclusion. Revenue, in the form of commission, becomes due in respect of these transactions on successful Where the Group introduces sellers and buyers of properties completion of a property sale. to one of the Group’s third party partners for conveyancing services, the Group earns commission for these referrals, which Customers receive benef it f rom the Group’s services as is due at completion of the property transaction. they are performed over time between an instruction to act on the customer’s behalf and completion of the property In respect of Conveyancing revenue, the Group’s Performance transaction. Therefore revenue in respect of these services is Obligation is to make the referral to the Group’s third party recognised under IFRS 15 over time on a straight line basis partners. Following that referral, the involvement of the Group as the Group fulf ils its performance obligation. Revenue is in the conveyancing process is incidental. recognised at the fair value of the expected consideration which will be receivable, taking into account historical Therefore, the Group recognises revenue on completion of its transaction completion rates. The fair value of consideration Performance Obligation, at the point of referral. Revenue is is a key estimate and therefore the Group monitors the rate recognised at the expected value of the consideration which of sales of properties marketed at each reporting date, in will become due at completion as determined at the point of order to restrict the revenue recognised under this method referral, calculated by reference to historical data in respect of to an amount at which it is highly probable that reversal sale completion rates. The Group monitors the conversion of will not occur. cases referred at each reporting date, in order to restrict the revenue recognised under this method to an amount at which it is highly probable that reversal will not occur. As part of the Group’s work on the adoption of IFRS 15, the Group’s relationship with its customers in respect of Conveyancing revenue has been re-assessed with a view to conf irming whether the Group is principal or agent in the underlying transactions. The Group’s view remains that, as previously, it is acting as an agent of the third party partner which contracts directly with the seller of the property and which invoices that seller directly. Therefore it is appropriate Previous accounting policy and impact of adoption of IFRS 15 Under the Group’s previous accounting policy, brokerage and escrow fees were recognised at completion of the underlying property sales. Therefore, on adoption of IFRS 15, the amount of reported accrued income has increased, and the amount of reported revenue has also increased. The amount of accrued cost of sales, which will become payable on completion of the 46 Purplebricks Annual Report 2019 Financial statements transaction and which are reported within accruals, has In respect of fees charged to landlords in exchange for the increased. The impact of the relevant adjustments is shown ongoing management of their rental properties the Group’s within the tables below . performance obligation is to provide management services over a period of time. There is no change under IFRS 15 to the The impact on reported revenue for the year ended 30 April Group’s previous accounting policy of recognising these fees 2018 is show within “other” revenue in table 5 in note 31. over the period of the tenancy. Lettings landlord setup services (d) 2.4.2 IMPLEMENTATION OF IFRS 9 In respect of contracts with prospective landlords to list Financial Instruments their property to let, the Group’s performance obligation is to provide a series of services aimed at identifying a suitable The Group adopted IFRS 9 Financial Instruments on 1 May 2018. tenant for the landlord’s property. These services include preparation of an advertisement to let and later support The adoption of IFRS 9 has had no impact on the services. Fees charged to landlords in exchange for identifying Group’s statement of f inancial position or results as a tenant for their rental property become due to the Group at previously disclosed. tenant move in. The change of moving f rom a historical credit loss model to an The Group has taken the judgement that all elements of the expected credit loss model for calculating bad debt provisions advertisement service and other support services provided had no material impact on the f inancial statements. represent a single Performance Obligation related to the identif ication of a suitable tenant who then moves into the 2.5 FUNCTIONAL AND PRESENTATION CURRENCY property. This Performance Obligation is the provision of Landlord Setup Services. The Group has taken the judgement The individual f inancial statements of each group company that an expected value of consideration which will become are presented in the currency of the primary economic due for the Services can be determined using historical data environment in which it operates (its functional currency). For regarding the proportion of successful tenant move ins and the purposes of the consolidated f inancial statements, the therefore that revenue can be reliably estimated before results and f inancial position of each group company are tenant move in. expressed in GBP, which is the functional currency of the Company, and the presentation currency for the Group. All revenue is therefore attributable to this single Performance Obligation. This revenue is recognised over time on a straight 2.6 FOREIGN CURRENCIES line basis between the instruction to list the property to let and tenant move in, as the customer receives the benef its of the Exchange differences arising on the settlement of monetary Landlord Setup Services are performed. items, and on the retranslation of monetary items, are included Costs associated with Landlord Setup Services revenue include arising on the retranslation of non-monetary items carried commissions paid to the Group’s Local Lettings Experts at fair value are included in the income statement for the (“LLEs”). This commission is due at tenant application, which period except for differences arising on the retranslation of is towards the end of the process. Therefore, these costs are non-monetary items in respect of which gains and losses are accrued over the period over which Landlord Setup Services are recognised directly in equity. For such non-monetary items, provided. These costs are reported within deferred income. any exchange component of that gain or loss is also recognised in the income statement for the period. Exchange differences Previous accounting policy and impact of adoption of IFRS 15 directly in equity. Under the Group’s previous accounting policy, Landlord Setup fees were recognised only at tenant move in when consideration in respect of each individual contract became certain. Therefore, on adoption of IFRS 15, the amount of reported accrued income has increased, and the amount of reported revenue has increased. The impact of the relevant adjustments revenue for the year ended 30 April 2018 is shown within “Other” revenue in table 5 in note 31. Lettings monthly management services (e) The Group also enters into contracts with landlords to provide rent collection and other tenant management services. Fees charged to landlords in exchange for the ongoing management of their rental properties become due to the Group monthly in arrears over the period of the tenancy. 2.7 FOREIGN EXCHANGE ON CONSOLIDATION On consolidation, assets and liabilities of undertakings whose functional currency is other than sterling are translated into sterling at the year end exchange rates. The results of these undertakings are translated into sterling at average rates of exchange for the year. Exchange differences arising on retranslation are recognised through other comprehensive income in the foreign exchange reserve. 2.8 SEGMENTAL REPORTING The Group trade is managed as a single division, providing services relating to the sale and letting of properties. However, management report to the Board, being the Chief Operating Decision Maker, using geographical segments being UK, Australia, USA and Canada. The f inancial information reviewed by the Board is materially the same as that reported under IFRS. Purplebricks Annual Report 2019 47 Financial statements 2.9 PENSION BENEFITS The Group operates def ined contribution pension Depreciation is calculated to write off the cost of property, plant and equipment less the estimated residual value on a straight- line basis over the expected useful economic life of the assets arrangements and accounts for employer pension contribution concerned. Estimated residual values are revised annually. expenses on an accruals basis. 2.10 TAXATION Current tax The useful lives over which these assets are depreciated are: Computer equipment – over 3 years Motor vehicles – over 3 years Fixtures and f ittings – over 5 years Tax expense recognised in prof it or loss comprises the sum of deferred tax and current tax not recognised in other 2.12 INVESTMENTS IN SUBSIDIARIES comprehensive income or directly in equity. Current income tax assets and liabilities comprise those obligations to, or claims The Company’s investments in subsidiaries are stated at cost f rom, f iscal authorities relating to the current or prior reporting less any provision for impairment. periods that remain unpaid at the reporting date. Current tax is payable on taxable prof it, which differs f rom prof it or loss in 2.13 JOINT VENTURES the f inancial statements. Calculation of current tax is based on tax rates and tax laws that have been enacted or substantively Under IFRS 11 Joint Arrangements, investments in joint enacted by the end of the reporting period. Repayable tax arrangements are classif ied as either joint operations or joint credits relating to research and development expenditure ventures. The classif ication depends on the contractual rights arising under the HMRC R&D regime for small and medium and obligations of each investor rather than the legal structure sized businesses are recognised within current tax. of the joint arrangement. During the year the Group has entered into a joint venture in respect of Homeday as described Deferred tax earlier in the report. Deferred income taxes are calculated using the liability method The Group’s interests in joint ventures are accounted for using on temporary differences between the carrying amounts of the equity method, after initially being recognised at cost in assets and liabilities and their tax bases. However, deferred the consolidated balance sheet. tax is not provided on the initial recognition of goodwill or on the initial recognition of an asset or liability unless the Under the equity method of accounting, investments are related transaction is a business combination or affects tax or initially recognised at cost and adjusted thereafter to recognise accounting prof it on initial recognition. Deferred tax assets and the group’s share of the post-acquisition prof its or losses of the liabilities are calculated, without discounting, at tax rates and investee in prof it or loss, and the Group’s share of movements laws that are expected to apply to their respective period of in other comprehensive income of the investee in other realisation, provided those rates are enacted or substantively comprehensive income. Dividends received or receivable f rom enacted by the end of the reporting period. associates and joint ventures are recognised as a reduction in the carrying amount of the investment. Deferred tax assets are recognised to the extent that it is foreseeable that the underlying tax loss or deductible When the Group’s share of losses in an equity-accounted temporary difference will be able to be utilised against future investment equals or exceeds its interest in the entity, taxable income. This is assessed based on the Group’s forecast including any other unsecured long-term receivables, the of future operating results, adjusted for signif icant non-taxable Group does not recognise further losses, unless it has incurred income and expenses and specif ic limits on the use of any obligations or made payments on behalf of the other entity. unused tax loss or credit. Unrealised gains on transactions between the group and its Deferred tax liabilities are always provided for in full, deferred associates and joint ventures are eliminated to the extent of tax assets and liabilities are offset only when the Group has a the Group’s interest in these entities. Unrealised losses are right and intention to set off current tax assets and liabilities also eliminated unless the transaction provides evidence of an f rom the same taxation authority. Changes in deferred tax impairment of the asset transferred. assets or liabilities are recognised as a component of tax income or expense in prof it or loss, except where they relate The carrying amount of equity-accounted investments, which to items that are recognised in other comprehensive income are held at cost in the Company, is tested for impairment in or directly in equity, in which case the related deferred tax accordance with the policy described in note 2.19. is also recognised in other comprehensive income or equity, respectively. 2.14 BUSINESS COMBINATIONS AND GOODWILL 2.11 PROPERTY, PLANT AND EQUIPMENT Acquisitions of subsidiaries are accounted for using the Property, plant and equipment are held at cost less accumulated depreciation and impairment charges. acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interest issued by the 48 Purplebricks Annual Report 2019 Financial statements Group in exchange for control of the acquiree. Acquisition- All other leases are treated as operating leases. Payments related costs are recognised in the income statement under operating lease agreements are recognised as an as incurred. expense on a straight line basis over the period of the lease. Associated costs, such as maintenance and insurance, are At the acquisition date, the identif iable assets acquired and expensed as incurred. The Group does not act as a lessor. the liabilities assumed are recognised at their fair value at the acquisition date, except that: See Note 4 for a description of the new leasing standard IFRS 16 which will be adopted in next year’s f inancial statements. deferred tax assets or liabilities and assets or liabilities related to employee benef it arrangements are recognised 2.16 CASH AND CASH EQUIVALENTS and measured in accordance with IAS 12 Income Taxes and IAS 19 Employee Benef its respectively; Cash and cash equivalents comprise cash in hand together liabilities or equity instruments related to share-based subject to any risk of changes in value. payment arrangements of the acquiree or share-based payment arrangements of the Group entered into to replace 2.17 INTERNALLY DEVELOPED INTANGIBLE ASSETS with other short-term, highly liquid deposits which are not share-based payment arrangements of the acquiree are measured in accordance with IFRS 2 Share-Based Payments Expenditure on research activities is recognised as an expense at the acquisition date (see below); and in the period in which it is incurred and is only incurred in assets (or disposal groups) that are classif ied as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale An internally generated intangible asset arising f rom the and Discontinued Operations are measured in accordance Group’s development activity is recognised in the statement with that Standard. of f inancial position when the Group can demonstrate respect of the Group’s software platform. If the initial accounting for a business combination is the following: incomplete by the end of the reporting period in which the the technical feasibility of completing the intangible asset so combination occurs, the Group reports provisional amounts that it will be available for use or sale. for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement its intention to complete the intangible asset and use or sell it. period (see above), or additional assets or liabilities are recognised, to reflect new information obtained about facts its ability to use or sell the intangible asset. and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognised as how the intangible asset will generate probable future of that date. economic benef its. Goodwill is measured as the excess fair value of the the availability of adequate technical, f inancial and other consideration transferred over the fair value of the identif iable resources to complete the development and to use or sell the net assets acquired. If the total of consideration transferred, intangible asset. and previously held interest measured at fair value, is less than the fair value of the net assets of the subsidiary acquired, the its ability to measure reliably the expenditure attributable to difference is recognised directly in prof it or loss as a bargain the intangible asset during its development. purchase gain. Goodwill is separately disclosed as an intangible asset and intangible assets is the sum of the expenditure incurred f rom is not amortised but tested for impairment annually and the date when the intangible asset f irst meets the recognition when there are any indications that its carrying value is criteria listed above. Where no internally-generated intangible not recoverable. As such, goodwill is stated at cost less any asset can be recognised, development expenditure is provision for impairment in value. For impairment testing recognised in prof it or loss in the period in which it is incurred. The amount initially recognised for internally-generated purposes, goodwill is allocated to cash-generating units (‘CGUs’). If a subsidiary undertaking is subsequently sold, Subsequent to initial recognition, internally-generated goodwill arising on acquisition is taken into account in intangible assets are reported at cost less accumulated determining the prof it or loss on sale. amortisation and accumulated impairment losses, on the same 2.15 LEASES In accordance with IAS 17, the economic ownership of a leased asset is transferred to the lessee if the lessee bears substantially all the risks and rewards related to the ownership of the leased asset. The related asset is recognised at the time of the inception of the lease at the fair value of the leased asset or, if lower, the present value of the lease payments plus incidental payments, if any to be borne by the lessee. basis as intangible assets that are acquired separately. The useful lives over which these assets are amortised are: Computer software – straight line over 3 years Capitalised software – straight line over 3 years Amortisation is included within administrative expenses. Purplebricks Annual Report 2019 49 Financial statements 2.18 INTANGIBLE ASSETS ACQUIRED IN A BUSINESS COMBINATION Financial assets Intangible assets acquired in a business combination and amortised cost using the effective interest method, less recognised separately f rom goodwill are initially recognised provision for impairment. The Group’s trade and other at their fair value at the acquisition date (which is regarded as receivables fall into this category of f inancial instruments. The Group has f inancial assets which are measured at their cost). See note 15 for details of such acquisitions. Subsequent to initial recognition, intangible assets acquired expected credit losses on trade receivables are by reference to in a business combination are reported at cost if appropriate past default experience of the debtors and an analysis of the less accumulated amortisation and accumulated impairment debtors’ current f inancial position, adjusted for factors that losses, on the same basis as intangible assets that are are specif ic to the debtors, general economic conditions of The Group applies the IFRS 9 expected credit loss model. The acquired separately. the industry in which the debtors operate and an assessment of both the current as well as the forecast conditions at the The useful lives over which these assets are amortised are: reporting date. customer relationships – straight line over 5 years For trade and other receivables, the amount of credit loss patents and trademarks – straight line over 18 months amount and the present value of estimated future cash flows is measured as the difference between the asset’s carrying certain intangible assets, such as brands, are deemed to have rate. The carrying amount of the asset is reduced and the an indef inite life, held at cost and not amortised but rather amount of the loss is recognised in prof it or loss. discounted at the f inancial asset’s original effective interest tested annually for impairment. 2.19 IMPAIRMENT If, in a subsequent period, the amount of the impairment loss decreases, the reversal of the previously recognised impairment loss is recognised in prof it or loss. The carrying amount of the Group’s assets including property, plant and equipment and intangibles is reviewed Impairment testing of trade receivables is described in note 20. at each year end date to determine whether there is any indication of impairment. If any such indication exists, the Credit risk management - Sale of receivables asset’s recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an Receivables f rom customers who elect to pay later for services asset or its cash-generating unit exceeds its recoverable rather than pay up-f ront are initially recognised at the amount. Impairment losses are recognised in prof it or loss. transaction price, which is approximate to fair value under a held for sale business model. Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to In order to manage both liquidity requirements and credit the revised estimate of its recoverable amount, but so that risk in the UK and Australia, the Group operates committed the increased carrying amount does not exceed the carrying facilities with a third party f inance house, whereby customer amount that would have been determined had no impairment receivables in respect of customers who utilise the Group‘s loss been recognised for the asset (or cash-generating unit) “pay later” option are sold immediately to the f inance in prior years. A reversal of an impairment loss is recognised house. The receivables are sold at a discount to face value on in prof it or loss where it relates to an amount charged to non-recourse terms, and the discount retained by the f inance prof it or loss. 2.20 FINANCIAL INSTRUMENTS house represents its fee for administering the collection of receivables. There are thresholds built into the facility agreement which allow the fee/discount to be revised upwards or downwards on a prospective only basis (i.e. in relation to Financial assets and f inancial liabilities are recognised in the the sale of receivables arising in the future) if actual credit and Group’s balance sheet when the Group becomes a party to the funding cost experience differs signif icantly f rom the initial contractual provisions of the instrument. assumptions that were used to set the fee. Financial assets and f inancial liabilities are initially measured At the point of sale of receivables to the factor the difference at fair value. Transaction costs that are directly attributable between fair value and sale price is charged to the income to the acquisition or issue of f inancial assets and f inancial statement as f inance expense. Receivables due f rom the liabilities (other than f inancial assets and f inancial liabilities factor are measured at amortised cost under a held to collect at fair value through prof it or loss) are added to or deducted business model and assessed for impairment under the f rom the fair value of the f inancial assets or f inancial liabilities, expected loss model. as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of f inancial assets or f inancial Outside of the UK and Australia, the Group does not sell on its liabilities at fair value through prof it or loss are recognised receivables and therefore bears credit risk and needs to assess immediately in prof it or loss. See note 26 for further details. expected credit losses. Credit risk refers to the risk that the counterparty will default on its contractual obligations resulting in f inancial loss to the Group. The Group’s credit risk is primarily attributable to its 50 Purplebricks Annual Report 2019 Financial statements trade receivables. As discussed under “Sale of Receivables” 2.21 SHARE-BASED PAYMENTS above, credit risk is managed in the UK via a non-recourse receivable sale arrangement and a similar arrangement applies The Group operates an equity settled share option programme in Australia. In the US, at present the Group manages “pay which allows employees and LPEs to acquire shares of the later” receivables itself by monitoring the aggregate amount Company. The fair value of options granted is recognised as and duration of exposure to any one customer. an income statement expense with a corresponding increase in equity. The fair value is measured using the Black-Scholes The credit risk on liquid funds is minimised because the model at grant date. The expense is allocated over the vesting counterparties are UK banks with high credit-ratings assigned period of each tranche of options granted. The relevant by international credit-rating agencies. deferred tax amount is calculated at each reporting date over the vesting period equivalent to the expected tax deduction on The Group applies the IFRS 9 simplif ied approach to measuring future exercise, and is recognised if appropriate (see deferred expected credit losses which uses a lifetime expected loss tax accounting policy note). Expense in respect of options allowance for all trade receivables which are not subject to the granted to employees of subsidiaries of the Company is debited receivable sale arrangement. to the cost of investment of the subsidiary by which they are employed. An element of the share-based payment cost of UK Trade receivables across the Group have been assessed with based employees who perform Group roles is allocated to and regard to credit risk characteristics which vary f rom country to recharged to the overseas entities, on a similar basis to salary country and according to the nature of the counterparty. The and other related costs. Group also considers days past due in making this assessment as well as historical credit losses experienced within over a 2.22 SHARE-BASED PAYMENTS RESERVE period of 12 months before 30 April 2019. The expected loss rates derived f rom the assessment described recognised in prof it or loss in relation to equity-settled options, above are adjusted to reflect current and forward-looking net of transfers of charge on exercise of options to the prof it information affecting the ability of the customers to settle the and loss reserve. This comprises the cumulative share-based payment charge receivables. Financial liabilities and equity Debt and equity instruments are classif ied as either f inancial liabilities or as equity in accordance with the substance of the contractual arrangement. Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities. Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. The only equity instrument applicable to the Company is its issued share capital. Derivative financial instruments The Group uses derivative f inancial instruments to manage its exposure to foreign exchange rate risk via foreign exchange forward contracts. Further details of derivative f inancial instruments are disclosed in note 22. Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair value at each balance sheet date. The resulting gain or loss is recognised in prof it or loss immediately. A derivative with a positive fair value is recognised as a f inancial asset whereas a derivative with a negative fair value is recognised as a f inancial liability. A derivative is presented as a non-current asset or a non-current liability if the remaining maturity of the instrument is more than 12 months and it is not expected to be realised or settled within 12 months. Other derivatives are presented as current assets or current liabilities. 3. Critical accounting estimates and judgements In the application of the Group’s accounting policies, the directors are required to make judgements (other than those involving estimations) that have a signif icant impact on the amounts recognised and to make estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent f rom other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ f rom these estimates. The estimates and underlying assumptions 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. Estimates The key assumptions concerning the future, and other key sources of estimation uncertainty at the reporting period that may have a signif icant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next f inancial year, are discussed below. 3.1 MEASUREMENT OF INTANGIBLE ASSETS The Group recognises an intangible asset in respect of software developed in house. This software is a key part of the Group’s operating model and value proposition. Management are required to estimate the time and related value attributable to the element of the development team that relates to Purplebricks Annual Report 2019 51 Financial statements developing intangible assets which meet the criteria for of the forecast period taken into account and the scale of the capitalisation in IAS 38. Because the amounts spent on the downside reduction applied, at the extreme, the amount of the development team are material, a signif icant change in this recognised deferred tax asset could range f rom 0% to 100% of estimate could have a signif icant effect on the value of costs the balance recognised being £7,120,000. capitalised. The impact of a change to this estimate could result, at the most extreme, in a -7% or +5% change to adjusted 3.4 REVENUE RECOGNITION operating costs for this year ended. Further details are included at note 16. 3.2 IMPAIRMENT In relation to instruction revenue which is recognised over time, the Group estimates the average period taken f rom instruction to completion. This estimate directly impacts the period over which revenue is recognised. Determining whether the carrying value of goodwill, investments or intercompany balances are below their The terms of the UK’s departure f rom the EU following the recoverable value and therefore impaired requires an referendum in 2016 (‘Brexit’) remain uncertain, and could have estimation of the value in use of the cash-generating units to an impact on the UK property market. This could impact the which value has been allocated. The value in use calculation time taken to sell properties in the UK market, which would requires the entity to estimate the future cash flows expected impact the timing of revenue recognition for the Group. Due to arise f rom the cash-generating unit and to apply a to the uncertainty of the impact of Brexit on the wider UK suitable discount rate in order to calculate present value. The economy, it is impractical to determine the impact on the assumptions and sensitivities applied by management in timing of revenue recognition in the UK business at the date of determining whether there is any impairment are set out in this report. notes 15, 16 and 20. Judgements 3.3 MEASUREMENT OF DEFERRED TAX ASSETS The Group has potential deferred tax assets, principally in the involving estimations (which are presented separately above), form of tax losses and potential tax deductions relating to the that the directors have made in the process of applying the exercise of share-based payments, but deferred tax assets Group’s accounting policies and that have the most signif icant are only recognised to the extent it is probable that suff icient effect on the amounts recognised in f inancial statements. The following are the critical judgements, apart f rom those future taxable income will be available against which the losses and deductions can be utilised. The issue of estimation 3.5 REVENUE RECOGNITION in respect of deferred tax assets, therefore, relates to the uncertainty inherent in forecasting future taxable prof its in The Group provides services for instruction fees, including each territory. The decision to recognise deferred tax assets, has fees receivable up f ront and fees receivable at completion of been made after taking into account forecasts of future taxable sale. The Group has taken a judgement that under IFRS 15 the prof its sensitised for downside risk. If our view of future taxable performance obligation relating to these fees is discharged prof its were to change materially in future, either positively over time (between instruction and completion) rather than or negatively, then this could have a material impact on the at a point in time. Further detail is set out in the revenue income statement credit or charge. Depending on the length recognition policy above. 4. New and revised IFRSs in issue but not yet effective At the date of authorisation of these f inancial statements, certain new standards, amendments and interpretations to existing standards have been issued but are not yet effective and have not been applied early by the Group. Management anticipates that the following pronouncements relevant to the Group’s operations will be adopted in the Group’s accounting policies for the f irst period beginning after the effective date of the pronouncement, once adopted by the EU: Amendments to IFRS 9 Prepayment Features with Negative Compensation Amendments to IAS 28 Long-term Interests in Associates and Joint Ventures Annual Improvements to IFRS Standards 2015 - 2017 Cycle Amendments to IFRS 3 Business Combinations, IFRS 11 Joint Arrangements, IAS 12 Income Taxes and IAS 23 Borrowing Costs Amendments to IAS 19 Employee Benefits Plan Amendment, Curtailment or Settlement IFRS 10 Consolidated Financial Statements and IAS 28 (amendments) Sale or Contribution of Assets between an Investor and its Associate or Joint Venture IFRIC 23 IFRS 16 Uncertainty over Income Tax Treatments Leases 52 Purplebricks Annual Report 2019 Financial statements IFRS 16 Leases (effective 1 January 2019) Nature of change is set out below. The Group believes that these measures, which are not considered to be a substitute for or superior to IFRS measures, provide stakeholders with helpful additional information on the underlying performance of the Group. IFRS 16 was issued in January 2016. It will result in almost all leases being recognised on the balance sheet by lessees, Adjusted EBITDA as the distinction between operating and f inance leases is removed. Under the new standard, an asset (the right to Def inition use the leased item) and a f inancial liability to pay rentals are recognised on the balance sheet, and lease expense is Prof it or loss f rom operating activities, adding back reclassif ied f rom operating expenditure to depreciation and depreciation, amortisation and share-based payment charges f inance cost. The only exceptions to this change in method are and non-recurring costs. for short-term and low-value leases. Impact Relevance to strategy The adjusted measure is considered relevant to assessing the The Group has reviewed its current leasing arrangements in underlying performance of the Group against its strategy and light of the new lease accounting rules in IFRS 16. The standard plans. The rationale for excluding certain items is as follows: will affect the accounting for the Group’s operating leases. As at the reporting date, the Group has non-cancellable operating Depreciation: a non cash item which fluctuates depending lease commitments of £4.3m, principally in relation to land and on the timing of capital investment. We believe that buildings (see note 28). Of these commitments, approximately a measure which removes this volatility improves £0.1m relate to short-term leases or to low value leases which comparability of the Group’s results period on period. will both be recognised on a straight-line basis as expense in prof it or loss. Amortisation: a non cash item which varies depending on the timing of and nature of acquisitions, and on the timing of For the remaining lease commitments, the Group expects to and extent of investment in internally generated intangibles recognise right-of-use assets of approximately £1.3m on 1 May such as software. We believe that a measure which removes 2019 and lease liabilities of £1.3m. No signif icant impact on this volatility improves comparability of the Group’s results recognised deferred tax is expected. Overall net assets will not period on period. be signif icantly affected, however net current assets will be around £0.4m lower due to the presentation of a portion of the Share-based payment charges: a non cash item which liability as a current liability. The Group expects that net prof it after tax will not be signif icantly affected. Adjusted EBITDA used to measure segment results is expected to increase by approximately £0.5m, as the operating lease payments were included in adjusted EBITDA, but the depreciation of the right-of-use varies signif icantly depending on the share price at the date of grants under the Group’s share option schemes, and depending on the assumptions used in valuing these awards as they are granted. We believe that a measure which removes this volatility improves comparability of the Group’s results period on period and also improves comparability with other companies which typically do not operate similar assets and interest on the lease liability are excluded f rom this share-based payment schemes. measure. Operating cash flows will increase, and f inancing cash flows decrease, by offsetting amounts of approximately Non-recurring costs: a one-off item which exists only in a £0.5m as repayment of the principal portion of the lease liabilities will be classif ied as cash flows f rom f inancing single accounting period. We believe adjusting for such non- recurring items improves comparability period on period. activities. Mandatory application date / date of adoption by Group Reconciliation Please see segmental reporting in note 7. The Group will apply the standard f rom 1 May 2019. The Group intends to apply the cumulative catch-up approach and Adjusted operating costs will not restate comparative amounts for the year prior to f irst adoption. Right-of-use assets for property leases will be Def inition measured on transition as if the new rules had always been applied. All other right-of-use assets will be measured at the Adjusted operating costs are administrative and establishment amount of the lease liability on adoption. expenses, adjusted by adding back depreciation, amortisation and share-based payment charges and non-recurring costs. 5. Alternative performance measures The Group makes use of a number of alternative performance measures in assessing the performance of the business. The def inition of and relevance of each of these Relevance to strategy The adjusted measure is considered relevant to assessing the underlying performance of the Group against its strategy and plans. The rationale for excluding depreciation, amortisation, share-based payments charges and non-recurring costs f rom this measure is consistent with that set out above in the “Adjusted EBITDA” section. Purplebricks Annual Report 2019 53 Financial statements Reconciliation GROUP Administrative expenses Depreciation & amortisation Share-based payment charge Non-recurring costs Adjusted operating costs UK Administrative expenses Depreciation & amortisation Share-based payment charge Non-recurring costs 2019 £m (24.7) 2.3 2.1 0.5 2018 £m (19.5) 1.6 2.4 - Adjusted operating costs (19.8) (15.5) Adjusted operating profit/loss Def inition Prof it or loss f rom operating activities, adding back share- based payment charges. Relevance to strategy The adjusted measure is considered relevant to assessing the underlying performance of the Group against its strategy and plans. The rationale for excluding share-based payments charges f rom this measure is consistent with that set out above in the “Adjusted EBITDA” section. Reconciliation GROUP Operating loss Share-based payment charge Adjusted operating loss UK Operating profit Share-based payment charge Adjusted operating profit CANADA Operating profit Share-based payment charge Adjusted operating loss AUSTRALIA Operating profit Share-based payment charge Adjusted operating loss 2019 £m (52.3) 4.3 (48.0) 2019 £m 5.3 2.1 7.4 2019 £m (3.2) 0.4 (2.8) 2019 £m (18.8) 0.9 (17.9) 2018 £m (27.8) 3.5 (24.3) 2018 £m 2.2 2.4 4.6 2018 £m - - - 2018 £m (13.2) 0.6 (12.6) 54 Purplebricks Annual Report 2019 2019 £m (61.0) 4.5 4.3 0.5 2018 £m (35.2) 1.7 3.5 - US Operating profit Share-based payment charge Adjusted operating loss 2019 £m (34.1) 0.9 (33.2) 2018 £m (16.8) 0.5 (16.3) Like-for-like UK gross profit margin (51.7) (30.0) Def inition Gross margin adjusting for signif icant items which are not directly comparable period on period. Relevance to strategy Gross prof it margin of the UK operating segment under IFRS in FY 19 is not directly comparable to gross prof it margin in FY 18 due to commercial changes in the business model which affect both the level of costs in the business and where these are recognised within the income statement. The adjustments made to gross prof it are in respect of: I. costs relating to the former deferred payment provider, which were recognised in FY 18 in cost of sales – deferred payment provider costs under the new commercial arrangement are recognised as f inance costs. II. costs relating to an outsourced property management service within the Lettings business recognised in FY 18 as cost of sales – these activities are now undertaken by an in-house team, the costs of which are presented within administrative expenses. The table below sets out the calculation of gross prof it margin under IFRS and as adjusted in the “like-for-like UK gross prof it margin” alternative performance measure. The alternative performance measure is considered a helpful additional measure as it provides insight into underlying performance between FY 18 and FY 19 on a more comparable basis. Adjustment has been made to FY 18 only to achieve this comparability. Reconciliation UK Gross Profit Margin under IFRS Revenue Cost of sales Gross profit Gross profit margin Like-for-like UK Gross Profit Margin Revenue Cost of sales Deferred payment provider costs Lettings outsourced property management service FY 19 £’000 90,125 (33,338) 56,787 63.0% FY 19 £’000 90,125 (33,338) - - FY 18 £’000 74,353 (31,276) 43,077 57.9% FY 18 £’000 74,353 (31,276) 1,662 1,555 Like-for-like cost of sales (33,338) (28,059) Like-for-like gross profit Like-for-like gross profit margin 56,787 63.0% 46,294 62.3% Group revenue growth excluding Canada 6. Revenue Group revenue growth excluding Canada, which is not def ined in IFRS, is a measure which is used by the board and management for planning and reporting. Revenue by contract type Def inition Total revenue for the year excluding revenue f rom the Canada operating segment, which arose in the year by acquisition, divided by total revenue for the prior year. Relevance to strategy Instructions Conveyancing Other Total revenue 7. Segmental reporting Financial statements 2019 £000 83,404 19,877 33,232 136,513 Restated1 2018 £000 60,296 15,566 11,925 87,787 The measure allows year on year comparison of the revenue generating performance in the current year of operating The Group trade is managed as a single division, providing segments which existed in the prior year, without the effect of services relating to the sale and letting of properties, however acquisitions in the year. Reconciliation Total Revenue for FY 19 Revenue arising from Canada acquisition Revenue for FY 19 excluding Canada Revenue for FY 18 Group revenue growth excluding Canada FY 19 £m 136.5 (23.7) 112.8 87.8 28.5% management report to the Board including the CODM using geographical segments. The f inancial information reviewed by the board is materially the same as that reported under IFRS and falls under the four geographic locations: the UK, Australia, the US and Canada. During the year, no customer contributed 10% or more of the Group’s revenues (2018: none). The following is an analysis of the Group’s revenue and results by reporting segment: Year ended 30 April 2019 Revenue Cost of sales Gross profit Gross profit margin (%) Administrative expenses Marketing expenses Share of results of joint venture Operating profit/(loss) Depreciation & amortisation Share-based payments Non-recurring acquisition costs Adjusted EBITDA US £’000 Canada Consolidation Consolidated £’000 £’000 £’000 Arising on UK Australia £’000 90,126 £’000 11,375 11,333 23,679 (33,339) (7,377) (4,858) (11,052) 56,787 63% (24,748) (26,708) - 5,331 2,334 2,098 467 3,998 35% (10,721) (12,071) - 6,475 57% (16,105) (24,497) - 12,627 53% (8,478) (7,374) - (18,794) (34,127) (3,225) 57 862 - 71 943 - 768 360 - - - - (964) - (536) (1,500) 1,302 - - 136,513 (56,626) 79,887 59% (61,016) (70,650) (536) (52,315) 4,532 4,263 467 10,230 (17,875) (33,113) (2,097) (198) (43,053) Year ended 30 April 2018 - Restated1 UK Australia £’000 £’000 Revenue Cost of sales Gross profit Gross profit margin (%) Administrative expenses Marketing expenses Operating profit/(loss) Depreciation & amortisation Share-based payments Adjusted EBITDA 1 See note 2.2 74,352 (31,275) 43,077 58% (19,487) (21,387) 2,203 1,601 2,369 6,173 US £’000 1,556 (527) 1,029 66% (8,402) (9,400) (16,773) 22 496 11,879 (6,406) 5,473 46% (7,306) (11,355) (13,188) 58 593 (12,537) (16,255) Consolidated £’000 87,787 (38,208) 49,579 56% (35,195) (42,142) (27,758) 1,681 3,458 (22,619) Purplebricks Annual Report 2019 55 Financial statements Non current assets UK Australia US Canada Consolidation adjustments Total Total assets UK Australia US Canada Consolidation adjustments Total Total liabilities UK Australia US Canada Consolidation adjustments Total 8. Loss from operating activities Loss f rom operating activities for the year has been arrived at after charging: Auditor’s remuneration: Audit of group financial statements Audit of subsidiaries Amounts received by auditors and their associates in respect of: Current statutory auditor: Services related to corporate finance transactions earned prior to appointment as statutory auditor Former statutory auditor: Amounts received by auditors and their associates in respect of: Taxation compliance Taxation advisory Taxation legal services Bad Debt expense Foreign Exchange (gains)/losses Depreciation and other amounts written off PPE: Owned, in respect of continuing activities Amortisation of development costs Amortisation of software Amortisation of other intangibles Aggregate charge against income in respect of research & development costs not eligible for capitalisation Rentals payable under plant and machinery operating leases Leasehold property rentals 1 See note 2.2 56 Purplebricks Annual Report 2019 2019 £’000 77,184 141 164 4,485 (20,808) 61,166 228,935 5,016 4,558 9,918 (95,875) 152,552 28,115 32,617 49,003 7,231 (68,139) 48,827 Restated1 2018 £’000 29,469 139 90 - (18,536) 11,162 211,892 3,835 3,326 - (35,547) 183,506 24,429 12,645 12,109 - (15,855) 33,328 2019 £’000 2018 £’000 135 45 36 - - - 988 (516) 822 1,713 461 1,530 3,455 62 1,291 85 17 - 30 110 7 - - 425 936 39 281 759 55 569 The aggregate charge in respect of research and development represents the total cost incurred during the year, less amounts capitalised in accordance with IAS 38: Intangible Assets. Amounts capitalised are shown in note 16. Deloitte LLP became the Group’s statutory auditor for the year ended 30 April 2019. Grant Thornton LLP was the Group auditor for the year ended 30 April 2018. Total fees payable to Deloitte in the current f inancial year were £216,000. Auditor’s remuneration for the year ended 30 April 2018 was paid to Grant Thornton LLP. Financial statements 9. Staff costs The average number of persons employed by the Group during Sales & Marketing the year was as follows: Technical Administration The aggregate payroll costs of the persons employed by the Wages and salaries Group, including the directors, were as follows: Social security Pension Share-based payment charge The average number of persons employed by the Company Sales & Marketing during the year was as follows: Technical Administration The aggregate payroll costs of the persons employed by the Wages and salaries Company, including the directors, were as follows: Social security Pension Share-based payment charge The following table provides details of remuneration paid to Salaries or fees, including bonus directors of the Company. Employers national insurance Share-based payment charge 2019 no. 911 144 186 1,241 2019 £’000 30,779 2,562 602 4,263 38,206 2019 no. 337 84 44 465 2019 £’000 11,278 1,455 202 2,098 15,033 2019 £’000 732 91 438 1,261 2018 no. 376 99 94 569 2018 £’000 18,936 1,771 71 2,458 23,236 2018 no. 261 77 48 386 2018 £’000 9,149 1,166 71 1,404 11,790 2018 £’000 477 59 651 1,187 The highest paid director received remuneration of £688,000 (2018: £811,000) during the year. No director had a material interest in any contract in relation to the business of the Group. No director exercised share options during the current or preceding f inancial year. In addition to the 9 directors (2018: 10), 18 senior management (2018: 9) are also considered to be key management personnel. Purplebricks Annual Report 2019 57 Financial statements The following table provides details of remuneration paid to key management personnel, being 27 individuals (2018: 19 individuals): Salaries or fees, including bonuses and employers national insurance Share-based payment charge The remuneration of the Directors for the years ended 2019 and 2018 was as follows: 2019 £’000 3,962 1,002 4,964 2018 £’000 1,835 1,410 3,245 Year ended 30 April 2019 Executive directors M Bruce J Davies Non- executive directors P Pindar N Discombe W Whitehorn A Blair S Downing M Wroe Total Short-term employee benefits Post employment benefits Share-based payments charge £’000s £’000s £’000s Total £’000s 250 273 30 3 5 56 56 61 734 - - - - - 1 - 1 2 23 415 - - - - - - 273 688 30 3 5 57 56 62 438 1,174 Michael Bruce stepped down f rom his role as an executive director of the group on 7 May 2019. His termination payments will be disclosed in the f inancial statements for the year ended 30 April 2020. Year ended 30 April 2018 Executive directors M Bruce J Davies N Cartwright Non- executive directors P Pindar N Discombe W Whitehorn Total Short-term employee benefits Post employment benefits Share-based payments charge £’000s £’000s £’000s Total £’000s 150 199 38 30 30 30 477 - - - - - - - 38 612 1 - - - 188 811 39 30 30 30 651 1,128 10. Share-based payments The Company operates an HMRC approved executive management incentive plan (EMI), an employee share ownership plan (ESOP) and a licensee share option plan (LSOP). Under these approved plans, a total of 19 schemes have been granted, of which a total of 18 schemes are currently operating. The vesting conditions for schemes 1, 2 and 4 are based on length of service, with 25% of the options vesting on or after the 12 month anniversary of the employee’s start date, and a further 6.25% vesting every three months thereafter so that options vest in full on the 48 month anniversary of the employee or licensee’s start date. The vesting conditions for schemes 6 to 19 are based on future service f rom the date of grant, with between 25% and 33% of the options vesting on or after either the 12 or 24 month anniversary of the grant, and a further vesting every three months thereafter so that options vest in full on the 48 month anniversary of the date of grant to the employee or the licensee. 58 Purplebricks Annual Report 2019 Financial statements The Company also operates an unapproved executive incentive plan (Scheme 5). The vesting conditions are based on length of service with 25% of the options vesting on or after the 12 month anniversary of the employee’s start date and a further 6.25% vesting every three months thereafter so that options vest in full on the 48 month anniversary of the employee’s start date. Performance conditions in respect of each scheme relate to length of service. Details of the total number of shares under option at the period end and conditions on qualif ication and exercise are set out below: Grant date Sch No Type of scheme No. of option holders 09.01.2015 10.07.2015 10.08.2015 06.11.2015 29.06.2016 05.12.2016 04.01.2017 05.03.2017 29.06.2017 06.09.2017 19.12.2017 05.03.2018 24.07.2018 02.08.2018 03.09.2018 20.11.2018 07.01.2019 23.01.2019 1 2 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 EMI EMI EMI EMI ESOP/LSOP ESOP/LSOP ESOP ESOP/LSOP ESOP/LSOP ESOP/LSOP ESOP/LSOP ESOP/LSOP ESOP/LSOP ESOP ESOP ESOP ESOP/LSOP ESOP 1 3 8 4 60 155 2 100 2 27 67 18 118 1 2 4 112 1 No. of options 48,721 201,090 138,056 3,361,660 2,355,650 2,322,258 387,500 1,562,502 1,400,000 403,000 1,986,400 402,500 2,882,500 500,000 225,000 375,000 2,775,000 500,000 Exercise Price Earliest exercise date Remaining contractual life £0.01 £0.13 £0.13 £0.01 £1.29 £1.25 £1.40 £3.10 £3.05 £4.69 £3.79 £4.15 £2.81 £2.87 £2.95 £1.73 £1.65 £1.59 09.01.2015 10.07.2015 10.08.2015 06.11.2016 29.06.2017 05.12.2017 04.01.2018 05.03.2018 29.06.2018 06.09.2018 19.12.2018 05.03.2019 24.07.2019 02.08.2020 03.09.2020 20.11.2022 07.01.2020 23.01.2020 see below see below see below see below 7.2 years 7.6 years 7.7 years 7.9 years 8.2 years 8.4 years 8.6 years 8.9 years 9.2 years 9.3 years 9.3 years 9.6 years 9.7 years 9.7 years 1,247,338 share options were exercised during the period (2018: 3,472,967) The number and weighted average exercise price of share options are as follows: Outstanding at start of period Granted during the period Exercised during the period Lapsed during the period Outstanding at end of period Exercisable at end of period 30 April 2019 30 April 2019 30 April 2018 30 April 2018 Weighted average exercise price Number of options Weighted average exercise price Number of options £1.85 £2.26 £0.77 £2.24 £1.97 £1.16 20,072,961 7,519,500 (1,247,338) (4,518,285) 21,826,838 7,241,657 £1.04 £3.79 £0.71 £1.60 £1.85 £0.70 19,715,516 5,418,000 (3,472,967) (1,587,588) 20,072,961 3,932,788 The weighted average share price at the date of exercise of options was £2.20. The weighted average remaining contractual life of the options is 8.2 years (2018: 8.5 years) Options outstanding at 30 April 2019 for schemes 1 and 5 have an exercise price of £0.01 (30 April 2018: £0.01). The weighted average remaining contractual life of the options is 6.5 years (30 April 2018: 7.5years). Options outstanding at 30 April 2019 for schemes 2 and 4 have an exercise price of £0.13 (30 April 2018: £0.13). The weighted average remaining contractual life of the options is 6.1 years (30 April 2018: 7.1 years). Fair value assumptions in respect of share-based payments The fair value of services received in return for share options granted is measured by reference to the fair value of share options granted. The estimate of fair value is measured using the Black-Scholes model. Details of the fair value of share options granted in the period and the prior period, together with the assumptions used in determining the fair value are summarised below. Purplebricks Annual Report 2019 59 Financial statements Weighted average share price at the date of grant Weighted average exercise price Weighted average contractual life (years) Weighted average expected volatility Weighted average risk free interest rate Total fair value of options granted (£’000) 30 April 2019 30 April 2018 £2.26 £2.26 10 36.3% 1.5% £3,824 £4.08 £3.78 10 31.5% 1.5% £6,776 The volatility assumption, measured at the standard deviation of expected share price movements, is based on a review of the Group’s own historical volatility and of volatility used by listed companies in the same sector. Charge to consolidated statement of comprehensive income The charge to consolidated statement of comprehensive income, included within administrative expenses, comprises; Share-based payment charge Credit to consolidated statement of changes in equity Tax credit with respect to share-based payments 11. Taxation Current tax credit/(charge) - Group Current year Adjustments in respect of prior years R&D tax credit relating to prior years Total current tax Deferred tax credit - Group Current year Adjustments in respect of prior year Total deferred tax Total credit/(charge) for the year Reconciliation of effective tax rate 30 April 2019 30 April 2018 £’000 4,263 £’000 3,458 30 April 2019 30 April 2018 £’000 (3,276) £’000 (1,295) 2019 £’000 (199) (37) 296 60 1,033 - 1,033 1,093 2018 £’000 (1,053) (242) 306 (989) 63 39 102 (887) The tax credit/(charge) for the period differs f rom the standard rate of corporation tax in the UK during the year of 19% (FY 2018: 19%). The differences are explained below. The tax reconciliation for the prior year has been re-analysed to amalgamate certain items to give a better understanding of key factors affecting the tax position. 60 Purplebricks Annual Report 2019 Loss before taxation Less share of loss of post-tax earnings of equity accounted investments Loss before taxation of equity accounted investments Tax calculated at UK corporate tax rate of 19% (FY 18: 19%) Effects of: Differences between UK and non-UK corporate tax rates Non-deductible and non-taxable items Utilisation of previously unrecognised deferred tax assets Other changes in unrecognised deferred tax assets Changes in tax rates Deferred tax prior year adjustment Current tax prior year adjustment R&D tax credit relating to prior years Total credit/(charge) for the year Financial statements 2019 £’000 (55,954) 536 (55,418) 10,529 3,201 (329) 205 (12,772) - - (37) 296 1,093 Restated1 2018 £’000 (29,190) - (29,190) 5,546 1,743 (281) 64 (7,907) (155) 39 (242) 306 (887) UK: The UK corporation tax rate for the year was 19% (FY 18: 19%). A reduction in the rate to 17% f rom 1 April 2020 has been substantively enacted. Additionally, new legislation which will restrict the use of brought forward losses has been substantively enacted in the UK. Whilst it is not expected that this legislation will affect the ability to use brought forward UK tax losses, it may extend the period over which they can be utilised. Deferred tax assets / liabilities are measured at the rate at which they are expected to reverse or be used. Other changes in unrecognised deferred tax assets primarily reflects non-recognition of deferred tax assets in respect of losses made in the USA and Australia. Tax included in changes in equity GROUP Deferred tax Current tax Total tax credit 2019 £’000 3,013 263 3,276 2018 £’000 - 1,295 1,295 The tax credits to equity represent the use as current year deductions, or recognition as deferred tax assets, of tax deductions related to share option schemes, which are in excess of related income statement expenses. Recognised deferred tax assets and liabilities GROUP Assets Liabilities Net deferred tax assets 2019 £’000 7,120 (4,519) 2,601 2018 £’000 3,068 (142) 2,926 1 See note 31 Purplebricks Annual Report 2019 61 Financial statements GROUP 2019 At 1 May Acquisition of subsidiaries Included in the income statement Included in equity Currency variations At 30 April GROUP 2018 At 1 May Included in the income statement Currency variations At 30 April ASSETS Fixed asset timing differences Other timing differences Share-based payments Tax losses £’000 3,068 305 (163) 2,900 (14) 6,096 £’000 £’000 £’000 - 74 (56) - - 18 - 736 113 1 850 - (39) 195 - - 156 ASSETS Fixed asset timing differences Other timing differences Share-based payments Tax losses £’000 3,020 67 (19) 3,068 £’000 £’000 £’000 19 (19) - - - - - - 48 (48) - - ASSETS COMPANY 2019 Fixed asset timing differences Other timing differences Share-based payments Tax losses LIABILITIES Fixed asset timing differences £’000 (142) (4,738) 321 - 40 (4,519) LIABILITIES Fixed asset timing differences £’000 (244) 102 - (142) LIABILITIES Fixed asset timing differences £’000 £’000 £’000 £’000 At 1 May Included in the income statement Included in equity Currency variations At 30 April £’000 2,893 (619) 2,900 - 5,174 - 11 - - 11 - 736 113 1 850 - - - - - - 104 - - 104 ASSETS COMPANY 2018 Fixed asset timing differences Other timing differences Share-based payments Tax losses At 1 May Included in the income statement At 30 April £’000 2,836 57 2,893 £’000 £’000 £’000 £’000 38 (38) - 19 (19) - - - - - - - LIABILITIES Fixed asset timing differences Total £’000 2,926 (4,398) 1,033 3,013 27 2,601 Total £’000 2,843 102 (19) 2,926 Total £’000 2,893 232 3,013 1 6,139 Total £’000 2,893 - 2,893 A proportion of the total potential deferred tax assets in the UK, Australia and the US have not been recognised due to insuff icient certainty that there will be relevant prof its available in the near future to utilise them. The unrecognised element of these deferred tax elements is given below. The value of the future deduction for share-based payments (options) is dependent on the share price at the point of exercise, therefore its value is highly uncertain. A signif icant proportion of the value of any future credit for the recognition or use of these unrecognised deferred tax assets would be taken to equity, rather than to the Income statement. 62 Purplebricks Annual Report 2019 Unrecognised deferred tax assets GROUP 2019 Restated1 2018 Gross Value Unrecognised Tax value Gross Value Unrecognised Tax value Financial statements Tax losses Share-based payments Fixed asset timing differences Other timing differences COMPANY Tax losses Share-based payments Fixed asset timing differences Other timing differences 12. Earnings per share Loss £’000 Weighted average number of shares (‘000) Loss per share (£) £’000 89,937 - 24 1,810 91,771 2019 Gross Value Unrecognised Tax value £’000 £’000 - - - - - - - - - - £’000 22,282 - 5 402 22,689 £’000 50,257 19,442 520 4,350 74,569 £’000 11,316 3,305 90 891 15,602 Restated1 2018 Gross Value Unrecognised Tax value £’000 18,214 19,442 507 3,007 41,170 £’000 3,096 3,305 86 511 6,998 BASIC AND DILUTED 2019 (54,861) 303,090 (0.18) Restated1 2018 (30,077) 273,072 (0.11) Diluted loss per share is equal to the basic loss per share as a result of the Group recording a loss for the year, which cannot be diluted. The table below reconciles the weighted average number of shares (‘000): Weighted average number of shares 2018 Weighted average issue of new shares and exercise of options Weighted average number of shares 2019 273,072 30,018 303,090 In addition to the above, there are 21,826,838 share options which could have a dilutive potential, but as these shares are anti-dilutive they have not been included in the weighted average number of shares used to calculate the diluted loss per share. 13. Finance income Interest income Fair value gains in respect of derivatives Finance income 1 See note 31 2019 £’000 763 54 817 2018 £’000 232 60 292 Purplebricks Annual Report 2019 63 Financial statements 14. Finance expense Interest expense Loss on factored receivables Finance expense 15. Goodwill Cost At 1 May & 30 April 2018 Acquisition of subsidiary As at 30 April 2019 Carrying amount: At 30 April 2019 At 30 April 2018 2019 £’000 50 4,406 4,456 DuProprio £’000 - 16,880 16,880 16,880 - BFL £’000 2,606 - 2,606 2,606 2,606 2018 £’000 - 1,724 1,724 Group £’000 2,606 16,880 19,486 19,486 2,606 Please refer to note 18 for details of the impairment assessments performed in respect of the carrying amount of goodwill. 15a Acquisition of subsidiary On 6 July 2018, the Group obtained control of 1005 9059-2114 Quebec Inc. by acquiring 100% of its issued share capital. This company heads a group of companies operating as DuProprio, which owns and operates one of Canada’s leading commission f ree real estate service networks as an online offering with similar aspects to Purplebricks. Goodwill of £16,880,000 arose on the acquisition. Trade and other receivables Cash and cash equivalents Other assets Property, plant and equipment Customer relationships DuProprio brand Proprietary technology Deferred income tax liabilities Trade and other payables Deferred revenues Total identifiable net assets Goodwill Total consideration Satisfied by: Cash Net cash outflow arising on acquisition: Cash consideration Less: cash and cash equivalents acquired Net cash outflow £’000 2,356 3,652 678 582 1,730 13,266 2,884 (4,829) (4,111) (2,146) 14,062 16,880 30,942 30,942 30,942 (3,652) 27,290 DuProprio contributed £23.7 million revenue and £3.2 million to the Group’s loss for the period between the date of acquisition and the reporting date. If the acquisition of DuProprio had been completed on the f irst day of the f inancial year, Group revenues would have been £142.3 million and loss for the year £55.7 million. 64 Purplebricks Annual Report 2019 16. Intangible assets GROUP Internally generated intangible Capitalised Software Patents and trademark Customer relationships Proprietary Tech Brand Other Total £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Financial statements Cost Balance at 1 May 2017 Addition Internally developed Balance at 30 April 2018 Addition Acquisition of subsidiary Internally developed Balance at 30 April 2019 Amortisation Balance at 1 May 2017 Amortisation for the year Balance at 30 April 2018 Amortisation for the year Balance at 30 April 2019 Net carrying value Balance at 30 April 2019 Balance at 30 April 2018 1,936 - 2,292 4,228 - - 2,606 6,834 (513) (936) (1,449) (1,713) (3,162) 3,672 2,779 193 641 - 834 217 - - 100 - - 100 - - - 1,051 100 (6) (67) (73) (27) (100) (3) (39) (42) (461) (503) 548 792 1,071 - - 1,071 - 1,730 - 2,801 (21) (214) (235) (499) (734) - - - - - - - - - - 2,884 13,266 - - - - - - 454 - - 2,884 13,266 454 - - - (791) (791) - - - - - - - - (213) (213) 241 - 3,300 641 2,292 6,233 671 17,880 2,606 27,390 (543) (1,256) (1,799) (3,704) (5,503) 21,887 4,434 - 27 2,067 836 2,093 13,266 - - The internally generated intangible asset relates to capitalised development costs in respect of the customer facing Purplebricks software platform. The intangible asset in respect of brand acquired has been deemed to have an indef inite life and is tested annually for impairment. All other intangible assets are amortised over their useful economic lives. Indef inite-lived intangible assets comprise those trademarks for which there is no foreseeable limit to the period over which they are expected to generate net cash inflows. These are considered to have an indef inite life, given the strength and durability of our brands and the level of marketing support. The nature of the industry we operate in is such that brand obsolescence is not common, if appropriately supported by advertising and marketing spend. In the case of the internally developed intangible asset, amortisation is charged on a straight line basis over three years. The useful economic life of the customer relationships is f ive years. Capitalised software is amortised over three years on a straight line basis. The remaining useful lives of each asset are in keeping with the amortisation policy. COMPANY Balance at 1 May 2017 Addition Internally developed Balance at 30 April 2018 Addition Internally developed Balance at 30 April 2019 Amortisation Balance at 1 May 2017 Amortisation for the year Balance at 30 April 2018 Amortisation for the year Balance at 30 April 2019 Net carrying value Balance at 30 April 2019 Balance at 30 April 2018 Internally generated intangible £’000 1,936 - 2,292 4,228 - 2,606 6,834 (513) (936) (1,449) (1,713) (3,162) 3,672 2,779 Capitalised Software £’000 194 634 - 828 94 - 922 (3) (39) (42) (190) (232) 690 786 Total £’000 2,130 634 2,292 5,056 94 2,606 7,756 (516) (975) (1,491) (1,903) (3,394) 4,362 3,565 Purplebricks Annual Report 2019 65 Computer equipment Furniture & fittings Motor vehicles Leasehold Improvements Total £’000 £’000 £’000 £’000 £’000 680 490 1,170 429 659 - 2,258 (199) (309) (508) (597) - (1,105) 1,153 662 264 271 535 136 319 (25) 965 (48) (109) (157) (184) 25 (316) 649 378 22 - 22 - - (12) 10 (1) (7) (8) (14) 12 (10) - 14 - - - 17 168 - 185 - - - (27) - (27) 158 - Computer equipment £’000 Furniture & fittings £’000 640 282 922 355 1,277 (194) (263) (457) (305) (762) 515 465 154 210 364 113 477 (36) (50) (86) (94) (180) 297 278 966 761 1,727 582 1,146 (37) 3,418 (248) (425) (673) (822) 37 (1,458) 1,960 1,054 Total £’000 794 492 1,286 468 1,754 (230) (313) (543) (399) (942) 812 743 Financial statements 17. Property, plant and equipment GROUP Cost Balance at 1 May 2017 Additions Balance at 30 April 2018 Recognised on acquisition of subsidiary (see note 15a) Additions Disposals Balance as 30 April 2019 Depreciation Balance at 1 May 2017 Charge for the year Balance at 30 April 2018 Charge for the year Accumulated depreciation on disposal Balance as 30 April 2019 Net book value At 30 April 2019 At 30 April 2018 COMPANY Cost Balance at 1 May 2017 Additions Balance at 1 May 2018 Additions Balance as 30 April 2019 Depreciation Balance at 1 May 2017 Charge for the year Balance at 1 May 2018 Charge for the year Balance as 30 April 2019 Net book value At 30 April 2019 At 30 April 2018 66 Purplebricks Annual Report 2019 18. Investment in subsidiaries COMPANY Cost 1 May 2018 Acquisitions Share-based payment charge in respect of employees of subsidiaries At 30 April 2019 Impairment charge for the year Charge arising in the year At 30 April 2019 Carrying amount At 30 April 2019 At 30 April 2018 Financial statements £’000 22,150 30,942 1,433 54,525 (22,651) (22,651) 31,874 22,150 The Group consists of a Parent Company, Purplebricks Group BFL plc, incorporated in the UK and a number of subsidiaries held directly by Purplebricks Group plc, which operate and are The acquisition of BFL Property Management Limited (“BFL”) incorporated around the world. in March 2017 gave rise to a cost of investment in the company balance sheet of £3.6 million, and a goodwill amount in the The Company holds 100% of the share capital and voting rights consolidated balance sheet of £2.6 million. As required by in respect of all subsidiaries. Impairment Review IAS 36, the carrying value of indef inite lived assets is tested annually for impairment. This assessment has been performed at the current reporting date for both the cost of investment in BFL and for goodwill relating to BFL on a value in use basis. Australia and US – assessment of carrying value of cost of investment in the Company statement of f inancial position BFL trading since acquisition has been in line with expectations at the time of acquisition, and as anticipated During the year, the performance of the Group’s operations in the Lettings business of Purplebricks Group plc has benef ited Australia and the United States was below expectation. After f rom the expertise acquired with BFL. Over time, contracts the year end, following strategic reviews, as set out earlier in with landlords held by BFL have been replaced as they the annual report, a decision was made to close operations in naturally come to an end with contracts with Purplebricks Australia, and in the US, each to be effected in FY 20. Group plc. Therefore, part of the value of the acquired business is now at 30 April 2019 represented by synergies within the The closure of the Australian operations is expected to result Group, rather than purely in contracts held by the acquired in a net cash outflow during FY 20. Therefore, the cost of company. No new contracts are currently being entered into in investment in the Australian business and the intercompany the name of BFL. receivables due f rom Australia have been impaired to zero in the accounts of Purplebricks Group plc, on a fair value less BFL - assessment of carrying value of goodwill in the costs of disposal basis. This has resulted in an impairment consolidated statement of f inancial position charge in the company of £40,837,000 including £10,832,000 in respect of cost of investment. This impairment has no effect on The goodwill arising on the acquisition of BFL has been the consolidated accounts. allocated to the cash generating unit represented by the Group’s UK lettings business as a whole. This is because The carrying value of US assets has been assessed on following the integration of BFL staff into the wider UK lettings a value in use basis. Forecasts for FY 20 indicate a cash business, the activity in lettings relating to BFL cannot be outflow. At the balance sheet date, cashflow forecasts for distinguished f rom the wider lettings business. beyond FY 21 were subject to signif icant uncertainty. Therefore, management have taken the decision to impair in full all The recoverable amount of the UK lettings business is investment and intercompany receivable balances as at 30 determined f rom the value in use calculation which uses April 2019. This has resulted in an impairment charge in the cashflow projections based on f inancial budgets approved by company of £53,082,000 including £8,819,000 in respect of the directors covering a f ive year period, revenue growth rate of cost of investment. This impairment has no effect on the 5% and a pre-tax discount rate of 8.5%. Cashflows beyond that consolidated accounts. f ive year period have been extrapolated using a steady growth rate of 2.5%. This rate does not exceed the average long-term growth rate for the relevant markets. Purplebricks Annual Report 2019 67 Financial statements The discounted cash flow calculation prepared in respect of Trading since acquisition has been in line with expectations the UK lettings business based on historical trends within this at the time of acquisition. Management have prepared a business indicates signif icant headroom over the carrying value fair value calculation based on a revenue multiple valuation of goodwill attributable to the BFL CGU. The key assumptions approach. This multiple, as well as estimates of costs of within this calculation include the rate of revenue growth and disposal, has been based on historical experience. This the discount rate. This calculation indicates a recoverable value approach indicates a recoverable value of £33.5 million, of £12,524,000 for this CGU, and headroom over the carrying indicating headroom over the carrying value of cost of value of goodwill of £9,918,000. investment of £2.5 million, and (adjusting for underlying net assets of the Canada business) over carrying value of goodwill A change in discount rate of 1.0% has an effect of attributable to the Canada CGU and brand value of £1.3 million. less than £2.0m on the DCF valuation and still shows signif icant headroom. Sensitivity analysis performed has included assessment of the impact of using an alternative revenue multiple and effects of A change in revenue growth rate of 5.0% has an effect of less a change in foreign exchange rates. This analysis indicates that than £0.5m on the DCF valuation. conditions which would require an impairment of goodwill and other indef inite lived intangible assets are an increase in BFL - assessment of carrying value of cost of investment in foreign exchange rate of 4% or decrease in revenue multiple of the Company statement of f inancial position 4%, which are not considered to be likely. In assessing the carrying value of cost of investment, a The Group consists of a Parent Company, Purplebricks Group discounted cash flow calculation has been prepared which plc, incorporated in the UK and a number of subsidiaries held takes into account only contracts held by BFL and not the directly by Purplebricks Group plc, which operate and are synergies in the wider Group. incorporated around the world. £’000 8,819 10,832 3,000 22,651 44,263 30,005 74,268 96,919 Due to the reduction in the size of the business conducted Summary of Company level impairments within BFL since acquisition as a result of the partial transfer of trade as described above, and as this transfer of trade is expected to continue in future years, the cash flow forecasts Impairment of investments indicate that a partial impairment of the cost of investment is required. This impairment amounts to £3.0m. This impairment results f rom management decisions taken as to the operation of the wider Lettings business rather than resulting f rom lower than expected performance of BFL post acquisition. US Australia BFL Assumptions within this calculation include the rate of revenue growth and the discount rate. US Australia Impairment of intercompany balances A change in discount rate of 1.0% has an effect of less than £0.1m on the DCF valuation. A change in contract loss rate of 5.0% has an effect of less than £0.2m on the DCF valuation. The expected future continued transfer out of BFL contracts may well lead to a further impairment of cost of investment in BFL in future periods. Management will continue to review the carrying value of BFL at future reporting dates in order to assess whether a further impairment has become necessary. Canada - assessment of carrying value of cost of investment in the Company statement of f inancial position and goodwill in the consolidated statement of f inancial position The acquisition of the Canada based DuProprio business during the year gave rise to a cost of investment in the company balance sheet of £30,942,000, and a goodwill amount in the consolidated balance sheet of £16,880,000 and other intangible assets with indef inite lives totalling £13,266,000. As required by IAS 36, the carrying value of goodwill is tested annually for impairment. This assessment has been performed at the current reporting date on a fair value less costs of disposal basis. 68 Purplebricks Annual Report 2019 The Company holds 100% of the share capital and voting rights in respect of all subsidiaries, which are listed below. Name of subsidiary Country of incorporation Country of operation Nature of business Registered office Financial statements BFL Property Management Limited United Kingdom United Kingdom Residential lettings Purplebricks Australia Pty Limited Purplebricks Franchising Pty Limited Australia Australia Australia Real estate agency Australia Real estate agency Purplebricks Services Pty Limited Australia Australia Real estate agency Mein Foxton Pty Ltd Hendra Pepper Pty Ltd Folkestone Mein Pty Ltd Pepper Mein Pty Ltd Australia Australia Australia Australia Australia Real estate agency Australia Real estate agency Australia Real estate agency Australia Real estate agency Purplebricks New Zealand Limited New Zealand New Zealand Dormant Purplebricks Inc Centerpoint Closing Services LLC Purplebricks Title Agency Inc 9059-2114 Quebec Inc ByTheOwner Inc / DuProprio Inc DP Immobilier Quebec Inc CF Real Estate Ontario Inc CF Real Estate Max Inc Comfree - Commission Free Realty Inc CF Real Estate First Inc CF Real Estate Maritimes Inc 8495122 Canada Inc VR Estate Inc Registered off ice USA USA USA Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada USA USA USA Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Real estate agency Real estate agency Real estate agency Real estate agency Real estate agency Real estate agency Real estate agency Real estate agency Real estate agency Real estate agency Real estate agency Real estate agency Real estate agency (1) (2) (2) (3) (2) (2) (2) (2) (4) (5) (5) (6) (7) (7) (7) (7) (7) (7) (7) (7) (8) (9) (1) Suite 7, Cranmore Place, Cranmore Drive, Shirley, West Midlands B90 4RZ, United Kingdom (2) Level 1 372 Elizabeth Street, Surry Hills, NSW 2010, Australia (3) The Executive Centre (Perth) Pty Ltd, Level 25, 108 St Georges Terrace, Perth, WA 6000 (4) 97b Orakei Road, Remuera, Auckland, 1050 , New Zealand (5) 400 Spectrum Center Drive, Ste. 360, Irvine, California 92618 (6) 875 Concourse Parkway, Ste. 135, Maitland, Florida 32751 (7) 300 - 8389 ave Sous-le-Vent, Lévis (Québec) G6X 1K7, Canada (8) 4000 - 1 Place Ville-Marie, Montréal (Québec) H3B-4M4 Canada (9) Thompson Dorfman Sweatman LLP, 1700-242 Hargrave Street, Winnipeg, Manitoba Canada Purplebricks Annual Report 2019 69 Financial statements 19. Investment in jointly controlled entity Opening Balance as at 1 May 2018 Additions At 30 April 2019 Share of Result of joint venture Opening Balance as at 1 May 2018 Share of result for the year At 30 April 2019 Carrying amount: At 30 April 2019 At 30 April 2018 GROUP £’000 - 11,249 11,249 - (536) (536) 10,713 - COMPANY £’000 - 11,249 11,249 - - - 11,249 - On 20 December 2018 PBG plc purchased 50% Post year end, the Joint Venture Agreement, the Investment of the share capital of Einhundertsiebte “Media” Agreement and the Shareholders’ Agreement were amended Vermogensverwaltungsgesellschaft bmH (“JV HoldCo”), and restated in August 2019 to reflect the progress made by a company incorporated in Germany which holds a Homeday. Under the amended Investment Agreement, JV 25.88% investment in Homeday GbmH, another company HoldCo provided a convertible loan to Homeday of €10m, incorporated in Germany, f rom Funfundachtzigste “Media” funded equally by Purplebricks and Axel Springer. Under the Vermogensverwaltungsgesellschaft mbH, a wholly owned amended Joint Venture Agreement Purplebricks has the right, subsidiary of Axel Springer SE. The other 50% shareholding at its discretion, to provide further capital and loan funding continues to be held by the Axel Springer group. to Homeday through JV HoldCo. Should Purplebricks choose not to participate in further funding of Homeday through JV Purplebricks and Axel Springer operate JV HoldCo as a joint HoldCo, its share in JV HoldCo and thus indirectly in Homeday venture under a joint venture agreement. Consideration for the may decrease if its joint venture partner decides to make purchase was £11,249,000. further investments in Homeday through JV HoldCo on its own. The same applies if both, Purplebricks and its joint Based in Berlin, Homeday operates homeday.de, a transaction- venture partner, choose not to participate in further funding based digital real estate platform in Germany that brings of Homeday through JV HoldCo and other shareholders of customers together with experienced brokers and supports Homeday decide to make further investments in Homeday. them in buying and selling property. Following the investment, Dr. Andreas Wiele, President Classif ieds Media Axel Springer SE, Under the amended Shareholders’ Agreement, Put and Call and James Davies, CFO of Purplebricks, have each taken a seat options exist between JV HoldCo and the other shareholders on the Advisory Board of Homeday. of Homeday which may require or allow JV HoldCo to acquire shares held by the other shareholders, for consideration to be The Group’s holding in JV HoldCo is accounted for under the determined with reference to the performance of Homeday in equity method. future periods leading up to the exercise dates of the options in 2021 and 2024. Under the amended Joint Venture Agreement Axel Springer has the right to increase its investment in JV Purplebricks has the right, at its discretion, to provide further Holdco beyond 50% by acquiring shares f rom Purplebricks funding to JV HoldCo to put JV HoldCo in a position to meet its at def ined points up to 2023 for variable consideration which purchase price payment obligations resulting f rom the Put and is based on the future performance of Homeday GmbH or a Call options. Should Purplebricks choose not to participate in return on investment for Purplebricks. such further funding of Homeday through JV HoldCo, its share in JV HoldCo and thus indirectly in Homeday may decrease if JV HoldCo and the other shareholders of Homeday its joint venture partner decides to make further investments in have entered into an Investment Agreement and a Homeday via JV HoldCo on its own. Shareholders’ Agreement. As at 30 April 2019, Purplebricks had a potential obligation whether Purplebricks will decide to make any further under the Investment Agreement, conditional on the investments, no range of potential purchase prices is provided As it is not suff iciently possible at this stage to determine future performance of Homeday, to provide further capital at this stage. and loan funding to Homeday of up to EUR 20 million in 2019. Purplebricks had the option to settle this potential future As a start up entity, Homeday is currently loss making liability either in cash or by the issue of a variable number of as the business makes signif icant investments in new shares in Purplebricks Group plc. marketing. Homeday forecasts to become prof itable as these investments translate into activity and revenue growth. Trading of Homeday has been in line with expectations at the time of acquisition. 70 Purplebricks Annual Report 2019 Financial statements The registered off ice of Einhundertsiebte “Media” The registered off ice of Homeday GbmH is Vermogensverwaltungsgesellschaft bmH is Axel-Springer- Prinzessinnenstrasse 26, 10969, Berlin, Germany Strasse 65, 10888, Berlin, Germany 20. Trade and other receivables Trade and other receivables Amount owed by group undertakings Prepayments Accrued income GROUP COMPANY 2019 £’000 6,163 - 11,562 9,721 27,446 Restated1 2018 £’000 4,258 - 8,502 6,432 19,192 2019 £’000 563 1,389 9,040 8,186 19,178 Restated1 2018 £’000 2,010 16,407 6,227 6,287 30,931 In order to manage both liquidity requirements and credit the Group. During the current f inancial year, both the level of risk in the UK and Australia, the Group operates committed trading outside of the UK, and the changes in business model facilities with a third party f inance house. Further detail is set used in the US and Australian markets (see note 2.4.1) has out in the accounting policy detailed in note 2.20. changed the credit loss prof ile of the Group, such that a credit loss provision has become necessary as at 30 April 2019. Outside of the UK and Australia, the Group does not sell on its receivables and therefore bears credit risk and needs to assess As the Group recognises accrued income at the expected value expected credit losses. of consideration receivable, no credit loss provision against accrued income is considered necessary. As the level of business conducted in the US and in Australia in the prior year was relatively low, and as at 30 April 2018, no Amounts owed by group undertakings to the Company bear trade receivables were overdue, no credit loss provision was interest at 3.75% above LIBOR and are repayable upon demand held at a Group or Company level at that date. Based on the by the Company. See further detail in respect of these amounts experience of operating in these markets, and the business as provided in note 27. model operated at the date of transition to IFRS 9, no credit loss provision was created at this date on adoption of IFRS The movement in loss allowances for trade receivables during 9, which requires the use of an expected loss model rather the year was as follows: than the incurred loss model which was previously used by Opening loss allowance at 1 May 2018 Increase in loan loss allowance recognised in profit or loss during the year Receivables written off during the year as uncollectible Loss allowance at 30 April 2019 GROUP £’000 - 988 (123) 865 GROUP As at 30 April 2019 Gross carrying amount Loss allowance Net carrying amount Expected loss rate 1 See note 31 Current 0-30 days past due 31-60 days past due 60+days past due £’000 3,846 - 3,846 0.0% £’000 £’000 850 - 850 0.0% 729 (80) 649 11.0% £’000 1,603 (785) 818 49.0% COMPANY £’000 - 242 (123) 119 Total £’000 7,028 (865) 6,163 12.3% Purplebricks Annual Report 2019 71 Financial statements GROUP As at 30 April 2018 Gross carrying amount Loss allowance Net carrying amount Expected loss rate COMPANY As at 30 April 2019 Gross carrying amount Loss allowance Net carrying amount Expected loss rate COMPANY As at 30 April 2018 Gross carrying amount Loss allowance Net carrying amount Expected loss rate Summary of movements in accrued income Balance at 1 May 2018 Revenue recognised prior to invoice Amounts invoiced Balance at 30 April 2019 21. Trade and other payables Trade payables Other taxation and social security Other creditors Accruals Deferred income Current £’000 4,258 - 4,258 0.0% 0-30 days past due 31-60 days past due 60+days past due £’000 £’000 £’000 - - - - - - - - - 0.0% 0.0% 0.0% Current 0-30 days past due 31-60 days past due 60+days past due Total £’000 4,258 - 4,258 0.0% Total £’000 £’000 £’000 £’000 £’000 401 - 401 0.0% Current £’000 2,010 - 2,010 0.0% 5 - 5 9 - 9 267 (119) 148 0.0% 0.0% 44.6% 0-30 days past due 31-60 days past due 60+days past due £’000 £’000 £’000 - - - - - - - - - 0.0% 0.0% 0.0% 682 (119) 563 17.4% Total £’000 ,2,010 - 2,010 0.0% GROUP £’000 6,432 (13,299) 16,588 9,721 COMPANY £’000 6,287 (14,108) 16,007 8,186 GROUP COMPANY 2019 £’000 11,326 2,345 163 11,126 24,960 19,348 44,308 Restated1 2018 £’000 8,206 2,038 - 6,056 16,300 16,842 33,142 2019 £’000 7,054 886 60 5,582 13,582 14,702 28,284 Restated1 2018 £’000 3,378 1,988 - 4,061 9,427 13,498 22,925 All trade and other payables are short-term. The directors consider that the carrying amount of trade and other payables approximates to their fair value. 1 See note 2.2 72 Purplebricks Annual Report 2019 Summary of movements in deferred income Balance at 1 May 2018 Payments received Revenue recognised net of refunds Balance at 30 April 2019 Financial statements GROUP £’000 16,842 85,909 (83,403) 19,348 COMPANY £’000 13,498 52,177 (50,973) 14,702 22. Derivative financial instruments The Group enters into contracts for foreign exchange forwards in order to secure a protected AUS:GBP and USD:GBP exchange rate in respect of the Group’s requirement to fund net cash outflows in these currencies. Foreign exchange forward contracts - carried at fair value through profit or loss Liability at start of period Gain in movement in fair value through profit or loss Asset / (liability) at end of period Of which; less than 1 year GROUP AND COMPANY 2019 £’000 (44) 54 10 10 2018 £’000 (104) 60 (44) (44) Notional amounts at 30 April 2019: £13,604,000 (20 April 2018 £3,936,000). Outstanding forward contracts mature at various dates up to seven months after the balance sheet date (2018 : at various dates up to six months after the balance sheet date). Further details of derivative f inancial instruments are provided in 26. 23. Share capital Allotted, issued and fully paid: Class: Ordinary Number Nominal value 303,090,347 £0.01 2019 £’000 3,031 3,031 2018 £’000 3,019 3,019 During the year the Company issued a total of 1,247,338 shares of £0.01p each at par, for total consideration of £964,000. (2018: 31,242,098 shares of £0.01p each at par, for total consideration of £102,463,000.) The table below summarises the movements of the number of shares at the beginning and end of the period: Ordinary shares at 1 May 2018 Shares issued during the period Ordinary shares at 30 April 2019 Ordinary shares 301,843,009 1,247,338 303,090,347 1 See note 2.2 Purplebricks Annual Report 2019 73 Financial statements 24. Share premium Balance at 1 May 2017 Premium arising on issue of equity shares Cost of share issue Premium arising on exercise of share options Balance at 30 April 2018 and 1 May 2018 Premium arising on exercise of share options Balance at 30 April 2019 £’000 74,901 99,722 (650) 2,427 176,400 952 177,352 25. Reserves 26. Financial instruments Share-based payment reserve The share-based payment reserve represents all current and Capital risk management prior period share-based payment charges less the exercise of Capital management objectives are to ensure the Company’s share options. ability to continue as a going concern and to provide a return to shareholders. Retained earnings Retained earnings includes all current and prior period retained prof its and losses. Share premium The amount paid to the Company by shareholders, in cash The capital structure of the Company currently consists of cash and equity attributable to equity holders of the Company, comprising issued capital, reserves and retained earnings as disclosed in the statement of changes in equity. The Company’s Audit Committee reviews the capital structure as part of its or other consideration, over and above the nominal value of risk analysis. As part of this review, the Committee considers shares issued to them. the cost of capital and the risks associated with each class Foreign exchange reserve The foreign exchange reserve records exchange differences The Company is not subject to externally imposed capital of capital. arising f rom the translation of the f inancial statements of requirements. foreign operations. Upon disposal of foreign operations, the related accumulated exchange differences are recycled to the Principal financial instruments income statement. The principal f inancial instruments used by the Group, f rom which f inancial instrument risk arises, are as follows: Cash and cash equivalents Trade and other receivables Trade and other payables Derivative f inancial instruments The Group held the following f inancial assets at each reporting date: GROUP COMPANY 2019 £’000 6,163 - 9,721 62,767 78,651 Restated1 2018 £’000 4,258 - 6,432 152,846 163,536 2019 £’000 563 1,389 8,186 57,617 67,755 Restated1 2018 £’000 2,010 16,407 6,287 149,684 174,388 Financial assets held at amortised cost: Trade and other receivables Amounts owed by group undertakings Accrued income Cash and cash equivalents 1 See note 2.2 74 Purplebricks Annual Report 2019 Financial assets held at fair value through profit and loss: Derivative financial instruments The Group held the following f inancial liabilities at each reporting date: Financial liabilities held at amortised cost: Trade payables Other creditors Accruals Financial liabilities held at fair value through profit and loss: Derivative financial instruments Financial statements GROUP COMPANY 2019 £’000 Restated1 2018 £’000 2019 £’000 Restated1 2018 £’000 10 - 10 - 78,661 163,536 67,765 174,388 GROUP COMPANY 2019 £’000 11,326 163 11,126 22,615 Restated1 2018 £’000 8,206 - 6,056 14,262 2019 £’000 7,054 60 5,582 12,696 Restated1 2018 £’000 3,378 - 4,061 7,439 GROUP COMPANY 2019 £’000 - 22,615 Restated1 2018 £’000 44 14,306 2019 £’000 - 12,696 Restated1 2018 £’000 44 7,483 Fair value of financial instruments Financial risk management Carrying value of the instruments in the f inancial assets and f inancial liabilities tables approximates to their fair value. During the year it was the policy of the Group to enter into USD and AUD forward foreign exchange contracts to manage currency risk in relation to the Group’s cash funding requirements for its US and Australian subsidiaries. Derivatives were not designated in hedge relationships. The Group uses the following hierarchy for determining and disclosing the fair value of f inancial instruments by valuation technique: Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities; Level 2: other techniques for which all inputs which have a signif icant effect on the recorded fair value are observable, either directly or indirectly; and Level 3: techniques which use inputs which have a signif icant effect on the recorded fair value that are not based on observable market data. All derivative f inancial instruments are level 2. During each of the reporting periods, there were no transfers between valuation levels. The Group is exposed through its operations to the following f inancial risks: Liquidity risk Interest rate risk Credit risk Foreign currency risk The Group’s policies for f inancial risk management are outlined below. Liquidity risk management Liquidity risk is the risk that the Group will not be able to meet its f inancial obligations as they fall due. The Group manages liquidity risk by maintaining adequate cash reserves and by monitoring forecast and actual cash flows to ensure cash is available to meet f inancial liabilities as they fall due. Suff icient cash is retained in immediate access accounts whilst cash which is surplus to short term requirements is deposited in notice accounts. Sensitivities are applied to cash forecasts to ensure the Company has early warning of any manifestation of liquidity risk. The following is an analysis of the contractual undiscounted cash flows payable under f inancial liabilities excluding derivatives which are disclosed in note 22. The table includes principal only cash flows in respect of trade and other payables. 1 See note 31 Purplebricks Annual Report 2019 75 Financial statements Trade and other payables GROUP COMPANY Trade payables, other creditors and accruals due within one month Trade payables, other creditors and accruals due within three months Trade payables, other creditors and accruals 2019 £’000 16,961 5,654 22,615 Restated1 2018 £’000 10,696 3,566 14,262 2019 £’000 9,522 3,174 12,696 Restated1 2018 £’000 5,579 1,860 7,439 Interest rate sensitivity analysis In the US, at present the Group manages “pay later” receivables itself by monitoring the aggregate amount and duration of Interest rate risk is the risk that the value of the future cash exposure to any one customer. As amounts due f rom each flows of a f inancial instrument will fluctuate due to changes individual customer are small, there is no concentration of in market rates. At the year end date there was no material credit risk. exposure to movement in interest rates. Credit risk management The credit risk on liquid funds is minimised because the counterparties are UK banks with high credit-ratings assigned by international credit-rating agencies. Credit risk refers to the risk that the counterparty will default on its contractual obligations resulting in f inancial loss to the Foreign currency risk management Group. The Group’s credit risk is primarily attributable to its trade receivables. A signif icant part of the Group’s transactions are carried out in pound sterling (GBP). Exposures to currency exchange Trade receivables across the Group have been assessed with rates arise f rom the Group’s trading activity carried out by regard to credit risk characteristics which vary f rom country to its overseas operations, which is primarily denominated in country and according to the nature of the counterparty. The Australian dollars (AUD), US dollars (USD) and Canadian dollars Group also considers days past due in making this assessment (CAD). The Company holds AUD, USD and CAD denominated as well as historical credit losses experienced within over a loans with its respective subsidiaries arising f rom intercompany period of 12 month before 30 April 2019. funding arrangements. The expected loss rates derived f rom this assessment are To mitigate the Group’s exposure to foreign currency adjusted to reflect current and forward-looking information transaction risk, planned non-GBP funding requirements in affecting the ability of the customers to settle the receivables. relation to its non-UK subsidiaries are monitored and forward The Group applies the IFRS 9 simplif ied approach to measuring those expected cashflows. The Group does not enter into expected credit losses which uses a lifetime expected loss forward exchange rate contracts to mitigate the exposure to allowance for all trade receivables which are not subject to the foreign currency translation risk on the carrying value of its receivable sale arrangement described below. non-GBP loan receivables. The loans carry a commercial rate foreign exchange contracts are entered into in relation to In order to manage both liquidity requirements and credit risk in relation to the f inancial statements of its overseas of interest. Additionally, the Group does not hedge translation risk in the UK and Australia, the Group operates committed subsidiaries. facilities with a third party f inance house, whereby customer receivables in respect of customers who utilise the Group‘s “pay Foreign currency denominated f inancial assets and liabilities later” option are sold immediately to the f inance house. The which expose the Group to currency risk are disclosed in the Group has assessed the credit risk of the counterparty as table below. The sensitivity of prof it in regards to the Group’s low. See note 2.20 for further details. f inancial assets and f inancial liabilities and the AUD/GBP, USD/ Outside of the UK and Australia, the Group does not sell on its receivables and therefore bears credit risk and needs to assess The table below sets out assets and liabilities held in foreign GBP and CAD/GBP exchange rates is also disclosed. expected credit losses. currencies and the impact in GBP of changes in the respective foreign exchange rates. The assumed percentage changes in AUD/GBP, USD/GBP and CAD/GBP exchange rate are determined based on historical market volatility and estimates of potential future volatility. 1 See note 31 76 Purplebricks Annual Report 2019 30 April 2019 Trade and other receivables Cash and cash equivalents Trade and other payables 30 April 2018 Trade and other receivables Cash and cash equivalents Trade and other payables Financial statements AUD $’000 3,875 2,434 (4,241) 2,068 AUD $’000 2,668 2,064 (5,255) (523) USD $’000 1,662 2,909 (5,433) (862) USD $’000 1,311 1,881 (5,426) (2,234) CAD AUD US CAD $’000 +/- 10% (£’000) +/- 7% (£’000) +/- 10% (£’000) 386 114 (583) (83) 6,759 1,988 (10,204) (1,457) 209 132 (229) 112 AUD 89 156 (292) (47) US +/- 9% (£’000) +/- 11% (£’000) 132 102 (259) (25) 105 150 (434) (179) Exposures to foreign exchange rates vary during the year depending on the volume of overseas transactions. Nonetheless, the analysis above is considered to be representative of the group’s exposure to currency risk as at 30 April 2019 27. Related party transactions Related party transactions occur as a result of funding provided to the wholly owned subsidiaries for the purposes of marketing and support f rom the UK. Company - balances with subsidiary undertakings Trade Receivables As at 30 April 2019 As at 30 April 2018 Purplebricks Australia PTY Limited Provision Purplebricks Inc. Provision BFL Property Management Limited DuProprio Inc. £’000 30,005 (30,005) 44,263 (44,263) 192 1,197 1,389 £’000 7,348 - 8,550 - 509 - 16,407 During the year Purplebricks Group plc lent £22,657,000 Other related party transactions to Purplebricks Australia PTY Limited (2018 : £51,000) and £35,713,000 to Purplebricks Inc (2018 : £8,550,000). During the Directors’ remuneration and key management personnel year the Company provided management services to Canada disclosures can be found in note 9. which have been recharged in the period. Movements in the balance with BFL relate to intragroup cash sweeps. On 21 December 2018, Michael Bruce, Chief Executive Off icer, purchased 167,925 shares in the Company; Simon Downing, The background to the provisions held against intercompany Non‐Executive Director, purchased 133,500 shares in the balances is set out in note 18. On 20 December 2018 PBG plc purchased 50% Company; and Adrian Blair, Non‐Executive Director, purchased 33,675 shares in the Company, in each case at £1.48 per share. of the share capital of Einhundertsiebte “Media” Axel Springer SE, an entity closely associated with Dr. Andreas Vermogensverwaltungsgesellschaft bmH (“JV HoldCo”), Wiele, Non‐executive Director, purchased 3,000,000 shares in a company incorporated in Germany which holds a the Company on 9 July 2018 at £3.07 per share and 43,662,417 25.88% investment in Homeday GbmH, another company shares on 3 June 2019 at £1.00 per share. incorporated in Germany, f rom Funfundachtzigste “Media” Vermogensverwaltungsgesellschaft mbH, a wholly owned Michael Bruce sold 4,444,444 shares in the Company on 25 subsidiary of Axel Springer SE. The other 50% shareholding April 2018 at 360p per share. continues to be held by the Axel Springer group. Purplebricks and Axel Springer operate JV HoldCo as a joint Michael Bruce, received a salary f rom the company of £11,000 During the year Isabel Bruce, a person closely associated with venture under a joint venture agreement. Consideration for the (FY 2018: £41,000) purchase was £11,249,000. See note 19 for further information. Purplebricks Annual Report 2019 77 Financial statements 28. Commitments As at 30 April 2019, Purplebricks had a potential obligation under its Investment Agreement with Homeday, conditional on the future performance of Homeday, to provide further capital and loan funding to Homeday of up to EUR 20 million in 2019. See note 19 for further details. Capital commitments, approved by the Board and existing at 30 April 2019 amounted to £nil (2018:£nil). Total commitments under non-cancellable operating leases are as follows: GROUP Payable: Within one year In the second to fifth years After five years COMPANY Payable: Within one year In the second to fifth years After five years 2019 Land and buildings £’000 1,474 2,503 340 4,317 2019 Land and buildings £’000 490 1,010 3 1,503 Other £’000 62 112 - 174 Other £’000 24 19 - 43 2018 Land and buildings £’000 697 1,349 - 2,046 2018 Land and buildings £’000 403 1,009 - 1,412 Other £’000 48 43 - 91 Other £’000 28 23 - 51 Operating leases relate to land, buildings and other assets, such as vehicles and IT equipment, used to support the operational requirements of the Company. 29. Ultimate controlling party There is no ultimate controlling party as no one investor has a majority shareholding. a reasonable degree of accuracy, the principal uncertainty in measuring net closure costs relates to the quantum of revenue and associated costs. Given the uncertainty around these factors, the Group currently estimates net closure costs in the range of £6 million – £8 million. 30. Post balance sheet event Closure of overseas operations On 7 May 2019, the Group announced that it had chosen to exit the Australian market and put the Australian business into an orderly run-down with immediate effect, pending closure. Since 8 May 2019, no new instructions have been taken in Australia and the business is focused on settling sales for customers under existing instructions, implementing an orderly reduction in staff numbers and curtailing relationships with suppliers and contractors. The run-down process remains ongoing. Through the run-down process, the Group is monitoring Australian “net closure costs” which it def ines as revenue earned since 8 May 2019, net of costs of serving existing customers, exiting supplier and contractor relationships, employee costs, customer refunds costs and other associated closure costs. Whilst employee costs and the costs of exiting supplier and contractor relationships can be estimated with 78 Purplebricks Annual Report 2019 The Group also announced on 3 July 2019, that it has chosen to cease investment in the US. This will result in a closure of the business via an orderly run-down, or a sale of all or part of the US operation if a suitable purchaser is identif ied. No new instructions will be taken by the business f rom 3 July 2019. The US workforce is being rationalised and the core remaining team will be focused on selling properties which are listed and curtailing relationships with suppliers and contractors, with close oversight f rom the Group. Since the decision to cease investment is a recent one, the closure costs are yet to be fully quantif ied and depend on various factors. However, initial preliminary estimates indicate that net closure costs of the US business will be between £4 million - £6 million. The Australia and US operations represent in their entirety the segments as disclosed in note 7. Other than normal accruals for services rendered and goods received, no specif ic provision for closure costs has been made in the f inancial statements for the year ended 30 April 2019. Financial statements Homeday Compliance As set out in note 19, as at 30 April 2019, Purplebricks had The Company is currently engaged in discussion with HMRC a potential obligation to its joint venture Homeday GmbH following an Anti Money Laundering (AML) compliance under an Investment Agreement, conditional on the inspection during the year, f rom which a number of f indings future performance of Homeday, to provide further capital were noted in relation to non compliance with certain aspects and loan funding to Homeday of up to EUR 20 million in of this legislation. At the balance sheet date and the date of 2019. Purplebricks had the option to settle this potential this annual report the Company is unable to reliably estimate future liability either in cash or by the issue of new shares in the f inancial impact of these f indings and related ongoing Purplebricks Group plc. discussions, therefore in accordance with IAS 37.14 herewith discloses a contingent liability in respect of these matters. Post year end, the Joint Venture Agreement, the Investment Agreement and the Shareholders’ Agreement were amended The Company or its subsidiaries are not involved currently in and restated in August 2019 to reflect the progress made by any legal, arbitration or governmental proceedings, including Homeday. Under the amended Investment Agreement, JV the aforementioned discussion with HMRC, which may have, HoldCo provided a convertible loan to Homeday of €10m, or have had in the 12 months preceding the date of this report, funded equally by Purplebricks and Axel Springer. Under the a material effect on the f inancial position or prof itability of the amended Joint Venture Agreement Purplebricks has the right, Company and its subsidiaries. at its discretion, to provide further capital and loan funding to Homeday through JV HoldCo. Further detail is set out in note 19. 31. Revenue recognition – transition to IFRS 15 Table 1 Impact of transition to IFRS 15 on retained earnings at 1 May 2017 Retained earnings as previously stated Increase in deferred income relating to estate agency services Increase in accrued income relating to conveyancing services Increase in prepaid expenses relating to estate agency services Increase in accrued expenses relating to conveyancing services Other effects of the implementation of IFRS 15 Retained earnings as restated £000 (3,984) (7,055) 3,015 3,288 (504) 29 (5,211) Purplebricks Annual Report 2019 79 UK AUS USA Canada As restated under IFRS 15 Financial statements Table 2a Condensed statement of comprehensive income for the year ended 30 April 2018 IFRS 15 adjustments by geographical segment Revenue Cost of sales Gross Profit Administrative and establishment expenses Marketing costs Loss from operating activities Finance income Finance expense Loss on ordinary activities before taxation Under previous accounting policies £’000 93,697 (41,107) 52,590 (35,195) (42,142) (24,747) 60 (1,492) (26,179) £’000 (3,765) 1,791 (1,974) - - £’000 (1,661) 880 (781) - - £’000 (484) 228 (256) - - (1,974) (781) (256) - - - - - - (1,974) (781) (256) Taxation on loss on ordinary activities (887) - - - Loss for the period (27,066) (1,974) (781) (256) Items that may subsequently be reclassified to profit and loss Exchange differences on translation of foreign operations Total other comprehensive income (490) (490) - - - - - - Total comprehensive loss (27,556) (1,974) (781) (256) £’000 £’000 - - - - - - - - - - - - - - 87,787 (38,208) 49,579 (35,195) (42,142) (27,758) 60 (1,492) (29,190) (887) (30,077) (490) (490) (30,567) Table 2b Condensed statement of comprehensive income for the year ended 30 April 2018 IFRS 15 adjustments by contract type Under previous accounting policies Instructions Conveyancing Other As restated under IFRS 15 Revenue Cost of sales Gross Profit Administrative and establishment expenses Marketing costs Loss from operating activities Finance income Finance expense Loss on ordinary activities before taxation Taxation on loss on ordinary activities Loss for the period Items that may subsequently be reclassified to profit and loss Exchange differences on translation of foreign operations Total other comprehensive income Total comprehensive profit/(loss) £000 93,697 (41,107) 52,590 (35,195) (42,142) (24,747) 60 (1,492) (26,179) (887) (27,066) (490) (490) £000 (6,301) 3,013 (3,288) - - (3,288) - - (3,288) - (3,288) - - (27,556) (3,288) £000 £000 £000 153 (26) 127 - - 127 - - 127 - 127 - - 127 238 (88) 150 - - 150 - - 150 - 150 - - 87,787 (38,208) 49,579 (35,195) (42,142) (27,758) 60 (1,492) (29,190) (887) (30,077) (490) (490) 150 (30,567) 80 Purplebricks Annual Report 2019 Table 3a Condensed statement of f inancial position as at 30 April 2017 - IFRS 15 adjustments by contract type Under previous accounting policies Instructions Conveyancing Other As restated under IFRS 15 £000 £000 £000 £000 £000 Financial statements Non-current assets Goodwill Intangible assets Property, plant and equipment Deferred tax asset Current assets Trade and other receivables Cash and other cash equivalents Current liabilities Trade and other payables Deferred income Derivative financial instruments Net current assets Total assets less current liabilities Non-current liabilities Deferred tax liabilities Net assets Equity Share capital Share premium Share-based payments reserve Foreign exchange reserve Retained earnings Total equity 2,606 2,757 718 3,087 9,168 4,865 71,330 76,195 (7,301) (2,307) (104) (9,712) 66,483 75,651 (244) 75,407 2,705 74,901 1,669 116 (3,984) 75,407 - - - - - 3,288 - 3,288 - (7,063) - (7,063) (3,775) (3,775) - (3,775) - - - - - - - - - 3,105 - 3,105 (558) - - (558) 2,547 2,547 - 2,547 - - - - (3,775) (3,775) 2,547 2,547 - - - - - - - - - - - - - - - - - - - - - - 2,606 2,757 718 3,087 9,168 11,258 71,330 82,588 (7,859) (9,370) (104) (17,333) 65,255 74,423 (244) 74,179 2,705 74,901 1,669 116 (5,212) 74,179 Purplebricks Annual Report 2019 81 Financial statements Table 3b Condensed statement of f inancial position as at 30 April 2018 - IFRS 15 adjustments by geographical segment Under previous accounting policies UK AUS USA Canada As restated under IFRS 15 £000 £000 £000 £000 £000 £000 Non-current assets Goodwill Intangible assets Property, plant and equipment Deferred tax asset Current assets Tax receivable Trade and other receivables Cash and other cash equivalents Current liabilities Trade and other payables Deferred income Derivative financial instruments Net current assets Total assets less current liabilities Non-current liabilities Deferred tax liabilities Net assets Equity Share capital Share premium Share-based payments reserve Foreign exchange reserve Retained earnings Total equity 2,606 4,434 1,054 3,068 11,162 306 9,380 152,846 162,532 (15,624) (3,467) (44) (19,135) 143,397 154,559 (142) 154,417 3,019 176,400 4,545 (374) (29,173) 154,417 - - - - - - - 8,406 - 8,406 (658) (10,755) - (11,413) (3,007) (3,007) - (3,007) - - - - - - - - - - - 1,100 - 1,100 - (2,076) - (2,076) (976) (976) - (976) - - - - - - - - - - - 306 - 306 (18) (544) - (562) (256) (256) - (256) - - - - (3,007) (3,007) (976) (976) (256) (256) - - - - - - - - - - - - - - - - - - - - - - - - 2,606 4,434 1,054 3,068 11,162 306 19,192 152,846 172,344 (16,300) (16,842) (44) (33,186) 139,158 150,320 (142) 150,178 3,019 176,400 4,545 (374) (33,412) 150,178 82 Purplebricks Annual Report 2019 Table 3c Condensed statement of f inancial position as at 30 April 2018 - IFRS 15 adjustments by contract type Under previous accounting policies Instructions Conveyancing Other As restated under IFRS 15 £000 £000 £000 £000 £000 Financial statements Non-current assets Goodwill Intangible assets Property, plant and equipment Deferred tax asset Current assets Tax receivable Trade and other receivables Cash and other cash equivalents Current liabilities Trade and other payables Deferred income Derivative financial instruments Net current assets Total assets less current liabilities Non-current liabilities Deferred tax liabilities Net assets Equity Share capital Share premium Share-based payments reserve Foreign exchange reserve Retained earnings Total equity 2,606 4,434 1,054 3,068 11,162 306 9,380 152,846 162,532 (15,624) (3,467) (44) (19,135) 143,397 154,559 (142) 154,417 3,019 176,400 4,545 (374) (29,173) 154,417 - - - - - - 6,300 - 6,300 - - - - - - 3,167 - 3,167 - (530) (13,356) - (13,356) (7,056) (7,056) - (7,056) - - - - - - (530) 2,637 2,637 - 2,637 - - - - (7,056) (7,056) 2,637 2,637 - - - - - - 345 - 345 (146) (19) - (165) 180 180 - 180 - - - - 180 180 2,606 4,434 1,054 3,068 11,162 306 19,192 152,846 172,344 (16,300) (16,842) (44) (33,186) 139,158 150,320 (142) 150,178 3,019 176,400 4,545 (374) (33,412) 150,178 Table 4 Impact of the adoption of IFRS 15 on the Group’s reported earnings per share for the year ended 30 April 2018 Earnings per share restated Loss for the period (£000) Weighted average number of shares Loss per share (£) Basic and diluted As previously stated Increase in loss on adoption of IFRS 15 Basic and diluted As restated (27,066) 273,072,000 (0.10) (3,011) - (30,077) 273,072,000 (0.11) Table 5 Impact of adoption of IFRS 15 on brokerage and lettings revenue for the year ended 30 April 2018 Other revenue as previously reported Impact of adoption of IFRS 15 £000 11,686 48 11,734 Purplebricks Annual Report 2019 83 Financial statements Table 6 Impact of adoption of IFRS 15 on consolidated statement of cash flows for the year ended 30 April 2018 - IFRS 15 adjustments by contract type Loss for the year after taxation Operating cash outflow before changes in working capital Movement in trade and other receivables Movement in trade and other payables Movement in deferred income Net cash utilised in operating activities Under previous accounting policies £000 (27,066) (19,589) (4,515) 8,323 1,161 (14,620) IFRS 15 adjustments Other restatements see note 2.2 As restated £000 (3,011) (3,011) (3,419) 118 6,312 - £000 - (1,724) - - - £000 (30,077) (24,324) (7,934) 8,441 7,473 (1,724) (16,344) Table 7a Company statement of f inancial position as at 30 April 2018 - IFRS 15 adjustments by contract type Under previous accounting policies Instructions Conveyancing Other As restated under IFRS 15 £000 £000 £000 £000 £000 Non-current assets Intangible assets Property, plant and equipment Investment in subsidiaries Deferred tax asset Current assets Tax receivable Trade and other receivables Cash and other cash equivalents 3,565 743 22,150 2,893 29,351 306 22,524 149,684 172,514 - - - - - 8,128 - 8,128 Total assets 201,865 8,128 - - - - - 279 - 279 279 Current liabilities Trade and other payables Deferred income Derivative financial instruments (8,767) (2,743) (44) - (530) (10,736) - - - (11,554) (10,736) (530) Net current assets Total assets less current liabilities, being net assets 160,960 190,311 (2,608) (2,608) Equity Share capital Share premium Share-based payments reserve Retained earnings Total equity 3,019 176,400 4,545 6,347 190,311 - - - (2,608) (2,608) (251) (251) - - - (251) (251) - - - - - - - - - (130) (19) - (149) (149) (149) - - - (149) (149) 3,565 743 22,150 2,893 29,351 306 30,931 149,684 180,921 210,272 (9,427) (13,498) (44) (22,969) 157,952 187,303 3,019 176,400 4,545 3,339 187,303 84 Purplebricks Annual Report 2019 Table 7b Company statement of f inancial position as at 30 April 2017 - IFRS 15 adjustments by contract type Under previous accounting policies Instructions Conveyancing Other As restated under IFRS 15 £000 £000 £000 £000 £000 Financial statements Non-current assets Intangible assets Property, plant and equipment Investment in subsidiaries Deferred tax asset Current assets Tax receivable Trade and other receivables Cash and other cash equivalents 1,614 564 3,574 2,893 8,645 - 11,245 69,941 81,186 - - - - - - - - - - - - 3,068 - 3,068 3,015 - 3,015 Total assets 89,831 3,068 3,015 - - - - - - 91 - 91 91 (55) - - 1,614 564 3,574 2,893 8,645 - 17,419 69,941 87,360 96,005 (6,996) (8,470) (104) Current liabilities Trade and other payables Deferred income Derivative financial instruments Net current assets Total assets less current liabilities, being net assets Equity Share capital Share premium Share-based payments reserve Retained earnings Total equity (6,437) (1,821) (104) (8,362) 72,824 81,469 2,705 74,901 1,669 2,194 81,469 - (504) (6,649) - - - (6,649) (504) (55) (15,570) (3,581) (3,581) - - - (3,581) (3,581) 2,511 2,511 - - - 2,511 2,511 36 36 - - - 36 36 71,790 80,435 2,705 74,901 1,669 1,160 80,435 Purplebricks Annual Report 2019 85 COMPANY INFORMATION Directors Paul Pindar, Chairman Auditor Deloitte LLP, Four Brindleyplace, Birmingham B1 2HZ Vic Darvey, Chief Executive Off icer (appointed 7 May 2019) James Davies, Chief Financial Off icer Nominated advisor Adrian Blair Simon Downing Andreas Wiele Mike Wroe Registered off ice Suite 7, Cranmore Place, Cranmore Drive, Shirley, Solihull, West Midlands B90 4RZ United Kingdom Registered number 08047368 Zeus Capital Ltd, 10 Old Burlington Street, London W1S 3AG Co-brokers Citigroup Global Markets Limited, Citigroup Centre, 33 Canada Square, London E14 5LB, Peel Hunt LLP, Moor House, 120 London Wall, London EC2Y 5ET Solicitor Norton Rose Fulbright LLP, 3 More London Riverside, London SE1 2AQ Board members’ photography by Matt Leete. mattleete.com Cover: Customers, the Hamed family, Nottingham UK on their move day, spring ‘19 Purplebricks is committed to the environmental issues reflected in this Annual Report. The cover is printed on Fedrigoni Symbol digital satin and the text pages on Condat digital silk which are FSC certif ied and ECF (Elemental Chlorine Free) f rom a FSC chain-of-custody certif ied mill. Printed in the UK by PSW Paper & Print Ltd. www.fsc.org FSC A000531 The mark of responsible forestry 86 Purplebricks Annual Report 2019 Purplebricks Group plc, Suite 7, Cranmore Place, Cranmore Drive, Shirley, Solihull, West Midlands B90 4RZ United Kingdom Company number 08047368 investors@purplebricks.com
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