From the Publishers of
The #1 NEW YORK TIMES BESTSELLER
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This Is
Quarto’s
Annual
Report
2020
The Old Brewery | 6 Blundell Street | London N7 9BH | United Kingdom
Tel: +44 (0)20 7700 6700 | Email: info@quarto.com
the quarto group
Contents
STRATEGIC REPORT
Highlights ................................................................................................................... 2
Quarto at a Glance ................................................................................................... 3
How a Book is Made ................................................................................................4
Chairman’s Statement ..............................................................................................6
Group Chief Executive Officer’s Statement ...................................................... 7
Divisional Review .......................................................................................................9
Market Overview .....................................................................................................10
One Content, Multiple Channels .........................................................................11
Global Sales Coverage ............................................................................................11
Financial Review ..................................................................................................... 12
Our Key Performance Indicators ....................................................................... 14
Our People ................................................................................................................ 16
Corporate Responsibility and Sustainability ..................................................... 17
Section 172 Statement ........................................................................................... 17
Risk Management, Principal Risks and Uncertainties .................................... 19
GOVERNANCE
Board of Directors ...................................................................................................22
Nominations Committee Report .......................................................................24
Audit and Risk Committee Report ......................................................................25
Remuneration Committee Report ....................................................................28
Annual Report on Remuneration ......................................................................35
Directors’ Report ................................................................................................... 40
Statement of Directors’ Responsibilities ...........................................................45
Independent Auditor’s Report ........................................................................... 46
FINANCIAL STATEMENTS
Consolidated Income Statement ........................................................................57
Consolidated Statement of Comprehensive Income ................................. 58
Consolidated Balance Sheet ...............................................................................59
Consolidated Statement of Changes in Equity ............................................. 60
Consolidated Cash Flow Statement .................................................................. 61
Notes to the Financial Statements .....................................................................62
Company Balance Sheet .................................................................................... 89
Company Statement of Comprehensive Income ......................................... 90
Company Statement of Changes in Equity ..................................................... 90
Notes to the Company Accounts ....................................................................... 91
Five-Year Summary ................................................................................................95
Officers & Professional Advisors ....................................................................... 96
Highlights
FINANCIAL
A STRONG PERFORMANCE AGAINST THE BACKDROP OF THE PANDEMIC, WITH ENHANCED PROFITABILITY
AND COMPLETION OF THE SUCCESSFUL TURNAROUND OF THE BUSINESS
REVENUE ($M)
OPERATING
PROFIT ($M)
EBITDA ($M)
2020
2019
126.9
135.8
2020
2019
9.3
8.8
2020
2019
13.0
12.5
PROFIT BEFORE
TAX ($M)
ADJUSTED1 BASIC
EARNINGS PER SHARE (CENTS)
BASIC EARNINGS
PER SHARE (CENTS)
2020
2019
3.8
6.6
2020
2019
14.1
19.0
2020
2019
11.7
14.1
1 Adjusted measures are stated before amortization of acquired intangible assets and exceptional items. Management believes this is a better reflection of
our trading performance.
OPERATIONAL
• Swift and prudent management action to minimize the impact of
Covid 19
• Clear focus on enhanced profitability and cash generation
• Increase in Adjusted Operating Profit of 6% driven by improved
margins and cost reductions
• Profit Before Tax up 71% at $6.6m with interest charges down $2.2m
• Net debt down 61% at $19.7m2
• ‘’This Book is Anti-Racist” by Tiffany Jewell and Aurelia Durand
became a #1 New York Times Bestseller ($1.2m)
• Open offer successfully completed in January 2020 raising $17.0m,
net of expenses
• New banking facilities signed in February 2021 to 16 July 2024
2. Net debt excludes lease liabilities relating to right-of-use assets (IFRS16)
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THE QUARTO GROUP, INC. ANNUAL REPORT 2020Strategic Report THE QUARTO GROUP, INC. ANNUAL REPORT 2020
Strategic Report
Quarto at a Glance
WE CREATE A WIDE VARIETY OF BOOKS AND INTELLECTUAL PROPERTY PRODUCTS WITH A
MISSION TO INSPIRE LIFE’S EXPERIENCES FOR THE WHOLE FAMILY
GLOBAL CREATIVE AND SALES
FORCE IN GROWTH SEGMENTS
DE-LEVERAGED BALANCE SHEET
WITH STRONG CASHFLOW
• Unmatched global sales platform
• Net bank debt at 0.3 times EBITDA
• Over 100 sales & marketing
professionals and representatives
• Strong free cash flow from
operations of $16.6m
TREASURE TROVE OF IP
GENERATES STEADY INCOME
ENABLED BY TECHNOLOGY
AND DATA ANALYTICS
• c. 15,000 backlist titles generating
steady sales
• Focused effort to ‘re-mint’ backlist
contents
• Continuous efficiency
improvement from IT
modernization and automation
• AI platform to aid decision making
c. 15,000
TITLES IN
OUR CATALOG
c. 300
TALENTED EMPLOYEES
IN 7 OFFICES
(UK, US & CHINA)
c. 623
INTERNATIONAL
PUBLISHING
PARTNERS
c. $20.3m
ANNUAL INTELLECTUAL
PROPERTY
INVESTMENT
50
COUNTRY MARKETS
THAT WE SELL INTO
c. 69%
OF ANNUAL SALES
FROM BACKLIST
TITLES
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How a Book is Made
A case study on This Book is Anti-Racist
“To make a book, you must
first have an idea. Sometimes,
this idea comes from an
agent, or even our slush pile.
But more often, it comes
from our brilliant creative
team.
Three years ago, one of our
editors suggested doing a
book on anti-racism. It is easy
to look back now and think it
was obvious. But at that point,
few knew what ‘anti-racism’
actually meant.
Luckily, Quarto has always
been a company that trusts its
creatives. When we had the
go-ahead to commission, we
found a brilliant author. Then
the editing process began. A
lot of people think this is just
about correcting spelling: it’s
not. It’s a long, back-and-forth
of suggestions that makes the
book better. Alongside this,
the designer was working
with the illustrator on the
IDEA
COMMISSIONED
WRITTEN
ILLUSTRATED
4
5
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Strategic Report images: looking at rough
sketches, placing final art, and
coming up with the iconic
cover design.
We’re all in the business
of selling books. Alongside
making This Book is Anti-
Racist, the editor and I were
selling it internally to our
colleagues in Sales at
conferences. They then went
and sold it to the outside
world. At about the time we
were delivering the final
layouts to our colleagues in
Production, who handled the
printing, and the Marketing
team sprang into action.
We received a starred
review from Kirkus and people
started talking on social
media. About 10,000 copies
were sold in the first month
of publication in January
2020, which is what we call
a good start.
Then, nearly six months
later, George Floyd was sadly
killed and anti-racism became
something families were
talking about all over the
world. We had the book that
they needed and it became
a No. 1 New York Times
bestseller. “By understanding
the world, and its fault lines,
by trusting our creatives and
taking risks, and by working
together to publish the best
book possible as best we
knew how, we managed to
have the right book at the
right time”
Katie Cotton,
Group Publisher, Children’s
4
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EDITED
DESIGNED
PRINTED
MARKETED
SOLD
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Strategic ReportSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Chairman’s Statement
“A year of robust performance and creation of a
strong financial base.”
Andy Cumming
Chairman
Against the backdrop of the Covid 19
pandemic, the Board has maintained a
focus on the successful completion of
the turnaround plan initiated in 2018, with
a clear emphasis on the following areas:
•
focusing on the Group’s core
strengths;
• maintaining a disciplined business
model; and
• pursuing a path of further bank debt
reduction.
During 2020, the Group performed
considerably ahead of expectations,
following the outbreak of Covid-19, and
the robust trading performance,
combined with the excellent support
from shareholders, resulted in a further
reduction in bank debt and the creation
of a strong financial base.
The position in relation to bank debt has
been further improved in Q1 2021
following the successful negotiation of a
new US$20m three year and five-month
facility which will be provided by two
supportive banks. In addition, the Group
will continue to be supported by
shareholders 1010 Printing Limited and
C.K. Lau who have agreed to extend
their existing US$13m unsecured and
subordinated loans to the Group with
1010 Printing Limited providing a further
US$10m loan.
The new banking facility, coupled with
shareholder support, has allowed the
existing bank facility to be fully repaid.
The new US$20m facility represents a
significant achievement for the Group
with bank facilities having been reduced
from US$80m in 2018.
The Board’s vision remains for the Group
to become the dominant publisher of
illustrated books worldwide and to
expand on the use of the Group’s
intellectual property in as many ways as
possible. The Board remains focused on
a product offering which brings the
highest value to consumers and on
operating an efficient publishing
company which excels at the delivery of
quality content in a cost effective way.
I reiterate my previous comments that
Quarto is a great business, with great
people and great products. I am proud
to be chairing a Board which is fully
committed to the business and to
maintaining the positive momentum
which has been achieved.
Dividend
The Board has not recommended a
payment of a final dividend, given the
need for further investment in the
business and the turnaround plan having
6
only recently been completed. The
dividend policy will, however, remain
under review in consultation with
shareholders and other stakeholders.
Corporate Governance
In February 2020, as the Group’s
turnaround continued, the experienced
publisher, Polly Powell, joined the Board
as CEO for the Group’s UK operations,
and Andrea Giunti Lombardo of
publisher Giunti Editore S.p.A, joined the
Board as a Non Executive Director. At
the same time, to keep the Company
within the authorized number of
directors, Michael Mousley, kindly
stepped down from the Board. Michael
has, however, been retained as an
advisor to the Board. In September 2020,
Polly Powell became Group CEO.
The strong team spirit displayed by the
talented staff within Quarto has allowed
the business to react quickly and
positively to the Covid-19 challenges
and, coupled with the significantly
improved balance sheet, I look forward
with confidence to an exciting future.
Andy Cumming
Chairman
21 March 2021
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THE QUARTO GROUP, INC. ANNUAL REPORT 2020Strategic Report Group Chief Executive
Officer’s Statement
US
ANZ
RoW
UK
“Book Publishing is a perennial business that has remained
resilient in 2020. Quarto’s range of children’s books and adult
hobby titles has provided a much-needed resource of education
and entertainment, particularly during lockdown.”
Polly Powell
Group Chief Executive Officer
Introduction
I joined Quarto’s Board in February 2020
and became Group CEO in September
2020. Managing the Company through
the extraordinary circumstances of the
Covid-19 pandemic has been a
challenge, but has reaffirmed my belief
that Quarto is a robust company, with
exceptional people, producing
extraordinary books. Its proactive
commitment to encouraging diversity in
the workplace, and in its publications,
and to investigating sustainable
alternatives has put Quarto at the
forefront of the book industry. The
Company was justly rewarded in the
summer of 2020 when its title This Book
Is Anti-Racist became a No 1 New York
Times Bestseller. I would like to thank the
Quarto Board for its support and
guidance over the past year.
Business Review
The Company returned to profitability in
2019, and the emphasis for the Board
and Senior Management in 2020 was to
maintain that position whilst focusing on
cash generation in order to further
improve the Company’s financial
position. During 2020, the closure of
high street outlets at various points in the
year meant that the Company had a
greater reliance on on-line retailers for
both print and electronic books. In
response, the publishing program was
refined, in order to concentrate the
Company’s sales and marketing efforts
on digital sales and those customers still
able to trade such as the grocery
supermarkets. Tight cost controls were
in place throughout the Company and
the procurement of print, Quarto’s
biggest single expense, was under
scrutiny.
Consequently, the Company ended the
year with net debt at $19.7m, down 61%
vs prior year (2019: $50.5m). As
previously detailed, the success of the
open offer of $17.0m allowed the
Company to further stabilize its financial
position. It was decided that a dividend
would not be appropriate, until debt was
further reduced.
Revenue declined by 7% to $126.9m
(2019: $135.8m), operating profit
increased by 6% to $9.3m (2019: $8.8m).
Company profit increased to $4.6m after
tax (2019: $2.9m). The strength of the
balance sheet improved to $43.7m (2019:
$21.1m)
The success of the Little People, Big
Dreams series continues unabated. Over
3.7 million copies have now been sold,
with standout titles in 2020 being David
Attenborough and Captain Tom. This
Book is Anti-Racist reached number 1 on
the New York Times Bestseller lists and
produced over $1 million dollars of
revenue. The Company reacted to its
success by donating all revenue from the
sales of its ebook edition of the book
over the summer months to charity.
Squishy Human Body continues to
perform worldwide, with over 200,000
copies sold. Quarto’s strongest selling
titles in the US were Beautiful Boards and
Modern Sourdough; in ANZ Epic Airfryer
with over 67,000 copies sold was the
Company’s bestselling book.
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THE QUARTO GROUP, INC. ANNUAL REPORT 2020Strategic ReportSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS CHIEF EXECUTIVE OFFICER’S STATEMENT (continued)
Key Strategies
PUBLISHING STRATEGY
The Company will continue to pursue its
path towards becoming a significant
trade publisher in North America, the UK
and ANZ. Its co-edition business remains
an important firm-sale part of the
business with long-standing publishing
partnerships throughout the world. The
realignment in 2020 of the children’s
imprints to create a complementary one-
stop-shop of children’s books – from
baby books to educational titles for older
learners – will become apparent in 2021.
Among a number of initiatives, the new
imprint Happy Yak will be launched,
focusing on playful, mass-market
children’s books. The advent of home-
learning during the pandemic has
provided impetus to QED, the Quarto
children’s ‘soft’ educational imprint, with
significant growth potential for on-line,
high street and subscription box sales.
IVY Kids is rebranded as the home of
children’s sustainable publishing,
including the introduction of carbon
offsetting, and is launching in 2021 with
the book When We Went Wild by Isabella
Tree. The Frances Lincoln imprint has
always been at the forefront of diverse
publishing, and will continue to
challenge with titles such as This Book is
Anti-Racist and I Am Not A Label.
The relaunch of the adult list Aurum, will
allow Quarto to broaden its publishing
remit out of the confines of purely
illustrated books to include a new list of
narrative non-illustrated non-fiction
books. This development will also
provide the opportunity to increase
Quarto’s ebook offering as well as the
impetus to launch audio books in 2021.
In the US, bestsellers including Modern
Sourdough and Beautiful Boards, have
strengthened Quarto’s position in the
market as a significant trade publisher.
The niche imprints have benefited in
particular from the popularity of hobbies
during lockdown and will continue to
focus on specific areas of home interest
including gardening, cooking, craft and
well-being. Becker & Mayer, the Quarto
imprint that produces licensed books,
will now publish its own titles, rather than
selling properties onto third parties,
thereby increasing flexibility and
profitability. Smart Lab, the home of
Squishy Human Body, has developed a
number of new products that will be
launched in 2021, and this area is
targeted for significant growth.
Quarto’s co-edition and custom
businesses remained resilient in 2020
and will continue to be a significant part
of the Company’s international offering
in 2021 and beyond. These parts of the
business focus on generating new and
re-use books for specific customers
- both publishers and retailers. With new
business opportunities, such as the
growth of subscription boxes, this side of
the business is in a good position to
expand. Bright Press, based in the
Brighton office, has introduced Bright
Kids in order to capitalise on the growth
of parental teaching which has become
important in lockdown and beyond.
ENHANCING OUR IT
INFRASTRUCTURE
We are enhancing our IT infrastructure to
facilitate the transformation of Quarto.
One of our key initiatives is to leverage AI
platform to quickly identify trending
topics. Traditionally, book publishing has
been a creative business based on “gut
instinct” and experience, but we believe
the emergence of AI could complement
Quarto’s creative force and enable our
editorial team to produce contents that
are highly relevant to our customers.
Our digital transformation in the areas of
print procurement and process
automation has been a great success with
significant savings made improving our
bottom-line. We will continue to expand
our transformation into other areas of our
business including inventory, title &
content management, and supply chain
management.
IMPROVING OUR SUPPLY CHAIN
Supply chain is often overlooked but is a
crucial part of the business. It will play an
even more critical part in 2021, as
Covid-19 has negatively impacted the
global supply chain. The disruption of
freight shipping has led to shipment
delays and 300% increase in shipping
costs. To counter further disruptions, we
will take a flexible holistic supply chain
approach and work closely with our
logistics suppliers and network of
onshore and offshore printers.
8
Top 10 Adult Titles
Beautiful Boards
New World Sourdough
The Bucket List
How to Draw Cute Stuff
Witchcraft
All New Square Foot Gardening
Mexican Home Kitchen
Ultimate Guide to Tarot
Kawaii Doodle Class
Complete Fiction of H. P. Lovecraft
Top 10 Kids Titles
Squishy Human Body
This Book Is Anti-Racist
LPBD David Attenborough
ABC for Me: ABC What Can She Be?
Smart Circuits: Electronics Lab
Shine a Light: Human Body
50 States
Tiny Baking!
National Parks of the USA
LPBD Martin Luther King Jr.
‘BOLT-ON’ ACQUISITIONS
Quarto has built its business through
organic growth and a series of
acquisitions. Our acquisition objective is
to increase our market share in the six
key categories: Cookery, Home and
Garden, Art and Craft, Heritage,
Children’s, and Wellbeing. We will focus
on ‘bolt-on’ acquisitions of publishers or
imprints that could generate synergistic
value by leveraging Quarto’s
procurement, operations, and sales
platform.
COVID-19
The effects of Covid-19 on the book
industry have been significant. As
expected, we saw a move to online book
sales, and the Company’s sales and
marketing teams adapted well to this
move. Our experience indicated that
books have been identified as an essential
aid to education and entertainment
during lockdown and most of those sales
lost as a result of the closure of retail
outlets have been replaced by on-line
sales. The industry has remained solid in
unpredictable times.
9
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Strategic Report In light of the uncertainties presented by
the Covid-19 pandemic, the 2020
publishing program was reduced as we
focused on titles that would maximize
revenue but also allow us to conserve
cash. Through the prompt action of the
board, the business was able to react to
the changing environment and navigate
our way through the challenge ahead.
During the year, the Group received
financial support from the Governments
in UK and USA. Any monies received or
receivable are initially held as liabilities on
the balance sheet. Grants are
subsequently recognized in profit and
loss when there is reasonable assurance
that the grant will be received through
compliance with grant conditions.
Grants will be recognized net in the
profit and loss account, on a systematic
basis, over the same period during which
the expenses, for which the grants were
intended to compensate are recognized.
Additional information is disclosed in
Note 6 and Note 18.
Quarto’s staff have adapted well to
working from home and there has been
little interruption to workflow when the
offices have had to close. The Company
has taken the view that keeping the
offices open, when allowed, is important
for maintaining staff morale and
wellbeing.
OUTLOOK
Quarto is in a good position to grow in
2021. The gradual return of the high-
street bookshop, gift outlets and heritage
sites from Easter onwards will revive
bricks-and-mortar retail sales, whilst
on-line sales are not expected to
diminish from their already high levels.
The supply chain remains a challenge for
books being imported from the Far East.
However, it is likely that once ships and
containers are in the right place, from
late spring onwards, both supply and
price will edge towards normal levels.
Quarto’s continuing shift towards
profitable trade publishing, and the
ever-present appetite for children’s books
in particular, puts the Company on firm
footing for the future. With an emphasis
on technology, and what it can do for
book publishing in particular, the
Company’s outlook is bright.
Polly Powell
21 March 2021
Divisional Review
US Publishing
US Publishing adjusted operating profit
was down 28% to $3.2m (2019: $4.5m)
due to a combination of factors:
• Without the one-off charges resulting
from the Becker & Mayer UEL appraisal,
operating profits would have been on a
par with 2019.
• A reduction in the number of new titles
published following a review of the
publishing program due to Covid-19 and
the continuing pandemic, with total
revenue falling by 12% from $71.5m to
$63.1m. Backlist revenues, a key part of
our business, dropped following reduced
investment in 2019 and retail lockdowns.
• Ebook revenue continues to grow with
revenues up 56%.
• Print margins improved by 1.3%
• Our Becker & Mayer imprints, with their
stronger focus on novelty products,
struggled this year, leading to a down-
ward reappraisal of the useful economic
lives of these lists.
• Overhead savings amounted to $2.3m,
with a significant reduction in Sales and
Marketing costs, but not enough to
reverse the decline in gross profit.
For instance, the David Attenborough
title in this series recorded sales of
$620k. Revenue growth of $1.7m (6%).
For instance, the David Attenborough
title in this series recorded sales over
135,000. Revenue growth of $1.7m (6%).
Gross margins increased with an
improvement in print margins and a
reduction in our product development
costs.
Overhead costs were broadly flat.
UK Publishing
UK Publishing performed strongly, with
adjusted operating profit up 29% to
$8.4m (2019: $6.5m) due to the
following factors:
Strong trade revenues, with the success
of This Book is Anti-Racist & our best-
selling Little People Big Dreams series.
Group Overhead
Group overhead, or corporate costs, were flat.
Adjusted Operating Profit ($m)
2020
2019
US Publishing
UK Publishing
Group overhead
Total adjusted operating profit
Amortization of acquired intangible assets
Exceptional items
Operating profit
3.2
8.4
(1.0)
10.6
(0.9)
(0.4)
9.3
4.5
6.5
(1.0)
10.0
(0.8)
(0.4)
8.8
8
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THE QUARTO GROUP, INC. ANNUAL REPORT 2020Strategic ReportSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Market Overview
Foreign Rights Sales
In terms of product categories,
children’s publishing and adult practical
books with stay-at-home subjects such
as pets, gardening, cookery, crafts,
hobbies and puzzle books are in
demand. However, some of our clients
feel the consumer’s purchasing power
might diminish, thus impacting the sales
of the more expensive titles.
Due to different national lockdown
policies and state support for the
publishing industry, the 2021 outlook
differs markedly from country to
country. The prospects for foreign
rights sales are mixed as most markets
except Asia are still in lockdown, and
sales have slowed in Spanish language
and Nordic territories. However, we see
resilience in long-established core
markets of France and Germany and in
the Central and Eastern Europe region.
Further developments in China and Asia
generally, provide support for a more
positive outlook for the general foreign
rights market.
US Trade Sales
We expect continued strong sales
growth in digital retail, catalog and
subscription accounts and in-house
specialty this year and a rebound in the
trade, toy, and gift markets when we get
into Q2 and stores start opening in full.
Our goals in 2021 are about maximizing
our backlist sales, increasing sell through
and opening more national and regional
accounts.
• ONLINE RETAIL – We are budgeting
double digit percentage growth in
online sales channels that include
Amazon, online catalog, subscription
box accounts and flash sale websites
such as Zulily and Groupon. We
believe that customers are
increasingly more comfortable in the
digital space and the shift to digital
navigation and shopping is here to
stay.
• PHYSICAL RETAIL – Disruption will
persist in markets that are
experiencing lock-down related
requirements. The mandates vary
state-to-state, but we expect
lessening degrees of sales
suppression as we move through late
fall to early summer. The independent
bookstore channel continues to pose
significant risk of continued closures.
• WHOLESALE – This channel, like
physical retail, suffered disproportion-
ately during lockdowns and closures.
The library market was down 36% last
year as schools were closed. We do
not expect to see a full rebound until
schools open in full across the
country in Autumn.
• SPECIALTY – We foresee double digit
growth with gradual gains over 2020
starting late Q1 and Q2 and more
vigorous gains post pandemic. This
segment of the market has been
amongst the hardest hit in 2020, but
we are encouraged by the resiliency
in this channel as these nimble
specialty stores pivoted to online
sales as a stop gap to their dramatic
losses at retail.
UK & Europe Trade Sales
Online channels will continue to drive
our revenue in 2021, yet our ability to
capitalize on the increased online
trading will be subject to the stock
availability of our key titles. Pressures on
the High Street with shop closures will
be a significant risk. The impact of Brexit
will continue to create uncertainty for
our European business and possibly
reshape the market for English
Language books.
• ONLINE RETAIL - We anticipate
increased online trading to continue
through Q2 or until restrictions are
eased and physical stores are once
again able to open and trade at
capacity. Despite online retailers
being in a strong position, some
accounts are struggling to scale
quickly enough to meet the increase
in demand. There is also the issue of
Brexit for some online accounts.
Overall, this channel will continue to
be the engine of our sales in 2021
and our books, proven to drive
demand, will continue to see strong
sales throughout the year.
• PHYSICAL RETAIL – This segment
will continue to be severely impacted
by the ongoing lockdown through
Q1/Q2 2021. A number of accounts
are selling through their online stores,
but their online sales volume remains
small compared to their historical
sales volume from physical stores. On
the plus side the supermarket
channel continues to perform. By
mid-Q2 we hope to see the gradual
and phased reopening of physical
retail, meaning a gentle return to
Trade business as normal in this
period.
• SPECIALTY – Quarto continues to
focus on online and physical specialty
accounts, as well as garden centres,
pet shops and farm shops which
continue to remain open.
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THE QUARTO GROUP, INC. ANNUAL REPORT 2020Strategic Report One Content, Multiple Channels
UNMATCHED SALES COVERAGE TO MAXIMIZING THE POTENTIAL OF OUR CONTENTS
TRADE SALES
CO-EDITION & CUSTOM SALES
US Trade
English
Language
Co-Edition
UK & EU
Trade
Foreign
Rights &
Co-Edition
Int’l
Trade
Custom
Sales
Global Sales Coverage
SERVED BY OVER 100 SALES AND MARKETING PROFESSIONALS AND REPRESENTATIVES
QUARTO OFFICES
USA
SEATTLE
CALIFORNIA
BOSTON
NEW YORK
UK
LONDON
BRIGHTON
CHINA
HONG KONG
10
Key
International partnerships
English language markets
Foreign language markets
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THE QUARTO GROUP, INC. ANNUAL REPORT 2020Strategic ReportSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Financial Review
“Adjusted Operating Profit for the Group increased by $0.6m to
$10.6m (2019: $10.0m) in a difficult environment.”
Polly Powell
Group Chief Executive Officer
Group Results
Revenue was $126.9m, a decrease of 7%,
compared to 2019 ($135.8m). However,
adjusted operating profit was up at $10.6m
(2019: $10.0m) and represented 8.4% (2019:
7.4%) of revenue. Diluted earnings per share
reduced to 11.6c (2019: 14.0c), as a result of
the share issue at the beginning of the year.
Only one of our titles exceeded 1% of Group
revenue, being the top revenue earner for
the second year in a row. The following titles
were our top ten sellers in 2020, with their
respective revenue and year of publication:
Squishy Human Body (2006)
This Book Is Anti-Racist (2019)
Beautiful Boards (2019)
New World Sourdough (2020)
David Attenborough (2020)
ABC for Me: ABC What Can She Be? (2018)
Witchcraft (2016)
All New Square Foot Gardening (2018)
Smart Circuits: Electronics Lab (2016)
50 States (2015)
$1,986,262
$1,226,040
$1,049,473
$715,052
$619,808
$555,566
$466,623
$447,923
$419,874
$414,854
US Publishing
Revenue for this segment was down 12%
at $63.1m (2019: 71.5m). Operating profit
before amortization of acquired
intangibles and exceptional items
(“adjusted operating profit”) was down
28% at $3.2m (2019: $4.5m). We
achieved an adjusted operating profit
margin of 5.1% (2019: 6.3%). Reprints
accounted for 71% of revenue, compared
to 68% in 2019.
UK Publishing
Revenue for this segment was down 1%
at $63.7m (2019: $64.3m). Adjusted
operating profit was up 29% at $8.4m
(2019: $6.5m). We achieved an adjusted
operating profit margin of 13.1% (2019:
10.2%). Reprints accounted for 67% of
revenue, compared to 63% in 2019.
Corporate costs
Corporate costs were flat at $1.0m (2019:
$1.0m).
Exceptional Items
Exceptional items, in 2020, comprised
banking and refinancing costs of
$195,000, and $251,000 arising from the
cost reduction program implemented to
address the impact of Covid-19.
Exceptional items, in 2019, comprised
refinancing costs of $387,000, and
$32,000 with respect to aborted
corporate transaction costs. Further
details are disclosed in note 5.
Finance costs
Finance costs were $2.7m (2019:
$4.9m). The reduction was attributable
to reduction in bank debt due to strong
cash generation and the equity raise.
Tax
The tax charge for the year was $2.0m
(2019: $1.0m).
Balance Sheet
The Group’s net assets increased to
$43.7m from $21.1m, driven by the
equity raise and trading performance
during the year. The most significant
change in the balance sheet related to
current liabilities. Current liabilities
reduced from $128.2m to $98.2m,
mainly because our borrowings
reduced from $66.1m to $41.8m. This
reduction was driven by the equity raise
($17.0m) and strong cash generation. In
February 2021 we extended banking
facilities to 16 July 2024.
Cash Flow and Indebtedness
At the year end, our net debt was
$19.7m1, a reduction of 61%, compared
to 2019, when it was $50.5m. Due to the
uncertainty created by Covid-19 in early
2020, the Group requested and received
waivers on its banking covenants. Free
cash flow remained strong at $16.6 m,
down 5% compared to 2019, when it
was $17.4m. In 2020, a primary objective
of the Board was to continue its efforts
to reduce the bank debt to a more
acceptable level and this was achieved
with strong cash generation as outlined
above.
1. Included in the debt of $19.7m is a loan of
$2.4m relating to government support given
under the Coronavirus Aid, Relief and
Economic Security Act of the USA. Without
reasonable assurance of forgiveness, it has
been treated as debt to be repaid within 12
months. See note 18.
Shareholder Return
The Board has not recommended a
payment of a final dividend, given the
need for further investment in the
business and the turnaround plan
having only recently been completed.
The dividend policy will, however,
remain under review in consultation
with shareholders and other
stakeholders.
12
13
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Strategic Report FINANCIAL REVIEW (continued)
Principal Risks and Uncertainties
Details of the Group’s principal risks and
uncertainties are set out on pages 19 to
21.
Viability Statement
In accordance with Provision 31 of the
2018 revision of the UK Corporate
Governance Code, the Directors
assessed the prospects of the Group
over both a one-year and a three-year
period. The one-year period has a
greater level of certainty and was
therefore, used to set budgets for all our
businesses which culminated in the
approval of a Group budget by the
Board. The directors have determined
that the three-year period is an
appropriate term over which to provide
its viability statement, being aligned
with both the publishing program cycle
and the long-term incentives offered to
Executive Directors and certain senior
management.
The Directors have considered the
underlying robustness of the Group’s
business model, products and
proposition and its recent trading
performance, cash flows and key
performance indicators. They have also
reviewed the cash forecasts prepared
for the three years ending 31 December
2023, which comprise a detailed cash
forecast for the period ending 31
December 2021 based on the budget
for that year and standard growth
assumptions for revenue and costs for
the years ending 31 December 2022
and 2023. This is to satisfy themselves
of the going concern assumption used
in preparing the financial statements
and the Group’s viability over a three-
year period ending on 31 December
2023. As part of this work, the model
was sensitized initially by a 5% reduction
in revenue to ensure headroom within
the covenants. This is deemed as a
severe but plausible scenario. The
model was then flexed to a tolerance of
13%, at which point the banking
covenants were breached. It is
considered remote that such a
reduction of revenue would occur,
given, even with the challenges of 2020,
revenue dropped by only 7% year on
year.
In February 2021, the Group renewed
its bank facilities, retiring the current
syndicate. The new facility will have a
term of 3 years and 5 months, allowing
us a prolonged period of certainty. In
carrying out their analysis of viability,
the Directors took account of the
Group’s projected profits and cash
flows and its new banking facilities and
covenants.
In addition to the agreement to the new
facility, 1010 Printing Limited (a
subsidiary of the Lion Rock Group
Limited) and C.K. Lau have agreed to
extend the current $13m unsecured and
subordinated loans to the Group, which
were entered into on 31 October 2018,
on identical terms to those originally
entered into and on normal commercial
terms. Furthermore, 1010 Printing
Limited has agreed to provide a further
$10m unsecured and subordinated loan
to the Company on normal commercial
terms. These unsecured and
subordinated loans are repayable by 31
August 2024.
The Directors also took account of the
principal risks and uncertainties facing
the business referred to on pages 19 to
21. The review focused on the
occurrence of severe but plausible
scenarios in respect of the principal
risks and considered the potential of
these scenarios to threaten viability.
The key principal risk that the business
faces is a downturn caused by a global
recession. The financial impact of this
downturn has been quantified to
illustrate the Group’s ability to manage
the impact on liquidity and covenants,
with sensitivity analysis on the key
revenue growth assumptions and the
effectiveness of available mitigating
actions. Further impact on the Group
from Covid-19 has additionally been
considered as part of the Group’s
viability. In considering this analysis, the
Directors took account of the mitigating
actions forecast twelve months ago and
the actual mitigating actions taken
during the year, from the onset of the
Covid-19 pandemic. These actions
included reductions in investment in
pre-publication costs, print volumes,
staffing levels and other variable costs.
Based on the above indications, after
taking into account the downside
scenario projections, the Directors have
a reasonable expectation that the
Group has adequate resources to
continue in operation and meet its
liabilities throughout the viability period
to 31 December 2023.
Polly Powell
Group Chief Executive Officer
21 March 2021
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13
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Strategic ReportSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Our Key Performance Indicators
Our strategy is to grow our revenue and margins by
leveraging our size, scale and reach as the leading
global illustrated book publisher, to build a business
with sustainable growth in earnings per share while
also managing our net debt.
EBITDA ($M)2
ADJUSTED1 OPERATING
PROFIT ($M)2
2020
2019
2018
13.0
2020
12.5
11.1
2019
2018
10.6
10.0
10.3
EBITDA is used to measure the
operational performance of the Group
and is used for banking purposes.
Adjusted operating profit is used to show
our operational performance.
RETURN ON NET
OPERATING ASSETS (%)4
NET DEBT ($M)2
2020
2019
2018
11.2
2020 19.7
10.3
9.7
2019
2018
50.5
60.4
The Board uses this ratio to evaluate the
long-term financial health of the Group.
Net debt is used as a measure as it has
been strategic goal to reduce our debt.
Our net debt has reduced by 61% in
2020.
1 Adjusted measure are stated before amortization of acquired intangible assets and exceptional items
2 See note 30
3 See note 10
4 Operating profit before amortization of acquired intangibles & exceptional costs over Group net
assets plus unallocated net liabilities from operating segment
14
15
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Strategic Report ADJUSTED1 DILUTED
EARNINGS PER SHARE (CENTS)3
BACKLIST % OF SALES (%)
2020
14.1
2019
2018
18.8
23.0
2020
2019
2018
69.2
65.4
63.2
The Board uses this ratio to evaluate the
quality of the Company’s earnings. The
reduction in 2020 is due to the share
issue, at the beginning of the year.
Backlist is measured as a performance of
our intellectual property.
INVENTORY % OF REVENUE (%)
INTELLECTUAL PROPERTY
DEVELOPMENT SPEND ($M)
2020
12.2
2020
20.3
2019
2018
14.3
2019
23.8
15.0
2018
27.6
This is a measure of the cash used up in
inventory as a proportion of revenue.
This shows our investment in new titles.
We reduced the IP spend in 2020,
planning to conserve cash during the
Covid-19 pandemic. See note 15 of the
financial statements.
CHILDREN’S PUBLISHING
REVENUES ($M)
RETURN OF FRONTLIST
INVESTMENT
2020
2019
2018
49.3
2020
49.8
2019
1.67
1.66
50.2
2018
1.59
Children’s publishing revenues now
represent 39% of Group revenue.
Return on Investment shown here is the
ratio of frontlist revenue generated from
investment in frontlist Intellectual
Property.
14
15
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Strategic ReportSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Our People
Quarto employs c. 300 people across 6
locations in the UK and the US, and
utilizes a network of creative contributors
and freelancers. We operate in a
competitive international marketplace
and need to attract, develop and retain
creative, talented and resourceful
employees.
Our Values
Quarto’s values shape our business.
They make Quarto an attractive place to
develop a career, and a responsible
organization.
Our Values
• BE ACCOUNTABLE
• BE PURPOSEFUL
• BE CONSISTENT
• BE EXCELLENT
• BE CURIOUS
• BE COLLABORATIVE
We will not discriminate on the basis of
age, gender, ethnicity, cultural
background, sexual orientation or
religious beliefs. We operate a robust
recruitment policy, including right to
work checks and commitment to a
policy of equal opportunity and
treatment, to foster an inclusive, fair and
diverse environment.
In 2020, Quarto launched a Diversity
Committee to set goals and objectives to
making our workplace inclusive and
diversity equitable. As part of this
initiative, a formal internship program
was launched in the autumn to bring
interns with a diverse background into
Quarto and develop potential future
employees. In Q4 of 2020, Quarto
hosted four “Eliminating Systems of
Oppression” sessions for all employees
led by Dr David Wallace of Awakening
Minds. The purpose was to raise
awareness and for staff to develop
strategy and tactics towards making the
Company’s culture more equitable and
inclusive. The sessions contained some
pre-work as well as group discussions.
Our plans for 2021 include a
continuation of the Committee’s work,
developing and implementing a staff led
Diversity Steering Committee, with the
help of Awakening Minds to introduce
initiatives that will ensure the culture at
Quarto is equitable and inclusive.
The Company acted quickly to protect its
employees and contractors when the
extent of Covid-19 spread became clear
closing its offices from March 2020 and
allowing teams to work from home, a
situation which has prevailed into 2021.
During this period, the Company
encouraged contact between its
employees both to manage workloads
effectively; socially, including arranging
online fitness sessions; and engaging
employees on how to tackle the
disruptions to normal business. During
Q4 2020 the Company prepared its
offices and occupation policies to
comply with government advice aimed
at reducing Covid-19 spread ready for
when office use is resumed.
Quarto has an employee code of
conduct, operates anti-bribery and
corruption, equal opportunities, anti-
harassment and whistle-blowing policies
and observes health and safety
requirements, demonstrating our
commitment to acting ethically and with
integrity in all employee and business
relationships. These policies are also
readily available to staff via the Quarto
intranet site and in the staff handbooks.
Quarto honours the dignity of all people
and respects the laws, customs and
values of the communities in which we
operate. We are committed to ensuring
that there is no modern slavery or
human trafficking in our supply chains or
in any part of our business.
At the end of 2020, the breakdown of
directors, senior managers and
employees was:
Directors
Senior managers
All employees
Male
Female
4
8
71
3
10
221
16
17
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Strategic Report Corporate Responsibility
and Sustainability
Corporate responsibility and
sustainability
Quarto wants to be a good corporate
citizen and considers the impact our
activities have on the environment; as
well as make a positive contribution to
society by making inspirational books
and actively supporting our
communities.
Supporting communities
Quarto launched the Quarto Foundation
in 2017 as a means for our people to
support local charities. The disruption of
the Covid-19 pandemic has reduced the
activities of The Quarto Foundation
however during summer 2020 Quarto
donated $19,803 from the sale of This
Book is Anti-Racist to anti-racist charities
as well as reducing the price of the ebook
version to make it available to more
readers. Additionally, for one year from
September 2020 the Company has
agreed to make contributions to the UK’s
NHS Charities Together from sales of
Little People Big Dreams: Captain Tom,
and we participated in charity events in
the US supporting Humble Bundle
helping them to raise over $200,000 in
2020 from sales of Quarto titles.
Environmental impact and
sustainability
Most of our impact arises through the
materials and services we procure such
as printing, production, distribution,
recycling and disposal of books. To
reduce our impact, we adopt the
following practices:
• Use of sustainable paper: most
books are printed on Forest
Stewardship Council (FSC) paper
supplies, or, for domestic US printing,
we use Sustainable Forestry Initiative
(SFI) paper. We estimate over 70% of
•
books are printed on sustainable
paper.
Increasing sustainable operations: we
continue to consolidate shipments
wherever possible so that the number
of journeys made is minimised.
• Ethical production: we continue to
work with our suppliers to adopt
ethical standards of manufacture
using ICTI and SEDEX Care protocols.
• Office requirements are reviewed
routinely and from Q1 2021, the
Company’s UK office footage will
reduce by 13%.
• 2021 will see the launch of a new
children’s imprint whose books will be
manufactured in local markets using
recycled paper and with carbon-
offsetting against manufacturing
emissions.
Section 172 Statement
The Directors promote the success of
the Company by giving due care and
attention to the following elements:
(A) LIKELY CONSEQUENCES OF
DECISIONS IN THE LONG TERM
The Board’s vision for the Group is to
become the dominant publisher of
illustrated print books worldwide and to
expand on the use of the Group’s
intellectual property in as many ways as
possible.
The Board recognizes that a coherent
and viable strategy is required which (i) is
nimble and responsive, (ii) is supported
by a modern infrastructure, and (iii)
allows the Group to grow its global
reach. These are considerations which
have long-term consequences, and so in
executing its strategy for the Group it
prioritises the greatest stability for its
publishing imprints and employees with
appropriate consideration for what is a
challenging international marketplace.
In 2020 this approach was evident from
the open offer to shareholders which
concluded successfully in January 2020.
This allowed the Group to reduce its
indebtedness and in Q1 2021 the
position in relation to bank debt has
improved further with a new US$20m
three year and five months bank facility.
(B) INTERESTS OF THE COMPANY’S
EMPLOYEES
Quarto is a publishing company and
having creative and motivated
employees is essential. Before the
Covid-19 pandemic, the Board had a
rolling program of employee meetings
through the year. These meetings
offered employees the opportunity to
discuss the Group’s strategic direction
and management. During the Covid-19
pandemic Quarto increased its effort to
engage with its employees through
online events and management briefings
as it adjusted its activities during the
pandemic. The Board has asked Andy
Cumming, an independent non-
executive director, to be the designated
employees’ liaison as recommended by
the Code.
The Company offers competitive market
rates of remuneration and introduced a
Diversity Committee during 2020 to
promote workplace inclusiveness and
diversity equitability (more details are
given on page 16). Additionally, the
Company encourages community
interaction through the Quarto
Foundation, established in 2017 (page 17
indicates some of the charitable work
the Company has supported).
The Company acted quickly to protect its
employees and contractors when the
extent of Covid-19 spread became clear
closing its offices from March 2020 and
allowing teams to work from home, a
situation which has prevailed into 2021.
During this period, the Company
encouraged contact between its
16
17
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Strategic ReportSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS (E) DESIRABILITY OF THE COMPANY
MAINTAINING A REPUTATION FOR
HIGH STANDARDS OF BUSINESS
CONDUCT
The Board complies with the
requirements of the UK’s 2018 Code of
Governance. In early 2020 the Company
strengthened the Board and is confident
that it has the right composition to
deliver its strategy to the benefit of its
employees, customers, and
shareholders.
The Board appraises its own
performance in accordance with the
Code, and recognises the value of fair
treatment of its suppliers, honouring its
commitments, so that it can achieve a
reliable and responsive supply chain that
serves the needs of its customers. To this
end, the Board routinely assesses the
performance of its supply chain.
The Company has an established
whistle-blowing policy and anti-bribery
policy.
(F) NEED TO ACT FAIRLY AS BETWEEN
MEMBERS OF THE COMPANY
The Company has a single class of
common shares. In 2019, C.K. Lau and
1010 Printing Limited, a company
controlled by C.K. Lau, became
controlling shareholders. The Company
and controlling shareholder parties
entered into a relationship agreement to
ensure that controlling shareholders do
not exert improper influence over the
Company, and in accordance with the
Listing Rules. During 2020, the
Company’s by-laws were amended to
complete the requirements of the Listing
Rules in relation to controlling
shareholders.
employees both to manage workloads
effectively; socially, including arranging
online fitness sessions; and engaging
employees on how to tackle the
disruptions to normal business. During
Q4 2020 the Company prepared its
offices and occupation policies to
comply with government advice aimed
at reducing Covid-19 spread ready for
when office use is resumed.
The Company participates in government
supported furlough schemes in the US
and UK, as well as enrolling in the CARES
scheme offered by the US government
(see Notes 6 and 18).
The Company invests in its people by
providing them with tools, technology
and training to meet the challenges of its
market and the evolving needs of its
customers. Quarto also involves
employees in areas of strategy where
possible.
(C) FOSTERING THE COMPANY’S
BUSINESS RELATIONSHIPS WITH
SUPPLIERS, CUSTOMERS AND
OTHERS
The Company benefits from its
association with Lion Rock which
operates as one of Quarto’s key suppliers
enabling it to maintain a positive
relationship with an essential supplier
base; this connection also allows Quarto
to print outside China and so provide a
better service to US customers
particularly sensitive to US tariffs.
The Board recognises the need to offer a
flexible service to its customers, be that
offering them outside-China printing, or
customised publishing, as well as the
need to cultivate suppliers of print-on-
demand in order to manage the business
efficiently and still fulfil customers’
orders. By exploring all the technologies
available, Quarto maximises its offer to
its customers.
Throughout the Covid-19 pandemic, the
Company has worked hard to support its
customers to ensure interruptions to
product supply was minimised. It has
also been able to pay its suppliers on
time.
(D) IMPACT OF THE COMPANY’S
OPERATIONS ON THE COMMUNITY
AND THE ENVIRONMENT
The Company seeks to minimise its
impact on the environment. It takes
advantage of schemes that promote
green energy, such as in the UK where
several of its offices now use 100% green
energy supplies; and when refitting its
offices, it accommodates energy-saving
elements (e.g. LED lighting). Energy used
by its IT operations has reduced as the
Company has adopted cloud-based
services, and new equipment is
increasingly energy-efficient. The
Company reviewed its office facilities
during Q4 2020 and decided to reduce
its office space in the UK from Q1 2021
by 13% reducing its energy consumption.
Quarto continues to publish socially
responsible and inspiring titles such as
the Little People Big Dreams series, The
ABC Series, Greta and the Giants
(endorsed by Greenpeace and 350.org),
and This Book is Anti-Racist. We have
participated in charity events with
Humble Bundle in the US and have
helped them raise over $200,000 in
2020 from sales of Quarto titles.
Through the Quarto Foundation, which
is very much staff led, Quarto
contributes to local causes. In 2020
Quarto donated $19,803 to anti-racism
charities from the sale of This Book is
Anti-Racist.
By choosing accredited production
schemes like ICTI and SEDEX, which
include worker welfare assessments,
Quarto ensures a minimum welfare
standard in its principal supplier base.
Additionally, the Group prints
predominantly on paper from sustainable
sources. In Q1 2021, Quarto will launch
a new environmentally conscious
children’s imprint. The books will be
manufactured from recycled
components, with additional carbon
offsetting against production emissions,
and will be printed in the markets where
the books are sold.
18
19
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Strategic Report Risk Management, Principal
Risks and Uncertainties
The Group’s risk management framework is designed to identify and assess the likelihood of risks arising, the consequences of
them doing so and the actions necessary in order to mitigate their impact.
The Board maintains a Risk Register which is reviewed, updated and approved at each meeting of the Audit and Risk Committee,
and presented at each quarterly Board meeting for review; this means that the Register is reviewed, typically, as many as seven
times a year. In addition during 2020 because of the Covid-19 pandemic, the Board met weekly then bi-weekly between March
and the end of June, a total of 14 times, to manage the impact of the pandemic on the business.
The risk review conducted by the Board is broad ranging addressing each part of the Group’s business and activities. For each
risk identified its impact is rated, and mitigations are identified. In addition, risks to the business are monitored regularly by the
Company’s Group and divisional CEOs, so that emergent risks can be identified and escalated quickly, and mitigations enacted.
Details of the Group’s financial risk management objectives and policies are set out in Note 22 to the Financial Statements. The
business risk review has identified the following risks that face our businesses
MARKET AND FINANCIAL RISKS
Risk
Description
Economic
conditions
The Group operates across many of the major
world economies and its revenues and profits
depend on the general state of the economy in
those territories. A downturn caused by a global
recession, potentially as a result of the Covid-19
pandemic, could reduce consumer discretionary
spending, which might result in a reduction in
profitability and operating cash flow. In addition,
the UK’s exit from the European Union and US-Sino
relations (resulting in the introduction of tariffs in
2019) contributes to uncertainty in the eco-nomic
environment.
Currency
The Group’s businesses operate in a number of
currencies giving rise to a risk of exchange loss
from fluctuating exchange rates.
Financial
The Group’s relatively high level of debt makes the
Group sensitive to interest rates and potential
covenant breaches.
.
Mitigating factor
The Group has adequate liquidity with up to $20m in
available debt facilities. In addition, in such an event, the
Directors have the ability to take a number of mitigating
actions, including the reduction of spend on pre-publica-
tion costs, inventory printings and other discretionary
Items. The Group offers non-Chinese printing for custom-
ers in order to avoid US tariffs on books. The Company’s
management information systems allow it to assess sales
performance quickly and so take the appropriate steps to
maximise operating performance. The Group has shown
itself to be adaptable by quickly accommodating the
changes necessary to its sales and marketing activities
during the Covid-19 pandemic.
The Group has a natural hedge that mitigates against
currency movements impacting our earnings in that one of
our largest costs, which is print costs, are paid in US
Dollars. Borrowings have been taken out in different
currencies to mitigate risk of currency movements impact-
ing our net assets.
In 2020 the Quarto progressed in its goal to reduce its debt
when it completed an open offer to shareholders in
January; the net proceeds of $17m were used to pay down
bank debt. Since the year end, a new three year and five
months banking facility of $20m has been secured,
together with additional shareholder support. This has
enabled the Company to repay the facility that existed at
the year end. Quarto continues to benefit from a strong
cost-reduction program introduced in the second half of
2018 and a competitive auction platform introduced during
2019 to procure printing services which is providing
additional cost savings. In 2021 the Company will reduce
its office footprint to accommodate new working styles
which will further reduce operating costs. Meanwhile the
Group is pursuing its strategy of organic growth through
innovation (as set out on page 8).
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19
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Strategic ReportSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS RISK MANAGEMENT, PRINCIPAL RISKS AND UNCERTAINTIES (continued)
OPERATIONAL RISKS
Risk
Description
Customer
Supply chain
and raw
materials
A significant dependency on a small number of
customers, for instance co-edition partners or
retailers, could be problematic if one of them tried
to secure preferential terms or stopped doing
business with the Group. The failure of a major
customer, or a distributor, could impact revenue
and profits. The impact of Covid-19 has moved
sales online which has increased the Group’s
exposure to Amazon and has reduced sales to
traditional retailers and bookstores. Until lock-
downs are over and customer buying patterns are
better understood, we can expect market disrup-
tion to continue and with that there is the risk that
sales to traditional customers will fall.
The Group relies on a group of print suppliers,
many of which are based in southern China. There
is a risk that an interruption in the availability of
printing services in that area or the financial failure
of one printer could disrupt the supply of new
books to customers. Any increase in costs such as
oil, port charges etc. would also impact shipping
costs. Any disruption in supply of paper could lead
to an increase in costs and production disruption.
There is also a reputational risk of using non-envi-
ronmentally friendly paper.
Inefficiencies in product movement introduced by
‘Brexit’, the departure of the UK from the EU from
2021, could disrupt timely product movement into
the UK.
The Covid-19 pandemic has disrupted freight
shipping causing severe delays and tripling shipping
costs.
Coronavirus
The global spread of the coronavirus (Covid-19) is
causing significant business interruption by
infecting the Group’s workforce; closing retail
outlets and impacting orders and revenues; causing
lockdowns altering customer buying patterns; and
impairing the Group’s supply chain adding cost and
delaying fulfilment of orders.
Mitigating factor
The Group has a long-established strategy of diversifying its
international customer base, including specialty retailers,
resulting in the fact that with one exception no customer,
or distributor, has over 20% of the business. Customer
relations are managed to ensure a fair-trading relationship.
Management monitors debts closely and maintains close
relationships with its customers, and distributors, which
may provide prior warning of likely failure. The Group
continues to adapt to supporting online selling and
continues to offer and promote e-book versions of its
books.
The Group maintains relationships with printers in other
parts of the world and is confident that printing could be
carried out by an alternative range of printers if supply from
China was interrupted or to mitigate shipping costs. We
maintain close relations with our printers, reducing the risk
of a lack of knowledge of any printer being in financial trou-
ble. The Group has worked with its major printers on a plan
to adopt sustainable paper and recently instituted a Forest
Stewardship Council (FSC) paper or Sustainable Forestry Ini-
tiative (SFI) paper policy across all our imprints.
Quarto monitors the Brexit-situation closely, taking note of
the advice of the UK Government and key suppliers to
ensure minimal disruption. Most of Quarto’s product is
shipped directly to EU countries from its printers based
principally in China. These shipments are not expected to
be affected by Brexit.
The Company recognises the disruptions from freight
shipping and will take a flexible holistic approach to its
supply chain activities and will work closely with logistics
suppliers and its network of onshore and offshore printers.
Quarto monitors and follows government advice making
the necessary adjustments in order to maintain the
well-being of its employees. Quarto promotes hygienic
practices in its offices and avoids unnecessary travel. The
Group operates modern IT systems that permit remote
working with the minimum of interruption. The Group also
has the ability to immediately reduce its investment in
pre-publication costs and inventory and manage discre-
tionary spending. Working with its suppliers and customers,
Quarto works hard to reduce the impact of any interruption
in its supply chain.
During 2020 Quarto was able to adapt to the increasing
value of book sales going online. It will continue to perfect
its approach to supporting sales as necessary.
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THE QUARTO GROUP, INC. ANNUAL REPORT 2020Strategic Report OPERATIONAL RISKS (continued)
Risk
Description
Product safety Our business is faced with increasing safety
and testing requirements on various product
components. The risk of a product recall due to
children’s safety would have a severe reputational
impact on the business.
Mitigating factor
All components receive safety testing from specialist and
accredited independent third parties. Management
carefully selects suppliers for components.
Quarto will monitor the regulatory impact of product
testing following the UK’s departure from the European
Union.
A loss of stored IP through failure of storage
medium or loss of back-ups would impact our
ability to process reprints and revisions and
could cause a loss of revenue.
A cloud storage solution is integrated into our production
workflow to provide storage, back-up and recovery services
for product files in development. Complete backlist
archives are stored in a mirrored storage array.
Loss of
intellectual
property
Laws and
regulations
As a creative and IP business, any changes to
copyright laws could have an impact on the
Group’s activities and any infringement could lead
to increased costs. Inconsistent internal practices
for negotiating contracts or clearing rights could
lead to IP claims.
Cyber security
Like many organizations, the Group is at risk from
cyber-attack. This presents a potentially serious risk
of disruption to the production process and could
have a significant impact on the profitability of the
business and the security of its IP assets.
People
As in any creative business, the Group is heavily
reliant on its people and operates with the inherent
risk of not making the ‘right’ books or creativity
being uneven year-on-year. Failure to retain talent
and attract new talent could ultimately lead to a
failure to generate successful new titles, leading to
a drop in revenue.
The departure of the UK from the EU (‘Brexit’) in
2020 will alter the right-to-work permissions of
EU-citizens to work in the UK potentially disrupting
the recruitment opportunities of our UK-based
rights selling team.
During 2018, an information system was introduced Group-
wide to harmonise the management of contracts. Quarto
reviews its licensing, permission-acquisitions and other
contracts routinely receiving advice from relevant profes-
sional firms (including the possible impact of Brexit) so that
legal instruments remain current and represent best
practices so that we ensure that our practices are aligned
and consistent across imprints, and Quarto’s IP rights are
properly protected.
The Group uses enterprise level firewalls and IT controls to
prevent attack as well as maintaining cloud-based copies
and offsite back-up of IP. Computerised files of the Group’s
books are also maintained by printers. We do not store any
personal or credit card data on our transactional website
www.quartoknows.com. The Group undertakes industry
standard system penetration testing.
Our portfolio of imprints and large number of products
spread this risk. The overall portfolio is well diversified with
no single title exceeded 5% of our total revenue in 2020
and no series accounted for more than 10% of our total
revenue in 2020.
Quarto’s Publishers are experienced and talented profes-
sionals who work alongside sales and marketing teams and
strive to stay close to publishing trends and markets. The
Group also offers competitive market rate remuneration
packages and works hard to make Quarto an attractive
place to work.
Quarto monitors the UK’s rights-to-work requirements
closely, taking note of the advice of the UK Government so
that it is ready to support any staff affected by post-Brexit
regulations and to support its recruitment of EU-citizens so
that any potential disruptions can be minimized.
The Strategic Report was approved by the Board and was signed on behalf of the Board by:
Polly Powell
Director
21 March 2021
20
21
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Strategic ReportSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Board of Directors
Andy Cumming | Non-Executive Chairman
Andy joined the Board on 1 March 2018 as an independent Non-Executive Director
and was appointed Non-Executive Chairman on 11 July 2018; he is a member of
the Audit and Risk, and Remuneration Committees, and he Chairs the Nominations
Committee.
Andy has over 40 years’ experience in banking and risk management. The last 17
years of his full-time career were spent with Lloyds Banking Group in a variety of
senior positions, including seven years as the Chief Credit Officer of the
Commercial Banking Division and four years as Managing Director of the Global
Non-Core Division. He was also a member of the Group Risk and Commercial
Banking Executive Committees.
Andy is currently a Non-Executive Director of (i) Lloyds Development Capital, the
private equity arm of Lloyds Banking Group, (ii) Bluestone Holdings Limited, a
multinational financial services business, (iii) Seadrill Partners LLC, which focuses on
the acquisition and operation of offshore drilling rigs, and (iv) Integrity Capital plc, a
company investing in asset backed secured lending.
Polly Powell | Group Chief Executive Officer
Polly was elected to the Board on 10 February 2020 as Executive Director. She was
appointed Group CEO of Quarto on 18 September 2020.
Polly has worked in non-fiction publishing for more than thirty years. She was a
member of the management team that acquired the book publishing business from
Chrysalis Music Limited in 2004. Polly became the sole owner of the business in
2012 renaming it Pavilion Books.
Polly is a Director of Pavilion Books Holdings Limited. In July 2020, Polly resigned
from the board of the National Gallery Company Limited where she was a Non-
Executive Director.
Chuk Kin Lau | Executive Director
C.K. Lau, “CK”, is also an Executive Director of Lion Rock Group and an Executive
Director of OPUS Group Limited, a subsidiary of Lion Rock. CK was elected to the
Board on 17 May 2018 as an Executive Director. He is President of the Company.
CK is a member of the Remuneration and Nominations Committees.
Ken Fund | Chief Operating Officer, Chief Executive Officer Quarto US
Ken became Chief Operating Officer of the Company in July 2016 and joined the
Board as an Executive Director on 11 July 2018; he is CEO of Quarto US. Ken joined
the Group in 1999 as President and CEO of the Group’s subsidiary Rockport Publishers
company.
Ken’s career started with Dino DeLaurentiis Productions in New Business
Development before moving to Simon & Schuster Publishers as Business Manager in
1984. He joined Harper Collins San Francisco in 1990 becoming senior Vice
President for Adult publishing.
Ken is a graduate of SUNY Oswego and holds an MBA in Finance from Pace University.
22
23
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Governance Jane Moriarty | Non-Executive Director
Jane joined the Board of the Company on 12 November 2018. Additionally, Jane is
Chair of the Audit and Risk, and Remuneration Committees; she is the Senior
Independent Director. Jane is Vice-Chair.
Jane is a Fellow Chartered Accountant who worked with KPMG LLP for over 29
years. During her time with KPMG, she worked with a broad range of businesses
helping them to develop strategies to realise opportunities and manage threats in
fast moving environments.
Jane is currently a non-executive director of (i) Mitchells & Butlers plc, one of the
largest operators of pubs, bars and restaurants in the UK, (ii) NG Bailey, an
independent engineering, construction and services company in the UK, (iii) Martin’s
Properties, a leading commercial, retail and residential property company, and (iv)
Nyrstar NV, a listed Belgian holding company with an investment in a global mining
and smelting business.
Mei Lan Lam | Non-Executive Director
Mei Lan is an Executive Director and Chief Financial Officer of Lion Rock Group and
responsible for the financial management of Lion Rock. Mei Lan has over 30 years’
experience in finance and has held senior financial positions in various listed
companies and a non-profit charitable organisation in Hong Kong. She joined the
Company after being elected to the Board as a Non-Executive Director on 17 May
2018.
Andrea Giunti Lombardo | Non-Executive Director
Andrea was elected to the Board on 10 February 2020.
Andrea is a member of the board of Giunti Editore S.p.A., the second largest
publishing house in Italy and owner of the Giunti al Punto bookstore chain. He has
been involved in different aspects of the publishing industry, and has extensive
experience in finance, M&A and digital development. Andrea was also involved in the
establishment of the Giunti Academy, a business management school in Italy.
22
23
THE QUARTO GROUP, INC. ANNUAL REPORT 2020GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Nominations Committee Report
The Nominations Committee comprises
the Group’s Non-Executive Directors,
Andy Cumming (Committee Chair), Jane
Moriarty (Senior Independent Director),
and C.K. Lau. A copy of the Committee’s
formal terms of reference can be found
on the Company’s website (www.quarto.
com).
The search for Board candidates is
conducted and appointments made, on
merit, against objective criteria and with
due regard to the benefits of diversity on
the Board, including gender. External
search consultants are engaged, as
appropriate, and formal and transparent
processes followed. When dealing with
the appointment of a successor to the
Chairman, the Senior Independent
Director will chair the Committee instead
of the Chairman.
All directors are required to allocate
sufficient time to discharge their
responsibilities and new Directors
receive a tailored induction on joining
the Board. This includes presentations
on the business, current strategy,
shareholder expectations and
familiarisation with the Group’s
operations worldwide. Guidance is also
given on the duties, responsibilities and
liabilities of a Director of a listed
company and key Board policies and
procedures.
The Board performs an annual
evaluation where the Board, its directors,
chairman and committees, assess their
respective performance. The results of
the evaluations are presented to the
Board and committees to address any
issues raised and to explore
opportunities to increase effectiveness.
Additionally, the chairman meets each
director annually to discuss their
performance and to receive their
feedback.
The Committee met once during the
year and was active in appointing Polly
Powell as an Executive Director and
Andrea Giunti Lombardo as a Non-
Executive Director.
The Chair of the Committee attends the
Annual Meeting to address any
shareholder questions relating to the
Committee.
Andy Cumming
Chair of the Nominations Committee
21 March 2021
24
25
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Governance Audit and Risk
Committee Report
In line with FRC guidance the Committee
has had 2 members throughout the year,
Jane Moriarty as Chair and Andy
Cumming, and Michael Mousley was a
member of the Committee from 12
August 2019 until 10 February 2020.
Responsibilities
The Committee acts in accordance with
its terms of reference, and its specific
responsibilities include:
• To consider and recommend the
appointment of the Group’s auditor,
the audit fee, audit engagement letter
and questions of auditor performance,
partner rotation, resignation and
dismissal.
• To meet with the auditor to discuss all
aspects of the audit including audit
planning, scope, findings, accounting
policies, management judgements
and estimates.
• To review the Board’s representation
letter to the auditor.
• To review the auditor’s management
letter and management’s response.
• To set policy and review the use of
any non-audit services and assess the
independence of the auditor.
• To review financial statements
released to the public including
interim and annual financial
statements.
• To review the Group’s accounting
policies, practices and use of
accounting standards especially for
decisions requiring major elements of
judgement, significant adjustments,
long-term viability and going concern.
• To review the Group’s internal
controls and risk management
including:
– the financial reporting process;
– identifying, managing and
monitoring financial, operational,
compliance and other risks;
– compliance with regulatory and
legal requirements;
– detecting fraud.
• To review the need for an internal
audit function at least annually.
Committee Meetings
The Committee meets throughout the
year to fulfil its responsibilities. The
Committee Chair also meets informally
with the Group Finance Director
throughout the year and with senior
management. She also meets with the
external Audit Partner from time to time
to discuss issues and be appraised of
regulatory changes.
By invitation the Company’s CEO, the
Group Finance Director, representatives
of the Company’s auditor, and Michael
Mousley (advisor to the Board and
former Company CFO), also attend
Committee meetings although part of
some meetings is exclusively for
Committee members without executive
management present.
The Chair of the Committee attends the
Annual Meeting to address any
shareholder questions relating to the
Committee.
The Committee met 3 times during 2020
and once so far in 2021.
The Committee, as part of full Board
meetings, was also involved in approving
announcements made to the London
Stock Exchange.
Activities of the Committee
During 2020 and 2021, to date, the work
of the Committee included:
• Review of the plan and scope of the
external audit.
• Review of the external auditor’s report
on the 2020 year-end audit and
approval of the preliminary
announcement and the annual report.
• Consider the external auditor’s
comments in relation to internal
controls and review the need and
potential scope of internal audit
functions.
• Consider the Group’s banking
agreements, particularly with respect
to ensuring the Group’s compliance
with its banking covenants.
• Review and approval of the interim
report 2020 after discussion with
management and the external auditor.
• Review and consider the goodwill
impairment review.
• Review and approve the financial
documents prepared to support the
open offer in January 2020.
Significant Audit Risks, Key
Findings and Financial
Judgements Relating to Year End
Accounts 2020
The Committee concentrated on the
following in relation to the 2020
accounts.
GOING CONCERN AND COVENANT
COMPLIANCE
The Committee considered the
underlying robustness of the Group’s
business model, products and
proposition, and the financial resources
available to it for the future to satisfy
itself of the going concern assumption in
preparing the financial statements.
Following the signing of the Group’s new
banking facilities, the Committee
reviewed the Group’s forecasts to
confirm the Group was able to meet its
current and future banking covenants.
The Group’s financial performance in
2020, and its forecast future
performance, reflects the positive impact
of the Group’s renewed focus on core
products and titles, the cost-out program
which began in 2018, and the fund
raising and resulting debt position of the
open offer to shareholders that occurred
in January 2020.
The Committee discussed the impact of
Covid-19 on the Group and, in particular,
considered the downside scenario that
was prepared as part of the going
concern review.
24
25
THE QUARTO GROUP, INC. ANNUAL REPORT 2020GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS AUDIT AND RISK COMMITTEE REPORT (continued)
ASSESSMENT OF THE CARRYING
VALUE OF GOODWILL
Goodwill arising from acquisitions is
stated at cost, less any accumulated
impairment losses. In accordance with
IAS 36, the Group tests the goodwill on
an annual basis for impairment. In the
tests carried out at 31 December 2020,
the value in use calculation exceeded
the carrying value of goodwill.
Further detail is set out in note 11 to the
Financial Statements.
RECOVERABILITY OF PRE-
PUBLICATION COSTS
Amortization of pre-publication costs is
charged to the income statement on a
straight-line basis over the estimated
useful lives of the intangible assets.
Pre-publication costs are capitalized in
accordance with IAS 38 and the
Committee, with the external auditor,
discussed the assumptions behind the
amortization profile including the
amortization period of the publications.
Further detail is set out in note 15 to the
Financial Statements.
REVENUE RECOGNITION AND SALES
RETURNS
The Committee considered the risk that
revenue may not be captured in the
relevant period. Apart from the usual
risks relating to the timing of revenue
recognition, management is required to
provide for returns, which may be
received subsequent to the period end.
Management assesses sales returns
through quantifying the previous returns
experience and post year end returns.
During 2020, the Committee reviewed
management’s methodology, and
discussed the procedures followed to
ensure that revenue was booked into the
correct period in line with the stated
accounting policies and that returns
provisions were reasonable.
External Audit
The Committee assesses the
effectiveness of its external auditor
through on-going dialogue and
communication with the Auditor. The
audit cycle includes formal meetings.
The audit planning meeting, which
happens prior to the audit, was when the
Committee discussed reporting
developments, significant accounting
risks, improvement in relation to risk
management and internal control and
controls in the accounting process.
At the end of the audit process, the
Committee met with the auditors to
receive their report on the key findings
with focus on identified key audit risks,
any misstatements in management’s
initial accounts and to consider areas of
judgement and estimates.
The Auditor showed diligence and
openness with the Committee during
meetings and through written
communication and during intermediate
briefing sessions with the Chair of the
Audit and Risk Committee. The Auditor
gave the Committee forthright views on
judgement areas whilst recognising that
the decisions lay with the Committee.
The Committee is satisfied with the
Auditor’s effectiveness in 2020.
Appointment of Auditor and
Independence
The Committee considers the
appointment of the external auditor each
year and considers the performance of
the lead audit partner and the audit
manager during the audit process.
For the 2020 audit of the Group and the
Company’s accounts, Grant Thornton
UK LLP charged $287,000 (2019:
$255,000).
Non-Audit Services
Grant Thornton UK LLP was engaged to
provide non-audit services in relation to
the preparation of the open offer made
to shareholders in January 2020. The
cost of these services to 31 December
2020 was $nil (2019: $172,000). The
Company has a policy in regard to the
provision of non-audit services by the
auditor which is reviewed annually.
Internal Audit
To date there has not been a separate
internal audit function, given the size and
scale of the Group’s operations.
The Audit and Risk Committee decided
not to establish a dedicated internal audit
function this year, for the reasons stated
above. It will review this decision on an
annual basis.
INTERNAL CONTROL AND RISK
MANAGEMENT SYSTEMS
The Executive Board is responsible for
ensuring appropriate risk management
control procedures are in place, and
regularly conducts reviews of the
effectiveness of the Company’s risk
management and internal control
systems. These reviews cover all material
controls designed to respond to
financial, operational and compliance
risks.
Quarto has continued to develop a
strong and effective control environment
for the business. This has built the
Board’s and Audit and Risk Committee’s
confidence in the financial management
of the Group.
26
27
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Governance The Executive Board is satisfied that the
Company had appropriate risk
management and risk control
procedures in place throughout the year
and up to the date of approval of this
Annual Report to prevent or detect any
material exposures. The Audit and Risk
Committee reviewed and monitored the
work of the Executive Board during the
year.
The internal control framework
comprises principles, procedures and
measures that are geared towards the
implementation of controlled
management decisions. It is designed to
ensure the effectiveness and efficiency
of business activities, the quality and
reliability of internal and external
accounting, compliance with the legal
frameworks that the Company must
adhere to, and to ensure that measures
are in place that safeguard proper
IT-based processing and data.
The following structures and processes
have been implemented by Quarto to
mitigate potential risks in the accounting
function:
• The Executive Board is responsible for
the internal control and risk
management framework with regard
to the accounting and consolidation
processes.
• The reporting structure relating to all
companies included in the
Consolidated Financial Statements
requires that significant risks are to be
reported immediately to the Executive
Board by the individual businesses on
identification.
• Certain accounting-related processes
(in particular payroll) are outsourced.
We consider the following items to be
significant to the effectiveness of the
internal control and risk-management
framework in the accounting and
consolidation processes:
•
Identification of significant risk and
control areas of relevance to the
Group-wide accounting process,
• Controls to monitor the consolidation
process and its results at the level of
the Executive Board and at the level of
the companies included in the
Consolidated Financial Statements,
• Preventative control measures in the
accounting system of the Group and
in the processes that generate
significant information used to
prepare the Consolidated Financial
Statements – areas include the Group
management report, segmental
analysis and commitment disclosures.
Jane Moriarty
Chair of the Audit and Risk Committee
21 March 2021
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THE QUARTO GROUP, INC. ANNUAL REPORT 2020GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Remuneration Committee Report
Annual Statement
DEAR SHAREHOLDER
I am pleased to present the Directors’ Remuneration Report for the year ended 31 December 2020, which has been prepared by
the Committee and approved by the Board.
For the year ended 31 December 2020, there were no substantial changes in Directors’ remuneration arrangements.
This is the Company’s seventh year of reporting in line with The Large and Medium-sized Companies and Groups (Accounts and
Reports) (Amendment) Regulations 2013.
The report is divided into two sections:
The first is Quarto’s Remuneration Policy recommended by the Board, which will apply from 25 May 2021 subject to approval at
the 2021 Annual Meeting. The proposed policy mirrors the existing policy implemented on 24 June 2020.
The second section is the Annual Report on Remuneration, which reviews how the existing policy has been implemented.
In line with The Large and Medium-sized Companies and Group’s (Accounts and Reports) (Amendment) Regulations 2013 the
following parts of the Annual Report on Remuneration are audited: the single total figure of remuneration for each Director,
including annual bonus outcomes for the financial year ended 31 December 2020; pension entitlements; and Directors’
shareholdings and share interests. All other parts of the Directors’ Remuneration Report are unaudited.
I would be happy to receive any comments you may have on this report. I hope you find the report clear and comprehensive
and that it helps demonstrate how remuneration is linked to the performance of the Company, and that you are able to support
the resolutions on remuneration being presented at this year’s Annual Meeting.
Jane Moriarty
Chair of the Remuneration Committee
21 March 2021
Remuneration Committee meeting attendance 2020
Committee membership1
Number of meetings held during the year: 3
Andy Cumming (Appointed 1 March 2018, Chair from 17 May 2018 to 7 March 2019)
Jane Moriarty (Appointed 12 November 2018, Chair from 7 March 2019)
C. K. Lau (Appointed 17 May 2018)
1 Michael Mousley was a member of the Remuneration Committee until his resignation on 10 February 2020.
3 of 3
3 of 3
3 of 3
Policy
This section sets out Quarto’s Remuneration Policy for Directors which is recommended by the Board for approval at the 2021
Annual Meeting. The Group’s principal remuneration policy aim is to ensure that the Executive Directors’ remuneration is
designed to promote long-term value creation through transparent alignment with the agreed corporate strategy.
Performance related elements are designed to be transparent, stretching and are rigorously applied.
In formulating its policies, the Committee had regard to and balanced the following factors:
•
•
•
•
the need to align the interests of the executive with those of the shareholders;
the performance of the individual executive and of the Group as a whole;
the remuneration practice in the markets in which the executive is principally based; and,
the remuneration packages offered to executives in companies competing in the same markets and industry as the Group,
but exercising caution, in view of the risk of an upward ratchet of remuneration levels with no corresponding improvement in
corporate and individual performance.
28
29
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Governance Operation
Opportunity
Performance metrics
Not applicable.
There is no prescribed
maximum to avoid setting
unhelpful expectations. Any
salary increases are applied in
line with the outcome of the
review and taking into account
wider factors, for example,
local market inflation.
Quarto’s Remuneration Policy Summary
FIXED PAY
Element of
remuneration
Purpose and
link to strategy
Base Salary/
Fees
Set at competitive
levels in the markets
in which Quarto
operates, in order to
attract and retain
executives.
Benefits
Designed to be
competitive in the
market in which the
individual is em-
ployed.
Reviewed annually with
changes normally effective
from 1 January of each year.
Reviews take account of:
• scope of the role and the
markets in which Quarto
operates;
• performance and experi-
ence of the individual;
• pay and conditions at
organisations of a similar
size and complexity; and,
• pay and conditions
elsewhere in the Group.
Benefits include life insur-
ance and private medical
insurance. Where appropri-
ate, other benefits may be
offered including, but not
limited to, participation in
all-employee share schemes.
Benefits are non-
pensionable.
Not applicable.
Benefits vary by role, individual
circumstance and eligibility
and are reviewed periodically.
Benefits are not anticipated to
exceed 5% of salary p.a. over
the period for which this policy
applies.
The Committee retains the
discretion to approve a higher
% in exceptional circumstances
(e.g. relocation) or in circum-
stances where factors outside
of the Group’s control have
materially changed (e.g.
increases in medical premi-
ums).
Pension
To provide cost
effective retirement
benefits.
Participation in defined
contribution plan or cash
allowance in lieu.
Up to 15% of base salary.
Not applicable.
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THE QUARTO GROUP, INC. ANNUAL REPORT 2020GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS REMUNERATION COMMITTEE REPORT (continued)
VARIABLE PAY
Element of
remuneration
Annual
performance
bonus
Purpose and
link to strategy
Designed to reinforce
individual perfor-
mance and contribu-
tion to the achieve-
ment of profit growth
and strategic objec-
tives.
Operation
Opportunity
Maximum potential opportuni-
ty of up to 100% of base salary
for the CEO and 50% for the
COO.
For the financial target, the
threshold bonus starts at 10%
of the total potential for
exceeding the base EBITDA
target by 2% and up to 100% of
the total potential for exceed-
ing the base EBITDA target by
10%.
Measures are reviewed at the
beginning of the financial
year to ensure they remain
appropriate and reinforce the
business strategy. Perfor-
mance targets are set
annually to ensure they are
appropriately stretching and
reflect those strategic
objectives. At the end of the
year the Committee deter-
mines the extent to which
these were achieved.
Awards are payable in cash.
Payments made under the
annual bonus are subject to
claw-back for the later of
one year following the date
of award or the completion
of the next audit of the
Group’s accounts, in the
event of a fraud or material
misstatement of results being
identified in relation to the
year in which the bonus is
earned.
Performance metrics
60% on financial
objectives and 40% on
personal objectives.
The Committee will
vary the weightings
from year-to-year to
reflect the changing
strategic needs for the
business with a default
bias towards financial
objectives.
In exceptional
circumstances, the
Committee has the
ability to exercise
discretion to override
the formulaic bonus
outcome within the
limits of the Plan
where it believes the
outcome is not truly
reflective of perfor-
mance and to en-sure
fairness to both
shareholders and
participants.
30
31
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Governance VARIABLE PAY (continued)
Element of
remuneration
Purpose and
link to strategy
Operation
Opportunity
Performance
Share Plan (PSP)
Ensures that the
Executive’s interests
are aligned with those
of shareholders
through reward for
providing sharehold-
ers with substantial
increases in share-
holder value and/or
for achievement of a
measure of sustained
growth in earnings
over the medium to
long term.
Award opportunities for
participants are up to 50% of
base salary.
Awards of up to 100% of base
salary may be provided in
exceptional circumstances (e.g.
recruitment).
20% of maximum vests for
Threshold, rising on a
straight-line basis to full vesting
for Stretch performance.
Awards of nominal-cost (or
nil-cost) options may be
granted annually as a
percentage of base salary.
Vesting is based on perfor-
mance measured over four
years. The performance
period normally starts at the
beginning of the financial
year in which the date of
grant falls.
Dividends accrue on PSP
awards and are paid on those
shares which vest. Award
levels and performance
conditions are reviewed
before each award cycle to
ensure they remain appropri-
ate.
Payments made under the
PSP are subject to claw-back,
for the later of one year
following date of vesting or
completion of the next audit
of the Group’s accounts, in
the event of a fraud or
material misstatement of
results being identified in
relation to the years in which
the PSP is earned.
FIXED PAY
Element of
remuneration
Purpose and
link to strategy
Operation
Opportunity
Non-Executive
Directors’ fees
To reflect the time
commitment in
preparing for and
attending meetings,
the duties and
responsibilities of the
role and the contribu-
tion expected from
the Non-Executive
Directors.
Annual fee for Chair.
Annual base fee for Non-Ex-
ecutive Directors. Additional
fees are paid to the Senior
Independent Director and
the Chair of the Committees
to reflect additional responsi-
bilities.
Fees are reviewed annually,
taking into account time
commitment, responsibilities
and fees paid by comparable
companies.
There is no prescribed
maximum. Non-Executive
Director fee increases are
applied in line with the
outcome of the review and
taking into account wider
factors, for example, inflation.
Performance metrics
Awards to Executives
are subject to
four-year cumulative
earnings per share
(EPS) and/or total
shareholder return
(TSR) performance.
In exceptional
circumstances, the
Committee has the
ability to exercise
discretion to override
the formulaic PSP
outcome within the
Plan limits to ensure
alignment of pay with
the underlying
performance of the
business during the
performance period.
Performance metrics
Not applicable.
30
31
THE QUARTO GROUP, INC. ANNUAL REPORT 2020GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS REMUNERATION COMMITTEE REPORT (continued)
Performance measure selection and approach to target setting
The measures used under the annual bonus plan are selected annually to reflect the Group’s key strategic priorities for the year and
reinforce financial performance and achievement of annual objectives as well as individual performance. Financial measures are based on
the amount of EBITDA generated compared to budget. The Committee considers this measure is the most appropriate measure of
long-term performance of the Group.
Performance targets are set at such a level as to be stretching and achievable, with regard to the particular strategic priorities and economic
environment. The annual bonus threshold is based on a 2% growth in profits with Stretch target being 10% growth.
The Committee reviews the performance targets applying to awards made to the proposed PSP scheme annually. Awards made to
participants will be based on either one or a combination of total shareholder return and cumulative earnings per share over the measured
period. These will be reported on each year in the Annual Report on Remuneration.
Differences in remuneration policy operated for other employees
Quarto’s approach to annual salary reviews is consistent across the Group. Key management personnel and senior managers with
substantial operational responsibilities are eligible to participate in an annual bonus scheme with similar metrics to those used for the Chief
Executive Officer. Opportunities and specific performance conditions vary by organisational level with business area-specific metrics
incorporated where appropriate.
Key management personnel and senior managers are eligible to participate in the PSP. Performance conditions are consistent for all these
participants, while award opportunities may vary by organisational level but are typically limited to 50% of base salary.
Shareholding guidelines
The Committee recognises the importance of aligning the interests of Executives with shareholders through the building up of a significant
shareholding in the Group. Executive Directors are required to retain shares of a value equal to 50% of the after-tax gain made on the
vesting of awards under the Plans, until they have built up a minimum shareholding of a value equivalent to at least 100% of annual base
salary.
Remuneration policy for new Directors
When hiring or appointing a new Executive Director, including by way of internal promotion, the Committee may make use of all the
existing components of remuneration as follows:
Component:
Base Salary
Benefits
Pension
Annual Bonus
PSP
Approach
Determined in line with the
stated policy, and taking into
account their previous salary.
Initial salaries may be set below
market and consideration
given to phasing any increases
over two or three years subject
to development in the role.
In line with the
stated policy.
In line with the
stated policy.
In line with the
stated policy.
In line with stated
policy, with the
relevant maximum
pro-rated to reflect the
proportion of the year
served.
Maximum
Value
Not applicable.
Not applicable. Not applicable.
50% to 100%
of base salary
50% of base
salary (100% in
exceptional
circumstances)
In determining appropriate remuneration for a new Executive Director, the Committee will take into consideration all relevant
factors (including quantum, nature of remuneration and the jurisdiction from which the candidate was recruited) to ensure that
arrangements are in the best interests of both the Company and its shareholders. The Committee may consider it appropriate to
grant an award under a structure not included in the policy, for example to ‘buy out’ incentive arrangements forfeited on leaving
a previous employer, and will exercise the discretion available under Listing Rule 9.4.2 R where necessary. In doing so, the
Committee will consider relevant factors including the expected value of all outstanding equity awards using a Monte Carlo,
Black-Scholes, or other relevant equivalent valuation and, where applicable, taking into account toughness of performance
conditions attached to these awards and the likelihood of those conditions being met.
In the case of appointing a new Executive Director by way of internal promotion, the Group will honour any contractual
commitments made prior to his or her promotion to Executive Director.
In the case of appointing a new Non-Executive Director, the approach will be consistent with the remuneration policy.
32
33
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Governance Executive Service contracts, Non-Executive letters of appointment and exit payments policy
Executive Director service contracts have no fixed term and have a notice period of not more than 12 months from either the
Executive or the Group. These notice periods meet best practice guidelines and give protection, mutually, to the Group and the
Executive. Executive Director service contracts are available to view at the Group’s registered office. The dates of the Executive
Director service contracts and the relevant notice period are as follows:
Director
C.K. Lau
Ken Fund
Polly Powell
Effective date of contract
17 May 2018
11 July 2018
10 February 2020
Notice period
3 months
6 months
6 months
Non-Executive Directors are engaged on the basis of a letter of appointment. In line with the UK Corporate Governance Code,
all Directors are subject to re-election annually at the Annual Meeting.
The Chair, together with the other Non-Executive Directors, have a one-month notice period, and are subject to re-election
each year.
The Non-Executive Director Letters of Appointment are available to view at the Group’s registered office and the effective dates
of their Letters of Appointment are as follows:
Non-Executive Director
Date of Appointment
Notice period
Andy Cumming
Mei Lan Lam
Jane Moriarty
Michael Mousley
1 March 2018
17 May 2018
12 November 2018
1 May 2019 (resigned on 10 February 2020)
Andrea Giunti Lombardo
10 February 2020
1 month
1 month
1 month
1 month
1 month
The Committee’s policy is to limit severance payments on termination to pre-established contractual arrangements and the
rules of the relevant incentive plans. In doing so, the Committee’s objective is to avoid rewarding poor performance.
Furthermore, the Committee will take account of the Executive Director’s duty to mitigate their loss.
Termination payments are limited to base salary and benefits during the unexpired notice period which cannot be mitigated.
No payments were made to past Directors.
In addition to the contractual provisions regarding payment on termination set out above, the Group’s incentive plans and share
schemes contain provisions for termination of employment.
Component
Bad leaver
Good leaver
Change-of-control
Annual bonus
PSP
No annual bonus payable
Outstanding awards are forfeited
Eligible for an award to the extent that performance
conditions have been satisfied and pro-rated for the
proportion of the financial year served, with Commit-
tee discretion to treat otherwise
Outstanding awards will normally continue and be
tested for performance over the full period, and
pro-rated for time based on the proportion of the
period served, with Committee discretion to treat
otherwise
Eligible for an award to the extent that performance
conditions have been satisfied up to the change of
control and pro-rated for the proportion of the
financial year served, with Committee discretion to
treat otherwise
Outstanding awards will normally vest and be tested
for performance over the period to change-of-
control, and pro-rated for time based on the
pro-portion of the period served, with Committee
discretion to treat otherwise
Any commitment made prior to, but due to be fulfilled after the policy comes into force, will be honoured.
An individual would normally be considered a good leaver if they leave for reasons of death, injury, ill-health, disability, part of
the business in which the individual is employed or engaged ceasing to be a member of the Group or any other reason as the
Committee decides. Bad leaver provisions apply under other circumstances.
32
33
THE QUARTO GROUP, INC. ANNUAL REPORT 2020GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS REMUNERATION COMMITTEE REPORT (continued)
External appointments
The Executive Directors may accept external appointments with the prior approval of the Board and provided only that such
appointments do not prejudice the individual’s ability to fulfil their duties at the Group. Whether any related fees are retained by
the individual or remitted to the Group will be considered on a case-by-case basis.
Illustration of the application of the remuneration policy
The chart below shows the remuneration that the Executive Directors could be expected to obtain based on varying performance
scenarios. C.K. Lau and Polly Powell are not included in the illustrations because neither of them is on bonus plans. Illustrations
are intended to provide further information to shareholders regarding the relationship between pay and performance.
Potential reward opportunities illustrated are based on the remuneration policy presented for shareholder approval at the Annual
Meeting on 24 June 2020, applied to the latest known fixed pay of base salaries, pension, other benefits and variable pay of
annual bonus and PSP. To better illustrate the annual potential reward opportunities, the remuneration and PSP Awards are
pro-rated to an annual equivalent.
EXECUTIVE DIRECTORS APPLICATION OF REMUNERATION POLICY
US$000
500
400
300
200
100
0
Ken Fund
0.7%
418
9.0%
90.3%
1.3%
458
16.4%
82.4%
377
100%
Fixed
Annual variable
PSP
Min
In line
Max
In illustrating the application of the remuneration policy the following assumptions have been made:
Minimum
On target
Maximum
Basic salary, pension or cash in lieu of pension and benefits. No bonus and no vesting of the PSP.
Basic salary, pension or cash in lieu of pension and benefits. Bonus pay out at 50% of the maximum
bonus. PSP vesting at 50% of maximum vesting.
Basic salary, pension or cash in lieu of pension and benefits. Bonus pay out at 100%. Full vesting of
the PSP.
Consideration of conditions elsewhere in the Group
When reviewing and setting executive remuneration, the Committee takes into account the pay and employment conditions of
all employees of the Group.
The Group has not carried out a formal employee consultation regarding Board remuneration, though it does comply with local
regulations and practices regarding employee consultation more broadly.
Consideration of shareholder views
It is the Committee’s policy to consult with major shareholders or their chosen shareholder representative body prior to any
changes to its Executive Director remuneration structure.
Jane Moriarty
Chair of the Remuneration Committee
21 March 2021
34
35
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Governance
Annual Report on Remuneration
THE REMUNERATION COMMITTEE
The Committee’s Terms of Reference are available on the Group’s website.
The Committee is responsible for:
• Recommending to the Board the remuneration and terms and conditions of employment of the Chair, Executive Directors
and key members of senior management;
• Measuring subsequent performance as a prelude to determining the Executive Directors’ and key managers’ total
remuneration on behalf of the whole Board;
• Determining the structure and quantum of short-term scheme; and,
• Granting awards under the Performance Share Plan.
The main issues discussed and/or approved during the financial year under review:
• Approval of the prior year Directors’ Remuneration Report;
• Annual review of the Executive Directors’ salaries and benefits; and
• Review of the Executive Directors’ and the senior managers’ performance under the prior year’s annual bonus scheme,
including a review of their performance against their personal objectives and approval of the bonus awards.
Statement of shareholder voting at the 2020 Annual Meeting
The following table shows the results of the advisory vote on the 2019 Annual Remuneration Report at the Annual Meeting on
24 June 2020.
For (including discretionary)
Against
Total votes cast
Withheld
Total number
of votes
% of
votes cast
27,899,057
99.99%
2,500
27,901,557
1,000
0.01%
100%
Single total figure of remuneration (audited)
The table below sets out a single figure for the total remuneration received (or receivable) by each Director for the year ended 31
December 2020 and the prior year. These amounts are shown in the reporting currency, although the payments that were
settled through the UK were paid in Sterling. The exchange rates used in 2020 and 2019 were 1.2900 and 1.2758, respectively.
Base Salary
Benefits1
Annual Bonus2
Long-term
incentives
Pension
Total
remuneration
Executive Directors
2020
$’000
2019
$’000
2020
$’000
2019
$’000
2020
$’000
2019
$’000
2020
$’000
2019
$’000
2020
$’000
2019
$’000
2020
$’000
2019
$’000
C. K. Lau*
Polly Powell* 6
Ken Fund* 7
—
286
315
—
—
346
—
—
14
—
—
13
—
—
—
—
—
20
—
—
175
—
—
44
—
29
18
—
—
18
—
315
522
—
—
441
Fees3
Benefits
Annual Bonus
Long-term
incentives
Pension
Total
remuneration
Non–Executive Directors
2020
$’000
2019
$’000
2020
$’000
2019
$’000
2020
$’000
2019
$’000
2020
$’000
2019
$’000
2020
$’000
2019
$’000
2020
$’000
2019
$’000
Andy Cumming*
Mei Lan Lam*
Jane Moriarty*
Michael Mousley* 4,5
Andrea Giunti Lombardo* 6
93
—
64
7
40
92
—
64
65
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
93
—
64
7
40
92
—
64
65
—
* For period for as a Director/Non-Executive Director.
1 Benefits comprise private medical insurance contributions.
2 Annual bonus for performance over the relevant financial year. Further details can be found in note 6.
3 Details of Non–Executive Directors’ fees can be found on pages 31 and 37.
4 The fees for Michael Mousley in 2019 include $23,000 of consulting fees, on an arm’s length basis.
5 Resigned on 10 February 2020. Since stepping down from the board of the Company, Michael Mousley has been retained as an advisor to the board.
6 Appointed on 10 February 2020.
7
In 2019 Ken Fund was granted a retention award (a long-term incentive) of which no part of the award payment is due before September 2021 and where
payment is subject to eligibility criteria noted on page 37.
35
34
THE QUARTO GROUP, INC. ANNUAL REPORT 2020GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS ANNUAL REPORT ON REMUNERATION (continued)
Directors’ shareholdings
The share interests of the Directors who held office during the year ended 31 December 2020 and of their connected persons
in the share capital of the Company are shown below:
Executive Directors
C.K. Lau4
Polly Powell
Ken Fund
Number of share
options of common stock
Number of US$0.10
shares of common stock1
31 December
20201
31 December
20192
—
—
—
—
25,496
75,188
31 December
20202
16,674,569
—
24,000
31 December
20193
6,874,672
—
24,000
During the year the market price of the shares of common stock ranged between 46p and 75p. The mid-market price on 31
December 2020 was 58.5p.
Non–Executive Directors
Andy Cumming
Mei Lan Lam
Jane Moriarty
Andrea Giunti Lombardo5,6
Michael Mousley7
Number of US$0.10
shares of common stock2,3
31 December
31 December
2020
2019
—
—
—
8,177,820
45,700
—
—
—
—
45,700
1 Following an open offer which concluded on 31 January 2020 the allotted share capital of the Company increased from 20,444,550 shares of common
stock to 40,889,100.
2 Or date of resignation
3 Or date of appointment
4 Shares held on 31 December 2020 by C.K. Lau (1,679,743) plus shares held by 1010 Printing Limited (14,994,826) a company over which C.K. Lau exercises
control.
5 Shares held by Andrea Giunti Lombardo are jointly held with Sergio Giunti and by Montecristo 2019 S.r.L. (a private limited company incorporated under the
laws of Italy; it is an entity ultimately controlled by Sergio Giunti and Andrea Giunti Lombardo).
6 Appointed on 10 February 2020.
7 Resigned on 10 February 2020.
No director receives, or has an entitlement to receive, shares in the Company as part of his or her remuneration. A 50%
appreciation in the Company’s share price would have no impact on a director’s remuneration. As noted below Ken Fund has
been granted share options under the Company’s PSP Scheme (see note 28).
Directors’ share options
Shares: Common Stock of $0.10 each
Ken Fund
Date of grant
19/04/2016
28/04/2017
As at
1 January
2020*
49,692
25,496
75,188
Granted
—
—
—
Lapsed in
year1
(49,692)
—
(49,692)
As at
31 December
2020
Face value at
date of grant
(£’000)
—
25,496
25,496
122
67
Fair value
at date of
grant
(£’000)
126
68
Price at
exercise date
n/a
n/a
1 The option granted on 19 April 2016 did not vest in April 2020.
* Or date of appointment
All awards under the PSP schemes have a four-year vesting period.
36
37
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Governance Executive directors’ base salaries/fees
During the year 2020, C.K. Lau, appointed on 17 May 2018, received $nil, in accordance with his service contract.
During the year 2020, Polly Powell, appointed on 10 February 2020, received $286,583, in accordance with her service contract.
During the year 2020, Ken Fund, appointed on 11 July 2018, received $314,738 in accordance with his service contract.
Pension and other benefits
The Group made an annual contribution to the personal pension plan of Ken Fund of $18,338, and £22,560 for Polly Powell.
Long-Term Incentives – PSP Awards
Under the Remuneration Policy, awards of nominal-cost (or nil-cost) options may be granted annually up to 50% (in exceptional
circumstances up to 100%) of base salary to the Executive Directors. Adhering to the same principles, other applicable
employees may receive an award (up a maximum of 40% of base salary, but typically much less). In considering the size of
awards, the Remuneration Committee has regard to the principles set out on page 30 of this report. The share options granted
in April 2016 did not vest in April 2020.
Half of the awards have a performance condition relating to cumulative Adjusted Diluted EPS performance for the four financial
years 2017 to 2020 inclusive. The other half of these awards have a performance condition relating to total shareholder returns
(‘TSR’) from a combination of dividends and share price growth (measured as an average over a 20 business day period leading
up to grant and vesting as appropriate). The TSR period runs from 28 April 2017 to 28 April 2021.
Targets for EPS are annual compounded growth of 5% for Threshold to 10% for Stretch. Targets for total shareholder returns over
the period are annual compounded growth of 7% for Threshold and 15% for Stretch.
The Committee believes the TSR directly measures shareholder returns and thereby aligns the goals of management and
shareholders. However, TSR can be affected by a variety of investment factors, which are far removed from those which
management can directly affect. The Committee believes that cumulative diluted EPS to be a good measure of managements’
long–term impact on the business and which over time translates into shareholder value. Thus a combination of TSR and EPS is
believed to be suitable goals for the PSP Awards. Major shareholders have been consulted about adding the TSR condition.
Retention Award
Ken Fund has been granted a retention award that offers a total payment of $500,000 composed of two elements: (i) a payment
of $350,000 so long as he remains employed by the Company until at least 30 September 2021, and (ii) a performance-related
payment of up to $150,000 assessed on profit-achievement by the Group for financial years 2020 and 2021.
Chair and Non-Executive director fees
The Non–Executive Directors’ annual fees for 2020 were as follows: Andy Cumming £72,000, Jane Moriarty £50,000, Mei Lan
Lam $nil, Michael Mousley £5,604 (resigned on 10 February 2020), and Andrea Giunti Lombardo (appointed on 10 February
2020) £31,092.
Relative importance of spend on pay
The graph below shows how total employee pay compares with expenditure on intellectual property for years ended 31
December 2019 and 31 December 2020.
25.0
21.8
24.4
20.3
16
30
20
10
0
36
37
Total employee pay
Intellectual property spend
2020
2019
THE QUARTO GROUP, INC. ANNUAL REPORT 2020GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS ANNUAL REPORT ON REMUNERATION (continued)
Review of group performance
The chart below compares the value of £100 invested in Quarto shares, including re–invested dividends, on 31 December 2010
compared to the equivalent investment in the FTSE Small Cap Index, over the last nine financial years. The FTSE Small Cap Index
has been chosen as it comprises companies of a broadly similar size to Quarto.
Performance graph
350
300
250
200
150
100
50
0
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Quarto
FTSE Small Cap
The table below shows the single figure for the CEO over the same period.
2010
2011
2012
2013
2014
2015
2016
750
996
1,0201
870
842
929
3,252
2017
701
2018
2302
2019
2020
—
1194
CEO single figure
of remuneration
including bonus
($’000)
Annual bonus
awarded
$ amount
($’000s)
393
573
1213
233
169
305
34
150
PSP vesting
% of maximum
opportunity
$ amount
($’000s)
% of maximum
opportunity
—
—
—
—
—
—
— 56.90% 33.50% 95.00%
12.0%
31%
—
—
—
—
—
—
—
—
2,651
100%
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1 The figure for 2012 is a combination of remuneration of Laurence Orbach, the previous CEO, and Marcus Leaver for the respective periods.
2 The figure for 2018 is a combination of remuneration of Marcus Leaver, the previous CEO, and C.K. Lau for the respective periods.
3 Discretionary.
4 The figure for 2020 is a combination of remuneration of C.K. Lau who was Group CEO until 18 September 2020 when Polly Powell was appointed Group
CEO.
38
39
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Governance
Change in CEO remuneration and for employees as a whole
The table below shows the change in CEO annual cash remuneration, defined as salary, taxable benefits and annual bonus,
compared to the average employees for 2019 to 2020.
$’000
Salary
Taxable benefits
Annual variable bonus
Total
1 From 18 September 2020 when Polly Powell replaced C.K. Lau.
Group CEO
Average
for other
employees
20201
119
—
—
119
2019
% change
% change
—
—
—
—
—
—
—
—
(6)
7
240
(5)
Salary, benefits and bonuses for other employees have been impacted by exchange rate movements.
Dilution limits
The Group has at all times complied with the dilution limits set out in the rules of its share plans (principally a limit of 10% in 10
years). In the 10-year period to 31 December 2020, awards made under the Group’s share schemes represented 3.6% (2019:
4.4%) of the Group’s issued share capital.
Directors’ shareholding guidelines and share scheme interests
There has been no requirement for Executive Directors to retain shares as no other shares have vested and they are compliant
with the shareholding guidelines.
Jane Moriarty
Chair of the Remuneration Committee
21 March 2021
38
39
THE QUARTO GROUP, INC. ANNUAL REPORT 2020GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Directors’ Report
Group
The Directors present their report and the audited financial statements of The Quarto Group, Inc., for the year ended 31
December 2020.
Results
The profit for the year was $4.6m (2019: $2.9m). The Directors do not propose a dividend.
Key performance indicators showing the Company’s performance in 2020 and the prior three years can be found on pages 14 and 15.
An indication of likely future developments in the business of the Group is included in the Strategic Report on page 8.
Directors
Serving Directors during the year were as follows:
Andy Cumming*
(Non-Executive Chairman) Appointed 1 March 2018
C.K. Lau
(Executive Director; President; Group Chief Executive Officer until 18 September 2020) Appointed 17
May 2018
Polly Powell
(Executive Director; Group Chief Executive Officer from 18 September 2020) Appointed 10 February 2020
Michael Mousley
(Appointed 17 May 2018 as an Executive Director) Non-Executive Director from 1 May 2019 until 10
February 2020
Mei Lan Lam
Ken Fund
(Non-Executive) Appointed 17 May 2018
(Executive Director; Chief Operating Officer) Appointed 11 July 2018
Jane Moriarty*
(Non-Executive; Vice-Chair; Senior Independent Director) Appointed 12 November 2018
Andrea Giunti Lombardo (Non-Executive) Appointed 10 February 2020
* Considered by the Board to be independent.
None of the Directors have a service agreement of more than one year’s duration. All of the directors are subject to annual re-election.
The letters of appointment of the Non-Executive Directors are made available for inspection at the Company’s registered office.
No Director had a contract of significance with the Company or its subsidiaries during the year.
On 10 February 2020, Polly Powell was appointed as an Executive Director (as Chief Executive Officer, Quarto UK; on 18
September 2020 she replaced C.K. Lau as Group Chief Executive Officer) and Andrea Giunti Lombardo was appointed as a
Non-Executive Director. Andrea Giunti Lombardo is not considered to be independent.
Disclosure of information under Listing Rule 9.8.4
For the purpose of compliance with LR 9.8.4 R, the following information is included by reference within the Directors’ Report:
LR 9.8.4 R requirement:
Location:
Directors’ remuneration
Annual Report on Remuneration, pages 35 to 39.
Details of Long-term Incentive Plans
Annual Report on Remuneration, pages 35 to 39.
Related Party Transactions
The Company purchases printing services from 1010 Printing Limited, a company over which C.K.
Lau exercises control. These purchases are made on a job-by-job basis at arm’s length. Financial
Statement note 29 summarizes purchases of printing services from 1010 Printing Limited.
Unsecured loans provided by 1010 Printing Limited and C.K. Lau are summarized in Financial
Statement note 29. 1010 Printing Limited provided an additional $10m unsecured loan in Q1 2021.
Revenue generated from Pavilion Books Limited, a company over which Group CEO Polly
Powell exercises control, is summarized in Financial Statement note 29.
Revenue generated from Giunti Editore spa, a company over which Non-Executive Director
Andrea Giunti Lombardo exercises control, is summarized in Financial Statement note 29.
With reference to LR 9.8.4 R (14)(a), the Company entered into a written and legally binding relationship agreement with 1010
Printing Limited, Lion Rock Group Limited and C.K. Lau. The Company confirms in relation to the requirements of LR 9.8.4 (14)
(c) that: (i) it has complied with the undertakings of the relationship agreement; (ii) as far as the Company is aware, the
controlling shareholder parties have complied with the relationship agreement; and (iii) so far as the Company is aware, the
procurement obligations of LR 9.2.2B R (2)(a) have been complied with within the period under review. At a special shareholder
meeting held on 31 January 2020 the Company’s By-Laws were amended to comply with LR 9.2.2AD R (2).
40
41
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Governance Employees
Applications for employment of disabled persons are always fully considered, bearing in mind the aptitudes of the applicant
concerned. In the event of staff becoming disabled, every effort is made to ensure that their employment with the Group
continues and that appropriate training is arranged. It is the policy of the Group that the training, career development and
promotion of disabled persons should, as far as possible, be identical with that of other employees.
The Group places considerable value on the involvement of its employees and has continued its practice of keeping them
informed on matters affecting them as employees and on the various factors affecting the performance of the Group. This is
achieved through formal and informal meetings. Employees are consulted regularly on a wide range of matters.
The Board recognises the importance of diversity amongst its employees and is committed to ensuring that employees are
selected and promoted on the basis of merit and ability, regardless of age, gender, race, religion, sexual orientation or disability.
In 2020 the Company established a Diversity Group to make the Company’s workplace inclusive and diversity equitable as
described on page 16. The gender split across the Group as at 31 December 2020 is illustrated in the table below.
Board
Senior managers
All employees
Males
Females
4
8
71
3
10
221
Substantial shareholders
The Directors have been advised of the following shareholders who have an interest of 5% or more in the shares of the common
stock of the Company at 31 December 2020 and 19 March 2021. 19 March 2021 is the latest practicable date prior to the
publication of this report.
1010 Printing Limited/C.K. Lau2
Giunti3
L.F. Orbach
As at 31 December 2020
As at 19 March 2021
Number of
US$0.10 shares of
common stock1
% holding of the
issued capital
of the Company
Number of
US$0.10 shares of
common stock
% holding of the
issued capital
of the Company
16,674,569
8,177,820
4,103,615
40.8
20.0
10.0
16,674,569
8,177,820
4,103,615
40.8
20.0
10.0
1 Following an open offer which concluded on 31 January 2020 the allotted share capital of the Company increased from 20,444,550 shares of common
stock to 40,889,100.
2 1010 Printing Limited is ultimately controlled by C.K. Lau. 1010 Printing Limited holds 14,994,826 common shares, and C.K. Lau holds 1,679,743 common shares.
3 Sergio Giunti and Andrea Giunti Lombardo (shareholders of the Company) plus Montecristo 2019 S.r.L., a private limited company incorporated under the
laws of Italy (an entity, ultimately controlled by Sergio Giunti and Andrea Giunti Lombardo).
The rights attaching to the Company’s shares of common stock are set out in the Company’s By-Laws, which can be found on
the Company’s website, www.quarto.com. The rules for appointment and replacement of the Directors are set out in the
Company’s By-Laws. The powers of the Directors are set out in the Company’s By-Laws.
The Company may amend its By-Laws by special resolution approved by the affirmative vote of the holders of a majority of the
voting power of the shares. The Directors’ interests in the shares of the Company are set out on page 36. There are no
restrictions on the number of shares that Directors can hold.
In 2020 the following amendment to the Company’s By-Laws was approved at a Special Meeting of shareholders held on 31
January 2020: the election or re-election of any independent director by shareholders must be approved by (a) the shareholders
of the Company, and (b) the independent shareholders of the Company (which excludes any controlling shareholders of the
Company). At the same Special Meeting, shareholders approved a resolution to increase the authorized number of Common
Shares ($0.10) to 55,000,000. The Company’s Certificate of Incorporation was amended accordingly.
Open Offer (January 2020)
On 16 January 2020, the Group announced an Open Offer of 20,444,550 new Common Shares at 68 pence per share, raising
net proceeds of $17m. On the same day, the Group concluded its refinancing, signing an extension to its existing bank facilities to
31 July 2021. The multi-currency facility comprised a $25m term loan, a $8m revolving credit facility and a $2m overdraft facility.
40
41
THE QUARTO GROUP, INC. ANNUAL REPORT 2020GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIRECTORS’ REPORT (continued)
Post balance sheet events
On 16 February 2021, the Group concluded its refinancing, signing an extension to its existing bank facilities to 16 July 2024. The
multi-currency facility comprises a $10m term loan, a $8m revolving credit facility and a $2m overdraft facility. On the same
date, Lion Rock Group Limited, a related party agreed to provide the Group a $10m loan note at 4% interest, repayable on 31 July
2024.
Risk management strategy
The Group is exposed to a number of principal risks and uncertainties. The Group’s financial risk management strategy is set out
in on page 19 of the Risk Management Review. Operational risks are set out on pages 20 and 21 of the Risk Management Review.
Corporate governance
The Company is committed to high standards of corporate governance and supports the principles laid down in the UK
Corporate Governance Code issued by the Financial Reporting Council in 2018 (the ‘Code’), available from the FRC website at
www.frc.org.uk. The Board considers that the Company has been in compliance with the principles and provisions of the Code
throughout the year ended 31 December 2020 and to the date of this report with the exception of Provisions 11 and 24.
From 2019, the Code provides that at least half the board of directors of a UK public listed company, excluding the chairman,
should comprise non-executive directors whom the board of directors considers to be independent (Provision 11). Having
considered the guidelines for independence as set out in the Code and the situation of each Director, the Board is satisfied on
each Director’s independence and considers that, even though the Company does not meet the quota of independent directors
pursuant to the Code, two independent directors, which has been the case since late 2018, are adequate for a company of the
Company’s size and nature of the business conducted by the Group.
As a “smaller company” (as defined in the Code as a company below FTSE 350 index throughout the year immediately prior to
the reporting year), the Company complies with the requirements of Provision 24 except that the Chair of the Board is a
member of the Audit and Risk Committee. The Board is satisfied that both members of the Audit and Risk Committee are
independent and bring a wide range of skills, expertise, experience and competence relevant to the sector in which the
Company operates and the challenges it faces and can satisfy the responsibilities of Provision 25.
The Board will continue to monitor its corporate governance arrangements, in the light of the Code (and future changes), as the
Group develops and grows.
The Directors consider that the annual report and accounts, taken as a whole, are fair, balanced and understandable and provide
the information necessary for shareholders to assess the Group’s performance, business model and strategy.
Section 172 statement
The Company’s section 172 statement can be found in the Strategic Report on pages 17 and 18.
Attendance by Directors at Board and Committee meetings in 2020
Andy Cumming
C.K. Lau
Polly Powell1,2
Ken Fund2
Mei Lan Lam2
Jane Moriarty
Andrea Giunti Lombardo2
Michael Mousley (resigned on 10 February 2020)3,4,5
Total number of meetings
Board
Audit and Risk
Committee
Nominations
Committee
Remuneration
Committee
18
12
17
18
18
17
17
—
18
3
—
—
—
—
3
—
—
3
1
1
—
—
—
1
—
—
1
3
3
—
—
—
3
—
—
3
1 Attends Remuneration Committee meetings from 2021 by invitation.
2 Not members of the Remuneration Committee.
3 Member of the Remuneration Committee from 16 April 2019 to 10 February 2020.
4 Member of the Audit and Risk Committee from 12 August 2019 to 10 February 2020; prior to 12 August 2019 attended Audit and Risk Committee by
invitation only.
5 Following resignation attends Board, Remuneration Committee, and Audit and Risk Committee meetings as an advisor by invitation.
42
43
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Governance
The principles of the Code have been applied as follows:
a) The Board of Directors represents the shareholders’ interests in maintaining and growing a successful business including
optimizing consistent long-term financial returns.
b) As at 31 December 2020, the Board comprised three Executive Directors and four Non-Executive Directors. The Chairman is
responsible for the leadership of the Board and ensuring its effectiveness. The different roles of the Chairman and Chief
Executive Officer are acknowledged. Jane Moriarty, the Senior Independent Director, is available to shareholders, if they have
concerns that are not able to be resolved through normal channels. Two Non-Executive Directors, Andy Cumming and Jane
Moriarty were considered by the Board to be independent throughout 2020.
c) There are a number of standing Committees of the Board to which various matters are delegated. They all have formal terms
of reference approved by the Board which are available on the Company’s website (www.quarto.com).
d) The Board met 18 times in 2020. Attendance details are set out above. A formal agenda is prepared for each meeting and all
board papers and information are circulated to the Board at least 2 business days before the meetings except in the case of
meetings that are convened on short notice.
e) All of the Directors are subject to re-election by the shareholders at the Annual Meeting. The Board is satisfied to support the
re-election of Andy Cumming, Jane Moriarty, Mei Lan Lam and Andrea Giunti Lombardo as Non-Executive Directors as they
have individually produced excellent performance in their duties and have shown a high level of commitment to their roles.
f) The remuneration of the Executive Directors is recommended by the Remuneration Committee, comprising Jane Moriarty,
who is the Committee Chair, Andy Cumming, Michael Mousley (from 16 April 2019 until 10 February 2020), and C. K. Lau. A
separate report with respect to Directors’ remuneration is included on page 35. The Committee meets at least twice a year. In
the year ended 31 December 2020 the Committee had met 3 times.
g) The Audit and Risk Committee comprises Jane Moriarty, who is Committee Chair, and Andy Cumming. The Board is satisfied
that the members of the Committee have appropriate financial experience to fulfil their role. Further details of the
Committee’s work can be found on pages 25 to 27.
h) The Nominations Committee comprises Andy Cumming, who is Committee Chair, Jane Moriarty and C. K. Lau. Details of the
work of the Nominations Committee during the year are set out in its report on page 24.
i) The C.K. Lau and the Company Chairman are responsible for investor relations. They meet with major shareholders during the
course of the year in order to understand their views, that are then communicated to the rest of the Board at Board meetings.
The Non-Executive Chairman and Senior Independent Director will meet with major shareholders from time to time.
Shareholders are invited to attend the Annual Meeting at least 20 days in advance of the meeting. In 2020 as a result of the
Covid-19 pandemic and government restrictions on travel, shareholders were advised not to attend the Annual Meeting and to
vote by proxy. Quarto notified shareholders of the opportunity to ask questions via e-mail in advance of the Annual Meeting.
j) The Board has a procedure for Directors to take independent professional advice at the Company’s expense, if required.
k) All Directors have access to the advice and services of the Company Secretary.
l) Quarto has arranged appropriate insurance cover in respect of legal action against the Directors.
m) The Company has an established whistle-blowing policy and anti-bribery policy.
Greenhouse gas emissions reporting
During the year, the Group worked with Energy Management Ltd, an energy procurement and carbon consultancy, to develop
GHG reporting protocol based on DEFRA and World Resource Institute guidelines.
The Group has chosen to use Operational Control in their approach to reporting utility data, electricity and natural gas from UK
and International operations. This includes sites that have been disposed of during the reporting period. Scope 1 (Natural Gas)
and Scope 2 (Electricity) are reported on below, but the Group is not reporting on Scope 3 emissions covering emissions from
transport and emissions from fully serviced offices where only a service charge is applied.
The Group has identified GHG (Greenhouse Gas) emissions per employee as the most appropriate available KPI (referred to as
the intensity ratio) and has chosen 2014 as our Base Year, following the disposal of our silk-screen printing business in 2013.
Global GHG emissions
Scope 1
Scope 2
Total
Average number of staff
Emissions per staff member
Total tCO2e
2020
UK (tCO2e)
2020
UK (kWh)
2020
Total tCO2e
2019
UK (tCO2e)
2019
UK (kWh)
2019
11
117
128
302
0.42
11
45
56
172
0.33
43
60,364
191,975
252,339
172
1,471
12
132
144
334
0.43
12
60
72
189
0.38
64,653
235,929
300,582
189
1,590
42
THE QUARTO GROUP, INC. ANNUAL REPORT 2020GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS DIRECTORS’ REPORT (continued)
Streamlined Energy and Carbon Reporting
The Company’s principal source of emissions arises from the operation of its facilities, and in 2020 following a review of office
space in the UK, office square footage reduced by 13% from March 2021. UK emissions are identified in the above table as
measured by tCO2e and kWh for 2020 and 2019.
The UK’s SECR requirement expands on the emissions that relate to the Company’s UK subsidiary, Quarto Publishing plc, and so
an appropriate report will be given in that company’s annual report.
During 2021, the Company will further review its activities in relation to SECR.
Risk management and internal controls
The Board is responsible for the Group’s system of internal control and for reviewing its effectiveness. As noted earlier,
the Directors have carried out a robust assessment of the principal businesses and considered the controls in place to eliminate
or mitigate the impact of key risks. The Board has in place risk management systems in relation to the Company’s financial
reporting process and the Group’s process for the preparation of the consolidated financial statements. However, such systems
are designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable
and not absolute assurance against material misstatement or loss.
Established procedures are in place to identify and consolidate reporting entities. Our control activities include policies and
practices covering appropriate authorization and approval of transactions, the application of financial reporting standards and
reviews of significant judgements and financial performance.
The main elements of the internal control and financial reporting systems are:
a) The results of individual operating segments are reported and reviewed by the Board at its meetings during the year.
b) The management reports of each operating segment are tailored to suit the business and management needs of local
management. Each operating segment has its own key performance indicators, and these are regularly reviewed and
assessed.
c) In addition to monthly reporting, individual operating units report certain management information more frequently, where it
is considered appropriate.
d) All operating units report their bank balances weekly and a report is produced summarizing the Group position.
e) All operating units prepare annual budgets and cash flow forecasts which are reviewed by the Board.
The UK Corporate Governance Code introduced a requirement that the Directors perform on-going monitoring and review of
the effectiveness of the Group’s system of internal controls, to cover all controls including financial, operational, compliance,
and risk management. The Board confirms that there are ongoing processes covering the identification, evaluation and
management of the significant risks faced by the Group which cover all material controls. The processes are carried out through
Group Board meetings, quarterly subsidiary management meetings, discussion and review by the Executive Board and the
finance department during the several visits per year to individual operating units, and discussions with professional advisers
where appropriate. We will continue to develop our risk management framework set out on pages 19 to 21 during 2021.
Michael Clarke
Company Secretary
21 March 2021
Company Registration Number: FC0 13814
44
45
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Governance Statement of Directors’ Responsibilities
in Respect of the Directors’ Report
and the Financial Statements
The Directors are responsible for the
maintenance and integrity of the
corporate and financial information
included on the Company’s website.
Legislation in the United Kingdom
governing the preparation and
dissemination of financial statements
may differ from legislation in other
jurisdictions.
To the best of our knowledge:
•
•
the Group financial statements,
prepared in accordance with IFRSs,
give a true and fair view of the assets,
liabilities, financial position and profit
or loss of the Company and the
undertakings included in the
consolidation taken as a whole; and
the Strategic Report and Directors’
Report include a fair review of the
development and performance of the
business and the position of the
Company and the undertakings
included in the consolidation taken as
a whole, together with a description
of the principal risks and uncertainties
that they face.
Polly Powell
Group Chief Executive Officer
21 March 2021
The Directors are responsible for keeping
adequate accounting records that are
sufficient to show and explain the
Company’s transactions and disclose
with reasonable accuracy at any time the
financial position of the Company and
enable them to ensure that the financial
statements and the Directors’
Remuneration report comply with the
Companies Act 2006 and Article 4 of the
IAS Regulation. They are also responsible
for safeguarding the assets of the
company and hence for taking
reasonable steps for the prevention and
detection of fraud and other irregularities.
•
The directors confirm 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.
The Directors are responsible for
preparing the annual report in
accordance with applicable law and
regulations. Having taken advice from the
Audit and Risk Committee, the directors
consider the annual report and the
financial statements, taken as a whole,
provides the information necessary to
assess the Company’s performance,
business model and strategy and is fair,
balanced and understandable.
The Directors are responsible for
preparing the Strategic Report, Annual
Report and the Directors’ Remuneration
Report and the financial statements in
accordance with applicable law and
regulations.
The Company is an ‘overseas’ company
within the meaning of the Companies
Act 2006.
Company law requires the directors to
prepare financial statements for each
financial year. Under that law the
directors have prepared the Group
financial statements in accordance with
International Financial Reporting
Standards (IFRSs) as adopted by the
European Union and the parent
Company financial statements in
accordance with United Kingdom
Generally Accepted Accounting Practice
(United Kingdom Accounting Standards)
and applicable law including FRS 102
‘The Financial Reporting Standard
applicable in the UK and Republic of
Ireland’. Under company law the
directors must not approve the financial
statements unless they are satisfied that
they give a true and fair view of the state
of affairs and profit or loss of the
company and group for that period. In
preparing these financial statements, the
directors are required to:
• select suitable accounting policies
and then apply them consistently;
• make judgements and accounting
estimates that are reasonable and
prudent;
• state whether applicable UK
Accounting Standards for the parent
company and IFRSs as adopted by the
European Union for the Group have
been followed, subject to any material
departures disclosed and explained in
the financial statements;
• prepare the financial statements on
the going concern basis unless it is
inappropriate to presume that the
company will continue in business.
44
45
THE QUARTO GROUP, INC. ANNUAL REPORT 2020GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Independent Auditor’s Report to the
Members of The Quarto Group, Inc.
Opinion
OUR OPINION ON THE FINANCIAL STATEMENTS IS UNMODIFIED
We have audited the financial statements of The Quarto Group, Inc. (the ‘parent company’) and its subsidiaries (the ‘group’) for
the year ended 31 December 2020 which comprise the consolidated income statement, the consolidated statement of
comprehensive income, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated
cash flow statement, the company balance sheet, the company statement of comprehensive income, the company statement
of changes in equity and notes to the financial statements, including a summary of significant accounting policies. The financial
reporting framework that has been applied in the preparation of the group financial statements is applicable law and
International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that
has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom
Accounting Standards, including Financial Reporting Standard 102 ‘The Financial Reporting Standard applicable in the UK and
Republic of Ireland’ (United Kingdom Generally Accepted Accounting Practice).
In our opinion:
•
•
•
•
the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31
December 2020 and of the group’s profit and the parent company’s profit for the year then ended;
the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;
the parent company financial statements have been properly prepared in accordance with United Kingdom Generally
Accepted Accounting Practice; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 which would
have applied were the parent company incorporated in the United Kingdom; and, as regards the group financial statements,
Article 4 of the IAS Regulation.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the ‘Auditor’s responsibilities for the audit of the financial
statements’ section of our report. We are independent of the group and the parent company in accordance with the ethical
requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied
to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We
believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Conclusions relating to going concern
We are responsible for concluding on the appropriateness of the directors’ use of the going concern basis of accounting and,
based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast
significant doubt on the group’s and the parent company’s ability to continue as a going concern. If we conclude that a material
uncertainty exists, we are required to draw attention in our report to the related disclosures in the financial statements or, if such
disclosures are inadequate, to modify the auditor’s opinion. Our conclusions are based on the audit evidence obtained up to the
date of our report. However, future events or conditions may cause the group or the parent company to cease to continue as a
going concern.
A description of our evaluation of management’s assessment of the ability to continue to adopt the going concern basis of
accounting, and the key observations arising with respect to that evaluation is included in the Key Audit Matters section of our
report.
In our evaluation of the directors’ conclusions, we considered the inherent risks associated with the group’s and the parent
company’s business model including effects arising from macro-economic uncertainties such as Brexit and Covid-19, we
assessed and challenged the reasonableness of estimates made by the directors and the related disclosures and analysed how
those risks might affect the group’s and the parent company’s financial resources or ability to continue operations over the
going concern period.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that,
individually or collectively, may cast significant doubt on the group’s and the parent company’s ability to continue as a going
concern for a period of at least twelve months from when the financial statements are authorised for issue.
In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the
preparation of the financial statements is appropriate.
In relation to the group’s and the parent company’s reporting on how they have applied the UK Corporate Governance Code,
we have nothing material to add or draw attention to in relation to the directors’ statement in the financial statements about
whether the directors considered it appropriate to adopt the going concern basis of accounting.
46
47
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Governance The responsibilities of the directors with respect to going concern are described in the ‘Responsibilities of directors for the
financial statements’ section of this report.
Our approach to the audit
Materiality
Key audit
matters
Scoping
•
•
OVERVIEW OF OUR AUDIT APPROACH
•
Overall materiality: £632,000, which represents approximately 0.5% of the group’s
revenue.
Key audit matters were identified as assessing the completeness of the sales return
provision, assessment of the carrying value of goodwill, assessment of the accuracy of
pre-publication intangible assets and the going concern assessment. This is consistent
with the key audit matters identified in the prior year.
We have performed a full scope audit of the financial statements of the parent
company and of the financial information of Quarto Publishing plc (‘Quarto UK’) and
Quarto Publishing Group USA Inc. (‘Quarto US’). We have performed analytical
procedures on the financial information of other companies within the group.
KEY AUDIT MATTERS
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial
statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to
fraud) that we identified. These matters included those that had the greatest effect on: the overall audit strategy; the allocation
of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our
audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on
these matters.
Description
Audit response
KAM
Disclosures
Key observations
or our results
In the graph below, we have presented the key audit matters, significant risks and other risks relevant to the audit.
High
t
c
a
p
m
i
t
n
e
m
e
t
a
t
s
i
l
a
c
n
a
n
fi
l
a
i
t
n
e
t
o
P
Intangibles - accuracy
Goodwill
Sales Return Provision
Intangibles - other
Revenue – Co-Edition
Going Concern
Management override
Related party
transactions
Trade Receivables
Trade Payables
IFRS 16
CARES Act Loan
Revenue -other
Exceptionals
Inventory
Low
Low
Extent of management judgement
High
Key audit matter
Significant risk
Other risk
46
47
THE QUARTO GROUP, INC. ANNUAL REPORT 2020GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
INDEPENDENT AUDITOR’S REPORT (continued)
Key Audit Matter – Group
How our scope addressed the matter – Group
COMPLETENESS OF THE SALES RETURNS
PROVISION
We have identified the completeness of the sales
returns provision as one of the most significant
assessed risks of material misstatement due to error
The Group generates material revenues from published
books. Certain trade customers have a right of return
for these books and therefore the revenue is recog-
nised net of a provision for these returns. At 31
December 2020, this provision totals $6,481,000.
Management judgement is required when assessing
the level of returns which are expected to occur
subsequent to the year end for sales made during the
year.
The key assumption applied is in relation to historical
return experience, which is used in order to predict
future returns and therefore the provision which is
required to be made.
We therefore identified the completeness of the sales
returns provision as a significant risk, which was one of
the most significant assessed risks of material misstate-
ment.
RELEVANT DISCLOSURES IN THE ANNUAL
REPORT AND ACCOUNTS 2020
• Financial statements: Note 1, General information
and significant accounting policies and Note 21,
Trade and other payables;
• Audit and risk committee report: Page 26
Our audit work included, but was not restricted to:
• Considering the appropriateness of the accounting policy for the
provision for sales returns by checking whether it is in accordance with
the financial reporting framework, including IAS 37 ‘Provisions, Contin-
gent Liabilities and Contingent Assets’ and IFRS 15 ‘Revenue from
Contracts with Customers’.
• Testing a sample of returns made during the year to supporting
documentation in order to confirm the accuracy of the data used to
calculate the rates of returns used in management’s calculation of the
provision;
• Recalculating the provision to confirm that it is appropriate and in
accordance with management’s policy;
• Comparing actual returns in the period to the provision made in the
prior period in order to evaluate the accuracy of management’s
forecasting;
• Obtaining actual returns for the period after the balance sheet date and
comparing these with the returns provision for the same period; and
• Inquiring of sales and operations staff as to their knowledge of any
exceptional returns in the period or the potential for these in the returns
period.
OUR RESULTS
• Our audit work did not identify any material errors in the completeness
of the sales returns provision.
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49
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Governance
Key Audit Matter – Group
How our scope addressed the matter – Group
ASSESSMENT OF THE CARRYING VALUE OF
GOODWILL
• We identified the assessment of the carrying value of
goodwill in relation to Quarto US as one of the most
significant assessed risks of material misstatement
due to error.
• The Group holds $19,381,000 of goodwill on its
balance sheet, including $12,882,000 relating to
Quarto US as disclosed in Note 11 to the group
financial statements.
• In accordance with International Accounting
Standard 36 ‘Impairment of Assets’ (‘IAS 36’), goodwill
is subject to an annual impairment test.
• We consider that the carrying value of the goodwill
for this cash generating unit (CGU) is a key risk due to
the sensitivity of the impairment calculations to a
reasonably possible change in the key assumptions,
including the discount rate, cash flow forecasts and
growth rates.
Our audit work included, but was not restricted to:
• Considering the appropriateness of the accounting policy by checking
whether it is in accordance with the financial reporting framework,
including IAS 36 ‘Impairment of Assets’;
• Consideration of the appropriateness of the CGU definition applied by
management, based on discussions with management and inspection
of internal reporting documents;
• Obtaining management’s impairment review model, testing its mathe-
matical accuracy and key assumptions within the model;
• Assessing the appropriateness of the asset and liability amounts
included in the carrying value of each of the cash generating units
which were assessed by management as part of the impairment review;
• Challenge of management on the allocation of overheads within the
CGUs;
• Assessing the discount rate applied, including an assessment by our
valuation specialists and benchmarking the rate against that used by
competitors;
• Performing sensitivity analysis around the value in use calculation
• We therefore identified the assessment of the
performed by management;
carrying value of goodwill as a significant risk, which
was one of the most significant assessed risks of
material misstatement.
RELEVANT DISCLOSURES IN THE ANNUAL
REPORT AND ACCOUNTS 2020
• Financial statements: Note 1, General information
and significant accounting policies and Note 11,
Goodwill;
• Audit and risk committee report: Page 26
• Considering the post year end performance for January and February of
the group against budget and comparing historical budgets to actual
performance in order to assess the accuracy of budgets prepared by
management; and
• Assessing the adequacy of financial statement disclosures in relation to
the impairment reviews and sensitivity analysis.
KEY OBSERVATIONS
• Our audit expert calculated that the discount rate used for the impair-
ment reviews should be in the range 12.0% to 14.3%, whereas manage-
ment’s rate was outside of this range at 11.4%. Using the auditor experts
discount rates did not on its own lead to an impairment, but we note
that the impact of a change in discount rate has a significant affect on
the discounted cash forecasts, as is indicated in management’s sensitivi-
ties as disclosed in note 11
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THE QUARTO GROUP, INC. ANNUAL REPORT 2020GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT (continued)
Key Audit Matter – Group
How our scope addressed the matter – Group
ASSESSMENT OF THE ACCURACY OF PRE-
PUBLICATION INTANGIBLE ASSETS
We identified the assessment of the accuracy of
pre-publication intangible assets as one of the most
significant assessed risks of material misstatement.
The Group’s holds capitalised pre-publication costs as
intangible assets which have a net book value of
$41,013,000 on its consolidated balance sheet. This
represents costs which are capitalised by the Group in
relation to the development of book titles, including
directly attributable overhead costs. There is manage-
ment judgement involved in determining which costs
are directly attributable to the development of books
and should therefore be capitalised.
We therefore identified the assessment of the accuracy
of pre-publication intangible assets as a significant risk,
which was one of the most significant assessed risks of
material misstatement.
RELEVANT DISCLOSURES IN THE ANNUAL
REPORT AND ACCOUNTS 2020
• Financial statements: Note 1, General information
and significant accounting policies and Note 15,
Intangible assets – pre-publication costs;
• Audit and risk committee report: Page 26
GOING CONCERN
We identified going concern as one of the most
significant assessed risks of material misstatement.
Covid-19 is one of the most significant economic
events currently faced worldwide and at the date of this
report its effects are subject to unprecedented levels of
uncertainty. This event could adversely impact the
future trading performance of the group and the
company. Whilst the Group has seen a decline in sales
to some bookstores it has also seen an increase in
sales by its online customers.
As such we identified going concern as a significant
risk, which was one of the most significant assessed
risks of material misstatement.
RELEVANT DISCLOSURES IN THE ANNUAL
REPORT AND ACCOUNTS 2020
• Financial statements: Note 1, General information
and significant accounting policies;
Our audit work included, but was not restricted to:
• Considering the appropriateness of the accounting policy by checking
whether it is in accordance with the financial reporting framework,
including IAS 38 ‘Intangible Assets’;
• Testing a sample of costs capitalised in the year to supporting docu-
mentation in order to confirm they are directly attributable to the
development of book titles;
• Holding inquiries with members of the creative team to understand their
role and the appropriateness of their time being capitalised to pre-publi-
cation costs;
• Challenging judgements made by management in determining which
costs are directly attributable to the development of book titles; and
• Testing the transfers made from assets under construction to pre-publi-
cation costs.
OUR RESULTS
• Our audit work did not identify any material errors in the accuracy of
pre-publication intangible assets.
Our audit work included, but was not restricted to:
• Obtaining management’s forecasts covering the period to 31 March
2022 and assessing their integrity and suitability as a basis for manage-
ment to assess going concern;
• Corroborating the existence and key terms of the group’s loan facilities and
covenant compliance for the period covered by management’s forecasts;
• Corroborating the opening net cash position within the model to
supporting evidence as at 31 December 2020;
• Analysing and challenging management’s historical forecasting accuracy;
• Considering the severity and plausibility, in light of our knowledge of the
business, of management’s sensitivity analysis for downside scenarios;
• Testing the accuracy of management’s reverse stress test scenario;
• Evaluating and corroborating key assumptions to underlying supporting
information and fact patterns as appropriate whilst considering any
contra indicators; and,
• Assessing the adequacy of the going concern disclosures included
• Audit and risk committee report: Page 25
within the financial statements based on our knowledge of the forecasts.
• Strategic report: Financial Review, Page 13
OUR RESULTS
• Our audit work did not identify any material uncertainties relating to
events or conditions that, individually or collectively, may cast significant
doubt on the group’s and the parent’s ability to continue as a going
concern for a period of at least twelve months from when the financial
statements are authorised for issue.
We did not identify any key audit matters relating to the audit of the financial statements of the parent company.
50
51
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Governance OUR APPLICATION OF MATERIALITY
We apply the concept of materiality both in planning and performing the audit, and in evaluating the effect of identified
misstatements on the audit and of uncorrected misstatements, if any, on the financial statements and in forming the opinion in
the auditor’s report.
Materiality was determined as follows:
Materiality measure
Group
Parent company
MATERIALITY FOR FINANCIAL
STATEMENTS AS A WHOLE
We define materiality as the magnitude of misstatement in the financial statements that,
individually or in the aggregate, could reasonably be expected to influence the economic
decisions of the users of these financial statements. We use materiality in determining the
nature, timing and extent of our audit work.
Materiality threshold
$632,000 which is 0.5% of revenue.
Significant judgements made by
auditor in determining the materi-
ality
Significant revision of materiality
threshold that was made as the
audit progressed
This benchmark is considered the most
appropriate because revenue is a key driver of
the business and is monitored by management
and the directors. As part of this assessment, we
considered the use of earnings before tax as the
benchmark however as there have been
significant fluctuations in the group’s earnings
before tax in recent years this was not deemed
to be appropriate. Given the current uncertain-
ties in the macro-economic environment a
percentage of 0.5% of the revenue benchmark
has been applied. We also referred to key
metrics and highlights raised in the annual
report to pinpoint our revenue based materiality,
this is based on expectations of what the entity
deems to be key benchmarks for users of the
financial statements
Materiality for the current year is lower than the
level that we determined for the year ended 31
December 2019 to reflect the decrease in the
group’s revenue in the current year.
We calculated materiality during the planning
stage of the audit based on a pro-rata of
revenue from January 2020 to August 2020.
During the course of our audit, we re-assessed
initial materiality based on actual revenue for the
year ended 31 December 2020 and adjusted our
audit procedures accordingly. This was to
ensure our audit work has been completed to
an appropriate level based on the materiality
benchmark selected.
$48,300 which is 1% of the parent compa-
ny’s total assets.
This benchmark is considered the most
appropriate because the parent company is
a holding company and has no revenue.
Materiality for the current year is higher
than the level that we determined for the
year ended 31 December 2019 to reflect
the increase in net assets of the parent
company as a result of the equity issue.
No reassessment of materiality was
required.
50
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THE QUARTO GROUP, INC. ANNUAL REPORT 2020GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT (continued)
Materiality measure
Group
Parent company
PERFORMANCE MATERIALITY
USED TO DRIVE THE EXTENT
OF OUR TESTING
We set performance materiality at an amount less than materiality for the financial statements
as a whole to reduce to an appropriately low level the probability that the aggregate of
uncorrected and undetected misstatements exceeds materiality for the financial statements as
a whole.
Performance materiality threshold
$442,400 which is 70% of financial statement
materiality.
$33,810 which is 70% of financial statement
materiality.
Significant judgements made by
auditor in determining the perfor-
mance materiality
In determining materiality, we made the significant judgement to increase performance
materiality from 65% to 70%, this is based on only a small number of adjustments being noted
in the prior year and changes being implemented by management in relation to the processes
surrounding areas in which adjustments have previously been identified.
SPECIFIC MATERIALITY
Specific materiality threshold
COMMUNICATION OF
MISSTATEMENTS TO THE AUDIT
COMMITTEE
Threshold for communication
We determine specific materiality for one or more particular classes of transactions, account
balances or disclosures for which misstatements of lesser amounts than materiality for the
financial statements as a whole could reasonably be expected to influence the economic
decisions of users taken on the basis of the financial statements.
We determined a lower level of specific
materiality for certain areas including directors'
remuneration and related party transactions.
We determined a lower level of specific
materiality for certain areas including
directors' remuneration and related party
transactions.
We determine a threshold for reporting unadjusted differences to the audit committee
$31,600 and misstatements below that thresh-
old that, in our view, warrant reporting on
qualitative grounds.
$1,400 and misstatements below that
threshold that, in our view, warrant
reporting on qualitative grounds.
52
53
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Governance The graph below illustrates how performance materiality interacts with our overall materiality and the tolerance for potential
uncorrected misstatements.
Overall materiality – Group Overall materiality – Parent company
Revenue
$126,383k
PM
$442k
70%
FSM
$632k
0.5%
TFPUM
$190k
30%
Total Assets
$4,604k
PM
$34k
70%
FSM
$48k
1%
TFPUM
$14k
30%
FSM: Financial statements materiality, PM: Performance materiality, TFPUM: Tolerance for potential uncorrected misstatements
An overview of the scope of our audit
We performed a risk-based audit that requires an understanding of the group’s and the parent company’s business and in
particular matters related to:
UNDERSTANDING THE GROUP, ITS COMPONENTS, AND THEIR ENVIRONMENT, INCLUDING GROUP-WIDE CONTROLS
• The engagement team obtained an understanding of the group and its environment, including group-wide controls, and
assessed the risks of material misstatement at the group level;
• The group comprises of two trading components alongside a number of dormant components. The groups financial system
is independent at each component however input is provided into the group wide controls by group management.
IDENTIFYING SIGNIFICANT COMPONENTS
• Evaluation by the group audit team identified components to assess the significance of that component and to determine the
planned audit response based on a measure of materiality. Significance was determined as a percentage of the group’s total
assets, revenues and profit before taxation
WORK TO BE PERFORMED ON FINANCIAL INFORMATION OF PARENT AND OTHER COMPONENTS
• The parent entity has been subjected to a full scope audit, being an audit of the financial information of the component using
component materiality, of its financial statements;
• Based on our evaluation we considered that the only significant components of the group are Quarto Publishing plc and
Quarto Publishing Group (USA) Inc. due to their significance to the group;
• Key audit matters were identified within the group as part of our risk assessment procedures. Disclosures as to how the key
audit matters identified have been addressed can be found within the key audit matter section of our audit report;
• The financial information of the other components in the group has been subjected to analytical.
PERFORMANCE OF OUR AUDIT
• The full scope audits performed represent 100% of the group’s continuing revenue for the year, 100% of the group’s total
assets, and 98.8% of the group’s total liabilities;
• As part of our procedures a review of the groups IT systems and controls has been completed.
CHANGES IN APPROACH FROM PREVIOUS PERIOD
• Our approach is consistent with the approach used in the previous period with the exception being that due to travel
restrictions imposed as a result of COVID-19, our audit work in relation to Quarto Publishing Plc and Quarto Publishing Group
(USA) Inc. had to be completed virtually as opposed to site visits, this includes the virtual attendance of stock counts.
52
53
THE QUARTO GROUP, INC. ANNUAL REPORT 2020GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
INDEPENDENT AUDITOR’S REPORT (continued)
Other information
The directors are responsible for the other information. The other information comprises the information included in the annual
report, other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not
cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of
assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the
audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material
misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material
misstatement of the other information. If, based on the work we have performed, we conclude that there is a material
misstatement of this other information, we are required to report that fact.
We have nothing to report in this regard.
OUR OPINIONS ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006, WERE IT TO APPLY TO THE PARENT
COMPANY, ARE UNMODIFIED
In our opinion, the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the
Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
•
the information given in the strategic report and the directors’ report for the financial year for which the financial statements
are prepared is consistent with the financial statements; and
the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.
•
MATTER ON WHICH WE ARE REQUIRED TO REPORT UNDER THE COMPANIES ACT 2006, WERE IT TO APPLY TO THE
PARENT COMPANY
In the light of the knowledge and understanding of the group and the parent company and its environment obtained in the
course of the audit, we have not identified material misstatements in the strategic report or the directors’ report.
MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION, WERE THE COMPANIES ACT 2006 TO APPLY TO
THE PARENT COMPANY
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report
to you if, in our opinion:
• adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been
•
received from branches not visited by us; or
the parent company financial statements and the part of the directors’ remuneration report to be audited are not in
agreement with the accounting records and returns; or
• certain disclosures of directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit
54
55
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Governance Corporate governance statement
The Listing Rules require us to review the directors’ statement in relation to going concern, longer-term viability and that part of
the Corporate Governance Statement relating to the group’s and the parent company’s compliance with the provisions of the
UK Corporate Governance Statement specified for our review.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate
Governance Statement is materially consistent with the financial statements or our knowledge obtained during the audit:
•
•
•
•
•
the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the going
concern basis of accounting in preparing the financial statements and the directors’ identification of any material
uncertainties to the group’s and the parent company’s ability to continue to do so over a period of at least twelve months
from the date of approval of the financial statements - refer to page [25];
the directors’ explanation in the annual report as to how they have assessed the prospects of the group and the parent
company, over what period they have done so and why they consider that period to be appropriate, and their statement as to
whether they have a reasonable expectation that the group and the parent company will be able to continue in operation and
meet their liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to
any necessary qualifications or assumptions - refer to page 25;
the directors’ statement that they consider the annual report and financial statements taken as a whole is fair, balanced and
understandable and provides the information necessary for shareholders to assess the group’s and the parent company’s
performance, business model and strategy - refer to page 42;
the directors’ confirmation in the annual report that they have carried out a robust assessment of the principal and emerging
risks facing the group and the parent company (including the impact of Brexit and Covid-19) and the disclosures in the annual
report that describe the principal risks, procedures to identify emerging risks and an explanation of how they are being
managed or mitigated including the impact of Brexit and Covid-19 - refer to page 19;
the section of the annual report that describes the review of the effectiveness of group’s and the parent company’s risk
management and internal control systems, covering all material controls, including financial, operational and compliance
controls - refer to page 19; and
•
the section of the annual report describing the work of the audit committee, including significant issues that the audit
committee considered relating to the financial statements and how these issues were addressed - refer to pages 25 to 39.
RESPONSIBILITIES OF DIRECTORS FOR THE FINANCIAL STATEMENTS
As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors
determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due
to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability to
continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of
accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no
realistic alternative but to do so.
AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is
a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these
financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting
Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
54
55
THE QUARTO GROUP, INC. ANNUAL REPORT 2020GovernanceSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT (continued)
EXPLANATION AS TO WHAT EXTENT THE AUDIT WAS CONSIDERED CAPABLE OF DETECTING IRREGULARITIES,
INCLUDING FRAUD
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our
responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. Owing to the
inherent limitations of an audit, there is an unavoidable risk that material misstatements in the financial statements may not be
detected, even though the audit is properly planned and performed in accordance with the ISAs (UK).
The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below:
• We obtained an understanding of the legal and regulatory frameworks applicable to the parent company and the group and
the industry in which they operate. We determined that the following laws and regulations were most significant: IFRSs as
adopted by the European Union, Listing Rules, Companies Act 2006 and the UK Corporate Governance Code.
• We obtained an understanding of how the parent company and the group is complying with those legal and regulatory
frameworks by making inquiries of management, those responsible for legal and compliance procedures and the company
secretary. We corroborated our inquiries through our review of board minutes and papers provided to the Audit Committee.
• We assessed the susceptibility of the parent company’s and group’s financial statements to material misstatement, including
how fraud might occur. Audit procedures performed included:
– identifying and assessing the design effectiveness of controls management has in place to prevent and detect fraud;
– understanding how those charged with governance considered and addressed the potential for override of controls or
other inappropriate influence over the financial reporting process;
– challenging assumptions and judgments made by management in its significant accounting estimates; and
– identifying and testing journal entries posted in the year which were deemed to be unusual.
• We note our key audit matter in relation to the completeness of the sales return provision relates to irregularities, including
fraud. Refer to key audit matters for work completed and our results from the procedures performed.
• No matters of non-compliance with laws and regulations and fraud were identified by the engagement team or
communicated to the engagement team.
• We note that there is no specific industry legislation that significantly impacts The Quarto Group, inc. and the engagement
team are deemed to hold appropriate competence and capabilities to identify non-compliance with laws and regulations
OTHER MATTERS WHICH WE ARE REQUIRED TO ADDRESS
Following the recommendation of the audit committee, we were appointed by the audit committee on 20 November 2017 to
audit the financial statements for the year ending 31 December 2017 and subsequent financial periods.
The period of total uninterrupted engagement including previous renewals and reappointments of the firm is 4 years, covering
the periods ending 31 December 2017 to 31 December 2020.
The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the group or the parent company and we
remain independent of the group and the parent company in conducting our audit.
Our audit opinion is consistent with the additional report to the audit committee.
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.
David White
Senior Statutory Auditor
for and on behalf of Grant Thornton UK LLP
Statutory Auditor, Chartered Accountants
London
21 March 2021
56
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Governance Consolidated Income Statement
FOR THE YEAR ENDED 31 DECEMBER 2020
Continuing operations
Revenue
Cost of sales
Gross profit
Administrative expenses
Impairment of financial assets
Distribution costs
Operating profit before amortisation of acquired intangibles
and exceptional items
Amortisation of acquired intangibles
Exceptional items
Operating profit
Finance income
Finance costs
Profit before tax
Tax
Profit for the year
Attributable to:
Owners of the parent
Earnings per share (cents)
From continuing operations
Basic
Diluted
The notes on pages 62 to 88 are an integral part of these consolidated financial statements.
Notes
2020
$’000
2019
$’000
2
126,883
135,807
(89,298)
37,585
(18,264)
(1,571)
(7,132)
10,618
(890)
(446)
9,282
—
(2,693)
6,589
(2,020)
4,569
4,569
4,569
(97,782)
38,025
(19,641)
(853)
(7,527)
10,004
(811)
(419)
8,774
9
(4,939)
3,844
(962)
2,882
2,882
2,882
11.7
11.6
14.1
14.0
17
4
5
7
8
9
10
10
57
57
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Consolidated Statement
of Comprehensive Income
FOR THE YEAR ENDED 31 DECEMBER 2020
Profit for the year
Items that may be reclassified to profit or loss
Foreign exchange translation differences
Cash flow hedge; (losses) arising during the year
Tax relating to items that may be reclassified to profit or loss
Total other comprehensive income
Total comprehensive income for the year
Total comprehensive income for the year attributable to:
Owners of the parent
The notes on pages 62 to 88 are an integral part of these consolidated financial statements.
2020
$’000
4,569
1,087
—
54
1,141
5,710
5,710
5,710
2019
$’000
2,882
403
(105)
(162)
136
3,018
3,018
3,018
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59
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial Statements
Consolidated Balance Sheet
AS AT 31 DECEMBER 2020
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Intangible assets: Pre-publication costs
Deferred tax assets
Total non-current assets
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Total current assets
Total assets
Current liabilities
Short term borrowings
Trade and other payables
Lease liabilities
Tax payable
Total current liabilities
Non-current liabilities
Deferred tax liabilities
Tax payable
Lease liabilities
Total non-current liabilities
Total liabilities
Net assets
Equity
Share capital
Paid in surplus
Retained earnings and other reserves
Total equity
Notes
2020
$000
2019
$000
11
12
13
15
19
16
17
18
18
21
20
19
20
24
24
25
19,381
159
6,818
40,913
3,604
70,875
15,465
44,519
22,079
82,063
19,192
1,282
10,883
48,697
3,331
83,385
19,378
46,397
15,621
81,396
152,938
164,781
(41,819)
(50,064)
(1,968)
(4,355)
(66,077)
(57,381)
(1,937)
(2,831)
(98,206)
(128,226)
(6,323)
(386)
(4,310)
(7,139)
(433)
(7,929)
(11,019)
(15,501)
(109,225)
(143,727)
43,713
21,054
4,089
48,701
(9,077)
43,713
2,045
33,764
(14,755)
21,054
The notes on pages 62 to 88 are an integral part of these consolidated financial statements.
The financial statements were approved by the Board of Directors and authorised for issue on 21 March 2021. They were
signed on its behalf by:
Polly Powell
Director
21 March 2021
58
59
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Consolidated Statement
of Changes in Equity
FOR THE YEAR ENDED 31 DECEMBER 2020
Share
capital
$000
2,045
Paid in surplus
$000
Hedging
reserve
$000
Translation
Reserve
$000
Retained
earnings
$000
33,764
105
(6,989)
(10,937)
—
2,882
Balance at 1 January 2019
Profit for the year
Other comprehensive income
Foreign exchange translation differences
Cash flow hedge: losses arising during the
year
Tax relating to items that may be
reclassified to profit or loss
Total comprehensive income
for the year
Share based payments charge
—
—
—
—
—
—
—
—
—
—
—
—
Balance at 31 December 2019
2,045
33,764
Profit for the year
Other comprehensive income
Foreign exchange translation differences
Tax relating to items that may be
reclassified to profit or loss
Total comprehensive income
for the year
Share capital raised
Costs of raising share capital
Share based payments credit
—
—
—
—
—
—
—
—
2,044
—
—
16,307
(1,370)
—
Balance at 31 December 2020
4,089
48,701
—
(162)
403
—
241
—
(6,748)
—
1,087
54
—
—
(105)
(105)
—
—
—
—
—
—
—
—
—
—
Equity
attributable to
owners
of the
parent
$000
17,988
2,882
—
—
—
403
(105)
(162)
2,882
3,018
48
(8,007)
4,569
—
—
48
21,054
4,569
1,087
54
1,141
4,569
5,710
—
—
—
(5,607)
—
—
(32)
(3,470)
18,351
(1,370)
(32)
43,713
The notes on pages 62 to 88 are an integral part of these consolidated financial statements.
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THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial Statements Consolidated Cash Flow Statement
FOR THE YEAR ENDED 31 DECEMBER 2020
Profit for the year
Adjustments for:
Net finance costs
Depreciation of property, plant and equipment
Software amortisation
Tax expense
Profit on disposal of right-of-use assets
Share based (credits)/payments
Amortisation of acquired intangibles
Amortisation and impairment of pre-publication costs
Operating cash flows before movements in working capital
Decrease in inventories
Decrease in receivables
(Decrease) in payables
Cash generated by operations
Income taxes paid
Net cash from operating activities
Investing activities
Interest received
Investment in pre-publication costs
Purchases of property, plant and equipment
Acquisition of businesses
Net cash used in investing activities
Financing activities
Interest payments
New share capital raised
Costs of raising new share capital
Lease payments
Drawdown of revolving credit facility and other loan
Repayment of term loan and revolving credit facility
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Foreign currency exchange differences on cash and cash equivalents
Cash and cash equivalents at end of year
The notes on pages 62 to 88 are an integral part of these consolidated financial statements.
2020
$000
4,569
2,693
2,160
231
2,020
(35)
(32)
890
28,646
41,142
4,023
2,721
(9,205)
38,681
(1,760)
36,921
2019
$000
2,882
4,930
2,127
276
962
—
48
811
28,694
40,730
3,157
8,961
(8,896)
43,952
(2,650)
41,302
—
9
(20,324)
(23,786)
(34)
—
(138)
(1,250)
(20,358)
(25,165)
(1,297)
18,351
(1,370)
(1,995)
4,520
(28,413)
(10,204)
6,359
15,621
99
22,079
(3,709)
—
—
(1,882)
1,963
(12,417)
(16,045)
92
15,384
145
15,621
60
61
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the Financial Statements
1 General information and significant accounting policies
The Quarto Group, Inc. is a company incorporated in the State of Delaware, United States. The address of the registered office is
given on page 94. The nature of the Group’s operations and its principal activities are set out in the Chief Executive Officer’s
Statement on page 7.
The accounting policies adopted, are consistent with those of the annual financial statements for the year ended 31 December
2019, as described in those financial statements.
Each entity in the Group determines its own functional currency and items included in the financial statements of each entity
are measured using that functional currency. The presentational currency of the Group is US dollars.
STATEMENT OF COMPLIANCE
The Group financial statements consolidate those of the Company and its subsidiaries (together referred to as the ‘Group’). The
parent company financial statements present information about the Company as a separate entity and not about its Group.
The Group financial statements have been prepared and approved by the Directors in accordance with International Financial
Reporting Standards as adopted by the EU (‘IFRS’). The Company has elected to prepare its parent company financial statements
in accordance with UK GAAP, including The Financial Reporting Standard applicable in the UK and Republic of Ireland (‘FRS 102’).
These are presented on pages 87 to 92.
BASIS OF ACCOUNTING
The financial statements are prepared on the historical cost basis, except that derivative financial instruments are stated at fair value.
STANDARDS, AMENDMENTS AND INTERPRETATIONS TO EXISTING STANDARDS THAT ARE NOT YET EFFECTIVE AND
HAVE NOT BEEN ADOPTED EARLY BY THE GROUP
A number of amendments to accounting standards and Interpretations, effective in the current financial year have been adopted
but have not had a material impact on the Group financial statements.
The Group has not applied any other standards, Interpretations or amendments that have been issued but are not yet effective.
Management anticipates that all relevant pronouncements will be adopted for the first period beginning on or after the effective
date of the pronouncement.
SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENTS
The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and
assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses.
The estimates and associated assumptions are based on historical experience and various other factors that are believed to be
reasonable under the circumstances. Actual results may differ from these estimates. The estimates and underlying assumptions
are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the year in which the estimate is revised if
the revision affects only that year or in the year of the revision and future years if the revision affects both current and future years.
Key estimates at the balance sheet date are:
Note 1, 21
The revenue recognition policy details our judgement in respect of sales returns and the method of estimating the related sales
returns allowance
Note 11: Key assumptions in making the assessment of carrying value of goodwill
Note 15: Recoverability of pre-publication costs and the assessment of their useful life
Key judgements at the balance sheet date are:
• The appropriateness of the going concern basis: when preparing the financial statements, management is required to make
an assessment of the entity’s ability to continue as a going concern and prepare the financial statements on this basis unless
it either Intends to liquidate the entity or to cease trading or has no realistic alternative but to do so. As set out in the going
concern basis in the following paragraph, after reviewing the most recent projections, the sensitivity analysis and the
mitigating actions available, the Directors have formed the judgement that it is appropriate to prepare the financial statements
on the going concern basis.
• Government grants: during the year, the Group received a loan of $2,422,000 relating to government support given under
the Coronavirus Aid, Relief and Economic Security Act of the USA. The loan is forgivable under certain prescribed conditions.
As at the balance sheet date, the Group cannot adequately ascertain that the prescribed conditions have all been satisfied
and, therefore, without such reasonable assurance, the loan has been treated as a borrowing.
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THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial Statements 1 General information and significant accounting policies (continued)
GOING CONCERN BASIS
The Board assessed the Group’s ability to operate as a going concern for the next 12 months from the date of signing the
financial statements.
The Directors have considered the underlying robustness of the Group’s business model, products and proposition and its
recent trading performance, cash flows and key performance indicators. They have also reviewed the cash forecasts prepared in
detail to 31 March 2022. This is to satisfy themselves of the going concern assumption used in preparing the financial
statements. The base case model was built using a detailed sales forecast driven by the publishing program for 2021. Core
margins have remained unchanged with trade receivable days remaining consistent with 2020.
As part of this work, the model was sensitised initially by a 5% reduction in revenue to ensure headroom within the covenants.
This is deemed as a severe but plausible scenario. The model was then flexed to a tolerance of 13%, at which point the banking
covenants were breached at the end of December 2021. It is considered remote that such a reduction of revenue would occur,
given, the detailed nature of the sales forecast and even with the challenges of 2020, revenue dropped by only 7% year on year.
Should we start to see a reduction in revenue, then mitigating action will be taken, such as reduction in investment in pre-
publication costs, print volumes, staffing levels and other variable costs.
Based on the above indications, the Directors believe that it remains appropriate to continue to adopt the going concern in
preparing the financial statements.
BASIS OF CONSOLIDATION
The Group financial statements include the results of the Company and all of its subsidiary undertakings. A subsidiary is an entity
controlled, directly or indirectly, by the Group. Control is the power to govern the financial and operating policies of the entity
so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial
statements from the date that control commences until the date that control ceases.
Intragroup balances and any unrealised gains and losses or income and expenses arising from intra-group transactions
are eliminated in preparing the consolidated financial statements.
The interest of non-controlling interests on an acquisition is initially measured at the minority’s proportion of the net fair value of
the assets, liabilities and contingent liabilities recognised.
BUSINESS COMBINATIONS, INTANGIBLE ASSETS AND GOODWILL
All business combinations are accounted for by applying the acquisition method. Goodwill represents the excess of the
consideration transferred over the fair value of the net assets and any contingent liabilities acquired. Acquisition costs are
expensed as incurred.
Goodwill arising on acquisitions is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-
generating units and is tested annually for impairment.
Other intangible assets, such as backlists, that are acquired by the Group are stated at cost less accumulated amortisation
and impairment losses.
Amortisation of intangible assets is charged to profit or loss on a straight-line basis over the estimated useful lives of the intangible
assets. The amortisation period for non-contractual relationships is 2.5 years, for backlists is 5 years and for software is 4 years.
VOLUME REBATES
In the ordinary course of business, the Group receives volume rebates from its printers. This is accounted for in accordance with
contractual terms and is credited to Inventory or cost of sales, as appropriate.
IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS INCLUDING GOODWILL
The carrying amount of the Group’s assets is reviewed at each balance sheet date to determine whether there is any indication
of impairment. If any such indication exists, the asset’s recoverable amount is estimated. The recoverable amount is the higher
of fair value, reflecting market conditions less costs to sell, and value in use based on an internal discounted cash flow valuation.
For goodwill, the recoverable amount is estimated at each balance sheet date. An impairment loss is recognised whenever the
carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in
profit or loss.
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THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (continued)
1 General information and significant accounting policies (continued)
GOVERNMENT GRANTS
During the year, the Group received financial support from Governments in UK and USA. The grants related to expense items.
Any monies received or receivable are initially held as liabilities on the balance sheet. Grants are subsequently recognised in
profit and loss when there is reasonable assurance that compliance has been satisfied. Additional Information is disclosed in
Note 6 and Note 18.
SEGMENT REPORTING
The Group has two operating segments: US Publishing and UK Publishing. In identifying these operating segments,
management follows the geographic locations of our business. The two segments are managed separately and focus on
different geographic markets. For management purposes, the Group uses the same measurement policies as those used in its
financial statements.
REVENUE RECOGNITION
Revenue arises largely from the sale of physical products. To determine whether to recognise revenue, the Group considers the
following criteria:
Identifying the contract with a customer
Identifying the performance obligations
•
•
• Determining the transaction price
• Allocating the transaction price to the performance obligations
• Recognising revenue as/when performance obligations are satisfied
Each contract is for an agreed price and revenue is recognised at a point in time when the Group satisfies performance
obligations by transferring the products to its customers; this is determined with reference to delivery terms. Invoices for
products transferred are due on the terms specified in the contract. Where invoices are issued prior to transfer of the product to
the customer, and there is unconditional rights to consideration the amounts invoiced are recorded as liabilities on the balance
sheet, under deferred Income. When the product has been transferred to the customer, the liabilities are released and treated as
revenue accordingly.
Revenue from the sale of publishing rights is recognised when the Group has discharged its performance obligations under the
contractual arrangements.
On certain contracts, the customer has a right to return the products. The Group makes an allowance for this, based on a review
of the historical return patterns associated with the customer, as well as current market trends. The estimated returns period is a
key input of the returns allowance and is calculated by reference to historic returns data. The estimated returns period for the
current and prior year is 6 months. The estimation of the variable income as a result of the sales returns is constrained to the
extent that it is deemed highly probable that there will be no significant reversal in the amount of cumulative revenue
recognised. This allowance is included within other payables. The Group also recognise an asset in relation to stock which is
expected to be returned within inventory, based on average print margins and an additional allowance for unsaleable returns.
FOREIGN CURRENCIES
Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary
assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the exchange rate ruling at that
date with any exchange differences arising on retranslation being recognised in the income statement.
The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are
translated into US Dollars at exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations
are translated into US Dollars at average exchange rates. Foreign exchange differences arising on retranslation are charged or
credited to other comprehensive income and are recognised in the currency translation reserve in equity. On disposal of a
foreign operation, the related cumulative translation differences recognised in equity are reclassified to profit or loss and are
recognised as part of the gain or loss on disposal.
EXCEPTIONAL ITEMS
Exceptional items are those which the Group defines as significant items outside the scope of normal business that need to be
disclosed by virtue of their size or incidence in order for the user to obtain a proper understanding of the financial information.
RETIREMENT BENEFIT COSTS
The Group’s pension costs relate to individual pension plans and are charged to profit or loss as they fall due.
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65
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial Statements 1 General information and significant accounting policies (continued)
TAXATION
Tax on the profit or loss for the year comprises both current and deferred tax. Current tax is the expected tax payable on the
taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustments to
tax payable in respect of previous years. Tax provisions are based on Management’s interpretation of country specific tax law and
recognised when it is considered probable that there will be a future outflow of funds to a tax authority. Provisions are made
annually based on the specific information available at that time and therefore there is limited risk of change in the estimates in
the short term. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.
However, deferred tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or a liability
unless the related transaction is a business combination or effects tax or accounting profit. Not all temporary differences give
rise to deferred tax assets/liabilities. A deferred tax asset is recognised only to the extent that it is probable that future taxable
profits will be available against which the asset can be utilised. Changes in deferred tax assets or liabilities are recognised as a
component of tax expense in the income statement, except where they relate to items that are charged or credited directly to
other comprehensive income or equity, in which case the related deferred tax is also charged or credited directly to other
comprehensive income or equity, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation and any provision for impairments in value.
Depreciation is provided on a straight-line basis to write off the cost, less the estimated residual value, of property, plant and
equipment over their estimated useful lives, which are reviewed annually. Where parts of an item of plant and equipment have
separate lives, they are accounted for and depreciated as separate items. Residual values are reassessed on an annual basis. Land
is not depreciated.
Estimated useful lives are as follows:
Right-of-use assets
Short leasehold property improvements
Plant, equipment and motor vehicles
Fixtures and fittings
Over the period of the lease
Over the period of the lease
4 to 10 years
5 to 7 years
Assets held under right-of-use leases are depreciated over their expected useful lives on the same basis as owned assets or,
where shorter, over the term of the relevant lease.
In the case of right-to-use assets, expected useful lives are determined by reference to comparable owned assets or the lease
term, if shorter. Material residual value estimates and estimates of useful life are updates as required, but at least annually.
The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and
the carrying amount of the asset and is recognised in income.
LEASED ASSETS
For any new contracts entered into on or after 1 January 2020, the Group considers whether a contract is, or contains, a lease. A
lease is defined as a ‘contract, or part of a contract, that conveys the right to use an asset for a period of time in exchange for
consideration’. To apply this definition the Group assesses whether the contract meets three key evaluations which are whether:
•
•
•
the contract contains an identified asset, which is either explicitly identified in the contract or implicitly specified by being
identified at the time the asset is made available to the Group
the Group has the right to obtain substantially all of the economic benefits from use of the identified asset throughout the
period of use, considering its rights within the defined scope of the contract
the Group has the right to direct the use of the identified asset throughout the period of use. The Group assess whether it has
the right to direct ‘how and for what purpose’ the asset is used throughout the period of use.
At lease commencement date, the Group recognises a right-of-use asset and a lease liability on the balance sheet. The right-of-
use asset is measured at cost, which is made up of the initial measurement of the lease liability, any direct costs incurred by the
Group, an estimate of any costs to dismantle and remove the asset at the end of the lease, and any lease payments made in
advance of the lease commencement date (net of any incentives received).
The Group depreciates the right-of-use assets on a straight-line basis from the lease commencement date to the earlier of the
end of the useful life of the right-of-use asset or the end of the lease term. The Group also assesses the right-of-use asset for
impairment when such indicators exist.
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THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (continued)
1 General information and significant accounting policies (continued)
At the commencement date, the Group measures the lease liability at the present value of the lease payments unpaid at that
date, discounted using the interest rate implicit in the lease if that rate is readily available or the Group’s incremental borrowing
rate. The Group’s incremental borrowing rate reflects the marginal interest rates available to the Group, in the countries in which
the assets reside. Lease payments included in the measurement of the lease liability are made up of fixed payments, variable
payments based on an index or rate, amounts expected to be payable under a residual value guarantee and payments arising
from options reasonably certain to be exercised. Subsequent to initial measurement, the liability will be reduced for payments
made and increased for interest. It is remeasured to reflect any reassessment or modification, or if there are any changes in
in-substance fixed payments. When the lease liability is remeasured, the corresponding adjustment is reflected in the right-of-
use asset, or profit and loss if the right-of-use asset is already reduced to zero.
The Group has elected to account for short-term lease and leases of low-value assets using the practical expedients. Instead of
recognising a right-of-use asset and lease liability, the payments in relation to these are recognised as an expense in profit or loss
on a straight-line basis over the lease term.
On the statement of financial position, right-of-use assets have been included in property, plant and equipment and lease
liabilities are disclosed separately.
INTANGIBLE ASSETS - PRE-PUBLICATION COSTS
Pre-publication costs represent directly attributable costs and attributable overheads incurred in the development of book titles
prior to their publication. Attributable overheads are allocated on a title by title basis. These costs are recognised as non-current
intangible assets in accordance with IAS38, where the book title will generate future economic benefits and costs can be
measured reliably. These costs are amortised on a straight-line basis upon publication of the book title over estimated economic
life of three years or less, being an estimate of the expected useful economic life of a book title. The estimated economic life is
based on the annual sales profile of the Group. The investment in pre-publication costs has been disclosed as part of the
investing activities in the cash flow statement.
Pre-publication costs include work-in-progress. Costs on such unpublished titles are regularly reviewed and if they fail to meet
economic expectations, the costs are impaired.
INVENTORIES
Inventory is valued at the lower of cost and net realisable value, on a weighted average cost basis. Net realisable value is the
estimated selling price in the ordinary course of business, less estimated costs of completion and selling expenses.
FINANCIAL INSTRUMENTS
Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the
contractual provisions of the instrument.
FINANCIAL ASSETS
Financial assets are measured at amortised cost using the effective interest method.
Financial assets are assigned to the different categories on initial recognition, depending on the characteristics of the instrument
and its purpose. A financial instrument’s category is relevant for the way it is measured and whether any resulting income and
expenses is recognised in profit or loss or directly in equity. See Note 22 for a summary of the Group’s financial assets by
category.
Generally, the Group recognises all financial assets using trade date accounting. An assessment of whether a financial asset is
impaired is made at least at each reporting date. All income and expense relating to financial assets are recognised in the
income statement line item ‘finance costs’ or ‘finance income’, respectively, with the exception of trade and other receivables
which are recorded in revenue and administrative expenses.
After initial recognition, Financial Assets are measured at amortised cost using the effective interest method. Discounting is
ignored, where the effect is immaterial. The Group’s cash and cash equivalents, trade and most other receivables, fall into this
category of financial instrument. Assets in this category are measured, initially, at their transaction price with gains or losses
recognized in profit or loss.
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THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial Statements 1 General information and significant accounting policies (continued)
In considering impairment of financial assets, the group uses a wide range of information when assessing credit risk and
measuring credit losses, including past events, current conditions, reasonable and supportable forecasts that affect the expected
collectability of future cash flows of the instrument.
The Group adopts a simplified approach in accounting for trade and other receivables and records the loss allowance as lifetime
expected credit losses. These are the expected shortfalls in contractual cash flows, considering the potential for default at any
point during the life of the financial instrument. The Group uses its historical experience, external indicators and forward-looking
information to calculate the expected credit losses using a provision matrix.
FINANCIAL LIABILITIES
The Group’s financial liabilities include borrowings, trade and other payables (including finance lease liabilities).
After initial recognition at fair value, all financial liabilities, with the exception of derivative financial instruments, are measured
at amortised cost using the effective interest rate method. A summary of the Group’s financial liabilities by category is given in
Note 22.
FINANCIAL LIABILITIES AND EQUITY INSTRUMENTS
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered
into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of
financial liabilities.
FINANCE COSTS
Finance costs comprise interest payable on borrowings calculated using the effective interest method together with
the amortisation of debt issuance costs.
FINANCE INCOME
Finance income comprises interest receivable, which is recognised in profit or loss as it accrues using the effective interest
method.
CASH AND CASH EQUIVALENTS
For the purposes of the statement of cash flows, cash and cash equivalents comprise cash balances, call deposits and bank
overdrafts that form an integral part of the Group’s cash management processes.
SHARE-BASED PAYMENTS
The Group issues equity settled share-based payments to certain employees. Equity settled share-based payments are
measured at fair value at the date of grant. The fair value, determined at the grant date, of equity settled share-based payments is
expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest.
The fair value of employee share option grants is calculated using a Monte Carlo model, taking into account the terms and
conditions upon which the options were granted. The value of the charge is adjusted to reflect expected and actual levels
of options vesting.
BORROWING COSTS
All borrowing costs are recognised in the income statement in the period in which they are incurred. Debt issuance costs
comprising arrangement fees and legal costs are capitalised and amortised on a straight-line basis over the period of the
borrowing facility or included within the amortised cost calculation as appropriate. The annual amortisation charge is included
within finance costs in the Consolidated Statement of Comprehensive Income.
No borrowing costs have been capitalized in the current or prior years in relation to any asset.
FINANCIAL RISK MANAGEMENT
The principal risk factors faced by the Group are disclosed in Note 22.
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67
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (continued)
2 External Revenue
Sales of products
Sales of publishing rights
Total revenue
2020
$’000
2019
$’000
122,848
131,857
4,035
3,950
126,883
135,807
See accounting policies for detail of the revenue recognition concerning the above revenue streams.
During the year, sales to our primary distributor exceeded 10% of Group revenue (2019: one primary distributor). The value of
these sales was $58.8m (2019: $59.6m).
3 Operating segments
The core publishing businesses comprises two divisions: US Publishing and UK Publishing. This is the basis on which operating
results are reviewed and resources allocated by the Chief Executive Officer, who is deemed to be the chief operating decision
maker.
2020
Continuing operations
External revenue
Operating profit before amortisation of acquired intangibles and exceptional items
Amortisation of acquired intangibles
Segment result
Unallocated corporate expenses
Corporate exceptional items
Operating profit
Finance costs
Profit before tax
Tax
Profit after tax
Capital expenditure
Depreciation and software amortization
Investment in pre-publication costs
Amortisation and impairment of pre-publication costs
Deferred Income released
US Publishing
$000
UK Publishing
$000
Total Group
$000
63,137
3,249
(851)
2,398
63,746
8,360
(39)
8,321
7
1,333
10,349
15,702
12,769
27
1,058
9,975
12,944
964
126,883
11,609
(890)
10,719
(991)
(446)
9,282
(2,693)
6,589
(2,020)
4,569
34
2,391
20,324
28,646
13,733
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69
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial Statements 3 Operating segments (continued)
2019
Continuing Operations:
External revenue
Operating profit before amortisation of acquired intangibles and exceptional items
Amortisation of acquired intangibles
Segment result
Unallocated corporate expenses
Corporate exceptional items
Operating profit
Finance income
Finance costs
Profit before tax
Tax
Profit after tax
Capital expenditure
Depreciation and software amortisation
Investment in pre-publication costs
Amortisation of pre-publication costs
Deferred Income released
BALANCE SHEET
Quarto Publishing Group USA
Quarto Publishing Group UK
Unallocated (Deferred tax and cash)
Total assets
Quarto Publishing Group USA
Quarto Publishing Group UK
Unallocated (Deferred tax, corporation tax and debt)
Total liabilities
GEOGRAPHICAL AREAS
The Group operates in the following main geographic areas:
United States of America
United Kingdom
Europe
Rest of the World
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69
US Publishing
$000
UK Publishing
$000
71,488
4,511
(570)
3,941
64,319
6,540
(241)
6,299
17
1,294
10,930
14,289
18,220
121
1,109
12,856
14,405
1,899
2020
$’000
69,330
57,925
25,683
Total
Group
$000
135,807
11,051
(811)
10,240
(1,047)
(419)
8,774
9
(4,939)
3,844
(962)
2,882
138
2,403
23,786
28,694
20,119
2019
$’000
81,154
64,675
18,952
152,938
164,781
26,930
29,413
52,882
29,613
37,634
76,480
109,225
143,727
Revenue
Non-current assets
2020
$’000
76,061
18,250
17,446
15,126
2019
$’000
80,131
19,193
21,392
15,091
2020
$’000
40,456
30,419
—
—
2019
$’000
47,887
35,498
—
—
126,883
135,807
70,875
83,385
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (continued)
4 Operating profit
Operating profit has been arrived at after charging/(crediting):
Depreciation of property, plant and equipment
Profit on disposal of right-to-use assets
Depreciation of software
Net foreign currency exchange differences
Amortisation of acquired intangibles
Amortisation of pre-publication costs (Note 15)
Impairment of pre-publication costs (Note 15)
Staff costs (Note 6)
Impairment losses of financial assets
Cost of inventory recognised as an expense
Exceptional items (Note 5)
AUDITOR’S REMUNERATION
Fees payable to the Company’s auditor for the audit of the Company’s annual accounts
Fees payable to the Company’s auditor and its associates for the audit of subsidiary companies
Fees payable to the Company’s auditor for other assurance services relating to Open Offer
5 Exceptional items
Staff severance costs
Refinancing costs
Aborted corporate transaction costs
Total
2020
$’000
2,160
35
231
240
890
23,304
5,342
21,741
1,571
30,120
446
108
179
—
287
2020
$000
251
195
—
446
2019
$’000
2,127
—
276
(181)
811
25,359
3,335
24,985
853
32,647
419
90
165
172
427
2019
$000
—
387
32
419
During the year, the Group determined that costs amounting to $446,000 (2019: $419,000) should be classified as exceptional
items, in accordance with the accounting policy disclosed in Note 1. The costs comprised $251,000 in respect of redundancy
costs following restructuring during the Covid-19 pandemic and a further $195,000 of refinancing costs in connection with
amendments to the existing facility agreement. In 2019, the Group incurred $387,000 of refinancing costs in connection with
the renewal of the facility agreement, signed 16 January 2020 and $32,000 of costs incurred on aborted corporate transaction
costs. The charge, net of taxation, amounted to $349,000 (2019: $339,000).
70
71
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial Statements 6 Staff costs
Average monthly number of employees (excluding Executive Directors)
Wages and salaries
Share-based (credits)/payments
Social security costs
Other pension costs
Less monies received by UK Government under Coronavirus Job Retention Scheme
2020
Number
2019
Number
302
$000
19,074
(32)
1,969
730
21,741
(387)
21,354
334
$’000
21,854
48
2,229
854
24,985
—
24,985
Directors’ remuneration is disclosed in the Remuneration Committee Report on page 28.
The remuneration of the Executive Directors (2019: Executive Directors), who are the key management personnel of the Group,
is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures.
Short term employee benefits
Post-employment benefits
2020
994
47
1,041
2019
788*
18
806
The Directors’ remuneration disclosed above Included the following amounts earned in respect of the highest paid director:
Short term employee benefits
Post-employment benefits
* Includes $58,000 discretionary bonus payments paid in 2019 but relating to performance in 2018.
7 Finance income
Interest income
8 Finance costs
Interest expense on borrowings
Amortisation of debt issuance costs and bank fees
Interest expense on lease liabilities arising from the adoption of IFRS 16
Other interest
2020
504
18
522
2020
$’000
—
2020
$’000
1,724
543
390
36
2019
379
18
397
2019
$’000
9
2019
$’000
3,360
936
454
189
2,693
4,939
70
71
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (continued)
9 Taxation
Corporation tax
Current tax
Prior periods
Total current tax
Deferred tax (Note 19)
Origination and reversal of temporary differences
Total tax expense
2020
$’000
3,156
2
3,158
(1,138)
2,020
2019
$’000
1,557
(123)
1,434
(472)
962
Corporation tax on UK profits is calculated at 19%, based on the UK standard rate of corporation tax, (2019: 19%) of the estimated
assessable profit for the year. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.
The table below explains the difference between the expected expense at the UK statutory rate of 19% and the Group’s total tax
expense for the year.
Profit before tax
Tax at the UK corporation tax rate of 19% (2019: 19%)
Effect of different tax rates of subsidiaries operating in other jurisdictions
Change in overseas tax rates during the year
Adjustment to prior years
Tax effect of items that are not deductible in determining taxable profit
Other
Tax expense
Effective tax rate
10 Earnings per share
From continuing operations
Profit for the year
Amortisation of acquired intangibles (net of tax)
Exceptional items (net of tax)
Earnings for the purposes of adjusted earnings per share
Number of shares
Weighted average number of ordinary shares
Average number of potentially dilutive share options
Diluted weighted average number of ordinary shares
Earnings per share (cents) – continuing operations
Basic
Diluted
Adjusted earnings per share (cents)
Basic
Diluted
2020
$’000
6,589
1,252
161
68
2
240
297
2,020
30.7%
2020
$’000
Group
4,569
626
349
5,544
2019
$’000
3,844
730
(79)
-
97
174
40
962
25.0%
2019
$’000
Group
2,882
654
339
3,875
Number
Number
39,185,388
20,444,550
123,037
171,597
39,308,425
20,616,147
11.7
11.6
14.1
14.1
14.1
14.0
19.0
18.8
72
73
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial Statements 11 Goodwill
Cost
At 1 January
Exchange differences
At 31 December
Accumulated impairment losses
At 1 January
Exchange differences
At 31 December
Carrying value
At 31 December
IMPAIRMENT TESTS FOR CASH GENERATING UNITS CONTAINING GOODWILL
The following units have significant carrying amounts of goodwill:
Quarto Publishing Group USA (QUS)
Quarto Publishing Group UK (QUK)
2020
$000
42,913
189
43,102
2019
$000
42,675
238
42,913
(23,721)
(23,721)
—
—
(23,721)
(23,721)
19,381
19,192
2020
$000
12,882
6,499
19,381
2019
$000
12,882
6,310
19,192
The recoverable amount of each cash generating unit (‘CGU’) is determined using the value in use basis. In determining value in
use, management prepares a detailed bottom up budget for the initial twelve-month period, with reviews conducted at each
business unit. A further two years are forecast using relevant growth rates and other assumptions. Cash flows beyond the
three-year period are extrapolated into perpetuity, by applying a 2% growth rate from the addressable market. The cashflows are
then discounted using a country-specific discount rate. The growth rates used are consistent with the growth expectations for
the sector in which the company operates and the discount rate has been calculated using pre-tax Weighted Average Cost of
Capital analysis.
The key assumptions for calculating value in use are:
United States of America
United Kingdom
Terminal Growth Rates
Discount Rates
2020
2%
2%
2019
2%
2%
2020
11.40%
11.12%
2019
10.81%
10.54%
Revenue growth rates: forecast sales growth rates are based on those applied to the Board approved budget for the year ending
31 December 2021 and three-year plan. They incorporate future expectations of growth driven by investment plans for each
CGU.
Long-term growth rates: the three-year forecasts are extrapolated to perpetuity on the basis that the CGU’s are long-established
business units. The long-term growth rates are blended rates formed from the territory-specific long-term growth rates.
Gross margins: gross margins are based on historic performance and expected changes to the sales mix in future periods.
72
73
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS (continued)
11 Goodwill (continued)
The Group has not identified any reasonable possible changes to key assumptions that would cause the carrying value of
goodwill of the QUK CGU to exceed its recoverable amount. QUS has by far the largest goodwill and non-current assets and
carries a greater risk of impairment. Based on the above long-term growth rate and discount rate, QUS exceeded the carrying
value of goodwill by $17.8m. The following sensitivities were applied to this CGU:
• 2% increase in discount rate, at which level there was no impairment. The recoverable amount exceeded the carrying value of
goodwill by $7.1m. The discount rate would need to increase to 15.3% to record any Impairment.
• Nil terminal growth rate, at which level there was no impairment. The recoverable amount exceeded the carrying value of
goodwill by $8.9m. The terminal growth rate would need to show an annual 2% decline before any impairment was recorded.
• 5% decline in first year revenues, at which level there was no impairment. The recoverable amount exceeded the carrying
value of goodwill by $13.1m.
• 5% decline in first year revenues and an increased discount rate of 13.1% would cause impairment if there were no mitigation
actions.
Should there be a headline change in revenues and margins, this could create an impairment.
12 Other intangible assets
Cost
At 1 January 2019
Exchange differences
At 1 January 2020
Exchange differences
At 31 December 2020
Amortisation and impairment
At 1 January 2019
Exchange differences
Charge for the year
At 1 January 2020
Exchange differences
Charge for the year
At 31 December 2020
Carrying amount
At 31 December 2020
At 31 December 2019
Backlists
$000
Software
$000
Total
$000
21,204
(30)
21,174
79
21,253
19,494
(31)
811
20,274
81
890
21,245
8
900
1,630
—
1,630
—
1,630
972
—
276
1,248
—
231
1,479
151
382
22,834
(30)
22,804
79
22,883
20,466
(31)
1,087
21,522
81
1,121
22,724
159
1,282
74
75
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial Statements 13 Property, plant and equipment
Cost
At 1 January 2019
Adjustment on transition to IFRS 16
Exchange difference
Additions
Remeasurement
Disposals
At 31 December 2019
Exchange difference
Additions
Remeasurement
Disposals
At 31 December 2020
Depreciation
At 1 January 2019
Exchange differences
Charge for the year: right of use asset
Charge for the year: other property, plant and equipment
Disposals
At 31 December 2019
Exchange differences
Charge for the year: right of use asset
Charge for the year: other property, plant and equipment
Disposals
At 31 December 2020
Net book value
At 31 December 2020
At 31 December 2019
Short-term
Leasehold
Improvements
$000
Right-of-use
Leasehold
Property
$000
Plant,
Equipment &
Motor
Vehicles
$000
—
10,538
156
—
508
—
943
71
27
138
18
—
Fixture &
Fittings
$000
1,085
—
1
—
—
—
Total
$000
3,270
10,609
210
138
526
(258)
11,202
1,197
1,086
14,495
(22)
227
2
(2,313)
9,096
—
—
1,545
—
—
1,545
—
1,760
—
(184)
3,121
5,975
9,657
25
34
—
—
2
—
—
—
1,256
1,088
391
17
64
310
—
782
50
—
217
—
819
—
—
104
—
923
2
—
78
—
1,049
1,003
26
261
2
(2,313)
12,471
1,718
25
1,609
518
(258)
3,612
65
1,760
400
(184)
5,653
207
415
85
163
6,818
10,883
1,242
—
26
—
—
(258)
1,010
21
—
—
—
1,031
508
8
—
104
(258)
362
13
—
105
—
480
551
648
All property, plant and equipment has been pledged as security for the Group’s bank borrowings (note 18).
Included in the net carrying amount of property, plant and equipment are right-of-use assets of $5,975,000 (2019: $9,683,000)
of which $5,975,000 (2019: $9,657,000) is attributable to leasehold property improvements and $nil (2019: $26,000) to plant,
equipment and motor vehicles. Depreciation charges on these assets are disclosed separately in the above table.
14 Subsidiaries
A list of the investments in subsidiaries, including the name, country of incorporation and proportion of ownership interest is
given in Note 5 to the Company’s balance sheet. All of these subsidiaries are included in the consolidated results.
74
75
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (continued)
15 Intangible assets – pre-publication costs
Cost
At 1 January
Exchange difference
Additions
Transfers
Impairment charge
Disposals
At 31 December
Amortisation
At 1 January
Exchange difference
Amortisation charge
Impairment charge
Disposals
At 31 December
2020
$000
2020
$000
Work in
progress
Published
products
2020
$000
Total
2019
$000
2019
$000
Work in
progress
Published
products
2019
$000
Total
12,929
118,271
131,200
13,544
124,096
137,640
147
20,324
(18,508)
(3,450)
—
11,442
—
—
—
—
—
—
2,056
—
18,508
—
(52,339)
86,496
82,503
1,665
23,304
1,892
(52,339)
57,025
2,203
20,324
—
(3,450)
(52,339)
97,938
82,503
1,665
23,304
1,892
(52,339)
57,025
213
23,786
(21,279)
(3,335)
1,827
—
21,279
—
—
(28,931)
2,040
23,786
—
(3,335)
(28,931)
12,929
118,271
131,200
—
—
—
—
—
—
84,934
1,141
25,359
—
(28,931)
82,503
84,934
1,141
25,359
—
(28,931)
82,503
Net book value
11,442
29,471
40,913
12,929
35,768
48,697
The assessment of the useful life of pre-publication costs and amortisation involves a significant management estimate based
on historical trends and future potential sales, in accordance with the accounting policy stated in Note 1. In the current year,
certain imprints operating under the US Publishing segment reported material falls in revenues and gross margins, which led to a
downward revision of the useful lives of these imprints. The additional charge of $1,892,000 (2019: $nil) is disclosed above.
Pre-publication costs form part of the carrying value of the CGU for each segment and are considered for impairment of
goodwill in note 11.
16 Inventories
Finished goods
Raw materials
2020
$000
15,285
180
15,465
2019
$000
19,270
108
19,378
All of the Group’s inventories have been reviewed for indicators of impairment. Certain inventories were found to be impaired
and a provision of $2,220,000 (2019: $2,318,000) has been recorded accordingly.
All inventories have been pledged as security for the Group’s bank borrowings (note 18).
76
77
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial Statements 17 Trade and other receivables
Trade receivables
Other receivables and prepayments
2020
$000
38,361
6,158
44,519
2019
$000
38,753
7,644
46,397
The average credit period on sales of goods is 77 days (2019: 73 days).
The Group applies the IFRS 9 simplified model of recognising lifetime expected credit losses for all trade receivables as these
Items do not have a significant financing component. In measuring the expected credit losses, the trade receivables have been
assessed on an Individual basis, as much as possible, because credit risk characteristics vary by customer. The expected loss
rates are based on the payment profile over the last 12 months, to reflect the Impact of Covid-19 on our customers. Trade
receivables are written off (ie, derecognised) when there is no reasonable expectation of recovery.
On the above basis, the expected credit loss for trade receivables as at 31 December 2020 and 31 December 2019 was
determined as follows:
31 December 2020
Gross carrying amount $000
Expected credit loss rate
Lifetime expected credit loss $000
31 December 2019
Gross carrying amount $000
Expected credit loss rate
Lifetime expected credit loss $000
Current
33,877
1.0%
347
Current
35,616
0.1%
35
Overdue
Less Than
30 Days
Overdue
Less Than
60 Days
Overdue
Less Than
90 Days
Overdue
More Than
90 Days
2,039
1.8%
37
1,506
3.8%
58
1,096
18.1%
199
1,757
72.5%
1,273
Overdue
Less Than
30 Days
Overdue
Less Than
60 Days
Overdue
Less Than
90 Days
Overdue
More Than
90 Days
1,770
1.1%
20
950
2.1%
20
292
72.2%
211
Movement in provision for lifetime expected credit loss is as follows:
Provision at beginning of year
Amounts de-recognised in the year
Amounts recovered during the year
Exchange differences
Increase in allowance recognised in profit or loss
Provision at end of the year
Total
40,275
4.8%
1,914
Total
39,921
2.9%
1,168
2019
$000
826
(677)
148
18
853
1,168
1,293
68.2%
882
2020
$000
1,168
(977)
138
14
1,571
1,914
The Directors consider that the carrying amount of trade and other receivables approximates to their fair value.
Note 22 includes disclosures relating to credit risk exposures and analysis relating to the allowance for expected credit losses.
76
77
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (continued)
18 Cash, borrowings and net debt
CASH
Bank balances
Cash and cash equivalents
The carrying amount of these assets approximates to their fair value.
The effective interest rate on bank balances and short-term deposits was 0% (2019: 0%).
BORROWINGS
Bank and other loans
On demand or within one year
Less: Amount due for settlement within 12 months (shown under current liabilities)
Amount due for settlement after 12 months
Total
$’000
Fixed rate
borrowings
$’000
Variable rate
borrowings
$’000
39,408
2,411
41,819
45,000
21,077
66,077
16,408
—
16,408
13,000
—
13,000
23,000
2,411
25,411
32,000
21,077
53,077
US dollar borrowings
Other currency borrowings
As at 31 December 2020
US dollar borrowings
Other currency borrowings
As at 31 December 2019
OTHER LOANS
Other loans (unsecured)
On demand or within one year
Less: Amount due for settlement within 12 months (shown under current liabilities)
Amount due for settlement after 12 months
Other loans comprise:
2020
$000
22,079
22,079
2019
$000
15,621
15,621
2020
$000
41,819
41,819
41,819
2019
$000
66,077
66,077
66,077
(41,819)
(66,077)
—
—
Weighted
average
interest rate
for fixed rate
borrowings
%
Average
time over
which interest
rate is fixed
Months
3.1
—
3.1
3.5
—
3.5
6.5
—
6.5
19.0
—
19.0
2020
$000
16,408
16,408
16,408
2019
$000
13,000
13,000
13,000
(16,408)
(13,000)
—
—
(a) Loans of $11,500,000 (2019: $11,500,000) from related parties, as disclosed in note 29, which were repayable, together with
the accrued interest on 31 July 2021 and carry an interest rate of 3.5%. After the year end, the repayment date of these loans has
been extended to 31 August 2024.
(b) A loan for $1,500,000 (2019: $1,500,000) which was repayable together with accrued interest on 31 July 2021 and carries an
interest rate of 3.5%. After the year end, the repayment date has been extended to 31 August 2024.
78
79
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial Statements 18 Cash, borrowings and net debt (continued)
(c) A loan of $2,422,000 (2019: $nil) relates to government support given under the Coronavirus Aid, Relief and Economic
Security Act of the USA. This attracts an interest rate of 1%. Without reasonable assurance of forgiveness, it has been treated as
debt to be repaid within the next 12 months.
(d) Accrued Interest of $986,000 (2019: $nil) on the above loans.
Total
$’000
Fixed rate
borrowings
$’000
Variable
rate
borrowings
$’000
Weighted
average
interest rate
for fixed rate
borrowings
%
Average
time over
which interest
rate is fixed
Months
16,408
13,000
16,408
13,000
—
—
2.8
3.5
6.5
19.0
US dollar borrowings
As at 31 December 2020
As at 31 December 2019
BANK LOANS
Bank loans
On demand or within one year
Less: Amount due for settlement within 12 months (shown under current liabilities)
Amount due for settlement after 12 months
US dollar borrowings
Other currency borrowings
As at 31 December 2020
US dollar borrowings
Other currency borrowings
As at 31 December 2019
Total
$’000
Fixed rate
borrowings
$’000
Variable rate
borrowings
$’000
23,000
2,411
25,411
32,000
21,077
53,077
—
—
—
—
—
23,000
2,411
25,411
32,000
21,077
53,077
2020
$000
25,411
25,411
25,411
2019
$000
53,077
53,077
53,077
(25,411)
(53,077)
—
—
Weighted
average
interest rate
for fixed rate
borrowings
%
Average
time over
which interest
rate is fixed
Months
—
—
—
—
—
—
—
—
—
—
—
—
At 31 December 2020, undrawn borrowing facilities totalled $9.6m (2019: $11.0m). The variable rate borrowings carry interest
based on LIBOR plus a margin, depending on the leverage ratio. The Directors estimate the fair value of the Group’s borrowings
to be equal to book value, by reference to market rates.
At 31 December 2020, the Group had a US$35m (2019: US$64.0m) multi-currency syndicated bank facility which was due to
expire on 31 July 2021. A new facility agreement was signed on 16 February 2021 with borrowing facilities of US$20m. Banking
EBITDA used for bank covenant purposes was $12,839,000 (Note 30) in 2020 (2019: $10,376,000).
The facilities, which were in place at the year end, were subject to three principal covenants which vary over the course of the
financial year. During the year, as part of the Group’s Covid-19 course of action, the banking covenants were waived for the year
ended 31 December 2020. As part of the new facility agreement referred to above, a new set of banking covenants were agreed
for the duration of the new facility.
.
78
79
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (continued)
18 Cash, borrowings and net debt (continued)
NET DEBT
Borrowings
IFRS 16 lease liabilities
Cash and cash equivalents
Net debt
Borrowings
IFRS 16 lease liabilities1
Cash and cash equivalents
Net debt
1 January
2020
$’000
(66,077)
(9,866)
15,621
(60,322)
1 January
2019
$’000
(75,752)
(10,609)
15,384
(70,977)
1 The effective date of IFRS 16 Leases was 1 January 2019.
19 Deferred tax
Deferred tax liabilities
Excess of capital allowances over depreciation – UK
Pre-publication costs and other temporary differences – UK
Pre-publication costs and other temporary differences - US
Deferred tax assets
Goodwill, intangible assets and other temporary differences – US
Net deferred taxation liability
The movement on the net provision for deferred taxation is as follows:
Net provision at 1 January
(Charge)/credit direct to equity
Exchange difference through other comprehensive income
Credit to profit and loss
Net provision at 31 December
20 Lease liabilities
Current
Non-current
Total
Cashflows
$’000
Non-cash
items
$’000
Foreign
exchange
$’000
31 December
2020
$’000
(92)
1,574
—
1,482
457
19
99
575
(41,819)
(6,278)
22,079
(26,018)
Non-cash
items
$’000
Foreign
exchange
$’000
31 December
2019
$’000
23,893
1,995
6,359
32,247
Cashflows
$’000
10,454
1,882
92
(188)
(979)
—
12,428
(1,167)
(591)
(160)
145
(606)
2020
$000
—
4,103
4,103
2,220
6,323
3,604
3,604
2,719
2020
$000
3,808
(54)
103
(1,138)
2,719
2020
$000
1,968
4,310
6,278
(66,077)
(9,866)
15,621
(60,322)
2019
$000
1
4,519
4,520
2,619
7,139
3,331
3,331
3,808
2019
$000
3,947
162
171
(472)
3,808
2019
$000
1,937
7,929
9,866
80
81
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial Statements 20 Lease liabilities (continued)
The Group has leases for its offices and some IT equipment. With the exception of short-term leases and leases of low-value
underlying assets, each lease is reflected on the balance sheet as right-of-use asset and a lease liability. Variable lease payments
which do not depend on an index or a rate (such as lease payments based on a percentage of Group revenues) are excluded
from the initial measurement of the lease liability and asset. The Group classifies its right-of-use assets in a consistent manner to
its property, plant and equipment (note 13).
Each lease generally imposes a restriction that, unless there is a contractual right for the Group to sublet the asset to another
party, the right-of-use asset can only be used by the Group. Leases are either non-cancellable or may only be cancelled by
incurring a substantive termination fee. For leases over office buildings the Group must keep those properties in a good state of
repair and return the properties in their original condition at the end of the lease. Further, the Group must insure items of
property, plant and equipment and incur maintenance fees on such items in accordance with the lease contracts.
The table below describes the nature of the Group’s leasing activities by type of right-to-use asset recognised on the balance sheet:
No of right-of-
use assets
leased
Range of
remaining term
Average
remaining lease
term
No of lease
with extension
options
No of lease
with options to
purchase
No of lease with
variable
payments
linked to an
index
No of lease with
termination
options
6
4-9 years
6 years
5
—
4
1
Right-of-use
asset
Office
building
Properties with extension, or termination, options are assessed on a case-by-case basis In determining take-up of the options.
The lease liabilities are secured by the related underlying assets. Future minimum lease payments at 31 December 2020 were as
follows:
Within 1 year
1-2 years
2-3 years
3-4 years
4-5 years
After 5 years
Total
Minimum lease payments due US$000
31 December 2020
Lease payments
Finance charges
Net present values
31 December 2019
Lease payments
Finance charges
Net present values
2,358
(390)
1,968
2,253
(390)
1,863
1,551
(269)
1,282
2,085
(329)
1,756
1,585
(219)
1,366
1,886
(267)
1,619
1,044
(161)
883
1,504
(204)
1,300
1,013
(234)
779
1,343
(149)
1,194
—
—
—
2,291
(157)
2,134
7,551
(1,273)
6,278
11,362
(1,496)
9,866
The total cash outflow in relation to lease liabilities during the year was $1,995,000 (2019: $1,882,000).
The Group has elected not to recognise a lease liability for short term leases or for leases of low value assets. Payments made
under such leases are expensed on a straight-line basis and amounted to $26,000 in the year (2019: $26,000).
21 Trade and other payables
CURRENT LIABILITIES
Trade payables
Other payables
Total
2020
$000
28,529
21,535
50,064
2019
$000
36,218
21,163
57,381
Under IFRS 15, the reserve for sales returns in included in other payables; it amounts to $6,481,000 (2019: $6,749,000). The
reserve is calculated based on a time lag between sales and returns and historical return patterns. Management monitors actual
returns against the reserve on a regular basis. If the rate of sales return had been 1% higher during the year, the provision would
have increased by $512,000 (2019: $488,000).
Included within other payables is $2,274,000 in respect of deferred Income (2019: $2,525,000), detailed below:
80
81
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (continued)
21 Trade and other payables (continued)
Opening liability
Deferred Income Invoiced
Revenue Recognised
Exchange difference
Closing liability
2020
$000
2,525
13,436
(13,733)
46
2,274
2019
$000
1,654
20,902
(20,119)
88
2,525
22 Financial instruments
The Group is exposed to market risk through its use of financial instruments and specifically to currency risk, interest rate risk,
credit risk, liquidity risk and certain other price risks, which result from both its operating and investing activities. The Group’s risk
management is coordinated at its headquarters, in close co-operation with the Board of Directors, and focuses on actively
securing the Group’s short to medium-term cash flows by minimising the exposure to financial markets.
The Group does not actively engage in the trading of financial assets for speculative purposes nor does it write options.
The most significant financial risks to which the Group is exposed and a summary of financial assets and liabilities by category
are described below.
FOREIGN CURRENCY SENSITIVITY
Exposures to currency exchange rates arise from the Group’s overseas sales and costs, which are primarily denominated in
Sterling, and, to a much lesser extent in Euros. The Group has minimal exposure to other foreign currencies.
Foreign currency denominated financial assets and liabilities, translated into US Dollars at the closing rate, are as follows:
Financial assets:
Financial liabilities
Short-term exposure
Financial liabilities:
Long-term exposure
At 31 December
2020
2019
$000
Sterling
11,792
(755)
11,037
$000
Other
1,053
(3,033)
(1,980)
$000
Sterling
10,321
(19,030)
(8,709)
$000
Other
2,121
(4,344)
(2,223)
—
—
—
—
11,037
(1,980)
(8,709)
(2,223)
The following table illustrates the sensitivity of the net result for the year and equity in regard to the Group’s financial assets and
financial liabilities and the US Dollar – Sterling exchange rate.
It assumes a +/– 5% change of the Sterling/US-Dollar exchange rate, in line with the movement over the last year.
The sensitivity analysis is based on the Group’s foreign currency financial instruments held at each balance sheet date.
If Sterling had strengthened against the US Dollar by 5% (2019: 7.5%) then this would have had the following impact:
Profit/(loss) after tax for the year
Equity
2020
$000
(240)
(240)
If Sterling had weakened against the US Dollar by 5% (2019: 7.5%) then this would have had the following impact:
Profit/(loss) after tax for the year
Equity
2020
$000
240
240
2019
$000
(120)
(120)
2019
$000
120
120
82
83
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial Statements 22 Financial instruments(continued)
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.
INTEREST RATE SENSITIVITY
The Group’s policy is to minimise interest rate cash flow risk exposures, where possible and commercially appropriate, on
long-term financing, through interest rate swaps. A part of longer-term borrowings are sometimes, therefore, at fixed rates.
At 31 December 2020, the Group is exposed to changes in market interest rates through its bank borrowings, which are subject
to variable interest rates – see Note 18 for further information.
The following table illustrates the sensitivity of the profit after tax for the year and equity to a reasonably possible change in
interest rates of +/–0.25%, with effect from the beginning of the year. These changes are considered to be reasonably possible
based on observation of current market conditions. The calculations are based on the Group’s financial instruments held at each
balance sheet date. All other variables are held constant.
A 0.25% increase in interest rates would have the following impact:
Profit for the year
Equity
A 0.25% decrease in interest rates would have the following impact:
Profit for the year
Equity
2020
$000
(48)
(48)
2020
$’000
48
48
2019
$000
(100)
(100)
2019
$’000
100
100
CREDIT RISK ANALYSIS
The Group’s maximum exposure to credit risk is limited to the carrying amount of financial assets recognised at the balance
sheet date, as summarised below:
Cash and cash equivalents
Trade receivables
2020
$’000
22,079
38,361
60,440
2019
$’000
15,621
38,753
54,374
The Group’s credit risk is primarily attributable to its trade receivables. There is minimal credit risk within other receivables. The
amounts presented in the balance sheet are net of allowances for doubtful receivables, estimated by the Group’s management
based on prior experience and their assessment of the current economic environment. The ongoing credit risk is managed
through regular review of ageing analysis together with credit limits per customer.
The Group continuously monitors defaults of customers and other counterparties, identified either individually or by group, and
incorporates this information into its credit risk controls. Where available at reasonable cost, external credit ratings and/or reports
on customers and other counterparties are obtained and used. The Group’s policy is to deal only with creditworthy counterparties.
The Group’s management considers that all the above financial assets that are not impaired for each of the reporting dates
under review are of good credit quality, including those that are past due. Credit losses written off during the year which are
subject to enforcement activity are minimal.
In respect of trade and other receivables, the Group is not exposed to any significant credit risk exposure to any single
counterparty or any group of counterparties having similar characteristics. The credit risk for liquid funds and other short-term
financial assets is limited, since the counterparties are reputable banks with high quality external credit ratings.
LIQUIDITY RISK ANALYSIS
The Group manages its liquidity needs by carefully monitoring scheduled debt servicing payments for long-term financial
liabilities as well as cash-outflows due in day-to-day business. Liquidity needs are monitored in various time bands, on a day-to-
day and week-to-week basis.
82
83
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (continued)
22 Financial instruments (continued)
The Group maintains cash and marketable securities to meet its liquidity requirements. Funding for long-term liquidity needs
is additionally secured by an adequate amount of committed credit facilities.
As disclosed in Note 18, at 31 December 2020, the Group had a US$35m (2019: US$64.0m) multi-currency syndicated bank
facility which was due to expire on 31 July 2021. The covenants linked to this facility were waived for the year ended 31
December 2020 only, as part of the Group’s Covid-19 course of action. A new facility agreement was signed on 16 February
2021 with borrowing facilities of US$20m. This facility is subject to two principal covenants in 2021, being:
(a) Net banking Indebtedness shall not exceed 2.0 times EBITDA (as defined in the facility agreement)
(b) EBITDA shall exceed 4 times net finance charges (as defined in the facility agreement)
The Group’s liabilities have contractual maturities which are summarised below:
31 December 2020
Bank and other loans
Lease liabilities
Trade payables
Other short-term financial liabilities
31 December 2019
Bank and other loans
Lease liabilities
Trade payables
Other short-term financial liabilities
Within 6
months
$’000
3,132
984
28,529
21,535
54,180
Within 6
months
$’000
1,365
932
31,218
21,163
54,678
Current
6 to 12
months
$’000
40,965
984
—
—
1 to 5
years
$’000
—
4,310
—
—
41,949
4,310
Non-Current
Over 5
years
$’000
—
—
—
—
—
Current
6 to 12
months
$’000
66,671
931
5,000
—
Non-Current
Over 5
years
$’000
—
2,133
—
—
1 to 5
years
$’000
—
5,870
—
—
72,602
5,870
2,133
SUMMARY OF FINANCIAL ASSETS AND LIABILITIES BY CATEGORY
The carrying amounts of the Group’s financial assets and liabilities as recognised at the balance sheet date of the reporting
periods under review may also be categorised as follows. See note 1, significant accounting policies, covering financial assets
and financial liabilities for explanations about how the category of instruments affects their subsequent measurement.
Current assets
Financial assets at amortised cost:
• Trade receivables
• Cash and cash equivalents
Current liabilities
Financial liabilities measured at amortised cost:
• Borrowings
• Lease liabilities
• Trade payables
• Other payables
2020
$000
2019
$000
38,361
22,079
60,440
41,819
1,968
28,529
21,535
93,851
38,753
15,621
54,374
66,077
1,937
36,218
21,163
125,395
84
85
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial Statements 22 Financial instruments (continued)
Non-current liabilities
Financial liabilities measured at amortised cost:
• Lease liabilities
4,310
4,310
7,929
7,929
CAPITAL RISK MANAGEMENT
The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising
the return to shareholders through an optimal balance of debt and equity. The capital structure of the Group consists of debt,
which includes the borrowings disclosed in note 18, cash and cash equivalents and equity attributable to equity holders of the
parent, comprising share capital and reserves as disclosed in the consolidated statement of changes in equity.
The Board reviews the capital structure, including the level of indebtedness and interest cover, as required. The Board’s objective
is to maintain the optimal level of indebtedness and manage interest cover to comply with the covenant requirements set out in
note 18. As part of this review, the Board considers the cost of capital and the risks associated with each class of capital. The
Group has complied with its covenant obligations during the year.
23 Post balance sheet events
On 16 February 2021, the Group concluded Its refinancing, signing an extension to its existing bank facilities to 16 July 2024. The
multi-currency facility comprises a $10m term loan, a $8m revolving credit facility and a $2m overdraft facility. On the same
date, Lion Rock Group Limited, a related party (Note 29) agreed to provide the Group a $10m loan note at 4% interest, repayable
on 31 July 2024.
24 Share capital and paid In surplus
SHARE CAPITAL
Authorised
2020
$000
2019
$000
55 million shares (2019: 28 million shares) of common stock of par value of US$0.10 each
5,500
2,800
Allotted, called up and fully paid:
40,889,100 (2019: 20,444,550) shares of common stock of par value of US$0.10 each
4,089
2,045
The Company has one class of common stock which carries no right to fixed income.
PAID IN SURPLUS
This reserve records the amount above par value received for common stock sold less transaction costs. The movement on this
reserve was as follows:
At 1 January
Issue of new common stock
At 31 December
2020
$000
33,764
14,937
48,701
2019
$000
33,764
—
33,764
On 16 January 2020, the Group announced an Open Offer of 20,444,550 new common stock at 68 pence per share, raising net
proceeds of $16,981,000. Of this amount, $2,044,450 Is attributed to share capital and the balance, $14,936,550 to the paid in
surplus reserve.
25 Retained earnings and other reserves
HEDGING RESERVE
The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging
instruments related to hedged transactions.
TRANSLATION RESERVE
The translation reserve comprises all foreign exchange differences arising from the translation of the closing balance sheets
of foreign operations of the Group and the results of foreign operations of the Group since 1 January 2004.
84
85
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (continued)
25 Retained earnings and other reserves (continued)
RETAINED EARNINGS
The retained earnings reserve comprises profit for the year attributable to owners of the Group and other Items recognised
directly through equity as presented on the consolidated statement of changes in equity.
26 Dividends
No dividends have been declared in the current or prior year.
27 Notes to the cash flow statement
Cash comprises cash on hand and demand deposits. Cash equivalents are short-term highly liquid investments that are readily
convertible to known amounts of cash and which are subject to insignificant changes in value.
28 Share based payments
PERFORMANCE SHARE PLAN (‘PSP’)
The Company operates a PSP scheme that awards free shares.
2016 AWARD
The awards under this scheme were granted on 19 April 2016. The vesting period is 4 years from the date of grant. The award
vests in the following proportion:
• 50% is conditional on the cumulative growth in Adjusted Diluted EPS being between 5% and 10% over the performance
period, resulting in the awards vesting on a sliding scale of 20% to 100%; and
• 50% is conditional on Total Shareholder Return being between 7% and 15%, resulting in vesting on a sliding scale of 20%
to 100%.
Participants are not entitled to receive dividends until awards have vested.
Details of the share options outstanding during the year are as follows:
Outstanding at beginning of the year
Forfeited during the year
Lapsed during the year
Outstanding at the end of the year
The key inputs used to value the options are:
Share price at date of grant
Expected life (years)
Fair value per award
Weighted average remaining contractual life (years)
Dividend yield (%)
Expected volatility of share price (%)
2020
Number
143,784
(33,673)
(110,111)
2019
Number
152,192
(8,408)
—
—
143,784
EPS Portion
TSR Portion
£2.45
4
£2.10
2.3
3.88
n/a
£2.45
4
£0.44
3.3
3.88
19.1
Dividend
discount
Monte-
Carlo
2017 AWARD
The awards under this scheme were granted on 28 April 2017. The vesting period is 4 years from the date of grant. The award
vests in the following proportion:
• 50% is conditional on the cumulative growth in Adjusted Diluted EPS being between 5% and 10% over the performance
period, resulting in the awards vesting on a sliding scale of 20% to 100%; and
• 50% is conditional on Total Shareholder Return being between 7% and 15%, resulting in vesting on a sliding scale of
20% to 100%.
Participants are not entitled to receive dividends until awards have vested.
86
87
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial Statements 28 Share based payments (continued)
Details of the share options outstanding during the year are as follows.
Outstanding at beginning of the year
Forfeited during the year
Outstanding at the end of the year
The key inputs used to value the options are:
Share price at date of grant
Expected life (years)
Fair value per award
Weighted average remaining contractual life (years)
Dividend yield (%)
Expected volatility of share price (%)
Model used
29 Related party transactions
The Group had the following related party transactions over the periods under review:
PRINTING PURCHASES:
Lion Rock Group Limited
Accounts payable at start of year
Purchases
Rebate received
Payments
Accounts payable at end of year
LOANS AND ACCRUED INTEREST:
Loans
Accrued interest on loans at end of year
2020
Number
84,995
(19,772)
65,223
2019
Number
104,463
(19,468)
84,995
EPS Portion
TSR Portion
£2.64
4
£2.20
3.3
4.55
n/a
£2.64
4
£0.48
3.3
4.55
18.6
Dividend
discount
Monte-
Carlo
2020
$’000
13,692
14,720
(1,464)
(14,053)
12,895
2019
$’000
6,083
11,562
—
(3,953)
13,692
At 31
December
2020
$000
At 31
December
2019
$000
11,500
874
11,500
470
The loans are from 1010 Printing Limited ($7.0m) and C K Lau ($4.5m). The loans are unsecured, are repayable, together with the
accrued interest, on 31 July 2021, and carry interest at 3.5%. After the year end, the repayment date was extended to 31 July
2024.
Lion Rock Group Limited and 1010 Printing Limited are companies over which C K Lau exercises control.
The rebate received in 2020 has been accounted for in accordance with the accounting policy disclosed in Note1. The rebate
scheme, at this stage, will not be renewed in 2021.
REVENUES AND TRADE RECEIVABLES:
86
87
Revenues
Outstanding receivables balance at end of year
At 31
December
2020
$000
At 31
December
2019
$000
137
63
—
—
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS (continued)
29 Related party transactions (continued)
The Group recorded revenues of $129,000 with Giunti Editore S.p.A, a company over which Andrea Giunti Lombardo, a non-
executive director appointed on 10 February 2020, exercises control. The transactions were in the normal course of business on
arms-length terms. The amount outstanding at 31 December 2020 was $58,000.
The Group recorded revenues of $8,000 with Pavilion Books Limited, a company over which Polly Powell, CEO (appointed 10
February 2020) exercises control. The transactions were in the normal course of business on arms-length terms. The amount
outstanding at 31 December 2020 was $5,000.
30 Reconciliation of figures included in other parts of the financial statements
Adjusted operating profit
Operating profit
Add back:
Amortisation of acquired intangibles
Other exceptional items (Note [5])
Adjusted operating profit
EBITDA
Operating profit before amortisation of acquired intangibles and exceptional items
Less: Net finance costs
Impact of IFRS 16
Adjusted profit before tax
Net finance costs
Depreciation of property, plant and equipment and software (excluding right-of-use assets)
Share based (credits)/payments
One off non-cash costs
EBITDA for banking purposes
Impact of IFRS 16
Depreciation of right-of-use assets
Less: one off non-cash costs
EBITDA
Adjusted profit before tax before amortisation of acquired intangibles and exceptional items
Adjusted operating profit before amortisation of acquired intangibles and exceptional items
Less: net finance costs
Adjusted profit before tax before amortisation of acquired intangibles and exceptional items
Free cashflow
Net cash from operating activities
Investment in pre-publication costs
Purchases of property, plant and equipment excluding IFRS 16 assets
Free cashflow
Net debt
Short-term borrowings
Cash and cash equivalents
Net debt
2020
$000
2019
$000
9,282
890
446
8,774
811
419
10,618
10,004
10,618
(2,693)
(270)
7,655
2,693
631
(32)
1,892
12,839
270
1,760
(1,892)
12,977
10,618
(2,693)
7,925
36,921
(20,324)
(34)
16,563
41,819
(22,079)
19,740
10,004
(4,930)
(271)
4,803
4,930
794
48
—
10,575
271
1,609
—
12,455
10,004
(4,930)
5,074
41,302
(23,786)
(138)
17,378
66,077
(15,621)
50,456
88
89
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial Statements
Company Balance Sheet
AS AT 31 DECEMBER 2020
Fixed assets
Investments
Current assets
Other receivables falling due within one year
Current liabilities
Creditors: Amounts falling due within one year
Creditors: Amounts falling due after more than one year
Tax payable
Net assets/(liabilities)
Equity
Called up share capital
Paid in surplus
Retained earnings
Total equity
Notes
4
6
7
8
2020
$000
1,234
1,234
3,370
3,370
2019
$000
1,266
1,266
—
—
(52)
(52)
(15,866)
(15,866)
(430)
4,122
(441)
(15,041)
4,089
48,701
(48,668)
4,122
2,045
33,764
(50,850)
(15,041)
The notes on pages 91 to 94 are an integral part of these consolidated financial statements
The financial statements were approved by the Board of Directors and authorised for issue on 21 March 2021.
They were signed on its behalf by
Polly Powell
Director
21 March 2021
88
89
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Company Statement of
Comprehensive Income
FOR THE YEAR ENDED 31 DECEMBER 2020
Other operating income
Dividends received
Administrative expenses
Foreign exchange gain/(loss)
Profit/(loss) before tax
Tax
Profit/(loss) for the year
Notes
3
2020
$’000
1,980
224
2,204
10
2,214
2019
$’000
—
(587)
(587)
—
(587)
The notes on pages 91 to 94 are an integral part of these consolidated financial statements
Company Statement of
Changes in Equity
FOR THE YEAR ENDED 31 DECEMBER 2020
Balance at 1 January 2019
Loss for the year
Transactions with owners
Share based payments/charges
Balance at 1 January 2020
Profit for the year
Transactions with owners
Share capital raised
Costs of raising share capital
Share based payments/charges
Balance at 31 December 2020
Share
capital
$’000
2,045
—
—
2,045
—
2,044
—
—
Paid in
surplus $’000
Retained
earnings
$’000
Equity
attributable to
owners
$’000
33,764
(50,311)
(14,502)
—
—
(587)
(587)
48
48
33,764
(50,850)
(15,041)
—
2,214
2,214
16,307
(1,370)
—
—
—
(32)
18,351
(1,370)
(32)
4,122
4,089
48,701
(48,668)
The notes on pages 91 to 94 are an integral part of these consolidated financial statements
90
91
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial Statements Notes to the Company Accounts
AT 31 DECEMBER 2020
1 Basis of preparation
The separate financial statements of the Company are presented and have been prepared in accordance with Financial
Reporting Standard 102 (FRS 102) issued by the Financial Reporting Council. These financial statements present information for
the Company, not about the Group.
The financial statements have been prepared in accordance with applicable accounting standards and under the historical cost
accounting rules modified to include certain items as fair value and in accordance with FRS 102. The financial statements have
been prepared using the going concern basis, as discussed in the Group going concern disclosure.
The Company has adopted the following disclosure exemptions:
the requirement to present a statement of cash flow and related notes; and
financial instrument disclosures, including,
•
•
• categories of financial instruments;
•
• exposure to, and management of, financial risks.
items of income, expenses, gains or losses relating to financial instruments; and
There were no significant judgements or estimates in preparing the financial statements of the Company.
2 Accounting policies
The following accounting policies have been applied consistently in dealing with items which are considered material in relation
to the financial statements. The functional currency of the company is Pounds Sterling, with the parent company accounts
presented in US Dollars.
INVESTMENTS
Investments in subsidiaries are stated at cost less, where appropriate, provisions for impairment.
OTHER RECEIVABLES
Amounts owed by subsidiary undertakings are initially recognised at fair value, and subsequently measured at amortised cost
using the effective interest method.
CREDITORS
Amounts owed to subsidiary undertakings are initially recognised at fair value, and subsequently measured at amortised cost
using the effective interest method.
SHARE-BASED PAYMENTS
The Company operates a number of equity-settled, share based compensation plans that are awarded to employees of the
Company’s subsidiary undertakings. The fair value of the employee services received under such schemes is recognised as an
expense in the subsidiary undertakings financial statements, which benefit from the employee services. The Company has
recognized the fair value of the share-based payments as an increase to equity with a corresponding adjustment to investments.
Equity settled share-based payments are measured at fair value at the date of grant. The fair value, determined at the grant date,
of equity settled share–based payments is expensed on a straight-line basis over the vesting period, based on the Group’s
estimate of shares that will eventually vest. The fair value of employee share option grants is calculated using a Monte Carlo
model, taking into account the terms and conditions upon which the options were granted. The value of the charge is adjusted
to reflect expected and actual levels of options vesting. Further detail is set out in note [28] to the group consolidated Financial
Statements.
CASH AND CASH EQUIVALENTS
There were no cash transactions during the year and accordingly no cash flow statement has been presented.
FOREIGN CURRENCIES
Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary
assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the exchange rate ruling at that
date with any exchange differences arising on retranslation being recognised in the income statement.
FINANCIAL GUARANTEE CONTRACTS
Where the Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within
its group, the Company considers these to be insurance arrangements, and accounts for them as such. In this respect, the
Company treats the guarantee contract as a contingent liability until such time as it becomes probable that the Company will be
required to make a payment under the guarantee.
90
91
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE COMPANY ACCOUNTS (continued)
3 Tax
Current tax (Credit)
2020
$000
(10)
2019
$000
—
Corporation tax is calculated at 21%, based on the US standard rate of corporate tax (2019: 21%) of the estimated assessable
profit for the year. The table below explains the difference between the expected expense at the US statutory rate of 21% and
the Company’s total tax expense for the year.
Profit/(loss) before tax
Tax at the US corporation tax rate of 21% (2019: 21%)
Tax effect of items that are not (taxable)/deductible in determining taxable profit
Other
Tax (Credit)
4 Investments
At 1 January
Movement during the year
At 31 December
5 Subsidiaries
A) TRADING COMPANIES
2020
$’000
2,204
463
(463)
(10)
(10)
2020
$000
1,266
(32)
1,234
2019
$’000
(587)
(123)
123
—
—
2019
$000
1,209
57
1,266
Incorporation
Name
Place
Date
Quarto Publishing Group
USA Inc.
Delaware, USA
28 June 2004
Quarto Publishing plc
United Kingdom 1 April 1976
Quarto, Inc.
Delaware, USA
16 October 1986
*Directly held by The Quarto Group, Inc.
Registered
address key
Issued and fully paid up
share capital
B
A
B
380 shares of
US$0.01 each
100,000 shares of £1
each
86 shares of no
par value
%
held
100
100*
100*
Segment
US
Publishing
UK
Publishing
US
Publishing
92
93
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial Statements 5 Subsidiaries (continued)
B) DORMANT COMPANIES
Name
Place
Date
Incorporation
Registered
address
key
Issued share capital
AP Screen Printers Limited
United Kingdom 30 September 1980 A
1000 shares of £1 each
Apple Press Limited
Aurum Press Limited
United Kingdom 5 June 1984
United Kingdom 31 May 1977
A
A
100 shares of £1 each
382,502 shares of £1 each
%
held
100
100
100
Books & Gifts Direct Limited
New Zealand
27 September 1996 C
400,000 shares of NZ$1 each 100*
Cartographica Press Limited
United Kingdom 27 July 1981
Design Eye Holdings Limited
United Kingdom 22 June 1992
Design Eye Limited
United Kingdom 18 March 1988
Design Eye Publishing Limited
United Kingdom 17 June 1992
EYE Quarto Inc
Delaware, USA
19 December 2002
Fine Wine Editions Limited
United Kingdom 23 June 1949
Frances Lincoln Limited
United Kingdom 15 December 1980
Frances Lincoln Publishers Limited
United Kingdom 11 March 1987
Global Book Publishing Pty Limited
United Kingdom 7 July 1986
Global Book Publishing Pty Limited
Australia
4 November 1999
Great American Trading Company
Limited (THE)
United Kingdom 24 February 1982
IQON Editions Limited
United Kingdom 5 December 1972
iqu-digital.com Limited
United Kingdom 30 November 1978
Ivy Press (The)
Jacqui Small LLP
JR Books Limited
United Kingdom 9 July 1996
United Kingdom 6 November 1998
United Kingdom 9 September 1986
Lewes Holdings Limited
United Kingdom 21 July 2005
Marshall Editions Limited
United Kingdom 7 February 2002
Marshall Publishing Limited
United Kingdom 7 February 2002
QEB Publishing Inc
Delaware, USA
27 April 2004
QED Publishing Limited
United Kingdom 12 November 1974
A
A
A
A
B
A
A
A
A
D
A
A
A
A
A
A
A
A
A
B
A
1000 shares of £1 each
200 shares of £1 each
100 shares of £1 each
2 shares of £1 each
1000 shares of no par value
9020 shares of £1 each
565,000 shares of 10p each
100 shares of £1 each
1000 shares of £1 each
1,000 shares of A$1 each
100 shares of £1 each
300 shares of £1 each
100 shares of £1 each
1042 shares of 10p each
100 units
43 004 shares of £1 each
20,840 shares of £0.01 each
1 shares of £1 each
1 shares of £1 each
1500 shares of no par value
400 shares of £1 each
QU:ID Publishing Limited
United Kingdom 30 September 1980 A
100 shares of £1 each
Quarto Australia Pty Limited
Australia
14 September 1981
D
110 shares of $A1 each
Quantum Books Limited
United Kingdom 7 February 1983
Quarto Children’s Books Limited
United Kingdom 6 January 1976
Quarto Group HK Ltd
Hong Kong
26 January 2015
Quarto Magazines Limited
United Kingdom 20 May 1986
Quarto Marketing Inc
Delaware, USA
26 April 1995
Quarto Media Inc
Delaware, USA
10 December 2010
Quarto Multi Media Limited
United Kingdom 14 December 1984
Quill Publishing Limited
United Kingdom 14 May 1979
Quintessence Editions Limited
United Kingdom 7 February 2002
Quintet Publishing Limited
United Kingdom 14 May 1979
RotoVision S.A.
Switzerland
18 July 1977
Small World Creations Limited
United Kingdom 20 September 1997
A
A
E
A
B
B
A
A
A
A
F
A
*Directly held by The Quarto Group, Inc.
93
100 shares of £1 each
2 shares of £1 each
100 shares of HKD1 each
1000 shares of £1 each
3000 shares of no par value
1000 shares of $1 each
1000 shares of £1 each
1000 shares of £1 each
1 shares of £1 each
100 shares of £1 each
1,500 shares of SFr500 each
1,536 share of £1 each
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
92
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS NOTES TO THE COMPANY ACCOUNTS (continued)
5 Subsidiaries (continued)
D) LIST OF REGISTERED OFFICES
A The Old Brewery, 6 Blundell Street, London, N7 9BH, United Kingdom
100 Cummings Center, Suite 265D, Beverly, MA 01915-6115, USA
B
(Quarto Publishing Group USA Inc., 251 Little Falls Drive, Wilmington, DE 19808, Delaware, USA; Quarto Inc.,
1209 Orange Street, Wilmington, Delaware 19801, USA)
C c/o Brownes CA Limited, Unit K, 215 Rosedale Road, Albany, Auckland, 0632, New Zealand
D c/o ZM Partners, Suite 10 Ground Floor, 123 Clarence Street, Sydney, NSW 2000, Australia
E Room 2306, Technology Plaza, 651 King’s Road, North Point, Hong Kong
F Passage Perdonet 1, 1005 Lausanne, Switzerland
6 Other receivables falling due within one year
Amounts owed by subsidiary undertakings
7 Creditors: Amounts falling due within one year
Amounts owed to subsidiary undertakings
Tax payable
2020
$000
3,370
3,370
2020
$000
—
52
52
2019
$000
—
—
2019
$000
15,814
52
15,866
8 Called up share capital
Details of called up share capital are set out in note 24 of the consolidated Financial Statements.
9 Contingent liabilities
The Quarto Group, Inc. has issued guarantees in respect of bank loans of subsidiaries of $25,411,000 (2019: $53,077,000). Refer
to note 18 of the group consolidated Financial Statements.
10 Related parties
The Company repaid an amount of $19,184,000 to its wholly owned subsidiary, Quarto Publishing plc, during the year
(2019: $0.6m borrowed in the year). The balance on the loan at 31 December 2020 was $3.4m (due to the company) (2019:
$15.8m owed by the company). These balances are non-interest bearing and repayable on demand.
94
95
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial Statements Five Year Summary
2020
$’000
2019
$’000
20182
$’000
20172
$’000
20161
$’000
135,807
149,292
152,512
154,610
10,004
10,305
7,193
16,989
126,883
10,618
9,282
7,925
6,589
4,569
8,774
5,074
3,844
2,882
70,875
82,063
83,385
81,396
(98,206)
(128,226)
(11,019)
43,713
(15,501)
21,054
4,303
5,945
(57)
(552)
79,481
92,289
(74,084)
(79,698)
17,988
43,713
21,054
17,988
20,973
—
—
—
—
43,713
21,054
17,988
20,973
11.7
11.6
14.1
14.1
14.1
14.0
19.0
18.8
(2.7)
(2.7)
23.2
23.0
(96.4)
(96.4)
18.3
17.8
(17,882)
3,893
16,144
13,880
(21,182)
(18,539)
13,035
(5,277)
85,075
94,248
(71,039)
(87,311)
20,973
105,507
97,133
(68,872)
(89,657)
44,111
39,219
4,892
44,111
46.4
45.4
49.8
48.7
Results
Revenue
Operating profit before amortisation
of acquired intangibles and exceptional items
Operating profit/(loss)
Profit before tax, amortisation of acquired
intangible assets and exceptional items
Profit/(loss) before tax
Profit/(loss) after tax
Assets employed
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net assets
Financed by
Equity
Non-controlling interests
Earnings/(loss) per share (cents)
Basic
Diluted
Adjusted basic
Adjusted diluted
1 The results of 2016 have not been restated to reflect the change in accounting for the absorption of overheads to pre-publication costs disclosed in the
2019 report and accounts.
2 The results for 2018 and prior have not been restated for the Impact of IFRS 16.
94
95
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial StatementsSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Officers & Professional Advisers
Directors
Polly Powell, Group Chief Executive Officer
C.K. Lau, Executive Director, President
Ken Fund, Chief Operating Officer,
Chief Executive Officer US
Andy Cumming*, Chairman
Jane Moriarty*, Vice Chair
Mei Lan Lam*
Andrea Giunti Lombardo*
* Non-executive
Secretary
Michael Clarke
Registered Office
The Old Brewery
6 Blundell Street
London N7 9BH
Tel: +44 (0) 20 7700 6700
Stockbrokers
finnCap Ltd
One Bartholomew Close
London
EC1A 7BL
Auditor
Grant Thornton UK LLP
30 Finsbury Square
London
EC2A 1AG
Solicitors
Cleary Gottlieb Steen & Hamilton LLP
2 London Wall Place
London
EC2Y 5AU
Registrars and Transfer Office
Link Group
10th Floor
Central Square
29 Wellington Street
Leeds
LS1 4DL
Principal Banks
Bank of America Corporation
100 Federal Street
Boston MA 02110 USA
Fifth Third Bank
38 Fountain Square Plaza
MD 109055
Cincinatti OH 45263 USA
Abbey National Treasury Services PLC
4th Floor Santander House
100 Ludgate Hill
London EC4M 7RE
The Royal Bank of Scotland plc
280 Bishopsgate
London EC2M 4RB
Company Registration Number
FC0 13814
96
THE QUARTO GROUP, INC. ANNUAL REPORT 2020Financial Statements From the Publishers of
The #1 NEW YORK TIMES BESTSELLER
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This Is
Quarto’s
Annual
Report
2020
The Old Brewery | 6 Blundell Street | London N7 9BH | United Kingdom
Tel: +44 (0)20 7700 6700 | Email: info@quarto.com
the quarto group