Warpaint London PLC Annual Report 2016

Plain-text annual report

Annual Report 2016 Warpaint London P LC Contents Strategic Report 03 Mission Statement 04 Headline Results 06 Chairman’s Statement 07 Joint Chief Executive s’ Statement 11 Financial Review 17 Risk Management Governance 19 Board of Directors 20 Corporate Governance Report 22 Audit Committee Report 23 Remuneration Committee Report 24 Directors’ Report 26 Independent Auditor s’ Report Financial Statements 29 Consolidated Statement of Comprehensive Income 30 Consolidated Statement of Financial Position 32 Consolidated Statement of Changes in Equity 33 Consolidated Statement of Cash Flows 34 Notes to the Consolidated Financial Statements 51 Company Statement of Financial Position 52 Company Statement of Changes in Equity 53 Notes to the Company Financial Statements 55 Appendix A Other Information 57 Ofﬁ cers and Professional Advisors 2 Annual Report 2016 S t r a t e g i c R e p o r t Mission Statement “Our mission is to ensure that everybody should have access to an extensive range of high quality cosmetics at an affordable price.” We strive to fulfil our mission by: • Minimising unnecessary, costly marketing and advertising expenditure • Creating innovative, eye catching and desirable packaging • Creating cosmetic products of high quality • Always striving to improve and better our brand and product offering • Being at the cutting edge of trend Our values • We use the ﬁnest quality ingredients available • We manufacture products that are safe and kind to the user • We follow and adhere strictly to all relevant regulatory compliance in all territories where we sell our products Our Ethics • We do not test our products on animals regardless of the regulatory requirements we encounter • We always seek the best value and quality from every constituent ingredient • We endeavour to ensure that all our suppliers mirror our values and understand our principles Our Ethos – Who will you be today? • W7 gives its customers the ability and ﬂexibility to style themselves based on who they want to be • W7 engages its customers by interacting with them directly using a variety of media platforms • W7 enables its customers by making product available through direct and third party sales • W7 empowers its customers by seeking their feedback, interaction and views 3 Warpaint London PLC Headline Results Headline proforma financial results for the year to 31 December 2016 Warpaint London PLC (“Warpaint”, the “Company” or the “Group”) is made up of two trading divisions; the ﬁrst and largest is the own-brand division which sells the Group’s leading cosmetic brand W7; the second and smaller division trades in close-out and excess stock of branded cosmetics and fragrances from around the world. On 11 November 2016, prior to admission of the Company’s shares to trading on AIM, a new group structure was formed. This annual report has been prepared in accordance with acquisition accounting standards, which deem that the larger business acquired the smaller business on that date. In order to present to shareholders a more consistent view of the trading of the Group we have prepared proforma consolidated statements of comprehensive income for the years ended 31 December 2015 and 31 December 2016, with a reconciliation between the proforma and the statutory consolidated statement of comprehensive income. Headline results, shown below, represent the performance comparisons between the proforma consolidated statements of income for the years ended 31 December 2015 and 31 December 2016. The proforma numbers have been adjusted to take account of restructuring changes and other non-recurring items, speciﬁcally the inclusion of the trade of the close-out division for the years ended 31 December 2015 and 31 December 2016. Reconciliations between the proforma consolidated income statements and the statutory consolidated income statements for the 12 months to 31 December 2016, and the 12 months to 31 December 2015 are included in the Financial Review. The proforma consolidated statement of comprehensive income for the years ended 31 December 2015 and 31 December 2016, includes the trade of the larger own-brand division plus the trade of the smaller close-out division for the whole of each year. The statutory consolidated statement of comprehensive income for the years ended 31 December 2015 and 31 December 2016, include the trade of the larger own-brand division for the whole of each year, plus the trade of the smaller close-out division from the acquisition date of 11 November 2016 only. In 2016, £1.7 million of expenses (2015: £0.06 million) have been treated as exceptional as they were one off payments related to the admission of the Group’s shares to trading on AIM in November 2016. 3 4 5 Annual Report 2016 S t r a t e g i c R e p o r t Unaudited Proforma results Statutory results Year ended 31 Dec 2016 Year ended 31 Dec 2015 Growth % Year ended 31 Dec 2016 Year ended 31 Dec 2015 Growth % Revenue £27.0m £22.3m 21.1 £22.5m £16.9m 33.1 Adjusted proﬁt from operations Adjusted proﬁt from operations margin £6.8m* £5.5m* 23.6 £6.2m* £5.6m* 10.7 25.2%* 24.7%* 27.6%* 33.1%* Adjusted PBT £6.7m* £5.4m* Adjusted EPS 8.6p* 6.9p* Net cash £3.5m £1.1m 24.1 24.6 £6.1m* £5.5m* 7.9p* £3.5m 7.1p* £1.1m 10.9 11.3 *Adjusted for the £1.7 million of one off IPO costs incurred in the year (2015: £0.06 million) Highlights • Proforma revenue increased by 21.1% to £27 million (2015: £22.3 million) • Proforma operating margin over 25% • Proforma adjusted earnings per share increased by 24.6% to 8.6p (2015: 6.9p) • Net cash at the year end of £3.5 million (31 December 2015: £1.1 million) • Encouraging start to e-commerce strategy • Brand awareness reaching global levels • Admitted to AIM on 30 November 2016 3 4 5 Warpaint London PLC Chairman’s Statement Clive Garston Results This is the ﬁrst reported annual results since our admission to AIM in November 2016. I am delighted with the way in which the Group has reorganised itself as a public company and also with the strong 2016 performance. Although the majority of these results reﬂect a period prior to the IPO it is pleasing to note the high rate of growth that was achieved and in particular, that the uncertainty caused by the UK referendum result on membership of the EU quickly disappeared and the Group was able to take appropriate measures to mitigate the effects of the fall in value of Sterling. The proforma numbers will be quoted throughout the annual report in order to give shareholders clarity in understanding the results for the year. Proﬁt before tax was £4.4 million (proforma £5.0 million) on a turnover of £22.5m (proforma £27.0 million) with basic earnings per share of 5.07p (proforma 5.84p). Earnings per share adjusted to exclude IPO costs were 7.87p (proforma 8.64p). Net cash at 31 December 2016 of £3.5 million underpins the balance sheet and leaves the Group in a strong position going forward. Dividend As was stated at the time of the IPO, our intention is to adopt a progressive dividend policy to allow shareholders to share in the Group’s growth in earnings and cash ﬂow. The board is pleased to recommend a ﬁnal dividend of 1.5p per share which, if approved by shareholders, will be paid on 21 July 2017 to shareholders on the register at close of business on 7 July 2017. The shares will go ex-dividend on 6 July 2017. Board and People I joined the board as non-executive chairman ahead of the IPO together with Paul Hagon and Keith Sadler who were appointed as non-executive directors and respectively chairman of the remuneration and audit committee. The remaining members of the board are Sam Bazini and Eoin Macleod the joint chief executives and Neil Rodol the chief ﬁnancial ofﬁcer. I regard it as a privilege to work alongside my fellow board members and particularly the joint chief executives who founded the business and are responsible for its success today. In addition to the board, Warpaint has a wonderful pool of people with real skills and who contribute enormously to its success. A key strength of the Company is the commitment of its employees, many of whom have been with the Group for some time. The culture of the Group has been responsible for this and the board recognises the importance of ensuring that the Group’s culture is appropriate for the business as it grows. Warpaint is a progressive, energetic and dynamic company which is driven by its executive team and all its employees. I would like to thank all of them for their contribution to the Group’s success. AGM Our ﬁrst annual general meeting will be held on 26 June 2017 at 10.00am at the ofﬁces of DAC Beachcroft LLP, 100 Fetter Lane, London, EC4A 1BN and I look forward to meeting all shareholders who are able to attend. Outlook Warpaint has made an encouraging start to its new life as a quoted company and has demonstrated its ability to prosper in the public arena and build shareholder value. I am delighted with the levels of interest that has been experienced from the market in our ﬁrst months of trading. I believe that the Group’s prospects are encouraging and that the outlook for the Group remains positive. I look forward very much to working with my colleagues on the board and all the Warpaint team to continue to deliver growth for shareholders. Clive Garston Chairman 9 May 2017 3 6 7 Annual Report 2016 S t r a t e g i c R e p o r t Joint Chief Executives’ Statement Sam Bazini Eoin Macleod We are delighted to present the Group’s ﬁrst annual results to shareholders following our Admission to AIM in November 2016. 2016 was a transformational year for the business, seeing strong progress in both domestic and international markets. We remain committed to the Group’s strategy of producing an extensive range of high quality cosmetics at an affordable price to customers. Business Overview Warpaint consists of two separate divisions, own-brand and close-out, with the own-brand business being the primary strategic focus of the Group and currently representing over 80% of the Group’s revenue. The W7 brand predominantly sells to high street retailers and independent beauty shops, although the online sales channel, that was established during the year, is a growing contributor. Sales to overseas customers are through a combination of direct sales to businesses or to distributors in those countries. W7 products are manufactured by carefully selected companies in Europe and China that also supply other leading global cosmetic brands. We believe the key to the success of W7 is spotting trends in cosmetic colourways or new products and then quickly launching them onto the market at a value price point. The W7 range now contains over 500 items and includes a broad collection of colour cosmetics, gift sets and accessories. Close-out, representing less than 20% of the Group’s business, buys and sells close-out and excess stock of branded cosmetics and fragrances from around the world, which it sells to high street outlets, wholesalers and the discount mass market retailers, mainly in the UK. Whilst not a strategic focus, the close-out side of the business provides a useful source of knowledge of the colour cosmetics market and access to new market trends. Our e-commerce platform that was established in May 2016 for the W7 brand has become increasingly important in terms of sales. We believe this growth is supported by the colour cosmetics industry, beneﬁting from a more engaged and educated customer base, driven by the success of beauty blogs, celebrity endorsement and social media. We have had a number of well received recent campaigns with a number of high proﬁle television celebrities that have translated into increased online ordering and brand awareness. Strategy Our overriding goal is to provide our customers with access to an extensive range of high quality cosmetics at an affordable price. To achieve this, we are building an internationally recognised brand in W7 which will help augment our future growth. In May 2016 an export manager was employed with the responsibility of opening up new territories overseas and this has already led to a number of new accounts. As outlined at the time of the admission to AIM, we are looking to make our offering more widely available to an international audience, particularly in China and the US, with a focus on social media and e-commerce activities. To accomplish this, we are soon to launch new US and China focused e-commerce sites, with the ability to transact in local currencies. A priority for us throughout 2016 was to ensure that our internal infrastructure was of a very high quality, able to cope with increased business and the demands of being a public company. From our sound foundations, we can look forward to supporting future growth, new customers and markets and developing new products to stay on trend. With selective investment, and new hires where appropriate, we believe there is plenty of latent capacity available within our distribution network. Recently we have employed brand managers to develop our brand portfolio as part of the Warpaint team. 3 6 7 Warpaint London PLC Joint Chief Executives’ Statement (continued) Brands Our key focus remains developing our ﬂagship brand, W7, an extremely creative, design-focused cosmetic brand proposition, delivering high quality cosmetics at affordable prices. We outsource manufacturing overseas to ensure competitive pricing and rapid production. The W7 range is characterised by eye-catching designs, bold packaging and creative product names. Our on-trend range of products beneﬁts from a short lead time due to the Group’s operational structure. Our third-party supply network enables us to offer a fast turnaround and competitive prices to our customers, whilst also ensuring high quality. We can deliver “fast-track” launches of products in a three to six-month time frame, which we believe is much quicker than most other competitors in the colour cosmetics market. An exciting development in 2017 has been the creation of a new range called Very Vegan. These products have been developed speciﬁcally for vegans and others supporting an animal friendly lifestyle. We believe that this range has great potential for growth. The range includes nine different product lines, encompassing 30 individual products and is scheduled to be on sale by June 2017. Our other brands include: Outdoor Girl This brand has now been developed and sales have been encouraging. CopyCat Currently being developed as a premium product range, to target large health and beauty retailers. Smooch To be developed as a prestige brand at a higher recommended retail price, aimed at department stores. Taxi To satisfy bespoke ad-hoc orders from the value sector. Products Warpaint is focused on colour cosmetics, which it separates into four main categories: • Face make-up: foundation, blushers, illuminators, face bronzing lotions, creams and powders and loose and pressed powders; • Eye make-up: eye shadows, eyeliners, eyebrow pencils and mascara; • Lip make-up: lipstick and glosses, lip pencils, lip plumpers and palettes; and • Nail make-up: nail varnishes and polishes, hardeners and strengtheners, base and top coat. As previously stated, new product additions for 2017 include Very Vegan. We have extended our range of cosmetic bags having sold out of stock prior to Christmas 2016. We currently have 25 new designs on order and will be bringing them to market soon. 3 8 9 Annual Report 2016 S t r a t e g i c R e p o r t W7’s largest selling product categories are eye products, face make-up and lip products, which together represented approximately 80% of the own-brand division’s revenue in 2016. The 12 months to 31 December 2016 product sales split for our W7 brand is shown across: Eye 44% W7 – 2016 Sales by Product Nail 4% Make Up Brushes 8% Accessories & Sets 8% Lip 8% Face Make Up 28% Customers & Geographies We are very pleased to be able to report that the customer base for the Group grew from 270 customers at the end of 2015 to 319 at the end of 2016. The majority of our largest clients are export customers from the US, Australia and Europe. At the end of 2016 our top ten W7 customers represented 56.3% of revenues, compared to 50.0% in 2015. Our W7 US distributor has expanded from 3.1% of W7 revenue in 2015 to 12.3% of W7 revenue in 2016. In 2016, the W7 own-brand business had over 280 customers (2015: 230 customers) in more than 50 countries (2015: 40 countries). The 12 months to 31 December 2016 and 31 December 2015 regional sales split for our W7 brand is shown below: W7 – 2016 Regional Sales Split W7 – 2015 Regional Sales Split ROW 3% USA 12% EU 27% ROW 2% USA 3% EU 25% Australia & NZ 12% UK 46% Australia & NZ 17% UK 53% 3 8 9 Warpaint London PLC Joint Chief Executives’ Statement (continued) Colour Cosmetics Market The colour cosmetics market comprises face make-up, eye make-up, lip products, nail products and colour cosmetics sets/kits and is typically made up of two categories; prestige and mass. Prestige products are considered to be premium and therefore generally command higher prices; such products are generally available through high-end department stores. Mass products are more affordable and widely available, generally occupying additional routes to market such as supermarkets, pharmacies and convenience stores. The accessible price points of the mass market see consumers buying these brands more frequently. Currently W7 operates in the mass market. The global mass market for colour cosmetics is expected to be the fastest growing cosmetics market category and in mature markets such as Western Europe and the US, consumers are increasingly favouring low cost make-up. The US is the largest colour cosmetics market globally, with a retail value in 2015 of around $11 billion; this is nearly three times the second largest market of China, at approximately $4 billion. New product innovation, in particular, has been inﬂuential in the growth of the colour cosmetics market. The global beauty market (mass and prestige) continues to grow with the mass market consistently achieving a higher annual growth rate than the prestige market. It has also demonstrated resiliency through economic cycles, often referred to as “the lipstick effect”, and it is expected that it will continue to show solid growth, making it a consistent consumer category. The industry remains relatively concentrated, with retail sales dominated by brands owned by large multinational companies. The UK was the fourth largest retail colour cosmetics market in the world in 2015 and is forecast to grow from an estimated £1.8 billion this year, to around £2.4 billion in 2021. In addition, the cosmetics industry is undergoing change. Today’s consumers are increasingly connected and inﬂuenced by friends, beauty bloggers, social media and other online content. The rise of beauty bloggers has been a beneﬁt for the sector, encouraging women to experiment with new looks and trends, driving the uptake of a wider range of products. Admission to AIM The admission to AIM has been a very positive experience for the Company in a number of ways. We have seen our proﬁle grow and we have also strengthened our relationships with suppliers, distribution partners and customers. We look forward to our continued growth on AIM and welcome our new shareholders. The funding received at Admission has allowed Warpaint to invest further in key staff to develop our brand portfolio and to continue to build the key W7 brand internationally. In addition, being a quoted company will enable us to incentivise staff through a planned new share option scheme. Outlook Warpaint enjoyed many years of successful growth prior to joining AIM and we are conﬁdent that with increasing awareness of our brands we remain well placed to continue this expansion. The Company remains at the forefront of developing on trend products for its ever discerning range of customers. Overseas business will continue to be a major driver as we aim to gain a larger share of the global colour cosmetics market. With a ﬂexible supplier base and a tight control of working capital the business remains inherently cash generative. We would like to take this opportunity to thank our employees for their commitment and hard work during what has been a year of signiﬁcant transition. We would also like to thank our advisors involved in the IPO process in what was a challenging year in the ﬁnancial markets. Working with a board of non-executive directors whose skill sets complement our entrepreneurial drive and ambition for the W7 brand and our other brands has been fantastic. The current year has started well and we look forward to updating shareholders on our progress. Sam Bazini & Eoin Macleod Joint Chief Executive Ofﬁcers 9 May 2017 3 10 11 Annual Report 2016 S t r a t e g i c R e p o r t Financial Review Neil Rodol 2016 saw signiﬁcant progress for the Group, both structurally and ﬁnancially, with improvement in our KPI’s during a busy year for the business. In order to aid shareholders’ understanding of the underlying performance of the business we have focused our comments on the proforma consolidated statement of income for the 12 months to 31 December 2016 compared with the proforma consolidated statement of income for the 12 months to 31 December 2015. Headline results represent the performance comparisons between the proforma consolidated statements of income for the years ended 31 December 2015 and 31 December 2016. The proforma numbers have been adjusted to take account of restructuring changes and other non-recurring items, speciﬁcally the inclusion of the trade of the close-out division for the years ended 31 December 2015 and 31 December 2016. Reconciliations between the proforma consolidated income statements and the statutory consolidated income statements for the 12 months to 31 December 2016, and the 12 months to 31 December 2015 are shown below. KPIs 2014 2015 2016 Unaudited proforma revenue (£m) 2016: £27.0 million + 21% Unaudited proforma adjusted proﬁt before tax* (£m) 2016: £6.7 million +24% 17.0 22.3 27.0 2014 2015 2016 4.1 5.4 6.7 0 5 10 15 20 25 30 0 1 2 3 4 5 6 7 *Adjusted for the £1.7 million of one off IPO costs incurred in the year. 3 10 11 Warpaint London PLC Financial Review (continued) Proforma Headline Consolidated Income Statement Revenue Cost of sales Gross proﬁt Administrative expenses Proﬁt from operations Analysed as: Proﬁt from operations before exceptional items Exceptional items Finance expense Proﬁt before tax Tax expense Proﬁt for the year 2016 Unaudited Proforma Statement £’000 2015 Unaudited Proforma Statement £’000 26,968 (16,745) 22,280 (14,148) 10,223 8,132 (5,205) (2,685) 5,018 5,447 6,757 (1,739) 5,508 (61) (16) (82) 5,002 5,365 (1,384) (1,196) 3,618 4,169 3 12 13 Annual Report 2016 S t r a t e g i c R e p o r t Reconciliation between the statutory consolidated income statement and the proforma consolidated income statement for the 12 months to 31 December 2016 Close-out business 2016 pre-acquisition 11 November 2016 £’000 Statutory Accounts £’000 22,483 (13,692) 4,485 (3,053) 8,791 1,432 (4,374) 4,417 6,156 (1,739) (16) 4,401 (1,260) 3,141 (787) 645 645 – – 645 (124) 521 Revenue Cost of sales Gross proﬁt Administrative expenses Proﬁt/(loss) from operations Analysed as: Proﬁt/(loss) from operations before exceptional items Exceptional items Finance expense Proﬁt/(loss) before tax Tax expense Proﬁt/(loss) for the year Weighted number of ordinary shares Earnings per share 61,981,720 5.07p Proﬁt for the year Add back exceptional items Adjusted proﬁt for the year 3,141 1,739 4,880 Weighted number of ordinary shares Adjusted earnings per share 61,981,720 7.87p Amortisation of Intangible assets on acquisition of close-out business £’000 2016 Unaudited Proforma Statement £’000 – – – (44) (44) (44) – – (44) – (44) 26,968 (16,745) 10,223 (5,205) 5,018 6,757 (1,739) (16) 5,002 (1,384) 3,618 61,981,720 5.84p 3,618 1,739 5,357 61,981,720 8.64p 3 12 13 Warpaint London PLC Financial Review (continued) Reconciliation between the statutory consolidated income statement and the proforma consolidated income statement for the 12 months to 31 December 2015 Revenue Cost of sales Gross proﬁt 2015 Statutory Accounts £’000 2015 Close-out business £’000 2015 Unaudited Proforma Statement £’000 16,938 (10,229) 5,342 (3,919) 22,280 (14,148) 6,709 1,423 8,132 Administrative expenses (1,117) (1,568) (2,685) Proﬁt/(loss) from operations 5,592 (145) 5,447 Analysed as: Proﬁt/(loss) from operations before exceptional items Exceptional items Finance expense 5,592 – (84) (84) (61) 2 5,508 (61) (82) Proﬁt/(loss) before tax 5,508 (143) 5,365 Tax expense (1,123) (73) (1,196) Proﬁt/(loss) for the year 4,385 (216) 4,169 Weighted number of ordinary shares Earnings per share 61,722,383 7.11p 61,722,383 6.75p Proﬁt for the year Add back exceptional items Adjusted proﬁt for the year 4,385 – 4,385 4,169 61 4,230 Weighted number of ordinary shares Adjusted earnings per share 61,722,383 7.11p 61,722,383 6.85p 3 14 15 Annual Report 2016 S t r a t e g i c R e p o r t Revenue Total proforma revenue grew by 21.1% from £22.3 million in 2015 to £27.0 million in 2016. Warpaint has been able to focus on sales growth in the year whilst also preparing the Group for our IPO. Revenue continues to be driven by increased export sales into the US and Europe, and by increased awareness of the W7 brand globally. As we look to 2017 it is pleasing that growth continues. A detailed commentary on our sales growth strategy and trading performance is included in the CEO’s report. Total statutory revenue grew by 33.1% from £16.9 million in 2015 to £22.5 million in 2016. Profit Before Tax and Exceptional Items Group proforma Proﬁt Before Tax (“PBT”) was £5.0 million (2015: £5.4 million), a decrease of 7.4% on the prior year. Underlying PBT (proﬁt before tax and exceptional items) was £6.7m (2015: £5.4 million), an increase of 24.1% on the prior year. In the 12-month period to 31 December 2016, £1.7 million of expenses have been treated as exceptional as they related to the admission of the Group’s shares to trading on AIM in November 2016. Group statutory Proﬁt Before Tax (“PBT”) was £4.4 million (2015: £5.5 million), a decrease of 20.0% on the prior year. Underlying PBT (proﬁt before tax and exceptional items) was £6.1m (2015: £5.5 million), an increase of 10.9% on the prior year. Product Gross Margin Proforma gross margin improved by 3.9% over 2015 to 37.9%. The cost impact of Brexit has been mitigated with a ratcheted discount mechanism from our key supplier in China, also by growing US revenue signiﬁcantly in 2016 and from enjoying margin growth as the W7 brand gains global awareness. Further contributing to Group margin is the close-out business which has delivered gross margin of 25.4% (See Close-out business income statement: Appendix A) compared to 24.9% in 2015. We remain focused on improving gross margin in both our own-brand and close-out businesses. Statutory gross margin decreased by 1.3% over 2015 to 39.1%. Operating Expenses Underlying proforma operating expenses (before exceptional items) grew 32.1% year on year, however expressed as a percentage of proforma turnover underlying operating expenses (before exceptional items) increased to 12.9% in 2016 from 11.8% in 2015. Costs grew in the main because of these factors: • The joint CEOs of the business were paid a salary for the ﬁrst time in 2016 • Cost of the PLC board in readiness for admission to AIM from November 2016 • Commercial arms length rent charged for the ﬁrst time in 2016 • Increased stafﬁng levels ahead of the IPO in the ﬁnancial and order processing departments • Increase in audit fees Statutory operating expenses before exceptional items grew 135.9% year on year, however expressed as a percentage of statutory turnover, operating expenses before exceptional items increased to 11.7% in 2016 from 6.6% in 2015. Statutory operating costs grew in the main because of the factors discussed above and additional operating costs that were reallocated from the close-out division to the own-brand division as the Group was restructured in 2016. Most operating expenses are relatively ﬁxed, however we continue to monitor and examine signiﬁcant costs to ensure they are controlled. Exceptional Items In 2016, £1.7 million of expenses (2015: £0.06 million) have been treated as exceptional as they were one off legal and professional fees and commissions incurred in relation to the admission of the Group’s shares to trading on AIM in November 2016. Tax The proforma tax rate for the Group for 2016 was 27.7% compared to the UK corporation tax standard rate of 20% for the year. Some of the costs of the admission to AIM have been disallowed for tax purposes, which has increased the effective tax rate. We would expect the tax rate on adjusted proﬁts to be approximately 19.25% in 2017 and falling in line with the UK Government measures to reduce corporation tax to 17% by 2020. The statutory tax rate for the Group for 2016 was 28.6% compared to the UK corporation tax standard rate of 20% for the year. Earnings Per Share The underlying proforma basic earnings per share before exceptional costs was 8.6p in 2016, an increase of 24.6% on the 6.9p achieved in 2015, as a result of improved sales and gross margin. The statutory basic earnings per share before exceptional costs was 7.9p in 2016, an increase of 11.3% on the 7.1p achieved in 2015. 3 14 15 Warpaint London PLC Financial Review (continued) Dividends The board is recommending a ﬁnal dividend for 2016 of 1.5 pence per share, making a total dividend of 6.1 pence per share of which 4.6 pence per share was paid in 2016 prior to the IPO (2015: 3.2 pence per share). Cash flow and cash position Net cash ﬂow generated from operating activities was £3.0 million (2015: £2.3 million), after payment of the £1.7 million exceptional items previously referred to. Management are continually monitoring trade receivables and stock levels to avoid working capital lock up as the business continues to grow. The Group’s net cash balance increased by £2.4 million to £3.5 million in 2016 (2015: £1.1 million). The cash generated was principally used to make dividend payments prior to the IPO. Capital expenditure requirements of the Group remain modest and we expect it to continue to be so. £0.16 million was spent in the year on new ofﬁce space for additional staff, an upgrade to our computer systems and the purchase of a promotional double decker bus for the W7 brand. Balance Sheet The Group’s balance sheet remains in a very healthy position with no debt. Net assets totalled £14.3 million at 31 December 2016, with the majority made up of liquid assets of stock, trade receivables and cash. Included in the balance sheet is £0.5 million of goodwill and £1.3 million of intangible ﬁxed assets arising from the acquisition accounting adopted to reﬂect the purchase of the close-out business by the much larger own-brand colour cosmetics business in November 2016, in preparation of the Group joining AIM. pursuant to a capital reduction to which 16,340,000 B ordinary shares of £0.052 each held by Sam Bazini and Eoin Macleod were cancelled in consideration for the transfer of the entire issued share capital of Warpaint Cosmetics Limited to a company owned and controlled by Sam Bazini and Eoin Macleod. This was part of a Group reconstruction prior to admission to AIM on the 30 November 2016. Admission to AIM Warpaint’s business is already beneﬁting from being a quoted company on AIM. The proﬁle of the Group and its key brand W7 has been enhanced with the increased public awareness. We have received investment to accelerate growth and now have the ability when and if needed, to easily access capital for further expansion or for acquisition capital should a compelling opportunity arise. On 11 November 2016 a new group structure was formed. On the 21 November 2016, the Company disposed of £1.4m of land and buildings Neil Rodol Chief Financial Ofﬁcer 9 May 2017 3 16 17 Annual Report 2016 S t r a t e g i c R e p o r t Risk Management Warpaint London is exposed to a variety of risks that can have ﬁnancial, operational and regulatory impacts on our business performance. The Board recognises that creating shareholder returns is the reward for taking and accepting risk. The effective management of risk is therefore critical to supporting the delivery of the Group’s strategic objectives. Currency / Foreign Exchange Due to the Group’s goods being manufactured overseas and its extensive export business, it both generates revenues and incurs manufacturing costs in foreign currencies. As a result, the Group is exposed to the risk that adverse exchange rate movements cause the value (relative to its reporting currency) of its revenues to decrease, or costs to increase, resulting in reduced proﬁtability. Following the result of the EU Referendum on 23 June 2016, the Directors negotiated a ratcheted discount mechanism with their main supplier to reﬂect the £:$ exchange rate, and they have increased average selling prices for the Group’s products from January 2017. In addition, the Group purchases US$ at favourable rates when available; however, residual currency risk remains which might have a material adverse effect on the Group’s ﬁnancial position, results of operations and future prospects. legislation and maintain adequate product and public liability insurance so as to ensure that any claims have little impact on the Group’s proﬁtability. Reliance on key suppliers In 2016 one key supplier from China was responsible for approximately 50% (2015: 60%) of the Group’s W7 brand range of colour cosmetics. If there were some catastrophic event that reduced or stopped the supply from this key supplier then the Directors are able to place orders with other existing suppliers. However, this would take several months to implement and such an event would therefore have a material adverse effect on the Group’s ﬁnancial position, results of operations and future prospects. Product liability All products are manufactured in facilities approved by relevant authorities. The ingredients in each product are compliant with and meet the relevant standards required by the markets to which the products will be sold into. There is however always the risk that an end user could have an allergic or other reaction to an individual product leading to the possibility of compensation claims and potentially damaging the good reputation of the Group’s brands. The Directors have every colour cosmetic item independently checked by a qualiﬁed chemist for compliance with EU Significant customers The Group has one customer in Australia with over 300 stores who has an exclusive distribution agreement for the W7 brand of colour cosmetics in Australia. In 2016 this customer represented 10.7% (2015: 15.4%) of own-brand/W7 revenues. In addition, the Group’s US distributor represented 12.3% of own brand W7 revenue in 2016 (2015: 3.1%). Signiﬁcant goodwill in the W7 brand has been built up by these customers and the Directors believe that should either of these customers decide to end their distribution agreement, a large amount if not all of the existing business will be taken up by other retailers, local wholesalers or other distributors. Location The Group, its operations, and most of its assets are at one location in Iver; if a ﬁre were to befall the premises occupied by the Group, most of its assets might be destroyed or damaged and – although the Group has insurance cover in place – the Group’s business, ﬁnancial results and prospects might be negatively affected by such an event. 3 16 17 Warpaint London PLC Members of the Board From left to right: Eoin Macleod, Sam Bazini, Neil Rodol, Clive Garston 3 18 19 Annual Report 2016 Board of Directors G o v e r n a n c e Sam Bazini, Joint Chief Executive Officer On leaving school at 16, Sam started work in a cosmetics warehouse, supplementing his income by selling cosmetics directly to the public at numerous London street markets. Selling directly to the public gave Sam an invaluable insight into consumer needs and in 1981 at the age of 18, using £500 he had saved he set up his own business, buying and selling close-out and end of line cosmetics and fragrance. During the course of the next ten years, Sam and Eoin’s paths crossed on numerous occasions, working intermittently with each other on a joint venture basis until they formally went into business together in 1992. Eoin Macleod, Joint Chief Executive Officer Eoin’s ﬁrst introduction to the world of beauty was at the age of 14 through a Saturday job in an indoor market selling cosmetics and perfumes. After leaving college, Eoin decided to set up his own business selling fragrance directly to the public through London street markets as well as selling into the wholesale sector and then expanding into selling cosmetics. In 1992 he formally went into business with Sam, operating initially in the close-out cosmetics and fragrance industry. Neil Rodol, Chief Financial Officer Neil joined the Group in August 2015, having previously been an advisor to the business for several years. He has overseen the introduction of new systems and procedures. Over the last 17 years he has been involved in several corporate purchases and acquisitions. In 2006, he sold his publishing company to a quoted group and became the group licensing director; in 2014 he completed a management buyout. Neil trained as an accountant at BDO Stoy Hayward and holds an honours degree in Maths and Computer Science. Clive Garston, Non-Executive Chairman Clive has been a corporate lawyer for over 40 years specialising in corporate ﬁnance and mergers and acquisitions, and he is currently a consultant at DAC Beachcroft LLP. He has been on the boards of a number of public and private companies and has been the deputy chairman of a fully-listed company and chairman of a number of AIM companies. He has signiﬁcant experience in small and medium quoted companies. He is a fellow of the Chartered Institute for Securities and Investment (CISI) and chairman of its corporate ﬁnance forum. Clive has been closely connected with the Quoted Company Alliance and is one of the authors of its corporate governance guidelines. Paul Hagon, Non-executive Director Paul is Group Strategy and Development Director at Palmer & Harvey McLane Ltd (“P&H”), the UK’s number one delivered wholesaler, with an annual turnover of more than £4 billion, and the UK’s 6th largest privately owned company. He is responsible for setting out the Operational Strategy and Three Year Plan for the P&H business alongside identifying new service solutions/market opportunities for retailers and suppliers. He is a board member of the Association of Convenient Stores (ACS). Keith Sadler, Non-executive Director Keith is chief ﬁnancial ofﬁcer of A Spokesman Said Limited, an online price comparison site. He is also a non-executive director of TLA Worldwide plc, a global sports management and events business, for which he chairs the audit committee. He was, until December 2014, chief ﬁnancial ofﬁcer of Dods Group PLC, a political communications business, and formerly chief operations ofﬁcer and group ﬁnance director of WEARE 2020 plc. Prior to this he was chief executive and group ﬁnance director of SPG Media Group plc, a marketing services business, group ﬁnance director of The Wireless Group and two quoted regional newspaper publishers; News Communication and Media plc and Bristol United Press plc. Before this he was treasurer of Mirror Group Newspapers plc. Keith is a chartered accountant and holds an honours degree in economics from the University of Kent. 3 18 19 Warpaint London PLC Corporate Governance Report The Directors recognise the importance of sound corporate governance and conﬁrm that the Company complies, so far as practicable and to the extent appropriate for a company of its nature and size, with the recommendations in the QCA Guidelines, which have become a widely recognised benchmark for corporate governance of smaller quoted companies, particularly AIM companies. Given the size of the Group, the Board currently comprises of three non-executive directors (including the Chairman), Clive Garston, Paul Hagon and Keith Sadler, and three executive directors, Sam Bazini, Eoin Macleod and Neil Rodol. The Board considers this to be appropriate at this relatively early stage of the Company’s development, but will reconsider this as the Group grows in size. The Board retains a range of ﬁnancial, commercial and entrepreneurial experience and there is a good balance of skills, independence, diversity and knowledge of both the Company and the sectors in which it operates. The non-executive directors have been appointed on merit and for their speciﬁc areas of expertise and knowledge. This enables them to bring independent judgement on issues of strategy and performance and to debate matters constructively. No single Director is dominant in the decision-making process. It is intended that the Board will meet at least ten times a year to review, formulate and approve the Group’s strategy, budgets, corporate actions and oversee the Group’s progress towards its goals. The Board has established the Audit Committee, Remuneration Committee and Insider Committee with formally delegated duties and responsibilities and with written terms of reference. From time to time separate committees may be set up by the Board to consider speciﬁc issues when the need arises. Due to the size of the Group, the Directors have decided that issues concerning the nomination of directors will be dealt with by the Board rather than a committee, but will regularly reconsider whether a nominations committee is required. The Group has adopted a code for directors’ and certain employee share dealings which the Directors believe is appropriate for an AIM quoted company. The Directors will comply with the Market Abuse Regime and Rule 21 of the AIM Rules relating to directors’ dealings and in addition will take all reasonable steps to ensure compliance by the Group’s applicable employees (as deﬁned in the AIM Rules). The Board of Directors The board of directors is responsible for formulating, reviewing and approving the Group’s strategy, budgets, major items of capital expenditure and acquisitions, and reporting to the shareholders. All non-executive directors are independent of management and free from any business or other relationship which could materially interfere with the exercise of their independent judgement. Compliance with the Bribery Act The Group has in place an anti-bribery and anti-corruption policy which sets out its zero-tolerance position and provides information and guidance to those working for the Group on how to recognise and deal with bribery and corruption issues. During the period, there were no incidents for consideration. Internal financial control and reporting The Board is responsible for establishing and maintaining the Group’s system of internal controls and reviewing its effectiveness. The procedures, which include ﬁnancial, compliance and risk management, are reviewed on an on- going basis. The board approves the annual budget and performance against budget is monitored and reported by the Board. The internal control system can only provide reasonable and not absolute assurance against material misstatement or loss. The board has considered the need for an internal audit function but does not consider it necessary at the current time with the current controls in place and the relative complexity of the business. 3 20 21 Annual Report 2016 G o v e r n a n c e Whistleblowing procedures The Group’s ’whistleblowing’ procedures ensure that arrangements are in place to enable employees and suppliers to raise concerns about possible improprieties on a conﬁdential basis. Any issues raised are investigated and appropriate actions are taken. Should any signiﬁcant issue arise they are highlighted to the Board. Relations with shareholders The Group reports to shareholders twice a year. The Group dispatches the notice of its Annual General Meeting, together with a description of the items of special business, at least 21 days before the meeting. Each substantially separate issue is the subject of a separate resolution and all shareholders have the opportunity to put questions to the Board at the Annual General Meeting. The chairmen of the Audit and Remuneration Committees normally attend the Annual General Meeting and will answer questions which may be relevant to their responsibilities. Insider Committee The Company has an Insider Committee which consists of Clive Garston (as chairman), Samuel Bazini and Neil Rodol. The Insider Committee is responsible, inter alia, for the identiﬁcation of inside information for the purpose of maintaining the Company’s insider lists and for reporting that information as required under Market Abuse Regulation (EU) 596/2014. 3 20 21 Warpaint London PLC Audit Committee Report Keith Sadler The audit committee consists of Keith Sadler (as chairman), Clive Garston and Paul Hagon. The audit committee is convened formally at least three times a year and otherwise as required. It has responsibility for ensuring that the ﬁnancial performance of the Group is properly reported on and reviewed, and its role includes monitoring the integrity of the ﬁnancial statements of the Group (including annual and interim accounts and results announcements), reviewing internal control and risk management systems, reviewing any changes to accounting policies, reviewing and monitoring the extent of the non-audit services undertaken by external auditors, reviewing ﬁndings of an audit with the auditors, meeting regularly with the auditors and advising on the appointment of external auditors. Whilst the Board as a whole has a duty to act in the best interests of the Company, the Committee has a particular role, acting independently of management, to ensure that the interests of shareholders are properly protected in relation to ﬁnancial reporting and the effectiveness of the Group’s systems of ﬁnancial internal controls. The key responsibilities of the Committee are to: • Review the signiﬁcant issues and judgements of management, and the methodology and assumptions used in relation to the Group’s ﬁnancial statements and formal announcements on the Group’s ﬁnancial performance; • Review the Group’s going concern assumptions; • Assess the effectiveness of the Group’s system of internal controls, including ﬁnancial reporting and ﬁnancial controls; • Consider and make recommendations to the Board on the appointment, reappointment, dismissal or resignation and remuneration of the external auditor; and • Assess the independence and objectivity of the external auditor and approve and monitor the application of the external auditor business standard. The full terms of reference for the Committee can be found on the Company’s website at www.warpaintlondonplc.com and are also available from the Group company secretary. audit of the Group and Company ﬁnancial statements, the audit of Group subsidiaries, and audit-related assurance services. In addition the Group paid £338,000 to BDO in 2016, for tax advice and services relating to the IPO. Committee performance and effectiveness As this is the ﬁrst reporting period for the Company and Group as a PLC no review of the performance and effectiveness of the Committee took place. Audit Committee Report This Audit Committee Report was reviewed and approved by the Board on 9 May 2017. Keith Sadler Audit Committee Chair 9 May 2017 The chief ﬁnancial ofﬁcer and the external auditor normally attend Committee meetings. The Committee will meet with the external auditor without management present during the year. External auditor BDO was appointed by the Board as the Company’s external auditor on 18 February 2016 for the 2016 reporting period and it is their intention to put them forward at the AGM to stand as auditors for the next ﬁnancial period. There are no contractual obligations that restrict the Committee’s choice of external auditor. The Group paid £62,000 to BDO for audit services in 2016, relating to the statutory 322 23 Annual Report 2016 Remuneration Committee Report Paul Hagon The remuneration committee consists of Paul Hagon (as chairman), Clive Garston and Keith Sadler. The remuneration committee is convened not less than twice a year and otherwise as required. It has responsibility for determining, within the agreed terms of reference, the Group’s policy on the remuneration packages of the Company’s chairman, and the executive directors and such other members of the senior management as it is designated to consider. The remuneration committee also has responsibility for determining (within the terms of the Group’s policy and in consultation with the chairman of the board and/or the chief executive ofﬁcers) the total individual remuneration package for each executive director and other senior managers (including bonuses, incentive payments and share options or other share awards). The remuneration of non-executive directors will be a matter for the board. No director or manager will be allowed to partake in any discussions as to their own remuneration. In exercising this role, the Directors shall have regard to the recommendations put forward in the relevant QCA Guidelines. Directors Remuneration Report The Group takes into account both Group and individual performance, market value and sector conditions in determining director and senior employee remuneration. The Group has maintained a policy of paying salaries comparable with peer companies in the sector in order to attract and retain key personnel. G o v e r n a n c e Directors’ remuneration and Directors’ interests Salary Pension S Bazini E Macleod N Rodol* C Garston* P Hagon* K Sadler* 165,000 165,000 16,667 10,000 5,000 6,667 *Appointed on 1 November 2016 – – – – – – Fair Value of Options – – – – – – Bonus – – 150,000 – – – Total Remuneration 2016 £ Total Remuneration 2015 £ 165,000 165,000 166,667 10,000 5,000 6,667 – – – – – – The Directors, who held ofﬁce at 31 December 2016, had the following interests in the shares of the Group: Number of share options held at 31 December 2016 Ordinary Shares as % of issued share capital Ordinary Shares held at 31 December 2016 Number of S Bazini E Macleod N Rodol C Garston P Hagon K Sadler Paul Hagon Remuneration Committee Chair 9 May 2017 – – – – – – 31.63 31.63 0.10 0.15 0.03 0.03 20,413,630 20,413,630 61,856 100,000 20,619 20,619 322 23 Warpaint London PLC Directors’ Report The Directors present their annual report on the affairs of the Group, together with the ﬁnancial statements and auditor’s report for the year ended 31 December 2016. The Corporate Governance Statement on pages 20-21 forms part of this report. Going concern The company’s going concern statement can be found in the Consolidated Financial Statements on page 34. Results and dividends Results for the year ended 31 December 2016 are set out in the Consolidated Income Statement on page 29. Directors The following Directors have held ofﬁce since incorporation on 4 July 2016, unless otherwise stated, to the date of authorisation of the accounts: Non-Executive Chairman C Garston (appointed 1 November 2016) Executive Directors S Bazini E Macleod N Rodol (appointed 1 November 2016) Non-Executive Directors P Hagon (appointed 1 November 2016) K Sadler (appointed 1 November 2016) Future development For details of future developments refer to the Strategic Report set out on pages 3-17. Substantial shareholdings The Group is aware of the following shareholdings of 3% or more in the share capital as at 31 December 2016: Shareholder Number of Shares S Bazini E Macleod Schroder Investment Management Limited BlackRock Investment Management Limited Hargreave Hale Limited 20,413,630 20,413,630 6,268,000 5,799,000 4,130,480 % 31.63 31.63 9.71 8.99 6.40 Financial instruments The Group’s ﬁnancial risk management objectives and policies are discussed in note 21 to the Consolidated Financial Statements. Auditors In accordance with section 485 of the Companies Act 2006, a resolution proposing that BDO LLP be re-appointed as auditors of the Group will be put to the Annual General Meeting. Indemnity of Directors The Group has purchased and maintains, for all Directors, insurance against any liability and the Group maintains appropriate insurance cover against legal action bought against its Directors. 3 24 25 Annual Report 2016 informed of developments in the Company through a combination of meetings and electronic communication. Statement of disclosure to the auditors So far as the Directors are aware: (a) there is no relevant audit information of which the Company’s auditors are unaware, and (b) they have taken all the steps that they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. G o v e r n a n c e On behalf of the Board Neil Rodol Chief Financial Ofﬁcer 9 May 2017 The Directors are responsible for preparing the Strategic and Directors’ Report and the Group ﬁnancial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group ﬁnancial statements for each ﬁnancial year. Under that law they have elected to prepare the Group ﬁnancial statements in accordance with International Financial Reporting Standards as adopted by the EU and applicable law. Under company law the Directors must not approve the Group ﬁnancial statements unless they are satisﬁed that they give a true and fair view of the state of affairs of the Group and of its proﬁt or loss for that period. In preparing the Group ﬁnancial statements, the Directors are required to: • Select suitable accounting policies and then apply them consistently; • Make judgements and estimates that are reasonable and prudent; • State whether they have been prepared in accordance with IFRSs as adopted by the EU; and • Prepare the Group ﬁnancial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business. The Directors are responsible for keeping adequate accounting records that are sufﬁcient to show and explain the Group’s transactions and disclose with reasonable accuracy at any time the ﬁnancial position of the Group and enable them to ensure that its ﬁnancial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and ﬁnancial information included on the Group’s website. Legislation in the UK governing the preparation and dissemination of ﬁnancial statements may differ from legislation in other jurisdictions. Employees It is the Company’s policy not to discriminate between employees or potential employees on any grounds. Full and fair consideration is given to the recruitment, training and promotion of disabled people and, should staff become disabled during the course of their employment, efforts are made to provide appropriate re-training. The Company places enormous importance on the contributions of its employees and aims to keep them 3 24 25 Warpaint London PLC Independent Auditors’ Report to the members of Warpaint London PLC Opinion Key audit matters We have audited the ﬁnancial statements of Warpaint London PLC (the ‘parent company’) and its subsidiaries (the ‘group’) for the year ended 31 December 2016 which comprise the consolidated statement of comprehensive income, the consolidated statement of changes in equity, the consolidated and company statements of ﬁnancial position, the consolidated cashﬂow statement and notes to the ﬁnancial statements, including a summary of signiﬁcant accounting policies. The ﬁnancial reporting framework that has been applied in the preparation of the group ﬁnancial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The ﬁnancial reporting framework that has been applied in the preparation of the parent company ﬁnancial statements is applicable law and United Kingdom Accounting Standards, including Financial Reporting Standard 102 The Financial Reporting Standard in the United Kingdom and Republic of Ireland (United Kingdom Generally Accepted Accounting Practice). In our opinion: • the ﬁnancial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2016 and of the group’s proﬁt for the year then ended; • the group ﬁnancial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; • the parent company ﬁnancial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and • the ﬁnancial statements have been prepared in accordance with the requirements of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the ﬁnancial statements section of our report. We are independent of the group in accordance with the ethical requirements that are relevant to our audit of the ﬁnancial statements in the UK, including the FRC’s Ethical Standard as applied to listed entities, and we have fulﬁlled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufﬁcient and appropriate to provide a basis for our opinion. Conclusions relating to going concern We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where: • the directors’ use of the going concern basis of accounting in the preparation of the ﬁnancial statements is not appropriate; or • the directors have not disclosed in the ﬁnancial statements any identiﬁed material uncertainties that may cast signiﬁcant doubt about the group’s or the parent company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the ﬁnancial statements are authorised for issue. Key audit matters are those matters that, in our professional judgment, were of most signiﬁcance in our audit of the ﬁnancial statements of the current period and include the most signiﬁcant assessed risks of material misstatement (whether or not due to fraud) we identiﬁed, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the ﬁnancial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. The following matters were identiﬁed by us as the most signiﬁcant assessed risks of material misstatement: Accounting for the group reorganisation As explained in note 1 the Warpaint London PLC group consists of two separate subgroups previously owned by the same shareholders. The combination of these businesses has been accounted for as a group reconstruction with regard the larger business and an acquisition under IFRS 3 for the smaller one, Treasured Scents. See note 8 for further information. The risk – Accounting for the business combinations involved signiﬁcant judgement in determining the appropriate accounting treatment for the reconstruction and acquisition and then determining the fair value of both the consideration paid for the Treasured Scents group and the underlying assets and liabilities of that group, including intangible assets such as customer relationships. Judgement was also exercised in determining the appropriate period over which to amortise the intangible asset in relation to customer relationships. How we addressed the risk – Our audit procedures included assessing the appropriateness of the accounting treatment adopted and challenging the Directors’ assessment of the fair value of the assets acquired and liabilities assumed with reference to evidence provided by third party experts engaged by management. We critically evaluated the capabilities, competence and objectivity of the external valuers engaged by the Directors involved in assessing the fair value of intangible assets and the fair value of the consideration paid, as well as evaluating and concluding on the appropriateness of their conclusions. We used our own valuation specialists to challenge the acquisition accounting including the identiﬁcation of amounts related to customer relationships and the valuation of the consideration paid. We also challenged the third party experts and management regarding the amortisation period of the intangible asset in relation to customer relationships. In addition, we considered the adequacy of the Group’s disclosures in respect of the business combinations. Carrying value of inventory See accounting policy in note 1. The risk – The group holds signiﬁcant levels of inventory and a number of estimates are involved in valuing slow moving and obsolete inventories, some of which have a limited shelf life. There are inherent uncertainties in consumer preferences and spending patterns, which are primarily driven by wider trends in the fashion and cosmetics industry. There is a recoverability risk associated with new product launches as well as with close out stock purchased at the end of ranges or seasons with judgement required in forecasting demand. 3 26 27 Annual Report 2016 How we addressed the risk – Our procedures included assessing the principles and appropriateness of the Group’s inventory provisioning policies based on our understanding of the business and the accuracy of previous provisioning estimates. In assessing inventory provisions our procedures included testing the methodology applied by management in preparing their provision including the identiﬁcation of slow moving and obsolete items. We considered the inventory write off ﬁgure during the year and compared this to the Group’s expected recoveries brought forward and to the position at the year end date. Further, we substantively tested the unprovided inventory balance to review sales volumes and values after the balance sheet date. In addition, we assessed the adequacy of the disclosures in respect of amounts recognised as provision against inventory during the period. Our application of materiality and overview of the scope of our audit The scope of our audit was inﬂuenced by our application of materiality. We set certain quantitative thresholds for materiality which, together with qualitative considerations, help us to determine the nature, timing and extent of our audit procedures on the individual ﬁnancial statement areas and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the ﬁnancial statements as a whole. We determined materiality for the ﬁnancial statements as a whole to be £515,000 which represents 8.5% of proﬁt before tax before exceptional items relating to the listing. We agreed with the audit committee that we would report to them misstatements identiﬁed during our audit above £25,000. We used proﬁt before tax before listing expenses as a benchmark given the importance of proﬁt as a measure for shareholders in assessing the performance of the Group. The group consists of two trading subgroups, both of which are run from the UK. In establishing the overall approach to the group audit, we completed full scope audits on the underlying subgroups. The group audit team obtained an understanding of the internal control environment related to the ﬁnancial reporting process and assessed the appropriateness, completeness and accuracy of group journals and other adjustments performed on consolidation. Other information Opinions on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: • the information given in the strategic report and the directors’ report for the ﬁnancial year for which the ﬁnancial statements are prepared is consistent with the ﬁnancial statements; and • the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements. Matters on which we are required to report by exception In the light of the knowledge and understanding of the group and the parent company and its environment obtained in the course of the audit, we have not identiﬁed material misstatements in the strategic report or the directors’ report. We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company ﬁnancial statements are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration speciﬁed by law are not made; or • we have not received all the information and explanations we require for our audit. Responsibilities of directors As explained more fully in the directors’ responsibilities statement as set out in the Directors’ report, the directors are responsible for the preparation of the ﬁnancial statements and for being satisﬁed that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of ﬁnancial statements that are free from material misstatement, whether due to fraud or error. 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 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. 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. Auditor’s responsibilities for the audit of the ﬁnancial statements 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. i F n a n c i a l S t a t e m e n t s 3 26 27 Warpaint London PLC Independent Auditors’ Report (continued) to the members of Warpaint London PLC 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. Mark RA Edwards (Senior Statutory Auditor) For and on behalf of BDO LLP, Statutory Auditor London 9 May 2017 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). 3 28 29 Consolidated Statement of Comprehensive Income for the year ended 31 December 2016 Revenue Cost of sales Gross proﬁt Administrative expenses Proﬁt from operations Analysed as: Proﬁt from operations before exceptional items Exceptional items Finance expense Proﬁt before tax Tax expense Proﬁt for the year attributable to equity holders of the parent company Other comprehensive income (net of tax) Total comprehensive income attributable to equity holders of the parent company Annual Report 2016 Note 1,2 3,5 3 3 5 6 Year ended 31 December 2016 £’000 22,483 2015 £’000 16,938 (13,692) (10,229) 8,791 (4,374) 4,417 6,156 (1,739) (16) 4,401 (1,260) 3,141 – 3,141 6,709 (1,117) 5,592 5,653 (61) (84) 5,508 (1,123) 4,385 – 4,385 i F n a n c i a l S t a t e m e n t s Basic and diluted earnings per share (pence) 25 5.07 7.11 3 28 29 Warpaint London PLC Consolidated Statement of Financial Position as at 31 December 2016 Registered Number: 10261717 Non-current assets Goodwill Intangibles Property, plant and equipment Total non-current assets Current assets Inventories Trade and other receivables Derivative ﬁnancial instruments Cash and cash equivalents Total current assets Total assets Current liabilities Trade and other payables Loans and borrowings Corporation tax liability Total current liabilities Non-current liabilities Bank loan Deferred tax liability Total non-current liabilities Total liabilities NET ASSETS Year ended 31 December Note 9 10 11 12 13 21 14 15 15 16 2016 £’000 513 1,403 237 2,153 7,669 5,364 37 3,503 16,573 18,726 (2,841) – (1,329) (4,170) – (278) (278) (4,448) 14,278 2015 £’000 – 65 1,475 1,540 5,296 4,170 – 1,758 11,224 12,764 (1,715) (201) (1,420) (3,336) (425) (12) (437) (3,773) 8,991 3 30 31 Consolidated Statement of Financial Position as at 31 December 2016 Registered Number: 10261717 Equities Share capital Share premium Merger reserve Retained earnings TOTAL EQUITY Annual Report 2016 Note 2016 £’000 2015 £’000 18 16,135 15,000 1,806 – (17,995) (20,000) 14,332 14,278 13,991 8,991 The ﬁnancial statements of Warpaint London PLC were approved and authorised for issue by the Board of Directors on 9 May 2017 and were signed on its behalf by: Neil Rodol Chief Financial Ofﬁcer i F n a n c i a l S t a t e m e n t s 3 30 31 Warpaint London PLC Consolidated Statement of Changes in Equity for the year ended 31 December 2016 At 1 January 2015 Proﬁt for the year Dividends paid As at 31 December 2015 Share issue for cash Share issue for Treasured Scents Share capital reduction Proﬁt for the year Dividends paid Share Capital Share Premium Merger Reserve Retained Earnings Total Equity Note 17 18 18 18 17 £’000 15,000 – – 15,000 644 1,340 (849) – – £’000 – – – – 1,806 – – – – £’000 (20,000) – – £’000 11,559 4,385 £’000 6,559 4,385 (1,953) (1,953) (20,000) 13,991 – 2,005 – – – – – – 3,141 (2,800) 8,991 2,450 3,345 (849) 3,141 (2,800) As at 31 December 2016 16,135 1,806 (17,995) 14,332 14,278 3 32 33 Consolidated Statement of Cash Flows for the year ended 31 December 2016 Operating activities Proﬁt before tax Interest paid Amortisation of intangible assets Depreciation of property, plant and equipment Loss/(proﬁt) on disposal of property, plant and equipment Increase in trade and other receivables Increase in inventories Increase in trade and other payables Cash generated from operations Tax paid Interest paid Net cash ﬂows from operating activities Investing activities Purchase of intangible assets Purchase of property, plant and equipment Proceeds received from investment in LLP Bank balances acquired Sale of investments Net cash (used in)/generated by investing activities Financing activities Proceeds from new share capital subscribed Share issue costs (Reduction)/increase in borrowings Dividends Net cash used in ﬁnancing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Cash and cash equivalents consists: Cash and cash equivalents Annual Report 2016 Year ended 31 December 2016 £’000 2015 £’000 4,401 5,508 16 57 58 8 (289) (1,413) 1,601 4,439 (1,465) (16) 2,958 (77) (163) – 98 (6) (148) 2,500 (53) (712) (2,800) (1,065) 1,745 1,758 3,503 3,503 3,503 i F n a n c i a l S t a t e m e n t s 84 4 51 – (1,457) (1,965) 236 2,461 (132) (84) 2,245 (28) (49) 138 – – 61 – – 411 (1,953) (1,542) 764 994 1,758 1,758 1,758 Note 5 10 11 10 11 17 3 32 33 Warpaint London PLC Notes to the Consolidated Financial Statements for the year ended 31 December 2016 1. Signiﬁcant accounting policies Basis of preparation The ﬁnancial statements of Warpaint London PLC (the “Company” or “Warpaint”) and its subsidiaries (together the “Group”) for the year ended 31 December 2016 were authorised for issue by the board of directors on 9 May 2017 and the statement of ﬁnancial position was signed on the board’s behalf by Neil Rodol. Warpaint London PLC is a public limited Company incorporated and domiciled in England and Wales. Its registered ofﬁce is Units B&C, Orbital Forty Six, The Ridgeway Trading Estate, Iver, Bucks., SL0 9HW. The Group’s ﬁnancial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The ﬁnancial statements are presented in pounds sterling because that is the currency of the primary economic environment in which the Group operates. The annual ﬁnancial statements have been prepared on the historical cost basis, except for certain ﬁnancial assets and liabilities which are carried at fair value or amortised cost as appropriate. The preparation of ﬁnancial statements in conformity with International Financial Reporting Standards adopted by the European Union requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the ﬁnancial statements and the reported amounts of revenues and expenses during the reported period. Although these estimates are based on management’s best knowledge of current events and actions, actual results ultimately may differ from those estimates. The principal accounting policies adopted are set out below. Basis of consolidation The consolidated ﬁnancial statements incorporates the ﬁnancial statements of the Group and all of its subsidiary undertakings. The ﬁnancial statements of all Group companies are adjusted, where necessary, to ensure the use of consistent accounting policies. Acquisitions are accounted for under the acquisition method from the date control passed to the Group. On acquisition, the assets and liabilities of a subsidiary are measured at their fair values. Any excess of the cost of acquisition over the fair values of the identiﬁable net assets acquired is recognised as goodwill. The Group was formed after the company, prior to its IPO and listing on AIM, completed share for share transactions for two separate groups owned by the same shareholders. The Board have taken the view that the most appropriate way to account for these in line with IFRS is to deem the share for share exchange with the Warpaint Group (the own brand business) as a group reconstruction. This has been accounted for under the basis of merger accounting given that the ultimate ownership before and after the transaction remained the same. Merged subsidiaries undertakings are treated as if they have always been a member of the Group. Any difference between the nominal value of the shares acquired by the Company and those issued by the Company to acquire them is taken to the merger reserve. There is currently no speciﬁc guidance on accounting for group reconstructions such as this transaction under IFRSs. In the absence of speciﬁc guidance, entities should select an appropriate accounting policy and IFRS permits the consideration of pronouncements of other standard-setting bodies. This group reconstruction as scoped out of IFRS 3 has therefore been accounted for using predecessor accounting principles resulting in the following practical effects; (a) (b) (c) (d) The net assets of the two companies are combined using existing book values, with adjustments made as necessary to ensure that the same accounting policies are applied to the calculation of the net assets of both companies; No amount is recognised as consideration for goodwill or negative goodwill; The consolidated proﬁt and loss account includes the proﬁts or losses of each company for the entire period, regardless of the date of the reconstruction, and the comparative amounts in the consolidated ﬁnancial statements are restated to the ﬁgures presented by the predecessor company Warpaint Cosmetics Group Limited; The retained earnings reserve includes the cumulative results of each company, regardless of the date of the reconstruction, and the comparative amounts in the statement of ﬁnancial position are restated to the presented by the predecessor company Warpaint Cosmetics Group Limited The share for share exchange of the other group of companies, namely Treasured Scents (the close-out business) was acquired on 11 November 2016 and has been treated as an acquisition under IFRS 3. This is the ﬁrst year that the Group has presented its results under IFRS. No reconciliation has been provided because there are no material differences. On 21 November 2016, the Company also undertook a capital reduction pursuant to which 16,340,000 B ordinary shares of £0.052 each held by Sam Bazini and Eoin Macleod were cancelled in consideration for the transfer of the entire issued share capital of Warpaint Cosmetics Limited to a company owned and controlled by Sam Bazini and Eoin Macleod. Going concern The Directors have prepared a detailed forecast with a supporting business plan for the foreseeable future. The forecast indicates that the Group will remain in a positive cash position throughout the forecast period. As such, the Directors have a reasonable expectation the Company and Group will have adequate resources to continue in operational existence for the foreseeable future. As such, they continue to prepare the ﬁnancial statements on the basis of going concern. Revenue Recognition Revenue for the Group is measured at the fair value of the consideration received or receivable. The Group recognises revenue for goods sold when the amount of revenue can be reliably measured and it is probable that future economic beneﬁts will ﬂow to the entity. 34334 3 35 35 Annual Report 2016 Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2016 1. Signiﬁcant accounting policies (continued) Intangible assets acquired separately Sale of goods Revenue from the sale of goods is recognised when all of the following conditions are satisﬁed: • the Group has transferred the signiﬁcant risks and rewards of ownership to the buyer; • the Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; • the amount of revenue can be measured reliably; • it is probable that the Group will receive the consideration due under the transaction; and • the costs incurred or to be incurred in respect of the transaction can be measured reliably. UK sales are recognised and invoiced to the customer once the goods have been delivered to the customer. Overseas sales are recognised and invoiced to the customer once the goods have been delivered to the customer, or collected by the customer from the company’s warehouse according to the terms of sale. Where the Company has entered in to distributor arrangements the risk and rewards are considered to be with the distributor from the date of dispatch from either the Company’s overseas supplier or from the Company’s UK warehouse. Revenue will therefore be recognised from the date of dispatch. Expenditure and provisions Expenditure is recognised in respect of goods and services received when supplied in accordance with contractual terms. Provision is made when an obligation exists for a future liability relating to a past event and where the amount of the obligation can be reliably estimated. Intangible assets with ﬁnite useful lives that are acquired separately are carried at cost less accumulated amortisation and accumulated impairment losses. Amortisation is recognised on a straight-line basis over their estimated useful lives. The estimated useful life and amortisation method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Intangible assets with indeﬁnite useful lives that are acquired separately are carried at cost less accumulated impairment losses. Intangible assets acquired in a business combination Intangible assets acquired in a business combination and recognised separately from goodwill are initially recognised at their fair value at the acquisition date (which is regarded as their cost). Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets that are acquired separately. Amortisation is provided on customer lists so as to write off the carrying value over the expected useful economic life of ﬁve years. Derecognition of intangible assets An intangible asset is derecognised on disposal, or when no future economic beneﬁts are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, and are recognised in proﬁt or loss when the asset is derecognised. Property, plant and equipment Items of property, plant and equipment are initially recognised at cost. As well as the purchase price, cost includes directly attributable costs. Depreciation is provided on all items of property, plant and equipment so as to write off their carrying value over the expected useful economic lives. It is provided at the following rates: Retirement Beneﬁts: Deﬁned contribution schemes Contributions to deﬁned contribution schemes are charged to the consolidated statement of comprehensive income in the year to which they relate. – 50 years Land and buildings Plant and machinery – 25% reducing balance Fixtures, ﬁttings and equipment – 25% reducing balance – 25% reducing balance Computer equipment – 25% reducing balance Motor vehicles Exceptional items Exceptional items which have been disclosed separately on the face of the income statement in order to summarise the underlying results. Exceptional items include costs incurred by the Group in relation to IPO costs. Neither ‘underlying proﬁt or loss’ nor ‘exceptional items’ are deﬁned by IFRS however the directors believe that the disclosures presented in this manner provide clear presentation of the ﬁnancial performance of the Group. Intangible assets Patents Patents are used by the Group in order to generate future economic value through normal business operations. The underlying assets are amortised over the period from which the Group expects to beneﬁt, which is typically between ﬁve to ten years. Financial assets The Group classiﬁes its ﬁnancial assets into the categories, discussed below, due to the purpose for which the asset was acquired. The Group has not classiﬁed any of its ﬁnancial assets as held to maturity. Loans and receivables These assets are non-derivative ﬁnancial assets with ﬁxed or determinable payments that are not quoted in an active market. They arise principally through the provision of services to customers (e.g. trade receivables), but also incorporate other types of contractual monetary asset. They are initially recognised at fair value plus transactions costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment. i F n a n c i a l S t a t e m e n t s 3 334 34 35 35 Warpaint London PLC Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2016 1. Signiﬁcant accounting policies (continued) Current tax The Group’s loans and receivables comprise of trade and other receivables included within the combined statement of ﬁnancial position. Cash and cash equivalents include cash held at bank and bank overdrafts. Bank overdrafts are shown within loans and borrowings in current liabilities in the combined statement of ﬁnancial position. Impairment provisions are recognised when there is objective evidence (such as signiﬁcant ﬁnancial difﬁculties on the part of the counterparty or default or signiﬁcant delay in payment) that the Group will be unable to collect all of the amounts due under the terms receivable, the amount of such a provision being the difference between the net carrying amount and the present value of the future expected cash ﬂows associated with the impaired receivable. For trade receivables, which are reported net, such provisions are recorded in a separate allowance account with the loss being recognised within administrative expenses in the income statement. On conﬁrmation that the trade receivables will not be collectable, the gross carrying value of the asset is written off against the associated provision. Financial liabilities The tax currently payable is based on taxable proﬁt for the year. Taxable proﬁt differs from ‘proﬁt before tax’ as reported in the consolidated statement of proﬁt or loss and other comprehensive income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Group’s current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. Deferred taxation Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the combined statement of ﬁnancial position differs from its tax base, except for differences arising on: • the initial recognition of goodwill; • the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting or taxable proﬁt; and The Group classiﬁes its ﬁnancial liabilities as other ﬁnancial liabilities which include the following: • Bank loans which are initially recognised at fair value net of any transaction costs directly attributable to the issue of the instrument. liabilities are subsequently measured at Such amortised cost ensuring the interest element of the borrowing is expensed over the repayment period at a constant rate. interest-bearing • investments in subsidiaries and jointly controlled entities where the Group is able to control the timing of the reversal of the difference and it is probable that the difference will not reverse in the foreseeable future. Recognition of deferred tax assets is restricted to those instances where it is probable that taxable proﬁt will be available against which the difference can be utilised. • Trade payables, other borrowings and other short-term monetary liabilities, which are initially recognised at fair value and subsequently carried at amortised cost using the effective interest method. Leased assets Assets obtained under hire purchase contract and ﬁnance leases are capitalised as tangible ﬁxed assets. Assets acquired by ﬁnance lease are depreciated over the shorter of the lease term and their useful lives. Assets acquired by hire purchase are depreciated over their useful lives. Finance leases are those where substantially all of the beneﬁts and risks of ownership are assumed by the company. Obligations under such agreements are included in creditors net of the ﬁnance charge allocated to future periods. The ﬁnance element of the rental payment is charged to the proﬁt and loss account so as to produce a constant periodic rate of charge on the net obligation outstanding in each period. The amount of the asset or liability is determined using tax rates that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the deferred tax liabilities or assets are settled or recovered. Deferred tax balances are not discounted. Deferred tax assets and liabilities are offset when the Group has a legally enforceable right to offset current tax assets and liabilities and the deferred tax assets and liabilities relate to taxes levied by the same tax authority on either: • the same taxable group company; or • different company entities which intend either to settle current tax assets and liabilities on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which signiﬁcant amounts of deferred tax assets and liabilities are expected to be settled or recovered. Operating Leases Where substantially all of the risks and rewards incidental to ownership are not transferred to the Group (an ‘operating lease’), the total rentals payable under the lease are charged to the combined statement of comprehensive income on a straight-line basis over the lease term. The aggregate beneﬁt of lease incentives is recognised as a reduction of the rental expense over the lease term on a straight-line basis. Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. Inventories Inventories are initially recognised at cost, and subsequently at the lower of the cost and net realisable value. Cost comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Foreign currencies Assets and liabilities in foreign currencies are translated into Sterling at the rates of exchange ruling of the Statement of Financial Position date. Transactions in foreign currencies are translated into Sterling at the rate of exchange ruling at the date of the transaction. Exchange differences are taken into account in arriving at operating proﬁt. 3 36 37 Annual Report 2016 Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2016 1. Signiﬁcant accounting policies (continued) Operating segments Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision maker has been identiﬁed as the management team including the Chief Executive Ofﬁcers and the Chief Financial Ofﬁcer. The Board considers that the Group’s project activity constitutes two operating and two reporting segments, as deﬁned under IFRS 8. Management reviews the performance of the Group by reference to total results against budget. The total proﬁt measures are operating proﬁt and proﬁt for the year, both disclosed on the face of the combined income statement. No differences exist between the basis of preparation of the performance measures used by management and the ﬁgures in the Group ﬁnancial information. Derivative ﬁnancial instruments The Group enters into a variety of derivative ﬁnancial instruments to manage its exposure to foreign exchange rate risk, through the use of foreign exchange rate forward contracts. Derivatives are initially recognised at fair value at the date the derivative contracts are entered into and are subsequently re-measured to their fair value at the end of each reporting period. The resulting gain or loss is recognised in proﬁt or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in proﬁt or loss depends on the nature of the hedge relationship. • IFRS 15 Revenue from Contracts with Customers (May 2014, September 2015 and April 2016 amendments) – This standard replaces IAS 18, ‘Revenues’ and introduces a ﬁve step approach to revenue recognition based on performance obligations under customer contracts. • IFRS 16 Leases (January 2016 amendments) – This standard replaces IAS 17, ‘Leases’ and introduces leases with the objective of ensuring that lessees and lessors provide relevant information that faithfully represents those transactions. The effect of these standards is under review but has not yet been quantiﬁed. Critical accounting estimates and judgements The Group makes certain estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based on historical experience and other factors, including the expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. The estimates and assumptions that have a signiﬁcant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next ﬁnancial year are discussed below. Judgements and accounting estimates and assumptions (a) Inventories Inventories are initially recognised at cost, and subsequently at the lower of the cost and net realisable value. There is judgement involved in assessing the level of inventory provision required in respect of slow moving inventory. Earnings per share (b) Fair value of consideration i F n a n c i a l S t a t e m e n t s Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders of the parent by the weighted average number of ordinary shares outstanding during the year, excluding treasury shares and shares in employee beneﬁt trusts, determined in accordance with the provisions of IAS 33 earnings per Share. Diluted earnings per share is calculated by dividing earnings attributable to ordinary shareholders of the parent by the weighted average number of ordinary shares outstanding during the year adjusted for the potentially dilutive ordinary shares. Changes in accounting policies This is the ﬁrst year the Group has prepared ﬁnancial statements under International Financial Reporting Standards, therefore all relevant IFRS’s have been adopted. New standards, interpretations and amendments not yet effective The following new standards, interpretations and amendments, which have not been applied in this ﬁnancial information, will or may have an effect on the Group’s future ﬁnancial information: • IFRS 9 Financial Instruments (July 2014 amendments) – This standard incorporates requirements for classiﬁcation and measurement, impairment, general hedge accounting and derecognition of ﬁnancial instruments. Goodwill arising on the acquisition of Treasured Scents (2014) Limited is calculated using consideration which is measured at fair value. The Group has used the earnings method in calculating fair value of the consideration being the EBITDA (earnings before interest, tax, depreciation and amortisation) multiplied by an ‘earnings multiple’. The directors have used judgement in calculating the level of the earnings multiple. (c) Intangible assets acquired On acquisition of Treasured Scents (2014) Limited the group has recognised the customer list also obtained in the business combination. The valuation of the customer list is based on judgement involved in assessing the projected future cashﬂows arising from those customers. Further judgement is involved in assessing the life of the intangible asset and a suitable discount rate to be used to measure the future revenues to present value. 3 36 37 Warpaint London PLC Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2016 2. Segmental information For management purposes, the Group is organised into two operating segments; W7 Branded and close-out. The segment ‘W7 Branded’ relates to the sale of own branded products whereas ‘close-out’ relates to the purchase of third party stock which is then repackaged for sale. These segments are the basis on which the Group reports internally to the Board. Revenue and costs not included in one of these operating segments, for example administrative expenses, have not been allocated to an operating segment. Year ended 31 December Revenue Cost of sales Gross proﬁt Administrative expenses Exceptional items Segment result Reconciliation of segment result to proﬁt before tax: Segment result Finance expense Proﬁt before tax Analysis of total revenue by geographical market: UK USA Rest of World Total 2016 W7 Branded 2016 Close-out £’000 21,862 (13,078) 8,784 (2,483) (1,739) 4,562 4,562 (16) 4,546 £’000 621 (614) 7 (152) – (145) (145) – (145) 2016 Total £’000 22,483 (13,692) 8,791 (2,635) (1,739) 4,417 4,417 (16) 4,401 11,841 2,880 7,762 22,483 Information regarding segment assets and liabilities as at 31 December 2016 and capital expenditure for the period then ended: W7 Brand Close-out Eliminations £’000 21,694 (9,056) 163 1,394 1,557 £’000 4,293 (2,653) 14 – 14 £’000 (7,261) 7,261 – – – Total assets Total liabilities Tangible asset additions Intangible asset additions Total capital expenditure 3. Operating proﬁt Operating proﬁt for the period is stated after charging/ (crediting): Foreign exchange movement Depreciation and amortisation Loss on disposal of ﬁxed asset Operating lease Exceptional IPO costs 2015 W7 Branded £’000 16,938 (10,229) 6,709 (1,117) – 5,592 5,592 (84) 5,508 9,135 526 7,277 16,938 Total £’000 18,726 (4,448) 177 1,394 1,571 Year ended 31 December 2016 £’000 (28) 115 8 263 1,739 2015 £’000 (2) 55 – – 61 Exceptional costs relate to legal and professional fees and commissions incurred in listing the company on AIM in the year ended 31 December 2016 were £1,739,000 (2015: £61,000). 3 38 39 Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2016 3. Operating proﬁt (continued) Analysis of auditor’s remuneration is as follows: Fees payable to the Company’s auditor for the audit of the Group’s annual accounts Fees payable to the Company’s auditor for the audit of subsidiary companies Other services pursuant to legislation: Tax compliance Tax advice Services relating to IPO Total non-audit fees 4. Staff costs Wages and salaries Social security costs Pension costs The average monthly number of employees during the period was as follows: Directors Administrative Finance Warehouse Sales Other Directors’ remuneration, included in staff costs Salaries Bonus Pension contributions Information regarding the highest paid director is as follows: Emoluments Annual Report 2016 Year ended 31 December 2016 £’000 13 49 62 – 30 308 338 2015 £’000 18 – 18 – – – – i F n a n c i a l S t a t e m e n t s Year ended 31 December 2016 £’000 1,413 159 6 1,578 2015 £’000 387 40 6 433 Year ended 31 December 2016 No. 3 5 2 22 4 4 40 2016 £’000 330 150 – 480 167 167 2015 No. 2 3 2 4 1 – 12 2015 £’000 – – – – – – 3 38 39 Warpaint London PLC Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2016 5. Finance expense Finance expense Loan interest 6. Income tax Current tax expense Current tax on proﬁts for the period Adjustment in respect of previous periods Deferred tax expense Origination and reversal of temporary differences Total tax expense Year ended 31 December 2016 £’000 16 16 2015 £’000 84 84 Year ended 31 December 2016 £’000 1,225 19 1,244 16 1,260 2015 £’000 1,116 – 1,116 7 1,123 The reasons for the difference between the actual tax charge for the year and the standard rate of corporation tax in the United Kingdom applied to proﬁt for the year as follows: Proﬁt for the period before tax Expected tax charge based on corporation tax rate of 20% in 2016 (20.25% in 2015) Expenses not deductible for tax purposes Other adjustments Prior year adjustments Deferred tax Total tax expense Year ended 31 December 2016 £’000 4,401 880 361 3 19 (3) 2015 £’000 5,508 1,115 1 2 – 5 1,260 1,123 The UK corporation tax at the standard rate for the year is 20.0% (2015: 20.25%). In July 2015 the UK government announced its intention to reduce the standard corporation tax rate to 18% by 2020. The measure to reduce the rate to 19% for the ﬁnancial year beginning 1 April 2017 and to 18% for the ﬁnancial year beginning 1 April 2020 were substantively enacted on 26 October 2015 and have been reﬂected in the calculation of deferred tax in the December 2016 numbers. 7. Subsidiaries At the period end, the Group has the following subsidiaries: Subsidiary name Warpaint Cosmetic Group Limited Warpaint Cosmetics (2014) Limited* Treasured Scents (2014) Limited Treasured Scents Limited* * indicates indirect interest Nature of business Holding company Wholesaler Wholesaler Wholesaler Place of incorporation England and Wales England and Wales England and Wales England and Wales Percentage owned 100% 100% 100% 100% On 11 November 2016, the Company acquired 100% of the issued share capital of Treasured Scents (2014) Limited and its subsidiary undertaking Treasured Scents Limited. All the other entities detailed above have been in existence for the whole of the reporting period. The registered ofﬁce for all the above-named subsidiaries is 2 Park Court, Pyrford Road, West Byﬂeet, Surrey, KT14 6SD. 3 40 41 Annual Report 2016 Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2016 8. Acquisitions Treasured Scents (2014) Limited On 11 November 2016, the Group acquired the entire share capital of Treasured Scents (2014) Limited, a close-out cosmetics wholesaler based in the UK. The principal reason for acquiring Treasured Scents (2014) Limited was due to the company operating in the same industry and the client relationships maintained by the directors, Mr E. Macleod and Mr S. Bazini. Treasured Scents (2014) Limited has contributed £621,260 to revenue for the period between the date of acquisition and the balance sheet date. Had Treasured Scents (2014) Limited been consolidated from 1 January 2016, the consolidated income statement for the year ended 31 December 2016 would show revenue of £26,968,000 and proﬁt before tax of £4,927,000. The provisional fair value of the net assets at the acquisition date is as follows: Client relationships Property, plant and equipment Stock Trade and other receivables Cash and cash equivalents Trade and other payables Current tax liabilities Deferred tax liabilities Net assets acquired Goodwill arising on acquisition Consideration The gross contractual amount of trade receivables is equal to the fair value. £’000 1,318 14 960 1,142 98 (334) (116) (250) 2,832 513 3,345 i F n a n c i a l S t a t e m e n t s Goodwill comprises the value of expected synergies and other opportunities arising from the acquisition, management know how, the skilled work force employed by Treasured Scents (2014) Limited and other intangible assets that do not qualify for separate recognition. None of the goodwill recognised is expected to be deductible for tax purposes. The fair value of consideration has been calculated by means of an EBITDA multiple supported by a discounted cashﬂow model. The fair value of consideration paid is as follows: Share consideration The proﬁt and loss for Treasured Scents (2014) Limited from the date of acquisition to 31 December 2016 is as follows: Revenue Cost of sales Gross proﬁt Administrative expenses Loss before tax Tax expense Total comprehensive loss for the period £’000 3,345 3,345 £’000 615 (614) 1 (152) (151) 19 (132) 3 40 41 Warpaint London PLC Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2016 9. Goodwill Cost Arising on business combination At 31 December 2016 Amortisation At 31 December 2015 and 31 December 2016 Net book value At 31 December 2016 At 31 December 2015 £’000 513 513 – 513 – Goodwill represents the excess of consideration over the fair value of the Group’s share of the net identiﬁable assets of the acquired subsidiary at the date of acquisition. Goodwill arising on acquisition in the year ended 31 December 2016 relates to the Group’s acquisition of Treasured Scents (2014) Limited. Impairment is calculated by comparing the carrying amounts to the value in use derived from discounted cash ﬂow projections for Treasured Scents (2014) Limited. A CGU is deemed to be an individual fascia and these have been grouped together into similar classes for the purpose of formulating operating segments as reported in note 2. Value in use calculations are based on a discounted cash ﬂow model (“DCF”) for the subsidiary, which discounts expected cash ﬂows over a ﬁve-year period using a pre-tax discounts rate of 15% (2015: nil). Cash ﬂows beyond the ﬁve-year period are extrapolated using the average growth rate of 0.5% (2015: nil). Management have performed the annual impairment review as recognised by IAS 36 and have concluded that no impairment is indicated with the fair value of goodwill exceeding book value. Key Assumptions and sensitivity to changes in assumptions The key assumptions are based upon management’s historical experience. The calculation of VIU is most sensitive to the following assumptions: • Sales and EBITDA – this is based on reasonable forecasts for the ﬁrst year. These have been forecasted for years two to ﬁve based on expected sales trends • Discount Rate – pre-tax discount rate of 15% reﬂects the Directors’ estimate of an appropriate rate of return, taking into account the relevant risk factors • Growth Rate – used to extrapolate beyond the budget period and for terminal values based on a long term average growth rate of 0.5%. Management believe that no reasonably possible change in key assumptions would lead to an impairment of goodwill. 10. Intangible assets Cost At 1 January 2015 Additions At 31 December 2015 On acquisition of subsidiaries Additions At 31 December 2016 Accumulated amortisation At 1 January 2015 Charge for the year At 31 December 2015 Charge for the year At 31 December 2016 Net book value At 31 December 2016 At 31 December 2015 At 1 January 2015 Customer list £’000 Patents £’000 Website £’000 Licenses £’000 63 28 91 – 41 132 22 4 26 8 34 98 65 41 – – – – 30 30 – – – 4 4 26 – – – – – – 6 6 – – – 1 1 5 – – – – – 1,318 – 1,318 – – – 44 44 1,274 – – 3 42 Total £’000 63 28 91 1,318 77 1,486 22 4 26 57 83 1,403 65 41 43 Annual Report 2016 Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2016 11. Property, plant and equipment Land and buildings Plant and machinery Fixtures and ﬁttings Computer equipment Motor vehicles £’000 £’000 £’000 £’000 £’000 Costs At 1 January 2015 Additions At 31 December 2015 Additions On acquisition of subsidiary Disposals At 31 December 2016 Accumulated depreciation At 1 January 2015 Charge for year At 31 December 2015 Charge for year On disposals At 31 December 2016 Net book value At 31 December 2016 At 31 December 2015 At 1 January 2015 1,400 – 1,400 – – (1,400) – 9 28 37 14 (51) – – 1,363 1,391 80 3 83 6 2 – 91 8 18 26 14 – 40 51 57 72 10 16 26 43 4 – 73 1 2 3 9 – 12 61 23 9 5 30 35 42 – (9) 68 – 3 3 10 (1) 12 56 32 5 – – – 72 8 – 80 – – – 11 – 11 69 – – Total £’000 1,495 49 1,544 163 14 (1,409) 312 18 51 69 58 (52) 75 237 1,475 1,477 The disposal of land and buildings occurred as part of the capital reduction exercise referred to in note 18 pursuant to which the entire issued share capital of Warpaint Cosmetics Limited was transferred to a company owned and controlled by Sam Bazini and Eoin Macleod. i F n a n c i a l S t a t e m e n t s 12. Inventories Finished goods As at 31 December 2016 £’000 7,669 2015 £’000 5,296 The cost of inventories recognised as an expense and included in ‘cost of sales’ amounted to £11,690,172 in the year ended 31 December 2016 (2015: £8,987,787). 13. Trade and other receivables Trade receivables – gross Allowance for doubtful debts Trade receivables – net Other receivables Prepayments and accrued income Total As at 31 December 2016 £’000 2,674 (110) 2,564 16 2,784 5,364 2015 £’000 3,204 (100) 3,104 607 459 4,170 The directors consider that the carrying value of trade and other receivables measured at book value and amortised cost approximates to fair value. 3 42 43 Warpaint London PLC Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2016 14. Trade and other payables Current Trade payables Social security and other taxes Other payables Accruals and deferred income Total As at 31 December 2016 £’000 2,537 – 23 281 2,841 2015 £’000 634 284 603 194 1,715 The directors consider that the carrying value of trade and other payables measured at book value and amortised cost approximates to fair value. Included in other payables are amounts owed to directors of £16,918 as at 31 December 2016 (2015: £602,966). The amounts owed to the directors are interest free and are repayable on demand. 15. Loans and borrowings Bank loans Repayable within 1 year Repayable within 2 – 5 years Total Repayable within 1 year Repayable within 2 – 5 years As at 31 December 2016 £’000 – – – – – – 2015 £’000 201 425 626 201 425 626 The bank loan was secured over the assets of the Company and transferred out of the Group as part of the capital reduction. Refer to note 18. 16. Deferred Tax Deferred tax is calculated in full on temporary differences under the liability method using tax rate of 19%-20%. The movement on the deferred tax account is as shown below: Opening balance On acquisition of subsidiary Recognised in proﬁt and loss: Tax expense Closing balance Year ended 31 December 2016 £’000 11 251 16 278 2015 £’000 5 – 7 12 The deferred tax has arisen due to the timing difference on accelerated capital allowances and on the intangible assets acquired in a business combination. In July 2015 the UK government announced its intention to reduce the standard corporation tax rate to 18% by 2020. The measure to reduce the rate to 19% for the ﬁnancial year beginning 1 April 2017 and to 18% for the ﬁnancial year beginning 1 April 2020 were substantively enacted on 26 October 2015 and have been reﬂected in the calculation of deferred tax in the December 2016 numbers. 3 44 45 Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2016 17. Dividends Year to December 2016 Interim dividend Interim dividend Year to December 2015 Interim dividend Interim dividend Interim dividend Interim dividend Interim dividend Annual Report 2016 Paid Amount per share 4 April 16 25 Nov 16 £12,000 9.79p Paid Amount per share 1 Jan 15 31 Jan 15 1 May 15 10 Oct 15 1 Dec 15 £1,090 £1,430 £1,600 £6,100 £9,310 Total £’000 1,200 1,600 2,800 Total £’000 109 143 160 610 931 1,953 The payment of dividends prior to the group restructuring on 11 November 2016 were based on 100 ordinary shares in issue. 18. Called up share capital Allotted and issued Ordinary shares of £1 each Share issue on incorporation Sub-division to A and B shares Cancellation of B shares Consolidation and subdivision of shares into ordinary shares 25p Ordinary shares of £0.25 each New share issue Preference shares of £1 each 2016 No of shares 2015 No of shares Date £’000 £’000 2016 £’000 2015 £’000 As at 31 December 11 Nov 16 15 Nov 16 21 Nov 16 24 Nov 16 30 Nov 16 16,340 16,340 (16,340) 45,621 61,961 2,577 – 64,538 – – – – – – 15,000 15,000 16,340 – (849) – 15,491 644 – 16,135 – – – – – – 15,000 15,000 At the date of incorporation, 2 ordinary shares of £1 were issued. On 11 November 2016, the Company issued a further 16,339,998 ordinary share of £1 each in exchange for 15,000,100 ordinary shares in Warpaint Cosmetics Group Limited and 1,339,900 ordinary shares in Treasured Scents (2014) Limited. On 15 November 2016, the Company re-designated and subdivided the ordinary shares of £1 in issue into 16,340,000 A ordinary shares of £0.948 each and 16,340,000 B ordinary shares of £0.052 each. On 21 November 2016, the Company undertook a capital reduction pursuant to which 16,340,000 B ordinary shares of £0.052 each held by Sam Bazini and Eoin Macleod were cancelled in consideration for the transfer of the entire issued share capital of Warpaint Cosmetics Limited to a company owned and controlled by Sam Bazini and Eoin Macleod and the allotment and issue by that company to Sam Bazini and Eoin Macleod 16,340,000 B ordinary shares of £0.052. On 24 November 2016, the Company consolidated each A ordinary share of £0.948 each into 1,000 A ordinary shares of £948 each and then subdivided each A ordinary share of £948 each into 3,792 A ordinary shares of £0.25 each. Each A ordinary share of £0.25 each was then re-designated into an ordinary share of £0.25 each. On 30 November 2016 in an initial public offering Warpaint London PLC issued 2,577,320 ordinary £0.25 shares at a price of £0.97, resulting in an increase in share capital of £644,330 and share premium of £1,855,670 and directly attributable share issue costs of £50,000. All ordinary shares carry equal rights. i F n a n c i a l S t a t e m e n t s 3 44 45 Warpaint London PLC Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2016 19. Other Reserves Share premium The share premium reserve contains the premium arising on the issue of equity shares, net of issue expenses incurred by the company. On 30 November 2016 in an initial public offering Warpaint London PLC issued 2,577,320 ordinary £0.25 shares at a price of £0.97, resulting in share premium of £1,855,670 and share issue costs of £50,000. Retained earnings Retained earnings represent cumulative proﬁts or losses, net of dividends and other adjustments. Merger reserve The effect of the application of merger accounting principles on the merger reserve is that the share capital and other distributable reserves that existed in Warpaint Cosmetics Group Limited (the company) as at the point Warpaint London PLC legally acquired Warpaint Cosmetics Group Limited is accounted for as if it had been in existence as at the comparative period end, 31 December 2015 and as at the opening balance sheet date, 1 January 2015. The corresponding entry being the merger reserve so the overall net assets as at the comparative dates are not affected. The movement on the merger reserve during the period arose due to the acquisition of Treasured Scents (2014) Limited on 11 November 2016. The shareholders of Treasured Scents (2014) Limited transferred their shares to Warpaint London PLC in exchange for shares in Warpaint London PLC, the difference in fair value of the consideration was £2,005,233. This is adjusted through the merger reserve as it is considered part of the consideration paid by Warpaint London PLC to acquire Treasured Scents (2014) Limited. 20. Related party transactions Transactions between the company and its subsidiaries, which are related parties, have been eliminated on consolidation. Compensation of key management personnel (including Directors) is disclosed in note 5 with the exception of dividends and drawings which are disclosed in note 18. During 2016, Treasured Scents (2014) Limited paid rent in the sum of £123,750 (2015: £31,250) to Trading Scents Group Limited, of which Mr Macleod is a director. At the year end the amount due to Trading Scents Group Limited was £Nil (2015: £Nil). During 2016, Warpaint Cosmetics (2014) Limited paid rent in the sum of £30,000 (2015: £Nil) to Trading Scents Group Limited, of which Mr Macleod is a director. At the year end the amount due to Trading Scents Group Limited was £Nil (2015: £Nil). During 2016, Warpaint Cosmetics (2014) Limited paid rent in the sum of £153,750 (2015: £31,250) to Direct Supplies (2014) Group Limited, of which Mr Bazini is a director. At the year end the amount due to Direct Supplies (2014) Group Limited was £Nil (2015: £Nil). During 2016, Warpaint Cosmetics (2014) Limited paid consultancy fees in the sum of £150,000 to Outdoor Girl Limited, of which Mr Rodol is a director. During 2016 as part of the restructure the group sold its subsidiary company Warpaint Cosmetics Limited by way of sale and purchase agreement to Johnhenlon Limited, a company which is owned jointly by Mr Bazini and Mr Macleod. This led to the cancellation of the ordinary B shares as noted by the capital reduction in the share capital note. During the year, the Company advanced £15,000 to Mr S Bazini, a director of the company. During the year, the director repaid £93,803. Mr S Bazini incurred expenses on behalf of the company totalling £2,002. At the year end the company owed the sums of £15,779 (2015: £200,015) to Mr S Bazini. During the year, the Company advanced £15,000 to Mr E Macleod, a director of the company. During the year, the director repaid £84,803. Mr E Macleod was reimbursed expenses on behalf of the Company totalling £2,663. At the year end the company owed the sums of £1,140 (2015: £402,952) to Mr E Macleod. Dividends paid to Mr S Bazini prior to the company listing on AIM totalled £600,000 (2015: £976,500). Dividends paid to Mr E Macleod prior to the Company listing on AIM totalled £600,000 (2015: £976,500). 21. Financial instruments Capital risk management The Board has overall responsibility for the determination of the Group’s risk management objectives and policies. The overall objective of the Board is to set policies that seek to reduce risk as far as possible without unduly affecting the Group’s competitiveness and ﬂexibility. The Group reports in Sterling. All funding requirements and ﬁnancial risks are managed based on policies and procedures adopted by the Board of Directors. The Group manages its capital to ensure its ability to continue as a going concern and to maintain an optimal capital structure to reduce cost of capital. The capital structure of the Group comprises equity attributable to equity holders of the Company consisting of invested capital as disclosed in the Statement of Changes in Equity and cash and cash equivalents. The Group’s invested capital is made up of share capital and retained earnings totalling £16,013,479 as at 31 December 2016 (2015: £8,990,992). The Group maintains or adjusts its capital structure through the payment of dividends to shareholders and issue of new shares. 3 46 47 Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2016 21. Financial instruments (continued) Capital risk management (continued) Financial assets Loans and receivables at amortised cost including cash and cash equivalents: Cash and cash equivalents Trade and other receivables Financial liabilities Trade and other payables Bank loan Net Cash and cash equivalents Annual Report 2016 Year ended 31 December 2016 £’000 3,503 2,617 6,120 (2,841) – (2,841) 3,279 2015 £’000 1,758 3,711 5,469 (1,431) (626) (2,057) 3,412 This comprises cash and short-term deposits held by the Group. The carrying amount of these assets approximates their fair value. General risk management principles The Group’s activities expose it to a variety of risks including market risk (interest rate risk), credit risk and liquidity risk. The Group manages these risks through an effective risk management programme and through this programme, the Board seeks to minimise potential adverse effects on the Group’s ﬁnancial performance. The Directors have an overall responsibility for the establishment of the Group’s risk management framework. A formal risk assessment and management framework for assessing, monitoring and managing the strategic, operational and ﬁnancial risks of the Group is in place to ensure appropriate risk management of its operations. The following represent the key ﬁnancial risks that the Group faces: Market risk The Group’s activities expose it to the ﬁnancial risk of interest rates. Interest rate risk The Group’s interest rate exposure arises mainly from its interest-bearing borrowings. Contractual agreements entered into at ﬂoating rates expose the entity to cash ﬂow risk. Interest rate risk also arises on the Group’s cash and cash equivalents. The Group does not enter into derivative transactions in order to hedge against its exposure to interest rate ﬂuctuations. An increase in the rate of interest by 100 basis points would decrease proﬁts by £Nil (2015: £1,000) with an increase in proﬁts by the same amount for a decrease in the rate of interest by 100 basis points. Credit risk Credit risk is the risk of ﬁnancial loss to the Group if a customer or a counterparty to a ﬁnancial instrument fails to meet its contractual obligations. The Group’s principal ﬁnancial assets are trade and other receivables and bank balances and cash. The credit risk on liquid funds is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies. The Group’s credit risk is primarily attributable to trade receivables. The Group has a policy of assessing credit worthiness of potential and existing customers before entering into transactions. There is ongoing credit evaluation on the ﬁnancial condition of accounts receivable using independent ratings where available or by assessment of the customer’s credit quality based on its ﬁnancial position, past experience and other factors. The Group manages the collection of its receivables through its ongoing contact with customers so as to ensure that any potential issues that could result in non- payment of the amounts due are addressed as soon as identiﬁed. The maximum exposure to credit risk in respect of the above is the carrying value of ﬁnancial assets recorded in the ﬁnancial statements. At 31 December 2016, the Group has trade receivables of £2,564,383 (2015: £3,104,231). The following table provides an analysis of trade receivables that were due, but not impaired, at each ﬁnancial year end. The Group believes that the balances are ultimately recoverable based on a review of past impairment history and the current ﬁnancial status of customers. i F n a n c i a l S t a t e m e n t s 3 46 47 Warpaint London PLC Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2016 21. Financial instruments (continued) Credit risk (continued) Current 1 – 30 days 31 – 60 days 61 – 90 days 91 + days Total trade receivables – gross As at 31 December 2016 £’000 1,296 1,084 112 89 93 2,674 2015 £’000 1,012 1,087 406 140 559 3,204 The Directors are unaware of any factors affecting the recoverability of outstanding balances at 31 December 2016 and, consequently, no further provisions have been made for bad and doubtful debts. Liquidity risk Liquidity risk arises from the Group’s management of working capital. It is the risk that the Group will encounter difﬁculty in meeting its ﬁnancial obligations as they fall due. The Group’s policy is to ensure that it will always have sufﬁcient cash to allow it to meet its liabilities when they become due. To achieve this aim, it closely monitors its access to bank and other credit facilities in comparison to its outstanding commitments on a regular basis to ensure that it has sufﬁcient funds to meet the obligations as they fall due. The Board receives regular forecasts which estimate cash ﬂows over the next eighteen months, so that management can ensure that sufﬁcient funding is in place as it is required. The tables below summarise the maturity proﬁle of the combined group’s non-derivative ﬁnancial liabilities at each ﬁnancial year end based on contractual undiscounted payments, including estimated interest payments where applicable: Year ended 31 December 2016 Trade payables Other payables Bank loans Year ended 31 December 2015 Trade payables Other payables Bank loans Foreign exchange risk Less than 6 months £’000 2,537 23 – 2,560 Between 6 months and 1 year £’000 Between 1 and 5 years £’000 – – – – – – – – Less than 6 months Between 6 months and 1 year Between 1 and 5 years £’000 634 284 101 1,019 £’000 – – 100 100 £’000 – – 425 425 Total £’000 2,537 23 – 2,560 Total £’000 634 284 626 1,544 The Group operates in a number of markets across the world and is exposed to foreign exchange risk arising from various currency exposure in respect of cash and cash equivalents, trade receivables and trade payables, in particular with respect to the US dollar. The Group mitigates its foreign exchange risk by negotiating contracts with key suppliers that offer a ﬂexible discount structure to offset any adverse foreign exchange movements and through the use of forward currency contracts. Derivatives designated and effective as hedging instruments carried at fair value: Exchange gain on forward foreign currency contracts 2016 £’000 37 2015 £’000 – 3 48 49 Annual Report 2016 Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2016 21. Financial instruments (continued) Forward contracts and options The Group enters into forward foreign exchange contracts and options to manage the risk associated with anticipated sale and purchase transactions which are denominated in foreign currencies. As at 31 December 2016, the group has 2 (31 December 2015: Nil) forward foreign exchange contracts outstanding. Derivative ﬁnancial instruments are carried at fair value. The following table details the USD foreign currency contracts outstanding as at the balance sheet date. a) Contracted exchange rate £/$ rate 3 months or less 3 to 6 months b) Contract value 3 months or less 3 to 6 months c) Foreign currency 3 months or less 3 to 6 months 2016 1.2411 – 1.266 – 2016 £’000 1,398 – 1,398 2016 £’000 1,750 – 1,750 2015 – – 2015 £’000 – – – 2015 £’000 – – – i F n a n c i a l S t a t e m e n t s Fair value of ﬁnancial assets and liabilities The Directors consider that there is no signiﬁcant difference between the book value and fair value of the Group’s ﬁnancial assets and liabilities. 22. Pension costs The Group operates a deﬁned contribution pension scheme. Contributions payable to the Company’s pension scheme are charged to the statement of comprehensive income in the period to which they relate. The amount charged to proﬁt in each period was £6,228 (2015: £5,746). 23. Operating lease commitments – Group company as lessee The Group leases ofﬁces and warehouses under non-cancellable operating lease agreements. The lease terms are between 5-10 years, and are renewable at the end of the lease period at market rate. The future aggregate minimum lease payments under non-cancellable operating leases are as follows: Land and buildings Not later than 1 year Later than 1 year and not later than 5 years Later than 5 years Total 2016 £’000 360 1,440 1,650 3,450 2015 £’000 – – – – 3 48 49 Warpaint London PLC Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2016 24. Controlling party In the opinion of the Directors there is no ultimate controlling party. 25. Earnings per share Basic earnings per share are calculated by dividing proﬁt or loss attributable to ordinary equity holders by the weighted average number of ordinary shares in issue during the period. The acquisition of Warpaint Cosmetics Group Limited by Warpaint London PLC on 11 November 2016 has been accounted for using merger accounting principles. The effect of using merger accounting principles on share capital is that the capital that existed as at the point Warpaint London PLC legally acquired Warpaint Cosmetics Group Limited is accounted for as if it had been in existence as at the comparative period end (31 December 2015) and as at the opening balance sheet date (1 January 2015). The weighted average number of shares in issue for the current and prior year has therefore been stated to reﬂect the post IPO share capital structure, this adjustment assumes the total shares issued during the IPO were in issue throughout the whole of the current and previous period presented. The weighted average number of shares includes the shares issued as consideration for the acquisition of Treasured Scents (2014) Limited on 11 November 2016. Basic earnings per share (pence) The calculation of basic earnings per share is based on the following data: Earnings Earnings for the purpose of basic earnings per share, being the net proﬁt 2016 5.07 2016 £’000 3,141 2015 7.11 2015 £’000 4,386 Number of shares Weighted number of ordinary shares for the purpose of basic earnings per share 2016 2015 61,981,720 61,722,383 50350 3 51 51 Company Statement of Financial Position for the year ended 31 December 2016 Fixed assets Investments Current assets Trade and other receivables Cash and cash equivalents Total current assets Current liabilities Trade and other payables Corporation tax liability Total current liabilities Net current assets Total assets less current liabilities Capital and reserves Share capital Share premium Capital redemption reserve Retained earnings Shareholders’ funds Annual Report 2016 Note 2 3 4 5 6 2016 £’000 16,340 16,340 3,060 859 3,919 67 – 67 3,852 20,192 16,135 1,806 849 1,402 20,192 i F n a n c i a l S t a t e m e n t s As permitted by section 408 of the Companies Act 2006, the proﬁt and loss account is not presented. The proﬁt for the year amounted to £3,850,780. The ﬁnancial statements on pages 51 to 54 were approved and authorised for issue by the Board of Directors on 9 May 2017 and were signed on its behalf by: Neil Rodol Chief Financial Ofﬁcer 3 350 50 51 51 Warpaint London PLC Company Statement of Changes in Equity for the year ended 31 December 2016 On incorporation Share issue Proﬁt for the year Share capital reduction Dividends paid As at 31 December 2016 Share Capital Share Premium Retained Earnings Total Equity Note 5/6 5 £’000 16,340 644 – (849) – £’000 – 1,806 – – – 16,135 1,806 £’000 – – 3,851 – (1,600) 2,251 £’000 16,340 2,450 3,851 (849) (1,600) 20,192 3 52 53 Annual Report 2016 On 21 November 2016 Warpaint London PLC disposed of the entire share capital in Warpaint Cosmetics Limited through a capital reduction. The Company subsidiaries, as at the period end are shown in note 8 of the consolidated ﬁnancial statements. 3. Debtors Due from group undertakings Other debtors Prepayments and accrued income Notes to the Company Financial Statements for the year ended 31 December 2016 1. Signiﬁcant accounting policies Basis of preparation The Company was incorporated on 4 July 2016, the ﬁrst period of account is therefore the 6 month period ended 31 December 2016. These separate ﬁnancial statements of Warpaint London PLC have been prepared in accordance with applicable United Kingdom accounting standards, including Financial Reporting Standard 102 – The Financial Reporting Standard Applicable in the United Kingdom and Republic of Ireland (FRS 102), and with the Companies Act 2006. The Company’s ﬁnancial statements are presented in GBP. In preparing these ﬁnancial statements the Company has taken advantage of the disclosure exemptions conferred by FRS 102. Therefore, these ﬁnancial statements do not include: • a statement of cash ﬂows; 4. Creditors due within one year • the disclosure of the remuneration of key management personnel; and • disclosure of related party transactions with wholly owned fellow Group companies. Trade payables Accruals and deferred income The ﬁnancial statements have been prepared under the historical cost convention. The principal accounting policies adopted are the same as those set out in note 1 to the consolidated ﬁnancial statements except as set out below. 5. Called up share capital At 31 December 2016 £’000 3,036 16 8 3,060 At 31 December 2016 £’000 47 20 67 At 31 December 2016 £’000 16,135 i F n a n c i a l S t a t e m e n t s Investments Fixed asset investments are stated at cost less provisions for diminution in value. The Company takes advantage of merger relief when recording the cost of the investment. Going Concern Going concern for the Company has been considered along with the Group by the directors. The consideration is set out in note 1 of the consolidated ﬁnancial statements. 2. Investments Cost and net book value At 31 December 2016 £’000 16,340 On 11 November 2016 Warpaint London PLC acquired the entire share capital in Warpaint Cosmetics Group Limited. On the same date, Warpaint London PLC acquired the entire share capital in Treasured Scents (2014) Limited. The transactions were as set out below: On 11 November 2016 Warpaint London PLC acquired the entire share capital in Warpaint Cosmetics Group Limited and Treasured Scents (2014) Limited. On 11 November 2016 Warpaint London PLC and Warpaint Cosmetics Group Limited entered into a sale and purchase agreement whereby the share capital of Warpaint Cosmetics Limited was acquired by Warpaint London PLC for consideration totalling £849,680. 3 52 53 Allotted and issues 64,538,600 ordinary shares of 0.25 pence each At the date of incorporation, 2 ordinary shares of £1 were issued. On 11 November 2016, the Company issued a further 16,339,998 ordinary share of £1 each in exchange for 15,000,100 ordinary shares in Warpaint Cosmetics Group Limited and 1,339,900 ordinary shares in Treasured Scents (2014) Limited. On 15 November 2016, the Company re-designated and subdivided the ordinary shares of £1 in issue into 16,340,000 A ordinary shares of £0.948 each and 16,340,000 B ordinary shares of £0.052 each. On 21 November 2016, the Company undertook a capital reduction pursuant to which 16,340,000 B ordinary shares of £0.052 each held by Sam Bazini and Eoin Macleod were cancelled in consideration for the transfer of the entire issued share capital of Warpaint Cosmetics Limited to a company owned and controlled by Sam Bazini and Eoin Macleod and the allotment and issue by that company to Sam Bazini and Eoin Macleod 16,340,000 B ordinary shares of £0.052. On 24 November 2016, the Company consolidated each A ordinary share of £0.948 each into 1,000 A ordinary shares of £948 each and then subdivided each A ordinary share of £948 each into 3,792 A ordinary shares of £0.25 each. Each A ordinary share of £0.25 each was then re-designated into an ordinary share of £0.25 each. On 30 November 2016 in an initial public offering Warpaint London PLC issued 2,577,320 ordinary £0.25 shares at a price of £0.97, resulting in an increase in share capital of £644,330 and share premium of £1,855,670. All ordinary shares carry equal rights. Warpaint London PLC Notes to the Company Financial Statements (continued) for the year ended 31 December 2016 6. Share premium Share premium At 31 December 2016 £’000 1,806 The share premium reserve contains the premium arising on the issue of equity shares, net of issue expenses incurred by the company. On 30 November 2016 in an initial public offering Warpaint London PLC issued 2,577,320 ordinary £0.25 shares at a price of £0.97, resulting in share premium of £1,855,670 and share issue costs of £50,000. 7. Related party transactions The Company has taken advantage of the disclosure of related party transactions with wholly owned fellow group companies. Related party transactions with key management personnel (including Directors) are shown in note 20 of the Consolidated Financial Statements. 3 54 55 Appendix A Treasured Scents (2014) Limited Unaudited Income Statement for the year ended 31 December 2016 Revenue Cost of sales Gross proﬁt Administrative expenses Proﬁt from operations Analysed as: Proﬁt from operations before exceptional items Exceptional items Finance income Proﬁt before tax Tax expense Total comprehensive proﬁt/(loss) for the ﬁnancial year Annual Report 2016 Year ended 31 December 2016 £’000 5,676 (4,233) 1,443 (969) 474 477 (3) – 474 (105) 369 2015 £’000 5,271 (4,601) 670 (722) (52) (52) – 2 (50) 8 (42) i F n a n c i a l S t a t e m e n t s 3 54 55 56 3Officers and Professional Advisors Directors C Garston S Bazini E Macleod N Rodol K Sadler P Hagon Chairman Joint Chief Executive Ofﬁ cer Joint Chief Executive Ofﬁ cer Chief Financial Ofﬁ cer Non-executive Director Non-executive Director Company Secretary S Craig Registered Ofﬁ ce Units B&C Orbital Forty Six The Ridgeway Trading Estate Iver Buckinghamshire SL0 9HW Company Number 10261717 Nominated Adviser & Broker Auditors Solicitors Registrars Financial PR Stockdale Securities Limited Beaufort House 15 St. Botolph Street London EC3A 7BB BDO LLP 55 Baker Street London W1U 7EU DAC Beachcroft LLP 100 Fetter Lane London EC4A 1BN Neville Registrars Limited Neville House 18 Laurel Lane Halesowen West Midlands B63 3DA IFC Advisory Limited 73 Watling Street London EC4M 9BJ Perivan Financial Print 245182 57 O t h e r I n f o r m a t i o n WARPAINT LONDON PLC Units B&C Orbital Forty Six The Ridgeway Trading Estate Iver Buckinghamshire SL0 9HW

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