Warpaint London PLC Annual Report 2018

Plain-text annual report

Warpaint London P LC Contents Strategic Report 03 Mission Statement 04 Headline Results 06 Chairman’s Statement 08 Chief Executive’s Statement 13 Financial Review 18 Risk Management Governance 21 Board of Directors 23 Corporate Governance Report 28 Audit Committee Report 29 Remuneration Committee Report 32 Directors’ Report 34 Independent Auditor’s Report Financial Statements 37 Consolidation Statement of Comprehensive Income 38 Consolidated Statement of Financial Position 40 Consolidated Statement of Changes in Equity 41 Consolidated Statement of Cash Flows 42 Notes to the Consolidated Financial Statements 67 Company Statement of Financial Position 68 Company Statement of Changes in Equity 69 Notes to the Company Financial Statements Other Information 71 Ofﬁ cers and Professional Advisers 2 Annual Report 2018 S S t t r r a a t t e e g g i i c c R R e e p p o o r r t t Mission Statement “Warpaint’s 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: • Creating innovative, eye catching and desirable packaging • Creating cosmetic products of high quality • Always striving to improve and better our brand and product offers • Being at the cutting edge of trend Our Values • We use the ﬁ nest 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? • To give customers the ability and the ﬂ exibility to style themselves based on who they want to be • To engage customers by interacting with them directly using a variety of media platforms • To make our products easily available to our customers • To empower our customers by seeking their feedback, interaction and views 3 Warpaint London P LC Headline Results Headline results for the year to 31 December 2018 Warpaint London plc (“Warpaint”, the “Company” or the “Group”) is made up of two divisions. The largest division sells own brand cosmetics under the lead brand names of W7 and Technic. W7 is sold in the UK primarily to discount retailers and internationally to local distributors or retail chains. The Technic brand is sold in the UK and the rest of Europe with a signiﬁ cant focus on the gifting market, principally for high street retailers and supermarkets. In addition, this division supplies own brand white label cosmetics produced for several major high street retailers. The Group also sells cosmetics using the smaller own brand names of Man’stuff, Body Collection, Vintage, Outdoor Girl, Very Vegan, Chit Chat, Smooch, Copy Cat and Taxi. The second division trades in close-out and excess stock of branded cosmetics and fragrances from around the world. On 2 August 2018, the Group acquired Marvin Leeds Marketing Services, Inc. (“LMS”) for a consideration of £1.6 million ($2.08 million). LMS sells the Group brands as well as close-out to their existing US customers. In the previous year on 30 November 2017, the Group acquired Retra Holdings Ltd (“Retra”) for £17.8 million. This annual report has been prepared in accordance with IFRS as adopted by the European Union, which requires use of acquisition method for business combinations. The reported ﬁ gures for 2017 only included the results of Retra for one month post acquisition, therefore in order to aid shareholders’ understanding of the underlying performance of the business we have focused our comments on the consolidated statement of comprehensive income for the year ended 31 December 2018 compared with the consolidated statement of comprehensive income for the year ended 31 December 2017, with reference where appropriate to “like for like” numbers which include the Retra business for the whole of 2017. Like for like numbers have not been adjusted for the business of LMS in 2017. LMS was a customer of the Group prior to acquisition and distributed the W7 brand throughout the period 1 January 2017 to 1 August 2018. The business conducted by LMS prior to acquisition is already included in the consolidated statements of comprehensive income for the years ended 31 December 2017 and 31 December 2018. Headline results, shown below, represent the performance comparisons between the consolidated statements of income for the years ended 31 December 2017 and 31 December 2018. The statutory consolidated statement of comprehensive income for the years ended 31 December 2017 and 31 December 2018, include the trade of the existing own brand and close-out businesses for the whole of each year, plus the trade of Retra from the acquisition date of 30 November 2017 only, and the trade of LMS from the date of its acquisition on 2 August 2018 only. 34 Annual Report 2018 S t r a t e g i c R e p o r t Statutory Results Year ended 31 Dec 2018 Year ended 31 Dec 2017 Growth % £48.5m £32.5m £4.9m 10.1% £4.7m 4.7p £6.9m 21.5% £6.9m 8.3p £1.3m £2.0m 49.2 -29.0 -31.9 -43.4 Adjusted Statutory Results 31 Dec 2018 Year ended 31 Dec 2017 Year ended % Growth £48.5m £32.5m £8.3m* £7.7m* 17.1%* 23.7%* £8.2m* £7.7m* 9.1p* 9.6p* £1.3m £2.0m 49.2 7.8 6.5 -4.2 Revenue Proﬁ t from operations Proﬁ t from operations margin PBT EPS Net cash Revenue Adjusted proﬁ t from operations Adjusted proﬁ t from operations margin Adjusted PBT Adjusted EPS Net cash * Adjusted for £0.16 million of LMS acquisition costs, plus £0.10 million of Retra acquisition costs, plus £0.08 million of Retra staff restructuring costs incurred in the year (2017: £0.4 million of Retra acquisition costs) and £2.3 million of amortisation of intangible assets (2017: 0.5 million) and £0.8 million of Retra impairment costs in the year (2017: Nil) Highlights • Revenue increased by 49.2% to £48.5 million (2017: £32.5 million) • Adjusted proﬁ t from operations £8.3 million (2017: £7.7 million) • Adjusted earnings per share 9.1p (2017: 9.6p) • Net cash at the year end of £1.3 million (31 December 2017: £2.0 million) • Cash generated from operating activities £4.3 million (2017: 4.8 million) • Final dividend for the year of 2.9p per share, total dividend for the year of 4.4p per share (2017: 4.0p per share) • Strategic acquisition of US distributor LMS, for US$2.08 million (£1.6 million) on 2 August 2018 • International revenue increased by 59.2% to £25.1 million (2017: £15.8 million) • UK revenue now 48% of total business (2017: 52%) as strategic emphasis on international expansion continues • Close-out revenue increased by 34.3% to £7.6 million (2017: £5.7 million) 5 Warpaint London P LC Chairman’s Statement Clive Garston 2018 was a challenging year for the Company as it faced continuing uncertainty caused by the prospect of Brexit, a ﬂ uctuating Sterling exchange rate and a severe decline in retail sales on the UK high street. During the year Retra was integrated into the enlarged Group and Marvin Leeds Marketing Services, Inc. (“LMS”), our US distributor was acquired. The acquisition of LMS will accelerate our growth into the largest colour cosmetics market in the world and provide the Group with dollar income. A new showroom was opened in Manhattan which is beginning to drive increased sales and US prospects are encouraging. US sales were up 108% compared to 2017. EU sales in 2018 were also ahead with Spain, in particular, trending up. At Retra we have concentrated on introducing all year round product, so that gifting is not so dominant for that business and we expect results for the ﬁ rst half of 2019 to reﬂ ect this. Results Like for like numbers and adjusted numbers will be quoted where appropriate in this annual report in order to give shareholders clarity in understanding the results for the year. Like for like numbers include the trade of Retra for the whole of 2017, as if it had been part of the Group for the whole of that year. Like for like numbers have not been adjusted for the business of LMS in 2017 as it was the exclusive distributor for our W7 brand into the US in that year and therefore the business conducted through LMS is already included in the consolidated statement of comprehensive income for the year ended 31 December 2017. Adjusted numbers exclude acquisition costs, staff restructuring costs, amortisation in relation to acquisitions and impairment costs. Adjusted proﬁ t before tax was £8.2 million (2017 £7.7 million) on revenue of £48.5 million (2017 £32.5 million) with basic earnings per share of 4.7p (2017 8.3p) and adjusted earnings per share of 9.1p (2017 9.6p). Net cash at 31 December 2018 was £1.3 million (31 December 2017 £2.0 million after having paid in the year £1.6 million for LMS, emphasising the Group’s strong cash generation. Sales margin reduced in 2018 and our priorities are to return to previous margins and increase earnings. The main reason for the reduced margin was the increased proportion of Group sales attributed to the close-out division. Sales from the close-out division are at a lower margin historically than of our own brands. The UK is Warpaint’s largest market and accounted for 48% of Group sales in 2018. Sales in the closeout division were 34% ahead of 2017, and Group sales outside of the UK were ahead of 2017 by 8% on a like for like basis. Dividend In accordance with the Group’s progressive dividend policy, the board is pleased to recommend a ﬁ nal dividend of 2.9p per share (2017 2.6p) which, if approved by shareholders at the AGM, will be paid on the 1 July 2019 to shareholders on the register at 14 June 2019. The shares will go ex-dividend on the 13 June 2019. Board and People I would like to thank my fellow board members and all the Group’s employees for their dedication and commitment throughout the year. Notwithstanding the challenges in 2018, Warpaint remains a progressive, energetic and dynamic company and this is driven by the commitment of its employees. Sally Craig joined the board as General Counsel & Company Secretary on 17 September 2018. Sally has been Warpaint’s Company Secretary since February 2017. She is a solicitor, has previously practised as a corporate lawyer and has many years’ experience providing company secretarial services to public and private companies in the UK. This appointment provides additional skills and experience to the board. Nowhere is the culture of Warpaint demonstrated more than by the dedication and ambition of the executive directors and senior management. They are determined to drive Warpaint forward. The non- executive directors, Keith Sadler and Paul Hagon make a very meaningful contribution to the board and I regard it as a privilege and pleasure to work alongside them all. As outlined in my statement last year a LTIP has been introduced to incentivise senior employees. Annual General Meeting The annual general meeting will be held on 21 May 2019 at 11am at the ofﬁ ces of DAC Beachcroft LLP, 25 Walbrook, London EC4N 8AF. I look forward to meeting all shareholders who are able to attend. 36 Annual Report 2018 S t r a t e g i c R e p o r t The Group has a sound ﬁ nancial footing with a strategy for growth across all our markets. The board is cautiously optimistic for the 2019 ﬁ nancial outturn, with growth in sales and EBITDA anticipated. Clive Garston Chairman 10 April 2019 Outlook Despite the challenges of 2018 I believe the Company is well placed for the future. Whilst trading conditions remain difﬁ cult in the UK, we have had a promising start to the current ﬁ nancial year. We continue to grow internationally and expect our sales outside the UK to be an ever greater proportion of Group sales going forward. In particular, I am encouraged by the sales of the Retra brands, which are growing strongly compared to 2018 and, our growth in the US. As with all International businesses results for 2019 may be impacted by prevailing exchange rates. 7 Warpaint London P LC Joint Chief Executive s’ Statement Sam Bazini Eoin Macleod 2018 was a challenging year for Warpaint nevertheless, at the same time the business has shown resilience and adapted to the changing market conditions, managing to increase international sales by 8% on a like for like basis. Our strategy of producing a wide range of high quality cosmetics at an affordable price has remained our key focus and we are very pleased with the reaction that our expanding product range received during the year. With the acquisition of Retra in November 2017 now fully integrated into the Group, sales of own brand colour cosmetics accounted for 79% of revenue (2017: 82% on a like for like basis), the small drop in overall percentage is because of the increase in close-out opportunities bought and sold in 2018. The own brand cosmetics business remains the primary strategic focus of the Group. The Group’s lead brand remains W7 with sales in 2018 being 48% of total revenue (2017: 51% on a like for like basis). In the UK, revenue of W7 was down 24% due to the tough trading conditions in the high street as footfall continues to decline and certain retailers struggle to survive in their present form. We believe the consumer is behaving (possibly because of Brexit fatigue) as if the UK economy is in recession, despite real wage growth and high employment levels. This is affecting spending patterns, shopping behaviour and consumer attitude. In our opinion the UK high street was also impacted in 2018 by the cold winter with snow in February and the record hot summer. We have implemented a strategy in the UK which we believe will increase sales of the W7 brand in the medium term. Whilst the UK was challenging, the W7 brand continued to grow in Europe up 15% and the US up 67%, in the Rest of the World if we adjust for the timing of a large order to Australia in December 2017, sales were ﬂ at year on year. The Retra business has a large proportion of gifting within its sales mix, in 2018 this was 53% of Retra sales (2017: 54%). UK high street conditions meant that some retailers reduced forecasts and orders for Christmas gifting and as a consequence sales were down in the year at £9.4 million, compared to £10.1 million in 2017. We have taken steps to improve the sales of the all year round cosmetics sold under the Retra brands, and have already seen an improvement in the start of 2019. The close-out division represented 16% of the overall revenue of the Group (2017: 11% on a like for like basis). Whilst not a core focus for the Group, this side of the business provides a signiﬁ cant source of intelligence in the colour cosmetics market and access to new market trends. Although close-out is less signiﬁ cant for the Group’s strategy, it has had a very good year with sales ahead of 2017 by 34% to £7.6 million. There are more close-out opportunities available due to the current retail climate in the UK and from contacts acquired in the US after purchasing LMS. We announced, on 23 April 2018, that Warpaint had been awarded the Queen’s Award for Enterprise – International Trade. This is a very prestigious award of which we are very proud and is testament to the efforts we have made in recent years on international expansion. We intend to continue to drive export sales to new and existing markets and develop our increased portfolio of brands. We continue to use manufacturing partners in China and Europe for our own brand business giving us the ﬂ exibility to choose those manufacturers we feel produce the best product for the best price, and meet our legal and ethical compliance requirements. Helping in this process is the Hong Kong based subsidiary sourcing ofﬁ ce (acquired as part of the Retra transaction) and its locally based China subsidiary (Jinhua Badgequo Cosmetics Trading Company Ltd) with local employees able to explore new factories and oversee quality control and ethical sourcing from new factories. The China company has started to conduct sales locally in China and Hong Kong with sales for the year of £0.3 million (2017: £0.2 million). The W7 brand is supported by an informed customer base, driven by the success of beauty blogs, celebrity endorsement and social media. We have applied the same approach during the year to the Retra brands with Technic and Man’stuff now having their own bespoke e-commerce sites. A similar marketing strategy has been deployed for our US e-commerce site launched during 2018, with sales made in local currency and with local fulﬁ lment in place. Acquisition of Marvin Leeds Marketing Services, Inc. (“LMS”) On 2 August 2018 the Group acquired its US distributor, LMS, for US$2.08 million in cash (£1.6 million). Prior to the date of acquisition two thirds of LMS revenue was from distributing W7 products, the remainder being the sale of other branded cosmetics through its close-out activities. LMS sells W7 to retail groups in the US and Canada including TJ Maxx and Winners, and has recently opened new accounts for the 38 Annual Report 2018 S t r a t e g i c R e p o r t W7 brand with Century 21, Forever 21 and Macys Backstage. The US is the largest colour cosmetics market in the world and developing sales into the region is a strategic goal for the growth of our brands. We have relocated the sales ofﬁ ce of LMS to the heart of Manhattan, New York, with a showroom displaying all the Group brands and situated in a building where other health and beauty businesses are located. This will be more convenient for buyers and should help increase sales. We have made an encouraging start in the ﬁ rst quarter of 2019 with sales year on year made by LMS up 36% and, in particular for the W7 brand, up 38%. Strategy In early 2018 the board adopted a three year strategic plan for the business, which is measured, monitored and reviewed regularly. The plan is designed to drive shareholder value and has deﬁ ned targets for sales, EBITDA, earnings per share, cash and share price. Recently the strategic plan has been amended by the board and includes six revised key strategic priorities. Understanding and following the six key strategic priorities will help deliver the expected growth in the business: 1. Continue to develop and build our brands We continue to build our major brands, by utilising brand ambassadors, bloggers and vloggers to engage with our target audience. Much of this is done through social media campaigns to educate and interact with our loyal brand users. Other brands will continue to be used for customer bespoke orders and we are actively seeking sales partnerships with high street retailers. The bestselling lines in each range and brand have been identiﬁ ed to be launched in trial programmes in new retail outlets with the goal of delivering increased presence in the high street and grow market share. 2. Provide New Product Development (“NPD”) that meets consumers changing needs and tastes A key focus of the business and NPD team is to supply our customers with a wide range of affordable, high quality cosmetics. The NPD team is made aware of our required margin and minimum sales revenue per item before development begins, but affordability and quality remain important drivers in the development process. While most of our brand ranges include core colour cosmetic items, we add on trend items and colourways developed by our growing NPD team, especially in our all year round ranges of our lead brands, W7 and Technic. This on trend and quick to market model is something our customers demand and expect from us. Our Body Collection brand is being developed further to cater for the growing mature female cosmetics market, the Man’stuff brand allows us the opportunity to develop a growing male grooming market and our Very Vegan range continues to grow as a vegan lifestyle or product choice becomes more prevalent. With our lead brands we are exploring opportunities into new sales channels and product categories e.g. tattoos, body scented sprays, and health and beauty accessories. 3. Grow Market Share in the UK Following the Retra acquisition, we have started developing the combined customer base of the enlarged business to sell all brands to all customers in the UK and overseas. Over 75% of the UK market remains unexploited by us, in particular pharmacy chains and several high street multiples and grocers. Expanding the UK customer base is a focus of management and plans are in place to gain market share. 4. Grow Market Share in the US and China The US strategic goal is underway with the acquisition of LMS; this locally based resource together with the US e-commerce site will enable a more rapid expansion in the US. A more detailed sales and marketing plan for growth in the US is currently in development, including the use of a locally based digital PR agency. In China, we are conducting business locally through our China subsidiary company. Sales are made to our exclusive distributor after individual products are registered with the authorities in China. The distributor is overseeing local promotional and social media based marketing campaigns. We participate in and contribute to marketing activity and provide online content to support our brands through the distributor. We are continuing to register products for sale in China in order to grow our total offering and increase sales. 5. Develop an online / e-commerce strategy for online brand development and sales Of W7’s target customers, 45% are buying colour cosmetics online. We are currently considering a differentiated own brand offering which will be available exclusively online. 6. Develop the appropriate Organisational Structure and People Plan Our roles have been further deﬁ ned to avoid overlap of time and effort as the business continues to grow. We continue to review the structures, resources and capabilities in the business with the objective of delivering the three year strategic plan, and communicate the plan throughout the Group to key staff. 9 Warpaint London P LC Joint Chief Executive s’ Statement (continued) Brands During 2018 Warpaint continued to focus on the development of its own brands. Our Very Vegan range launched in 2017 has continued to sell well with revenue of £0.5 million in 2018 (2017: £0.3million). For 2018, this range included 22 Stock Keeping Units (“SKUs”) and for 2019 we are adding 8 SKUs as we continue to build the range and provide greater variety for the consumer. We are also updating and modernising the packaging to be more eco-friendly. Outdoor Girl now has 22 SKUs in its range and there are 50 new SKUs planned for 2019 of which 35 are an assortment of nail varnish colours, plus further eye and lip products. Sales of Outdoor Girl were £0.2 million in the year (2017: £0.2 million). We believe there is an opportunity in the value sector in the US for a larger range of Outdoor Girl given that the pricing at retail is less than the lead brand W7. The W7 range has now grown to 1115 live SKUs (2017: 762). The increase is partly from additional new ranges i.e. face masks, and from providing existing product as carded single item SKUs (ideal for selling through certain grocery and multiple retailers). Products W7’s largest selling product categories are eye products, face makeup and lip products, which together represented 80% of the W7 brand revenue in 2018. For the Retra portfolio of brands the largest selling product categories are gift sets, face makeup and eye products which together represented 76% of Retra business sales in 2018. The 12 months to 31 December 2018 product sales split for Group own brands is shown below: 2018 Group Own Brand Sales by Product Make Up Brushes 3% Eye Products 31% Accessories & Sets 4% Others 4% Man'stuff 4% Nail Products 5% Lip Products 7% Gifting 20% Warpaint also own the brands Smooch, Copy Cat and Taxi which are used occasionally for bespoke one off orders. Face Make Up 22% The total SKU count for all the Retra brands (Technic, Body Collection, Man’stuff, Vintage and Chit Chat) was 762 live SKUs (2017: 672). Retra has a wide gifting range and this is redeveloped and redesigned each year. There were 151 SKUs in the gifting range for 2018. Group own brand sales W7 brand Technic brand Other own brands 2018 59% 27% 14% 100% 2017 (like for like) 61% 26% 13% 100% Customers & Geographies In 2018 our top ten customers represented 49% of revenues (2017: 55%). Group sales are now made in 67 countries (2017: 62 countries). US We have continued to see growth in the US through our now acquired distributor LMS. Group sales for all our brands and close-out sold into the US were up in the year, increasing 102% compared to 2017 (in local currency the increase was 99%, the difference being due to exchange rates). Sales of W7 into the US were up 67% in the year compared to 2017. Current customers include Century 21, Forever 21, Macys Backstage and TJ Maxx. Europe Group sales in Europe increased by 111% compared to 2017. On a like for like basis including sales made by Retra for the whole of 2017 sales increased in Europe by 10%. This increase was predominantly for our lead brand W7 which was 15% up in the year, with signiﬁ cant growth in Spain and Scandinavia. 310 Annual Report 2018 Rest of the World Sales in our Rest of the World region for the Group are down by 41% in the year compared to 2017. This was due to the timing of a large order supplied to our Australian distributor for W7 late in 2017, if we adjust for this order sales were ﬂ at year on year across the Group. We expect sales to the Rest of the World region to improve in 2019. UK Trading conditions in the UK remain challenging because of the UK high street slow down and ongoing Brexit anxiety. Group sales in the UK were down by 13% in the year on a like for like basis compared to 2017. The W7 brand was down in the UK by 24%, and Retra brands collectively were down 9% in the UK on a like for like basis. Key Country’s where Group own brands are sold Country’s where Group own brands are not yet sold S t r a t e g i c R e p o r t 11 Warpaint London P LC Joint Chief Executive s’ Statement (continued) The 12 months to 31 December 2018 and 31 December 2017 regional sales split for Group total sales is shown below: Group Sales by Region 2018 Group Sales by Region 2017 RoW/AUS/NZ 6% USA 11% EU 35% UK 48% RoW/AUS/NZ 16% USA 8% EU 24% UK 52% Summary We are extremely grateful to our employees for their continued loyalty, commitment and hard work during 2018, a year that has seen yet another big change for Warpaint following the acquisition of Retra at the end of 2017, and as we welcomed the LMS team into our enlarged Group. Sam Bazini & Eoin Macleod Joint Chief Executive Ofﬁ cers 10 April 2019 312312 Annual Report 2018 S t r a t e g i c R e p o r t Financial Review Neil Rodol Our KPIs of revenue and adjusted proﬁ t before tax improved in the year by 49% and 7% respectively (on a like for like basis including the Retra business for the whole of 2017 revenue fell 3%). We remain focused on margin, being net debt free, generating cash and delivering a progressive dividend policy. In order to aid shareholders’ understanding of the underlying performance of the business we have focused our comments on the consolidated statement of comprehensive income for the year ended 31 December 2018 compared with the consolidated statement of comprehensive income for the year ended 31 December 2017, with reference where appropriate to “like for like” numbers which include the Retra business for the whole of 2017. Like for like numbers include the trade of Retra for the whole of 2017 as if it had been part of the Group for the whole of that year. Like for like numbers have not been adjusted for the business of LMS in 2017. LMS was a customer of the Group prior to acquisition and distributed the W7 brand throughout the period 1 January 2017 to 1 August 2018. The business conducted by LMS prior to acquisition is already included in the consolidated statements of comprehensive income for the years ended 31 December 2017 and 31 December 2018. Headline results, shown below, represent the performance comparisons between the consolidated statements of income for the years ended 31 December 2017 and 31 December 2018. KPIs 2014 2015 2016 2017 2018 Revenue (£m) 2018: £48.5 million + 49% Adjusted proﬁ t before tax* (£m) 2018: £8.2 million +7% 17.0 22.3 27.0 32.5 48.5 2014 2015 2016 2017 2018 4.1 5.4 0 10 20 30 40 50 60 0 2 4 6 6.8 7.7 8.2 8 10 *Adjusted for £0.16 million of LMS acquisition costs, plus £0.10 million of Retra acquisition costs, plus £0.08 million of Retra staff restructuring costs incurred in the year (2017: £0.4 million of Retra acquisition costs) and £2.3 million of amortisation of intangible assets (2017: 0.5 million) and £0.8 million of Retra impairment costs in the year (2017: Nil) 13 13 Warpaint London P LC Financial Review (continued) Acquisitions On 2 August 2018, the Group acquired its US distributor LMS. In the year to 31 December 2017 LMS had revenue of US$5.9 million and proﬁ t before tax (adjusted for non-recurring costs after completion of the acquisition) of approximately US$0.4 million. Net Assets, adjusted for a capital reorganisation on completion of the acquisition, as at 31 December 2017, were US$1.1 million. The ﬁ nal consideration paid in cash was $2.08 million (£1.6 million) after applying a net assets adjustment to the purchase price. The ﬁ nal net assets position acquired was $0.6 million. The US is the largest colour cosmetics market in the world and developing sales into the region with the help of LMS is a strategic goal for the growth of the business. (see note 8). Revenue Group revenue for the year grew by 49.2% from £32.5 million in 2017 to £48.5 million in 2018. Like for like revenue fell by 3.2% from £50.1 million in 2017 to £48.5 million in 2018. Like for like revenue for 2017 includes £17.6 million from the Retra business being the sales made from 1 January 2017 to 30 November 2017, prior to its acquisition. Internationally, like for like revenue grew 8.0% from £23.2 million in 2017, to £25.1 million in 2018. Our international growth strategy remains on track and in 2018 we received the Queen’s Award for Enterprise – International Trade as testament to this. Strategy for growth includes continuing to develop and build our brands, provide new product development that meets consumers changing needs and tastes, to grow market share in the UK, US and China, develop an online strategy for brand development and sales and, to put in place appropriate organisational structure and people in the business. A detailed commentary on our sales growth strategy and trading performance is included in the CEO’s report. The sales of W7 branded product fell by 9.3% from £25.5 million in 2017 to £23.2 million in 2018. The decline in sales was partly due to the UK where the market remains challenging, but also the timing of a large order for Australia received at the back end of 2017 which was not repeated in 2018. However, in the US and Europe there were signiﬁ cant increases for the W7 brand, with sales ahead by 66.5% and 14.8% respectively. The own brands acquired with Retra in November 2017 contributed sales of £14.9 million in the year, this was down 3.5% on a like for like basis on 2017. Retra in particular, because of their high proportion of Christmas gifting, suffered from reduced uptake against original forecasts and orders from some UK high street retailers, with sales in the UK down 8.7% on a like for like basis. The white label business of Retra was also down in the year 19.9% to £2.7 million on a like for like basis. The white label business is traditionally cost competitive and Retra choose which projects to embark on based on commercial viability, in particular margin. In 2018 it was decided not to tender for certain projects when the margin went below the minimum requirement. Retra business to Europe is the only other region of signiﬁ cant sales and this was down 12.9% on a like for like basis and most of this decline was from the lower white label business. The issue in the UK high street is demonstrated when we look at Christmas gifting across the Group which is signiﬁ cant and mostly delivered to UK customers. Sales for Christmas gifting in the year were £11.0 million compared to £12.8 million in 2017 on a like for like basis. At the half year, we reported a growing order book totalling £8.2 million, compared to £7.2 million at 30 June 2017 on a like for like basis. The expected uplift, experienced in prior years from UK customers on the initial half year order book, did not materialise. The close-out business revenue grew by 34.3% from £5.7 million in 2017 to £7.6 million in 2018. Product Gross Margin Gross margin for the Group decreased by 3.3% from 38.8% to 35.5%. The main reason for the reduced margin was our margin mix across the Group. Sales from the close-out division are at a lower margin historically than our own brands, and close-out sales at a lower margin were a greater proportion of total sales than we expected for the year. In addition, the lower margin sales from Retra brands in particular gifting were not included in 2017 until the date of acquisition on the 30 November 2017. Sales at LMS since acquisition were also below the W7 margin as this business changed from being a distributor on commission only basis. We are not experiencing cost pressure on our manufactured pricing and making good use of our Hong Kong buying ofﬁ ce to ensure this continues. Currency pressure due to Brexit is mitigated with a discount mechanism linked to the US dollar exchange rate from our key supplier in China, by moving production 314 Annual Report 2018 S t r a t e g i c R e p o r t to new factories of equal quality to retain or improve margin, and from US dollar revenue which continues to provide a natural hedge. We remain focused on improving gross margin in both our own brand and close-out businesses and now in the enlarged Group including Retra and LMS. W7 margin excluding sales made by LMS after acquisition was down 0.9% to 39.6% for the year, this was the effect of currency translations in the year with the gain on currency shown in overheads. The Retra margin for the year decreased 0.6% on a like for like basis to 34.7%. Currency, whilst a concern for Retra, is built into the costing margin at the start of the year when selling in advance to customers especially for the gift offering, with any dollar or euro exposure covered at the time of receiving orders. The reason for the fall in margin is the adoption of the Group stock ageing policy in the year, which addressed some small value older stock SKUs that needed selling off or providing against in the year and sales commissions payable for the ﬁ rst time from using the integrated sales network of the Group. Gross margin for LMS was low at 3.2% on sales of £2.4 million. Up to the date of acquisition this business earned commission on W7 sales, and Warpaint would sell stock to its US distributor at full margin, effectively the price charged to the customers in the US. Since the acquisition, commission is not charged back to Warpaint, so the majority of sales made by LMS of its stock holding on hand at the date of acquisition were sold through at little to no margin. As the initial stock holding is sold through, margin will recover to similar levels to the rest of the Group and we have seen this happen as 2019 starts. Close-out margin improved 4.3% to 35.4% for the year, much of this gain was from buying several large parcels in the year where the opportunity, margin and capital commitment were attractive. Operating Expenses Total operating expenses before exceptional items, amortisation and impairment costs, depreciation, foreign exchange movements and share based payments increased by £4.0 million to £8.6 million in the year. This increase was from the addition of Retra operating expenses for the full year (£3.8 million) and for the ﬁ rst time LMS, from the date of acquisition (£0.2 million). The most signiﬁ cant costs in the Group are wages and salaries of £5.0 million, rent and rates of £1.1 million and PR and marketing for our brands of £0.6 million. In 2017 on a like for like basis these costs were, £4.8 million, £1.0 million and £0.7 million respectively. The increase in wages is inﬂ ationary plus the cost of auto enrolment across the Group, the increase in rent and rates is in our Retra business which leased an extra warehouse facility rather than using third party logistics to fulﬁ l orders, and the decrease in PR and marketing is a function of not having a long term brand ambassador on contract for the W7 brand and instead using ad hoc PR activity across a broader range of celebrity inﬂ uencers. Warpaint remains a business with most operating expenses relatively ﬁ xed and evenly spread across the whole year. We continue to monitor and examine signiﬁ cant costs to ensure they are controlled and strive to reduce them. In addition, the increased scale of the business has given the Group increased buying power. Profit Before Tax and Exceptional Items Group proﬁ t before tax was £4.7 million compared to £6.9 million in 2017, a fall of 32%. Adding back amortisation of intangibles, impairment charges, depreciation charges, exceptional items and ﬁ nance costs would adjust proﬁ t before tax to £8.8 million in 2018, compared to £7.9 million for 2017 on the same basis, an increase of 11%. The increase in proﬁ t before tax for 2018 is due to the proﬁ ts included for the full year for the ﬁ rst time from the Retra business. Exceptional Items Exceptional costs in 2018 included £0.16 million of acquisition costs as they were one off legal and professional fees incurred in acquiring LMS on 2 August 2018, plus £0.10 million of professional fees relating to the acquisition of Retra in 2017, plus £0.08 million of staff restructuring costs at Retra (2017: £0.40 million of acquisition costs as they were legal and professional fees and commissions incurred in acquiring Retra on 30 November 2017. Total acquisition costs were £1.2 million of which £0.8 million related to the issue of new shares to fund the purchase of Retra and these were charged against the share premium account). Tax The tax rate for the Group for 2018 was 24.5% compared to the UK corporation tax standard rate of 19.0% for the year. Some of the costs of the acquisition of Retra and LMS have been disallowed for tax purposes, as have the impairment charge for Retra this year which has 15 Warpaint London P LC Financial Review (continued) increased the effective tax rate. Since the acquisition of LMS, the Group is exposed to tax in the US at an effective rate of approximately 25% and in other jurisdictions the Group operates cost centres, but these are not materially exposed to changes in tax rates. We would expect the tax rate on adjusted proﬁ ts to be approximately 19% in 2019 and falling in line with the UK Government measures to reduce corporation tax to 17% by 2020. Earnings Per Share The statutory basic earnings per share was 4.66p in 2018, a decrease of 44.1% on the 8.34p achieved in 2017. Adjusted earnings per share before exceptional items, amortisation costs and impairment charges was 9.1p in 2018, a decrease of 5.2% on the 9.6p achieved in 2017. Dividends The board is recommending a ﬁ nal dividend for 2018 of 2.9 pence per share, making a total dividend of 4.4 pence per share of which 1.5 pence per share was paid on 16 November 2018 (2017: Total dividend of 4.0 pence per share, of which the interim dividend was 1.4 pence per share and the ﬁ nal dividend was 2.6 pence per share). The dividend for the year is covered 2.1 times by adjusted earnings per share. Long Term Incentive Plan (“LTIP”) & EMI Share Options On 24 September 2018, the Company announced the implementation of a new LTIP with initial grants to six senior team members including Sam Bazini and Eoin Macleod, the Joint Chief Executive Ofﬁ cers, and Neil Rodol, the Chief Financial Ofﬁ cer. The LTIP has been established to incentivise management to increase shareholder value over the long term. Share options were granted with an exercise price of 254.5p, equal to the closing mid-market value immediately prior to the date of grant, and subject to the achievement of demanding Earnings Per Share and Total Shareholder Return performance conditions measured over a period of up to 5 years. The entire award represents 5.0% of the current issued share capital of the Company. On 29 June 2017 EMI share options were granted over 277,788 ordinary shares of 25p each in the Company under the Warpaint London PLC Enterprise Management Incentive Scheme. The options provide the right to acquire 277,788 ordinary shares at an exercise price of 237.5p per ordinary share. The LTIP and EMI share options had no dilutive impact on earnings per share in the period. The share-based payment charge of the LTIP and EMI share options for the year was £0.12 million (2017: £0.05 million) and has been taken to the share option reserve. (see Note 21). Cash Flow and Cash Position Net cash ﬂ ow generated from operating activities was £4.3 million (2017: £4.8 million), after payment of the £0.3 million (2017: £0.4 million) exceptional items previously referred to. The Group’s cash balance increased by £0.6 million to £4.0 million in 2018 (2017: £3.4 million). The cash generated was principally used to make dividend payments in the year, and to pay from cash the consideration for the acquisition of LMS. Capital expenditure requirements of the Group remain modest and we expect it to continue to be so. In 2018 £0.39 million (2017: £0.56 million) was spent on display stands for use in store by customers, on refurbishment works necessary as a one off cost in the new leased warehouse for Retra and general ﬁ xtures and plant upgrades. Balance Sheet Management are continually monitoring trade receivables and stock levels to avoid working capital lock up as the business continues to grow. Trade receivables are monitored by management to ensure collection is made to terms, to reduce the risk of bad debt and to control debtor days. At the year end trade receivables were £11.1 million (2017: £12.1 million), the decrease on 2017 is mainly due to the timing at the back end of 2017 of a large order for one customer in Australia that has not repeated at the same time in 2018. In 2018 there was a bad and doubtful debt credit of 316 Annual Report 2018 S t r a t e g i c R e p o r t Foreign Exchange The Group imports the majority of its ﬁ nished goods from China paid for in US dollars, which this year weakened on average against Sterling by 4% compared to 2017 ($1.341 v $1.289). Although Sterling has recovered a little in 2018 this is the second year following the Brexit referendum of a strong dollar. The Group has a natural hedge from sales to the US which are entirely in US dollars, in 2018 these sales were higher at $6.3 million (2017: $3.2 million). Together with the discount mechanism from our main supplier in China, sourcing product from new factories where it makes commercial sense to do so and by buying dollars when rates are favourable, we have been able to mitigate the effect of the strong US dollar against Sterling. Neil Rodol Chief Financial Ofﬁ cer 10 April 2019 £0.008 million because of the collection of debts previously provided for in 2017 (2017: £0.052 million). The provision at the year end for bad and doubtful debts carried forward is £0.11 million, 1.0% of gross trade receivables (2017: £0.17 million, 1.4%). Stock was higher at the year end at £15.5 million (2017: £11.6 million), this increase was due to the increase in range offering across the Group and the acquisition of LMS who hold stock of our brands locally in the US. The provision for old and slow stock was £0.11 million, 0.7% at the year end (2017: £0.11 million, 1.0%). The reduction in provision percentage reﬂ ects the close attention of management in dealing with slower stock items as they occur and on stock purchase order levels that are reasoned. Whilst provisioning for older and slow stock is prudent, the reality is that any such items are generally sold through our close-out division without a loss to the business. On acquiring Retra in 2017 the Group took on their debt of £8.7 million being £7.6 million of invoice and trade ﬁ nance facilities, term loans of £0.3 million and HP contracts of £0.8 million. At 31 December 2017, after repaying some of these amounts through cash ﬂ ow, £1.4 million of debt remained outstanding of which £1.1 million related to term loans and HP contracts. In 2018 a further £0.3 million of the term loans and HP contracts has been repaid leaving £0.8 million outstanding at the year end. The remaining loans and HP contracts are being repaid to terms in order to avoid unnecessary early settlement charges. At the year end £1.9 million of invoice ﬁ nance remained outstanding and was repaid in full February 2019. Working capital increased by £3.6 million in the year (2017: £11.3 million) with the main components an increase in stock of £3.8 million, a decrease in trade and other receivables of £0.9 million, and an increase in cash at the year end of £0.7 million. Free cash ﬂ ow remained strong at £3.9 million (2017: £4.2 million). The Group’s balance sheet remains in a very healthy position being net debt free. Net assets totaled £41.0 million at 31 December 2018, an increase of £0.6 million from 2017. The impairment charge of £0.8 million on the Retra acquisition for the year has impacted retained proﬁ ts leaving a smaller than expected surplus after payment of dividends, it is expected that the impairment is a one off charge and that the balance sheet will continue to grow from retained proﬁ ts ongoing. The majority of the balance sheet is made up of liquid assets of stock, trade receivables and cash. Included in the balance sheet is £7.1 million of goodwill (2017: £7.5 million) and £9.5 million of intangible ﬁ xed assets (2017: £10.7 million) arising from acquisition accounting. 17 Warpaint London P LC Risk Management Warpaint London is exposed to a variety of risks that can have ﬁ nancial, 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. 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. 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 proﬁ tability. Reliance on Key Suppliers In 2018 one key supplier from China was responsible for approximately 24% (2017: 44%) of the Group’s own brand ranges 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 ﬁ nancial position, results of operations and future prospects. Product Liability All products are manufactured in facilities approved by relevant authorities. The Directors have every colour cosmetic item independently checked by a qualiﬁ ed chemist for compliance with EU legislation and maintain adequate product and public liability insurance so as to ensure that any claims have little impact on the Group’s proﬁ tability. Significant Customers The Group has one customer in Spain with over 90 stores. In 2018 this customer represented 9.7% (2017: 5.4%) of own brand and close-out revenues, we currently have an excellent working relationship with this customer. Signiﬁ cant goodwill in our own brands has been built up by this customer. The Directors believe that, should the customer decide not to sell our brands, a large amount (if not all) of the existing business will be taken up by other retailers in Spain. Location The Group, half of its operations and assets are at one location in Iver, with the other half based in Silsden; if a ﬁ re were to befall either of the premises occupied by the Group, half of its assets might be destroyed or damaged and – although the Group has insurance cover in place – the Group’s business, ﬁ nancial results and prospects might be negatively affected by such an event. Brexit The UK Brexit referendum decision to leave the EU has led to a period of economic and political uncertainty, which is likely to continue until the exit process has concluded and possibly thereafter. Brexit may continue to dampen consumer demand and impact Group customers on the UK High Street. The Group is closely watching developments in the Brexit process and adapting its strategy as the effect of Brexit becomes clearer. Cyber Attacks There is an increasing risk that cybercrime will cause business interruption, loss of key systems, loss of online sales, theft of data or damage to reputation. The Group regularly review and invest in the development and maintenance of our IT infrastructure, systems and security. We have in place disaster recovery and business continuity plans that are tested annually. This Strategic Report was approved by the board on 10 April 2019 and signed on its behalf. Neil Rodol Chief Financial Ofﬁ cer 10 April 2019 318 Annual Report 2018 S t r a t e g i c R e p o r t 19 Warpaint London P LC Members of the Board From left to right: Paul Hagon, Neil Rodol, Clive Garston, Sam Bazini, Sally Craig, Eoin Macleod and Keith Sadler 320 Annual Report 2018 Board of Directors Clive Garston (73), Non-Executive Chairman (Insider Committee (Chair), Remuneration Committee, Audit Committee) Clive has been Non-Executive Chairman of the Group since November 2016. He has been a corporate lawyer for over 40 years specialising in corporate ﬁ nance 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 signiﬁ cant 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 ﬁ nance forum. Sam Bazini (56), Joint Chief Executive Ofﬁ cer (Insider Committee) 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. Together with Eoin Macleod, Sam developed the business which resulted in the formation of W7. G o v e r n a n c e Eoin Macleod (56), Joint Chief Executive Ofﬁ cer Eoin’s ﬁ rst 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. Together with Sam Bazini, Eoin developed the business which resulted in the formation of W7. Neil Rodol (56), Chief Financial Ofﬁ cer (Insider Committee) Neil joined the Group in August 2015, having previously been an adviser to the business for several years. He has overseen the introduction of new systems and procedures. He joined the board as Chief Financial Ofﬁ cer in November 2016. 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. Sally Craig (58), Group Counsel & Company Secretary Sally has been Company Secretary to Warpaint London plc since February 2017 and was appointed to the board in September 2018. She is a solicitor and has previously practised as a corporate lawyer. She has many years’ experience providing company secretarial services to private and public companies in the UK including then AIM listed, Osmetech plc. She holds an honours degree in law from Manchester Metropolitan University. 21 Warpaint London P LC Board of Directors (continued) Paul Hagon (55), Non-Executive Director (Remuneration Committee (Chair), Audit Committee) Paul joined the Group as a Non-Executive Director in November 2016. Having worked in the Grocery Sector for over 30 years in both wholesaling and major branded suppliers, Paul is currently providing consultancy services for a number of retail, manufacturing and wholesale businesses to assist with strategies, change programmes and the implementation of practical business plans. Prior to this, Paul has worked in selling, marketing and business management roles with Nestle and more recently, Palmer and Harvey, where his latter role was as Group Strategy and Development Director. Paul has also served as Chairman of the Association of Convenience Stores for whom he had also been a board Member for 20 years. Keith Sadler (60), Non-Executive Director (Audit Committee (Chair), Remuneration Committee) Keith joined the Group as a Non-Executive Director in November 2016. 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 formerly chief ﬁ nancial ofﬁ cer of A Spokesman Said Limited, a radio station operating under the name Love Sport and an online price comparison site and, until December 2014, chief ﬁ nancial ofﬁ cer of Dods Group PLC, a political communications business, and formerly chief operations ofﬁ cer and group ﬁ nance director of WEARE 2020 plc. Prior to this he was chief executive and group ﬁ nance director of SPG Media Group plc, a marketing services business, group ﬁ nance 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. 322 Annual Report 2018 Corporate Governance Report Chairman’s Introduction I am pleased to introduce the Corporate Governance Report for the year ended 31 December 2018. As an AIM listed company, we recognise the importance of sound corporate governance in supporting and delivering the strategy of the Company and its subsidiaries (together the “Group”). This involves managing the Group in an efﬁ cient manner for the beneﬁ t of its shareholders and other stakeholders whilst maintaining a corporate culture which is consistent with our values. The Company adopted the QCA Corporate Governance Code (“QCA Code”) on 25 September 2018 and the Company’s Corporate Governance Statement is available to view on the Company’s website at www.warpaintlondon.com The board of directors is responsible for the long term success of the Company and, as such, devises the Group strategy and ensures that it is implemented. The board is determined to ensure that the Company protects and respects the interests of all stakeholders and, in particular, is very focused upon creating the right environment for our staff. We want a happy workplace and we want our employees to be fully and properly rewarded and to feel that they are an integral part of the Warpaint family. A reward structure is therefore in place, which includes the grant of share options, enabling members of staff to participate in the growth of the Company, as appropriate. We want our suppliers, who are an essential part of the Company, to also feel part of the Warpaint family and we work closely with them to ensure that this is the case. Above all, the Company wishes to ensure that shareholders obtain a good return on their investment and that the Company is managed for the long-term beneﬁ t of G o v e r n a n c e all shareholders and other stakeholders. Appropriate Corporate Governance procedures will ensure that that is the case and reduce the risk of failure. This section of the Report from pages 21 to 33 sets out our approach to governance and provides further information on the operation of the board and its committees and how the Group seeks to comply with the QCA Code. The instances where we do not comply are very few and explanations for non- compliance are provided in the report below. Clive Garston Chairman 10 April 2019 Strategy The Group has established a strategy and business model which aims to promote long term shareholder value. The Group’s strategy is reviewed each year and is set out in the Strategic Report on page 9. The Board of Directors The board is responsible for the long-term success of the Company. This includes formulating, reviewing and approving the Group’s strategy, budgets, major items of capital expenditure and acquisitions and, reporting to the shareholders. The board currently comprises of three non-executive directors (including the Chairman), Clive Garston, Paul Hagon and Keith Sadler, and four Executive Directors, Sam Bazini, Eoin Macleod, Neil Rodol and Sally Craig. Sally has been Company Secretary of the Group since February 2017 and was appointed to the board on 17 September 2018 as General Counsel. She continues to act as Company Secretary. The board considers its composition to be appropriate at this stage of the Company’s development, but this remains constantly under review as the Group grows in size. The two non- executive directors are independent. No single director is dominant in the decision-making process. At this stage in the Company’s development the board does not consider that having a senior independent director is appropriate but this will also remain under review. The board retains a range of ﬁ nancial, 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 including cosmetics, retailing, ﬁ nance and computing, innovation, international trading, ecommerce, marketing and public markets. The non-executive directors have been appointed on merit and for their speciﬁ c areas of expertise and knowledge. This enables them to bring independent judgement on issues of strategy and performance and to debate matters constructively. Directors attend seminars and other regulatory and trade events where appropriate to ensure that their knowledge and industry sector contacts remain current. The Articles of Association of the Company (the “Articles”) require that one-third of the directors must stand for re-election by shareholders annually in rotation and that any new directors appointed during the year must stand for re-election at the annual general meeting (“AGM”) immediately following their appointment. The biographies of each of the directors, including the committees on which they serve and chair, are shown on pages 21 to 22. 23 Warpaint London P LC Corporate Governance Report (continued) Board Operation There is a formal schedule of matters reserved to the board for its decision. These include formulating, reviewing and approving the Group’s strategy, budgets, major items of capital expenditure and acquisitions, and reporting to the shareholders. The board aims to meet ten times each year for regular board meetings, which are scheduled prior to the commencement of each ﬁ nancial year. These meetings are scheduled to coincide with the announcement of the Company’s annual and half yearly accounts and throughout the remainder of the year at regular monthly intervals (apart from in August and December). These are supplemented by additional meetings where required for business including informal business reviews, to review budgets and focus on strategy. Dialogue occurs regularly between directors outside of scheduled meetings. A formal agenda is produced for each meeting and for formal board meetings which includes the review and approval of minutes recorded, matters arising, a review of material operational matters relating to Group’s businesses and other special items for discussion or consideration. Board papers are circulated to board and committee members in advance to allow directors adequate time for consideration. Any speciﬁ c actions arising from such meetings are agreed by the board or relevant committee, circulated after the relevant meeting by the Company Secretary and then followed up by the Company’s management. Board Meetings The board met 18 times during the ﬁ nancial year ended 31 December 2018. 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 with at least one meeting on the premises of its subsidiary Retra, providing the board an opportunity to meet with its senior management and be involved with the business of the wider Group. In addition, the board held a focused, dedicated meeting on strategy on 14 January 2019 and intends to continue to schedule similar meetings annually. The executive directors are each required to commit at least the following number of days per week to their roles: The Joint Chief Executive Ofﬁ cers, ﬁ ve days; the Chief Financial Ofﬁ cer, four days and the General Counsel & Company Secretary, two days. The non-executive directors are required to provide such time as is required to fully and diligently perform their duties. All board members are expected to attend all meetings of the board and the committees on which they sit, wherever possible. Audit, Remuneration and Insider Committees The board has established the Audit Committee, Remuneration Committee and Insider Committee with formally delegated duties and responsibilities and with written terms of reference. The full terms of reference of each committee are available from the Company’s website at www.warpaintlondon.com The Reports of the Audit Committee and the Remuneration Committee can be found on pages 28 to 31 and describe the work undertaken by the Committees throughout the year. The Audit Committee comprises three non- executive directors: Keith Sadler (Chair), Clive Garston and Paul Hagon. The Remuneration Committee comprises three non-executive directors: Paul Hagon (Chair), Clive Garston and Keith Sadler. The Insider Committee comprises one non-executive director and two executive directors: Clive Garston (Chair), Sam Bazini and Neil Rodol. During the ﬁ nancial year ended 31 December 2018, the Audit Committee met twice, the Remuneration Committee four times and the Insider Committee twice. From time to time separate committees are set up by the board to consider speciﬁ c 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. Board and Committee attendance for the year ended 31 December 2018 There were nine formal board meetings and nine telephone board meetings held during the year. Eoin Macleod was unable to attend one formal and two telephone meetings due to ill health. In the event that directors are unable to attend a meeting, their comments on papers submitted may be discussed in advance with the Chairman enabling their contribution to be included in the wider board discussion. 324 Annual Report 2018 G o v e r n a n c e The following table shows directors’ attendance at all board and committee meetings during the year. Clive Garston Sam Bazini Eoin Macleod Neil Rodol Sally Craig * Paul Hagon Keith Sadler Board 18/18 17/18 13/18 18/18 6/6 15/18 18/18 *Sally Craig was appointed on 17 September 2018. Audit Remuneration Insider 2/2 n/a n/a n/a n/a 2/2 2/2 4/4 n/a n/a n/a n/a 4/4 4/4 2/2 2/2 n/a 2/2 n/a n/a n/a Roles of the Chairman, Joint Chief Executive Officers, Chief Financial Officer and General Counsel & Company Secretary The Chairman is responsible for running the business of the board and for ensuring appropriate strategic focus and direction. The Joint Chief Executive Ofﬁ cers are responsible for proposing the strategic focus to the board, implementing it once it has been approved and overseeing the management of the Company through the executive team. There is a clear division of responsibility between the Chairman and the Joint Chief Executive Ofﬁ cers. Whilst the Joint Chief Executive Ofﬁ cers operate together in the majority of areas and on matters of strategy there is a delineation of duties between them within the day to day business of the Group. The Chief Financial Ofﬁ cer works closely with the Joint Chief Executive Ofﬁ cers and is primarily responsible for the provision of monthly ﬁ nancial information to the board, control of working capital, overseeing the audit and preparation of all Group company statutory accounts and consolidated Interim Statements along with the overall ﬁ nancial management of the Group and its processes. The executive ofﬁ cers are responsible for formulation of the proposed strategic focus for submission to the board, the day-to-day management of the Group’s businesses and its overall trading, operational and ﬁ nancial performance in fulﬁ lment of that strategy, as well as plans and budgets to be approved by the board of directors. The General Counsel & Company Secretary is responsible for the oversight of legal issues and regulatory compliance along with executive share schemes, investor queries, HR matters, insurances and policy implementation. In addition, she assists the Chairman and other committee chairs in ensuring all meetings of the board and committees are informed and effective. Board Performance and Evaluation The Group’s performance is reported monthly against headline performance and agreed budgets and reviewed by the board (as a minimum) at each monthly board meeting. The board challenges the executive directors and senior management on performance against budgets, forecasts and key business milestones. The board have adopted a set of KPI’s against which the performance of the Company and therefore the board, can be measured. The Company is at a relatively early stage in its development as a listed company and is yet to adopt a formal performance evaluation procedure for the board and directors individually. This will remain under review and the board will consider the implementation of performance evaluations facilitated by external advisers for the board, both individually and as a group, to ensure the efﬁ cient and productive operation of the board. As the business of the Group grows, the expertise required at management level is expanded and developed although there are no prescribed procedures for succession planning at board level. Internal Financial Control and Risk Management The board is responsible for establishing and maintaining the Group’s system of internal controls and reviewing its effectiveness. The procedures, which include ﬁ nancial, compliance and risk management, are reviewed on an on-going basis. 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. The principal risks identiﬁ ed by the board are set out in the Strategic Report on page 18. The assessment and management of risk is primarily the function of the executive ofﬁ cers, most speciﬁ cally the Joint Chief Executive Ofﬁ cers for strategic and business risk and the Chief Financial Ofﬁ cer for ﬁ nancial risk. Where appropriate, matters of risk are referred to the board for consideration. In addition, the Financial Controller reports to the board each month, including on key risk issues. 25 Warpaint London P LC Corporate Governance Report (continued) Conflicts of Interest At each meeting the board considers Directors’ conﬂ icts of interest. The Company’s Articles provide for the board to authorise any actual or potential conﬂ icts of interest. External Advice The board seeks external advice from time to time to enable it to effectively perform its duties including from its lawyers, accountants, nominated adviser and corporate broker, ﬁ nancial PR advisers and insurance brokers. Advice regarding the implementation of an executive reward scheme has been provided to the board by h2glenfern Limited. All directors have access to the advice and services of the General Counsel & Company Secretary, who is responsible for ensuring that board procedures are followed and that the Company complies with applicable rules, regulations and obligations. Corporate Culture The board maintains a corporate culture consistent with the Group’s strategic objectives which aims to promote an ethical and responsible business. The Company places enormous importance on the contributions of its employees and aims to keep them informed of developments in the Company through a combination of meetings and electronic communication. The Group operates an open-door policy, everyone is known by name to the senior managers and executive directors with the Chief Executive Ofﬁ cers engaging daily with employees across the business. Communication is encouraged on an informal basis, usually verbal. Communication channels within the business are key and the open-door policy aides this. Feedback from employees led to the introduction of ﬂ exible working and a revision to the warehouse operating hours at Iver. The Group has an extremely loyal work force with a low staff churn Modern Slavery and Human Trafﬁ cking The Group has relationships with businesses around the world and is opposed to modern slavery and human trafﬁ cking wherever it may occur. The Group’s processes and supply chains are examined and reviewed at least annually to ensure that slavery and human trafﬁ cking are prevented in its business and supply chains. Compliance with the Modern Slavery Act 2015 or equivalent anti- slavery, human trafﬁ cking laws are mandatory in all supply contracts. • Employees and Equal Opportunities The Group’s employment policy is set out in the Directors’ Report. During the year, Sally Craig was appointed to the board of directors as General Counsel, whilst retaining her role as Company Secretary. At senior management level there are eleven female managers and nine male managers. Throughout the Group, the proportion of female to male employees is approximately 65% to 35%. • Environment The business consumes signiﬁ cant amounts of cardboard and paper and the Group utilises a regular recycling collection service. The Group’s products and packaging use paper and cardboard which enables the Group, the wholesaler and end user to recycle the waste effectively. Relations with Shareholders The Company’s principal means of communication with shareholders is through the Annual Report and Financial Statements, the full-year and half-year announcements and the AGM. The board recognises that the AGM is an important opportunity to meet private shareholders. Each substantially • rate, promoting from within, offering staff mobility from the warehouse ﬂ oor to administrative roles and managerial positions. Employees have the opportunity to purchase extra holiday and child care vouchers. A reward structure is in place, which includes the grant of share options, enabling members of staff to participate in the growth of the Company, as appropriate. The corporate culture is monitored by the Joint Chief Executive Ofﬁ cers who appraise the board of any issues arising. In addition, the board receives monthly reports from the Financial Controller on HR and employee matters. The culture is implemented through a number of policies on Anti-Bribery, Whistleblowing, Modern Slavery, Employment and the Environment which are described below and regularly reviewed: • Anti-Bribery 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. • Whistleblowing The Group’s ’whistleblowing’ procedures ensure that arrangements are in place to enable employees and suppliers to raise concerns about possible improprieties on a conﬁ dential basis. Any issues raised are investigated and appropriate actions are taken. Should any signiﬁ cant issue arise they are highlighted to the board. 326 Annual Report 2018 G o v e r n a n c e views were taken into consideration when implementing the Long Term Incentive Plan which was introduced on 21 September 2018. Investor queries may be addressed to the Company Secretary at investors@warpaintlondonplc.com A range of corporate information (including all Company announcements) is also available to shareholders, investors and the public on the Company’s corporate website www.warpaintlondon.com separate issue is the subject of a separate resolution at the AGM and all shareholders have the opportunity to put questions to the board. All board directors endeavour to attend AGMs and answer questions put to them which may be relevant to their responsibilities. In addition, the directors are available to listen informally to the views of shareholders immediately following the AGM. For each vote, the number of proxy votes received for, against and withheld is announced at the meeting. The results of the AGM are published on the Company’s corporate website. The executive directors participate in retail investor events such as Mello South, where feasible. The board receives regular updates on the views of shareholders through brieﬁ ngs and reports from the executive directors, the Company’s brokers and PR advisers. The Joint Chief Executive Ofﬁ cers and the Chief Financial Ofﬁ cer make presentations to institutional shareholders and participate in Investor Road Shows both following the announcement of the full-year and half-year results and, at other times throughout the year. Not every executive ofﬁ cer participates in every investor presentation. The Chairman will participate in these presentations in future where appropriate and is always available to speak with shareholders. Dialogue with individual institutional shareholders also takes place in order to understand and work with these investors to seek to comply with their investor principles where practicable. During the year ended 31 December 2018, the board, through the Remuneration Committee, consulted with two of the Company’s major institutional shareholders, whose 27 Warpaint London P LC Audit Committee Report Keith Sadler On behalf of the board, I am pleased to present the Audit Committee Report for the year ended 31 December 2018. The Audit Committee is responsible for ensuring that the ﬁ nancial performance of the Group is properly reported on and reviewed, and its role includes monitoring the integrity of the ﬁ nancial 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 ﬁ ndings of an audit with the auditors, meeting regularly with the auditors and advising on the appointment of external auditors. During the year, the Committee consisted of three non-executive directors: me (as Chairman), Clive Garston and Paul Hagon. The Audit Committee is convened as required and met two times during the year ended 31 December 2018 to discharge its responsibilities inter alia in connection with the Group’s Financial Statements for the year ended 31 December 2017 and the Interim Financial Statements for the six months ended 30 June 2018. A further planning meeting took place with the external auditor BDO LLP during the year. The Chief Financial Ofﬁ cer and the external auditor normally attend committee meetings. The committee met with the external auditor without management present during the year. The board is satisﬁ ed that I, as Chairman of the Committee, have recent and relevant ﬁ nancial experience. I am a Chartered Accountant and, over the past 25 years have served on the board of a number of public limited companies in ﬁ nance roles including as Chief Financial Ofﬁ cer, Group Finance Director and Treasurer. 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 ﬁ nancial reporting and the effectiveness of the Group’s systems of ﬁ nancial internal controls. External auditor BDO LLP was appointed by the board as the Company’s external auditor on 12 June 2018 for the 2018 reporting period and it is their intention to put them forward at the AGM to stand as auditors for the next ﬁ nancial period. There are no contractual obligations that restrict the Committee’s choice of external auditor. The Group paid £113,500 to BDO for audit services in 2018, relating to the statutory audit of the Group and Company ﬁ nancial statements, the audit of Group subsidiaries, and audit-related assurance services. In addition, the Group paid £10,000 to BDO in 2018, for tax advice and interim reviews. Committee performance and effectiveness The Company is at a relatively early stage in its development and is yet to adopt a formal performance evaluation procedure for the board, its committees and directors individually. Audit Committee Report This Audit Committee Report was reviewed and approved by the board on 10 April 2019. Keith Sadler Audit Committee Chairman 10 April 2019 The key responsibilities of the Committee are to: • Monitor the integrity of the Group’s ﬁ nancial statements and other statements and announcements relating to its ﬁ nancial performance, reviewing and challenging the methodology and assumptions used where necessary; Consider the Group’s accounting policies and practices along with its application of accounting standards and signiﬁ cant judgements; Review the effectiveness of the Group’s system of internal controls, including ﬁ nancial reporting and controls and risk management systems; Review the adequacy and security of the Group’s procedures and controls for whistleblowing; the detection of fraud and the prevention of bribery; Consider and make recommendations to the board on the appointment, reappointment, removal or resignation and remuneration of the external auditor; and Oversee the relationship with the Group’s external auditor including consideration of the objectivity and independence of the external audit process. • • • • • The full terms of reference for the Committee can be found on the Company’s website at www.warpaintlondonplc.com 328 Annual Report 2018 Remuneration Committee Report Paul Hagon On behalf of the board, I am pleased to present the Remuneration Committee Report for the year ended 31 December 2018. The main objectives of the Remuneration Committee are to develop and implement compensation packages designed to attract and retain staff, creating opportunities for senior management and employees to participate in share option schemes and develop bonus arrangements which reward performance and incentivise employees, thus increasing shareholder value over the long term. The Remuneration Committee 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 Ofﬁ cers) 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. G o v e r n a n c e The Remuneration Committee consists of three non-executive directors: me (as Chairman), Clive Garston and Keith Sadler. The Remuneration Committee is convened not less than twice a year and otherwise as required. The committee met four times during the year ended 31 December 2018. The full terms of reference for the Committee can be found on the Company’s website at www.warpaintlondonplc.com Activity during the Year – Introduction of Long-Term Incentive Plan (“LTIP”) On 24 September 2018, the Company announced the implementation of a new LTIP with initial grants to six senior team members including Sam Bazini and Eoin Macleod the Joint Chief Executive Ofﬁ cers and Neil Rodol, the Chief Financial Ofﬁ cer. The LTIP has been established to incentivise management to increase shareholder value over the long term. The Remuneration Committee is keen to ensure that remuneration for the Company’s senior team is effective and fair and motivate them to deliver success for the Company, its shareholders and employees. Share options with an exercise price of 254.5p, equal to the closing mid-market value immediately prior to the date of grant, and subject to the achievement of demanding Earnings Per Share (“EPS”) and Total Shareholder Return (“TSR”) performance conditions measured over a period of up to 5 years were granted to Sam Bazini, Eoin Macleod and Neil Rodol on 21 September 2018 as set out in the table below: S Bazini E Macleod N Rodol Share Options Exercise Price 1,534,986 1,534,986 306,996 254.5p 254.5p 254.5p The share options are exercisable up to 10 years from the date of grant. Vesting is subject to the performance conditions set out below: 50% of the award is subject to an adjusted EPS growth performance condition. One third of this portion of the award will be tested and vest after three, four and ﬁ ve years. Vesting is based on adjusted EPS in the years ending Dec 2020, 2021 and 2022. Threshold vesting of 20% of the award is achieved at 12.5% compound annual EPS growth and full vesting at 22.5% compound annual EPS growth, measured from 31 December 2017. 50% of the award is subject to an absolute TSR performance condition tested following the announcement of results for the years ending 31 December 2020, 2021 and 2022. Threshold vesting of 20% of the award is achieved at 8% compound annual TSR and straight line vesting up to 100% vesting at 18% compound annual TSR, measured from 31 December 2017. An additional grant of 460,494 share options with the same terms was made to three senior management individuals of the Company, each of whom was granted 153,498 share options. The entire award represents 5.0% of the current issued share capital of the Company. 29 Warpaint London P LC Remuneration Committee Report (continued) External Advice and consideration of Shareholder Views The Remuneration Committee was assisted in meeting its responsibilities by h2glenfern Limited, who provided advice relating to the implementation of the LTIP, for which they received fees of £13,000. The Remuneration Committee is satisﬁ ed that the advice it received was objective and independent. The Committee also consulted with two of the Company’s major institutional shareholders and took their views into account when implementing the Plan. Directors Remuneration Policy 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. Directors’ Remuneration for the year ended 31 December 2018 Salary Pension Beneﬁ ts S Bazini E Macleod N Rodol S Craig * C Garston P Hagon K Sadler 200,000 200,000 150,000 29,000 60,000 40,000 40,000 - - 1,000 1,000 - - 1,000 8,000 6,000 - - - - - *S Craig joined the board on 17 September 2018 Bonus Total Remuneration 2018 £ Total Fair Value Remuneration 2017 £ of Options £ - - - - - - - 208,000 206,000 151,000 29,000 60,000 40,000 41,000 2,102,931 2,102,931 511,987 8,683 - - - 206,000 205,000 112,000 - 60,000 40,000 40,000 Directors’ interests in share options for year ended 31 December 2018 As at 31 December 2018 the following directors held the following performance related share awards (Enterprise Management Incentive Scheme Options or LTIPs) over ordinary shares of 25p each under the Warpaint London plc Enterprise Management Incentive Scheme. For details of the share option schemes see Note 21 on Page 60 Type of Share Award LTIP LTIP EMI LTIP EMI - - - Date of Grant 21.09.2018 21.09.2018 29.06.2017 21.09.2018 29.06.2017 - - - Number of Shares at 31 December 2018 1,534,986 1,534,986 105,262 306,996 10,000 - - - Exercise Price 254.5p 254.5p 237.5p 254.5p 237.5p - - - End of Performance Period 31 Dec 2022 31 Dec 2022 29 June 2020 31 Dec 2022 29 June 2020 - - - S Bazini E Macleod N Rodol S Craig * C Garston P Hagon K Sadler Number of Shares at 31 December 2017 (or date of appointment if later) - - 105,262 - 10,000 - - - *S Craig joined the board on 17 September 2018 330 Annual Report 2018 The directors, who held ofﬁ ce at 31 December 2018, had the following interests in the shares of the Company: Number of share options held at 31 December 2018(c) Number of Ordinary Shares held at 31 December 2018 Ordinary Shares as % of issued share capital Number of Ordinary Shares held at 31 December 2017 S Bazini(a) E Macleod(b) N Rodol S Craig* C Garston P Hagon K Sadler 1,534,986 1,534,986 412,258 10,000 – – – 17,695,208 17,695,208 103,961 – 126,315 31,145 31,145 *S Craig joined the board on 17 September 2018 In addition to the above holdings: (a) 1,750,000 (2017: 3,000,000) shares are held by the wife of S Bazini (b) 1,750,000 (2017: 3,000,000) shares are held by the wife of E Macleod (c) For details of the share option schemes see Note 21 on Page 60 23.06 23.06 0.14 – 0.16 0.04 0.04 17,545,208 17,545,208 103,961 – 126,315 31,145 31,145 G o v e r n a n c e There were no changes in the shareholdings of the directors between 31 December 2018 and the date of this report. Service Contracts and non-executive directors’ Letters of Appointment The executive directors have rolling contracts that are terminable on 12 months’ notice, in the case of Sam Bazini and Eoin Macleod (the Joint Chief Executive Ofﬁ cers) and 6 months’ notice, in the case of Neil Rodol (Chief Financial Ofﬁ cer) and Sally Craig (General Counsel & Company Secretary). The Chairman and each of the non-executive directors have entered into a letter of appointment which is terminable on three months’ notice. Shareholder Approval of Directors’ Remuneration Report Shareholders are asked to approve this directors’ Remuneration Report (excluding the directors’ Remuneration Policy) for the year ended 31 December 2018 at the forthcoming Annual General Meeting. This resolution is advisory in nature. Paul Hagon Remuneration Committee Chairman 10 April 2019 31 Warpaint London P LC Directors Report The Directors present their annual report on the affairs of the Group, together with the ﬁ nancial statements and auditor’s report for the year ended 31 December 2018. The Corporate Governance statements on pages 21 to 33 forms part of this report. Going concern The Company’s going concern statement can be found in the Consolidated Financial Statements on page 42. Results and dividends The Group’s results for the year ended 31 December 2018 are set out in the Consolidated Income Statement on page 37. The directors recommend a ﬁ nal dividend of 2.9 per ordinary share (2017: 2.6p) to be paid on 1 July 2019 for the year ended 31 December 2018 which, when added to the interim dividend of 1.5p (2017: 1.4p), gives a total dividend for the period of 4.4p per share (2017: 4.0p). Directors The following directors who held ofﬁ ce during the year and to the date of authorisation of the accounts are as follows: Non-Executive Chairman C Garston Executive Directors S Bazini E Macleod N Rodol S Craig (appointed 17 September 2018) Non-Executive Directors P Hagon K Sadler In accordance with the Company’s Articles of Association Sally Craig, having been appointed since the last Annual General Meeting, will stand for re-election at the forthcoming Annual General Meeting and Sam Bazini and Paul Hagon will retire and stand for re-election. Likely Future developments Details of the Group’s future developments are contained in the Strategic report set out on pages 3 to 18. Substantial shareholdings The Group is aware of the following shareholdings of 3% or more in the share capital as at 31 December 2018: Shareholder S Bazini (including connected parties) E Macleod (including connected parties) Schroders plc Blackrock Investment Management Limited Canaccord Genuity Group Inc. Number of Shares 19,445,208 19,445,208 9,231,636 7,589,524 2,348,612 % 25.34 25.34 12.03 9.88 3.06 Financial instruments The Group’s ﬁ nancial risk management objectives and policies are discussed in note 23 to the consolidated ﬁ nancial statements on pages 61 to 65. 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. 332 Annual Report 2018 G o v e r n a n c e The Company places enormous importance on the contributions of its employees and aims to keep them informed of developments in the Company through a combination of meetings and electronic communication. The Group operates an open-door policy, everyone is known by name to the senior managers and executive directors with the Chief Executive Ofﬁ cers engaging daily with employees across the business. Communication is encouraged on an informal basis, usually verbal. Communication channels within the business are key and the open-door policy aides this. 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. On behalf of the board Neil Rodol Chief Financial Ofﬁ cer 10 April 2019 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. • United Kingdom Generally Accepted Accounting Practice; prepare the ﬁ nancial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. Directors’ Responsibilities The directors are responsible for preparing the annual report and the ﬁ nancial statements in accordance with applicable law and regulations. Company law requires the directors to prepare ﬁ nancial statements for each ﬁ nancial year. Under that law the directors have elected to prepare the Group ﬁ nancial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union, and the Company ﬁ nancial statements in accordance with 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). Under company law the directors must not approve the ﬁ nancial statements unless they are satisﬁ ed that they give a true and fair view of the state of affairs of the Group and Company and of the proﬁ t or loss of the Group and Company for that period. The directors are also required to prepare ﬁ nancial statements in accordance with the rules of the London Stock Exchange for companies trading securities on AIM. In preparing these ﬁ nancial statements, the directors are required to: • • • select suitable accounting policies and then apply them consistently; make judgements and accounting estimates that are reasonable and prudent; state whether they have been prepared in accordance with IFRSs as adopted by the European Union or The directors are responsible for keeping adequate accounting records that are sufﬁ cient to show and explain the Group and Company’s transactions and disclose with reasonable accuracy at any time the ﬁ nancial position of the Group and the Company and enable them to ensure that the ﬁ nancial statements comply with the requirements of the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Website publication The directors are responsible for ensuring the annual report and the ﬁ nancial statements are made available on a website. Financial statements are published on the Company’s website in accordance with legislation in the United Kingdom governing the preparation and dissemination of ﬁ nancial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Company’s website is the responsibility of the directors. The directors’ responsibility also extends to the ongoing integrity of the ﬁ nancial statements contained therein. 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. 33 Warpaint London P LC Independent Auditors’ Report to the members of Warpaint London P LC Opinion We have audited the ﬁ nancial statements of Warpaint London Plc (the ‘parent company’) and its subsidiaries (the ‘group’) for the year ended 31 December 2018 which comprise the consolidated statement of comprehensive income, the consolidated and company statement of changes in equity, the consolidated and company statements of ﬁ nancial position, the consolidated statement of cash ﬂ ows and notes to the ﬁ nancial statements, including a summary of signiﬁ cant accounting policies. The ﬁ nancial reporting framework that has been applied in the preparation of the group ﬁ nancial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The ﬁ nancial reporting framework that has been applied in the preparation of the parent company ﬁ nancial 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 directors have not disclosed in the ﬁ nancial statements any identiﬁ ed material uncertainties that may cast signiﬁ cant 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 ﬁ nancial statements are authorised for issue. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most signiﬁ cance in our audit of the ﬁ nancial statements of the current period and include the most signiﬁ cant assessed risks of material misstatement (whether or not due to fraud) we identiﬁ ed, 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 ﬁ nancial 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 identiﬁ ed by us as the most signiﬁ cant assessed risks of material misstatement: • the ﬁ nancial 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 2018 and of the group’s proﬁ t for the year then ended; Impairment of intangible assets and goodwill See accounting policy and details of judgements and accounting estimates given in note 1. • the group ﬁ nancial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; • the parent company ﬁ nancial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and • the ﬁ nancial 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 ﬁ nancial statements section of our report. We are independent of the group and the parent company in accordance with the ethical requirements that are relevant to our audit of the ﬁ nancial statements in the UK, including the FRC’s Ethical Standard as applied to listed entities, and we have fulﬁ lled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufﬁ cient 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 ﬁ nancial statements is not appropriate; or The issue – the group is required to consider whether impairment of goodwill is required in respect of the acquisition of Retra Holdings or Marvin Leeds Marketing. Judgement is required in respect of this consideration, and the use of an inappropriate model or inappropriate assumptions within the model in respect of discount rate, long term growth rate or underlying short-term forecasts may lead to any impairment being materially misstated. The group has engaged third party experts to assist with the preparation of the impairment model and to assist in determining the key assumptions within the model. The results of the model are extremely sensitive to changes in the discount rate in particular as explained in note 9 to the ﬁ nancial statements. We have highlighted this as a key audit matter due to the size of the acquisition of the Retra business, the judgements involved in determining any impairment charge, and the challenging trading conditions currently experienced by the business. How we addressed the issue – We checked that management had appropriately determined the carrying amount for each Cash Generating Unit (CGU). We conﬁ rmed the cash ﬂ ow forecasts prepared by management were consistent with those approved by the Board and examined the cashﬂ ow forecasts by testing the underlying models, including an analysis of underlying assumptions and a comparison to recent performance trends and results after the year end. 334 Annual Report 2018 We assessed the competence and independence of the third party experts engaged by management in preparing the underlying impairment model. The key assumptions of the discount rate and long term growth rate underlying the impairment test were addressed using the expertise of our own valuation specialists to benchmark the key assumptions against comparator companies and general market indicators. We used proﬁ t before tax, amortisation, impairment and exceptional items as a benchmark given that this represents the underlying trading position of the business and it is this ﬁ gure which is considered most important for shareholders in assessing the performance of the Group. Each component of the Group was audited to a lower level of materiality. Component materiality ranged from £100,000 to £330,000. We checked that appropriate and adequate disclosures were included in the ﬁ nancial statements which were in accordance with the requirements of the accounting standards. We discussed the key assumptions used within the model and how we challenged the discount rate applied with the audit committee. Performance materiality is the application of materiality at the individual account or balance level set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the ﬁ nancial statements as a whole. Performance materiality was set at £303,750 (2017: £271,600) which represents 75% (2017: 70%) of the above materiality levels. Carrying value of inventory See accounting policy and details of judgements and accounting estimates given in note 1. We agreed with the audit committee that we would report to them misstatements identiﬁ ed during our audit above £20,250. We also agreed to report differences below these thresholds that, in our view, warranted reporting on qualitative grounds. G o v e r n a n c e The issue - The group holds signiﬁ cant 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. How we addressed the issue - 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 identiﬁ cation of slow moving and obsolete items. We considered the inventory write off ﬁ gure 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 tested the unprovided inventory balance by reviewing sales volumes and values after the balance sheet date. We discussed the key assumptions within the inventory provision and the movements and aging of inventory with the audit committee. Our application of materiality The scope of our audit was inﬂ uenced 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 ﬁ nancial statement areas and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the ﬁ nancial statements as a whole. We determined materiality for the ﬁ nancial statements as a whole to be £405,000 which represents 5% of proﬁ t before tax, amortisation, impairment and exceptional items. In the prior year materiality was calculated at £388,000 which was based on 5% of proﬁ t before tax and exceptional items. Materiality of the company was set at £105,000 with performance materiality set at £78,750 based on 75% of materiality. Materiality was based on a capped asset basis and is equivalent to 0.2% of assets of the company. An overview of the scope of our audit The group consists of four trading subgroups, all of which are run from the UK except for Marvin Leeds Marketing Services Inc. which is based in the United States of America. In establishing the overall approach to the group audit, we completed full scope audits on the underlying subgroups and the parent company, except for Marvin Leeds Marketing Services Inc, on which we tested speciﬁ c account balances. All audit work was carried out by BDO LLP. Other information The directors are responsible for the other information. The other information comprises the information included in the annual report, other than the ﬁ nancial statements and our auditor’s report thereon. Our opinion on the ﬁ nancial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the ﬁ nancial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the ﬁ nancial 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 ﬁ nancial 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. 35 Warpaint London P LC Independent Auditors’ Report (continued) to the members of Warpaint London P LC 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 ﬁ nancial year for which the ﬁ nancial statements are prepared is consistent with the ﬁ nancial statements; and • the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to inﬂ uence the economic decisions of users taken on the basis of these ﬁ nancial statements. A further description of our responsibilities for the audit of the ﬁ nancial 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. Matters on which we are required to report by exception Use of our report This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Mark RA Edwards (Senior Statutory Auditor) For and on behalf of BDO LLP, Statutory Auditor London, UK 10 April 2019 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). 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 identiﬁ ed 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, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company ﬁ nancial statements are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration speciﬁ ed 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 set out in the Directors’ report, the directors are responsible for the preparation of the ﬁ nancial statements and for being satisﬁ ed that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of ﬁ nancial statements that are free from material misstatement, whether due to fraud or error. In preparing the ﬁ nancial statements, the directors are responsible for assessing the group’s and the parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the ﬁ nancial statements Our objectives are to obtain reasonable assurance about whether the ﬁ nancial 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. 336 Consolidation Statement of Comprehensive Income for the year ended 31 December 2018 Revenue Cost of sales Gross proﬁ t Administrative expenses Analysed as: Adjusted proﬁ t from operations1 Amortisation Impairment losses Exceptional items Proﬁ t from operations Finance expense Proﬁ t before tax Tax expense Proﬁ t for the year attributable to equity holders of the parent company Other comprehensive income: Item that will or maybe reclassiﬁ ed to proﬁ t or loss: Exchange gain on translation of foreign subsidiary Total comprehensive income attributable to equity holders of the parent company Basic earnings per share (pence) Diluted earnings per share (pence) Annual Report 2018 Year ended 31 December Note 1,2 2018 £’000 48,477 2017 £’000 32,549 (31,263) (19,911) 17,214 3,4 (12,330) 8,303 (2,272) (812) (335) 4,884 (150) 4,734 (1,159) 3,575 48 3,623 4.66 4.66 3,9,10 3,9,10 3 3 5 6 27 27 i F n a n c i a l S t a t e m e n t s 12,638 (5,744) 7,749 (469) – (386) 6,894 (37) 6,857 (1,384) 5,473 – 5,473 8.34 8.34 Note 1 – Adjusted proﬁ t from operations is calculated as earnings before interest, taxation, amortisation, impairment and exceptional items. The notes on pages 42 to 70 form part of these ﬁ nancial statements. 37 Warpaint London P LC Consolidated Statement of Financial Position as at 31 December 2018 Registered Number: 10261717 Non-current assets Goodwill Intangibles Property, plant and equipment Total non-current assets Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets Current liabilities Trade and other payables Loans and borrowings Corporation tax liability Derivative ﬁ nancial instruments Total current liabilities Non-current liabilities Bank loan Deferred tax liability Total non-current liabilities Total liabilities NET ASSETS The notes on pages 42 to 70 form part of these ﬁ nancial statements. 338 Note 9 10 11 12 13 14 15 16 23 16 17 Year ended 31 December 2018 £’000 7,051 9,486 1,358 17,895 15,362 12,761 4,041 32,164 50,059 (3,489) (2,169) (1,034) – 2017 (restated) £’000 7,532 10,653 1,497 19,682 11,531 13,676 3,369 28,576 48,258 (3,537) (582) (939) (3) (6,692) (5,061) (553) (1,796) (2,349) (9,041) (814) (1,959) (2,773) (7,834) 41,018 40,424 Consolidated Statement of Financial Position as at 31 December 2018 Registered Number: 10261717 Equities Share capital Share premium Merger reserve Other reserves Retained earnings TOTAL EQUITY Annual Report 2018 Note 19 20 2018 £’000 19,187 19,359 2017 £’000 19,187 19,359 (16,100) (16,100) 209 18,363 41,018 45 17,933 40,424 The ﬁ nancial statements of Warpaint London PLC were approved and authorised for issue by the Board of Directors on 10 April 2019 and were signed on its behalf by: Neil Rodol Chief Financial Ofﬁ cer i F n a n c i a l S t a t e m e n t s The notes on pages 42 to 70 form part of these ﬁ nancial statements. 39 Warpaint London P LC Consolidated Statement of Changes in Equity for the year ended 31 December 2018 Share Capital Share Premium Merger Reserve exchange reserve option reserve Foreign Share £’000 £’000 £’000 At 1 January 2017 16,135 Note £’000 £’000 1,806 – – – – – – 2,789 18,410 263 – – – (857) – (17,995) – – – – 1,895 – – Comprehensive Income for the year Proﬁ t for the year Dividends paid Total comprehensive income for the year Transactions with owners Shares issued during the year Shares issued for Retra Holdings Share issue costs Movement in other reserves Total transactions with owners 18 19 19 19 3,052 17,553 1,895 As at 31 December 2017 19,187 19,359 (16,100) Comprehensive Income for the year On translation of foreign subsidiary Proﬁ t for the year Total comprehensive income for the year Transactions with owners Movement in other reserves Dividends paid Total transactions with owners – – – – – – – – – – – – – – – – – – 21 18 As at 31 December 2018 19,187 19,359 (16,100) The notes on pages 42 to 70 form part of these ﬁ nancial statements. 340 Retained Earnings £’000 14,332 Total Equity £’000 14,278 5,473 5,473 (1,872) (1,872) 3,601 3,601 – – – – – 21,199 2,158 (857) 45 22,545 17,933 40,424 – 48 3,575 3,575 3,575 3,623 – 116 (3,145) (3,145) (3,145) (3,029) 18,363 41,018 – – – – – – – – – – 48 – 48 – – – 48 – – – – – – – 45 45 45 – – – 116 – 116 161 Annual Report 2018 Year ended 31 December 2018 £’000 4,734 150 812 2,272 529 7 116 1,574 (2,524) (1,753) 48 5,965 (1,565) (150) 4,250 (48) (392) 2017 (restated) £’000 6,857 37 – 469 184 6 45 419 224 (1,356) – 6,885 (2,077) (37) 4,771 (52) (555) i F n a n c i a l S t a t e m e n t s (1,591) (15,750) 272 – 242 33 (1,759) (16,082) – – (261) 1,587 (3,145) (1,819) 672 3,369 4,041 4,041 4,041 21,199 (857) (20) (7,273) (1,872) 11,177 (134) 3,503 3,369 3,369 3,369 Note 5 9 10 11 10 11 8 8 18 Consolidated Statement of Cash Flows for the year ended 31 December 2018 Operating activities Proﬁ t before tax Interest paid Impairment of goodwill Amortisation of intangible assets Depreciation of property, plant and equipment Loss on disposal of property, plant and equipment Share based payment Decrease/(increase) in trade and other receivables Decrease/(increase) in inventories Decrease in trade and other payables Foreign exchange translation differences Cash generated from operations Tax paid Interest paid Net cash ﬂ ows from operating activities Investing activities Purchase of intangible assets Purchase of property, plant and equipment Acquisition of business Bank balances acquired Proceeds from sale of property, plant and equipment Net cash used in by investing activities Financing activities Proceeds from new share capital subscribed Share issue costs Repayment of borrowings Increase/(decrease) in stock and invoice ﬁ nance facilities Dividends Net cash (used in)/ generated by ﬁ nancing 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 The notes on pages 42 to 70 form part of these ﬁ nancial statements. 41 Warpaint London P LC Notes to the Consolidated Financial Statements for the year ended 31 December 2018 1. Signiﬁ cant accounting policies Basis of preparation The ﬁ nancial statements of Warpaint London PLC (the “Company” or “Warpaint”) and its subsidiaries (together the “Group”) for the year ended 31 December 2018 were authorised for issue by the board of directors on 10 April 2019 and the statement of ﬁ nancial position was signed on the board’s behalf by Neil Rodol. Warpaint London PLC is a public limited company incorporated and registered in England and Wales. Its registered ofﬁ ce is Units B&C, Orbital Forty Six, The Ridgeway Trading Estate, Iver, Bucks, SL0 9HW. The Group’s ﬁ nancial 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 ﬁ nancial statements are presented in pounds sterling because that is the currency of the primary economic environment in which the Group operates. All values are rounded to the nearest thousand (£’000) except where otherwise indicated. The annual ﬁ nancial statements have been prepared on the historical cost basis, except for certain ﬁ nancial assets and liabilities which are carried at fair value or amortised cost as appropriate. The preparation of ﬁ nancial 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 ﬁ nancial 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 Where the Company has control over an investee, it is classiﬁ ed as a subsidiary. The Company controls an investee if all three of the following elements are present: power over the investee, exposure to variable returns from the investee, and the ability of the investor to use its power to affect those variable returns. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control. Exchange differences recognised proﬁ t or loss in Group entities’ separate ﬁ nancial statements on the translation of long-term monetary items forming part of the Group’s net investment in the overseas operation concerned are reclassiﬁ ed to other comprehensive income and accumulated in the foreign exchange reserve on consolidation. On disposal of a foreign operation, the cumulative exchange differences recognised in the foreign exchange reserve relating to that operation up to the date of disposal are transferred to the consolidated statement of comprehensive income as part of the proﬁ t or loss on disposal. 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 ﬁ nancial statements on the basis of going concern. Revenue Recognition The Group has adopted IFRS 15 from 1 January 2018. The standard provides a single comprehensive model for revenue recognition. Performance obligations and timing of revenue recognition The Group’s revenue is derived from selling goods with revenue recognised at a point in time when control of the goods has transferred to the customer. This is generally when the goods are delivered to the customer. However, for export sales, control might also be transferred when delivered either to the port of departure or port of arrival, depending on the speciﬁ c terms of the contract with a customer. There is limited judgement needed in identifying the point control passes: once physical delivery of the products to the agreed location has occurred, the group no longer has physical possession, usually will have a present right to payment (as a single payment on delivery) and retains none of the signiﬁ cant risks and rewards of the goods in question. 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 Group’s warehouse according to the terms of sale. The consolidated ﬁ nancial statements present the results of the Company and its subsidiaries as if they formed a single entity. Intercompany transactions and balances between Group companies are therefore eliminated in full. All subsidiaries have a reporting date of December. Where the Group 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 Group’s overseas supplier or from the Company’s UK warehouse. Revenue is therefore recognised on the date of dispatch. The consolidated ﬁ nancial statements incorporate the results of business combinations using the acquisition method. In the statement of ﬁ nancial position, the acquiree’s identiﬁ able assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of acquired operations are included in the consolidated statement of comprehensive income from the date on which control is obtained. They are deconsolidated from the date on which control ceases. On consolidation, the results of overseas operations are translated into pound sterling at rates approximating to those ruling when the transactions took place. All assets and liabilities of overseas operations, including goodwill arising on the acquisition of those operations, are translated at the rate ruling at the reporting date. Exchange differences arising on translating the opening net assets at opening rate and the results of overseas operations at actual rate are recognised in other comprehensive income and accumulated in the foreign exchange reserve. Determining the transaction price Most of the Group’s revenue is derived from ﬁ xed price contracts and therefore the amount of revenue to be earned from each contract is determined by reference to those ﬁ xed prices. Exceptions are as follows: • Some contracts provide customers with a limited right of return. These relate predominantly, but not exclusively, to online sales direct to consumers and retailers. Historical experience enables the group to estimate reliably the value of goods that will be returned and restrict the amount of revenue that is recognised such that it is highly probable that there will not be a reversal of previously recognised revenue when goods are returned. 342342 Annual Report 2018 Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2018 1. Signiﬁ cant accounting policies (continued) Intangible assets acquired separately • Variable consideration relating to volume rebates has been considered in estimating revenue in order that it is highly probable that there will not be a future reversal in the amount of revenue recognised when the amount of volume rebates has been determined. Allocating amounts to performance obligations For most contracts, there is a ﬁ xed unit price for each product sold, with reductions given for bulk orders placed at a speciﬁ c time. Therefore, there is no judgement involved in allocating the contract price to each unit ordered in such contracts (it is the total contract price divided by the number of units ordered). Where a customer orders more than one product line, the Group is able to determine the split of the total contract price between each product line by reference to each product’s standalone selling prices (all product lines are capable of being, and are, sold separately). Practical Exemptions The Group has taken advantage of the practical exemptions: • not to account for signiﬁ cant ﬁ nancing components where the time difference between receiving consideration and transferring control of goods (or services) to its customer is one year or less; and Intangible assets with ﬁ nite 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 indeﬁ nite 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 and brands so as to write off the carrying value over the expected useful economic life of ﬁ ve years. Other details of the acquisition are detailed in note 8. Goodwill • expense the incremental costs of obtaining a contract when the amortisation period of the asset otherwise recognised would have been one year or less. Goodwill represents the excess of the cost of a business combination over the Group’s interest in the fair value of identiﬁ able assets, liabilities and contingent liabilities acquired. 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. Cost comprises the fair value of assets given, liabilities assumed, and equity instruments issued, plus the amount of any non-controlling interests in the acquiree. Contingent consideration is included in cost at its acquisition date fair value and, in the case of contingent consideration classiﬁ ed as a ﬁ nancial liability, remeasured subsequently through proﬁ t or loss. i F n a n c i a l S t a t e m e n t s Retirement Beneﬁ ts: Deﬁ ned contribution schemes Contributions to deﬁ ned contribution schemes are charged to the consolidated statement of comprehensive income in the year to which they relate. 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 relate to legal and professional fees incurred on the acquisition of Marvin Leeds Marketing Services, Inc. (2017: Retra Holdings Limited). Neither ‘underlying proﬁ t or loss’ nor ‘exceptional items’ are deﬁ ned by IFRS however the directors believe that the disclosures presented in this manner provide clear presentation of the ﬁ nancial performance of the Group. Intangible assets Patents Patents are used by the Group in order to generate future economic value through normal business operations. Patents are acquired separately and carried at cost less amortisation and impairment. The underlying assets are amortised over the period from which the Group expects to beneﬁ t, which is typically between ﬁ ve to ten years. Goodwill is capitalised as an intangible asset with any impairment in carrying value being charged to the consolidated statement of comprehensive income. Where the fair value of identiﬁ able assets, liabilities and contingent liabilities exceed the fair value of consideration paid, the excess is credited in full to the consolidated statement of comprehensive income on the acquisition date. Impairment of non-ﬁ nancial assets (excluding inventories and deferred tax assets) Impairment tests on goodwill and other intangible assets with indeﬁ nite useful economic lives are undertaken annually at the ﬁ nancial year end. Other non-ﬁ nancial assets are subject to impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Where the carrying value of an asset exceeds its recoverable amount (i.e. the higher of value in use and fair value less costs to sell), the asset is written down accordingly. Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the smallest group of assets to which it belongs for which there are separately identiﬁ able cash ﬂ ows; its cash generating units (‘CGUs’). Goodwill is allocated on initial recognition to each of the Group’s CGUs that are expected to beneﬁ t from a business combination that gives rise to the goodwill. Impairment charges are included in proﬁ t or loss, except to the extent they reverse gains previously recognised in other comprehensive income. An impairment loss recognised for goodwill is not reversed. 43 43 Warpaint London P LC Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2018 1. Signiﬁ cant accounting policies (continued) Derecognition of intangible assets An intangible asset is derecognised on disposal, or when no future economic beneﬁ ts 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, are recognised in proﬁ t or loss when the asset is derecognised. of the trade receivables is assessed. This probability is then multiplied by the amount of the expected loss arising from default to determine the lifetime expected credit loss for the trade receivables. For trade receivables, which are reported net, such provisions are recorded in a separate provision account with the loss being recognised within administrative expenses in the consolidated statement of comprehensive income. On conﬁ rmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision. 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. The Group’s ﬁ nancial assets measured at amortised cost comprise trade and other receivables, and cash and cash equivalents in the consolidated statement of ﬁ nancial position. 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: Plant and machinery - 25% reducing balance and 20% straight line Fixtures and ﬁ ttings - 25% reducing balance and 20% Cash and cash equivalents include cash in hand, deposits held at call with banks, other short term highly liquid investments with original maturities of three months or less, and – for the purpose of the statement of cash ﬂ ows - bank overdrafts. Bank overdrafts are shown within loans and borrowings in current liabilities on the consolidated statement of ﬁ nancial position. straight line Financial liabilities Computer equipment - 25% reducing balance and 33.33% Motor vehicles Financial assets straight line - 20% straight line The Group has adopted IFRS 9 from 1 January 2018. The standard introduced new classiﬁ cation and measurement models for ﬁ nancial assets. The Group classiﬁ es its ﬁ nancial assets into one of the categories discussed below, depending on the purpose for which the asset was acquired. Other than ﬁ nancial assets in a qualifying hedging relationship, the Group’s accounting policy for each category is as follows: Fair value through proﬁ t or loss This category comprises in-the-money derivatives and out-of-money derivatives where the time value offsets the negative intrinsic value (see “Financial liabilities” section for out-of-money derivatives classiﬁ ed as liabilities). They are carried in the statement of ﬁ nancial position at fair value with changes in fair value recognised in the consolidated statement of comprehensive income in the ﬁ nance income or expense line. Other than derivative ﬁ nancial instruments which are not designated as hedging instruments, the Group does not have any assets held for trading nor does it voluntarily classify any ﬁ nancial assets as being at fair value through proﬁ t or loss. Amortised cost These assets arise principally from the provision of goods and services to customers (eg trade receivables), but also incorporate other types of ﬁ nancial assets where the objective is to hold these assets in order to collect contractual cash ﬂ ows and the contractual cash ﬂ ows are solely payments of principal and interest. They are initially recognised at fair value plus transaction 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. The Group classiﬁ es its ﬁ nancial liabilities into one of two categories, depending on the purpose for which the liability was acquired. The Group’s accounting policy for each category is as follows: Fair value through proﬁ t or loss This category comprises out-of-the-money derivatives where the time value does not offset the negative intrinsic value (see “Financial assets” for in-the-money derivatives and out-of-money derivatives where the time value offsets the negative intrinsic value). They are carried in the consolidated statement of ﬁ nancial position at fair value with changes in fair value recognised in the consolidated statement of comprehensive income. The Group does not hold or issue derivative instruments for speculative purposes, but for hedging purposes. Other than these derivative ﬁ nancial instruments, the Group does not have any liabilities held for trading nor has it designated any ﬁ nancial liabilities as being at fair value through proﬁ t or loss. Other ﬁ nancial liabilities Other ﬁ nancial liabilities include the following items: • Bank loans which are initially recognised at fair value net of any transaction costs directly attributable to the issue of the instrument. Such interest-bearing liabilities are subsequently measured at amortised cost ensuring the interest element of the borrowing is expensed over the repayment period at a constant rate. • 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. Derivative ﬁ nancial instruments The Group enters into a variety of derivative ﬁ nancial instruments to manage its exposure to foreign exchange rate risk, through the use of foreign exchange rate forward contracts. New impairment requirements use an ‘expected credit loss’ (‘ECL’) model to recognise an allowance. Impairment is measured using a 12- month ECL method unless the credit risk on a ﬁ nancial instrument has increased signiﬁ cantly since initial recognition in which case the lifetime ECL method is adopted. For receivables, a simpliﬁ ed approach to measuring expected credit losses using a lifetime expected loss allowance is available and has been adopted by the Group. During this process the probability of the non-payment 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 proﬁ t or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in proﬁ t or loss depends on the nature of the hedge relationship. 344 Annual Report 2018 Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2018 1. Signiﬁ cant accounting policies (continued) Foreign currencies Transactions entered into by Group entities in a currency other than the currency of the primary economic environment in which they operate (their “functional currency”) are recorded at the rates ruling when the transactions occur. Foreign currency monetary assets and liabilities are translated at the rates ruling at the reporting date. Exchange differences arising on the retranslation of unsettled monetary assets and liabilities are recognised immediately in proﬁ t or loss, except for foreign currency borrowings qualifying as a hedge of a net investment in a foreign operation, in which case exchange differences are recognised in other comprehensive income and accumulated in the foreign exchange reserve along with the exchange differences arising on the retranslation of the foreign operation. 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 beneﬁ t of lease incentives is recognised as a reduction of the rental expense over the lease term on a straight-line basis. Leased assets Assets obtained under hire purchase contract and ﬁ nance leases are capitalised as tangible ﬁ xed assets. Assets acquired by ﬁ nance 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 beneﬁ ts and risks of ownership are assumed by the Company. Obligations under such agreements are included in creditors net of the ﬁ nance charge allocated to future periods. The ﬁ nance element of the rental payment is charged to the statement of comprehensive income so as to produce a constant periodic rate of charge on the net obligation outstanding in each period. Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. Current tax The tax currently payable is based on taxable proﬁ t for the year. Taxable proﬁ t differs from ‘proﬁ t before tax’ as reported in the consolidated statement of comprehensive income 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. • 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 proﬁ t will be available against which the difference can be utilised. The amount of the asset or liability is determined using tax rates that have been enacted or substantively enacted by the end of the reporting period 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 signiﬁ cant amounts of deferred tax assets and liabilities are expected to be settled or recovered. 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. 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 identiﬁ ed as the management team including the Chief Executive Ofﬁ cers and the Chief Financial Ofﬁ cer. The Board considers that the Group’s project activity constitutes two operating and two reporting segments, as deﬁ ned under IFRS 8. Management reviews the performance of the Group by reference to total results against budget. The total proﬁ t measures are operating proﬁ t and proﬁ t 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 ﬁ gures in the Group ﬁ nancial information. The Group’s current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. Earnings per share Deferred taxation Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the combined statement of ﬁ nancial 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 proﬁ t; and 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 beneﬁ t 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. i F n a n c i a l S t a t e m e n t s 45 45 Warpaint London P LC Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2018 1. Signiﬁ cant accounting policies (continued) IFRS 16 ‘Leases’ Share Capital The Group’s ordinary shares are classiﬁ ed as equity instruments. Share-based payments Where equity settled share options are awarded to employees, the fair value of the options at the date of grant is charged to the consolidated statement of comprehensive income over the vesting period. Non-market vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each reporting date so that, ultimately, the cumulative amount recognised over the vesting period is based on the number of options that eventually vest. Non-vesting conditions and market vesting conditions are factored into the fair value of the options granted. As long as all other vesting conditions are satisﬁ ed, a charge is made irrespective of whether the market vesting conditions are satisﬁ ed. The cumulative expense is not adjusted for failure to achieve a market vesting condition or where a non-vesting condition is not satisﬁ ed. Where the terms and conditions of options are modiﬁ ed before they vest, the increase in the fair value of the options, measured immediately before and after the modiﬁ cation, is also charged to the consolidated statement of comprehensive income over the remaining vesting period. Where equity instruments are granted to persons other than employees, the consolidated statement of comprehensive income is charged with the fair value of goods and services received. Dividends Dividends are recognised when they become legally payable. In the case of interim dividends to equity shareholders, this is when declared by the directors. In the case of ﬁ nal dividends, this is when approved by the shareholders at the annual general meeting. Changes in accounting policies a) New standards, interpretations and amendments effective from 1 January 2018 New standards impacting the Group that will be adopted in the annual ﬁ nancial statements for the year ended 31 December 2018, and which have given rise to changes in the Group’s accounting policies are: • IFRS 9, Financial Instruments (IFRS 9); and • IFRS 15, Revenue from Contracts with Customers (IFRS 15) Details of the impact these two standards have had are given above. Other new and amended standards and Interpretations issued by IASB and adopted by the EU that will apply for the ﬁ rst time in the next annual ﬁ nancial statements are not expected to impact the Group as they are either not relevant to the Group’s activities or require accounting which is consistent with the Group’s current accounting policies. b) At the date of authorisation of these ﬁ nancial statements, certain new standards, amendments and interpretations to existing standards have been published by the IASB and adopted by the EU but are not yet effective and have not been adopted early by the Group. Management anticipates that all of the relevant pronouncements will be adopted in the Group’s accounting policies for the ﬁ rst period beginning after the effective date of the pronouncement. Information on new standards, amendments and interpretations that are expected to be relevant to the Group’s ﬁ nancial statements is provided below. Certain other new standards and interpretations have been issued but are not expected to have a material impact on the Group’s ﬁ nancial statements. IFRS 16 is effective for the periods commencing 1 January 2019 and the ﬁ rst reporting date when IFRS 16 will be applied will be the interim period ending 30 June 2019. IFRS 16 introduces new or amended requirements with respect to lease accounting. It introduces signiﬁ cant changes to the lessee accounting by removing the distinction between operating and ﬁ nance leases and requiring the recognition of a right-of-use asset and a lease liability at the lease commencement for all leases, except for short-term leases and leases of low value assets. The Group intends to adopt the modiﬁ ed retrospective approach. Under this approach, a lessee does not restate comparative information. Consequently, the date of initial application is the ﬁ rst day of the annual reporting period in which a lessee ﬁ rst applies the requirements of the new leases standard. At the date of initial application of the new leases standard, lessees recognise the cumulative effect of initial application as an adjustment to the opening balance of equity as of 1 January 2019. The Directors have estimated the impact of adopting this new standard and it is anticipated the Group will recognise right-of-use assets in respect of the properties it leases with a value of approximately £5.0m being attributed to right-of-use assets and a lease liability of the same amount. Effect of changes in accounting policies IFRS 15 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 has superseded the previous revenue recognition guidance including IAS 18 Revenue, IAS 11 Construction Contracts and the related interpretations. The group has adopted IFRS 15 for the year ended 31 December 2018 and has applied the modiﬁ ed retrospective approach without restatement of comparatives. Under IFRS 15, volume rebates and early settlement discounts represent variable consideration and is estimated and recognised as a reduction to revenue as performance obligations are satisﬁ ed. Management recognises revenue based on the amount of estimated rebate to the extent that revenue is highly probable of not reversing. Management monitors this estimate at each reporting date and adjusts it as necessary. There has been no material impact to the recognition of revenue relating to variable consideration. The Group has applied IFRS 9 from 1 January 2018. The Group has elected not to restate comparatives on initial application of IFRS 9. With respect to the classiﬁ cation and measurement of ﬁ nancial assets, the number of categories of ﬁ nancial assets under IFRS 9 has been reduced compared to IAS 39. Under IFRS 9 the classiﬁ cation of ﬁ nancial assets is based both on the business model within which the asset is held and the contractual cash ﬂ ow characteristics of the asset. There will be no change in the accounting for any other ﬁ nancial liabilities. The impairment model under IFRS 9 reﬂ ects expected credit losses, as opposed to only incurred credit losses under IFRS 9. Under the impairment approach in IFRS 9, it is not necessary for a credit event to have occurred before credit losses are recognised. Instead, an entity always accounts for expected credit losses and changes in those expected credit losses. The amount of expected credit losses should be updated at each reporting date. 346 Annual Report 2018 Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2018 The valuation of the customer list is based on judgement involved in assessing the projected future cashﬂ ows 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. A one per cent increase in the discount rate from 20.1% to 21.1% would reduce the fair value of customer lists by approximately £22,000. c) Impairment of goodwill Following the assessment of the recoverable amount of goodwill allocated to Retra Holdings Limited, the directors consider the recoverable amount of goodwill to have been impaired by £812,000. The assessment of the recoverable amount of goodwill was based on a value in use calculation which involved judgement in assessing the projected future cashﬂ ows arising from the CGU and a suitable discount rate to be used to measure the future cash ﬂ ows to present value. A one per cent increase in the discount rate from 16.7% to 17.7% would reduce the recoverable amount by approximately £1.25 million. i F n a n c i a l S t a t e m e n t s 1. Signiﬁ cant accounting policies (continued) The new impairment model applies to the Group’s ﬁ nancial assets that are debt instruments measured at amortised costs or FVTOCI. The Group has applied the simpliﬁ ed approach to recognise lifetime expected credit losses for its trade receivables, as required or permitted by IFRS 9. To measure the expected credit losses on a collective basis, trade receivables are grouped based on aging and the group believes that all trade receivables are on a similar credit risk. The Group’s calculation of the loss allowance for these assets as at 31 December 2017 is £19,000 lower compared to the amount disclosed previously under IAS 39. The expected loss rates are based on the Group’s historical credit losses over the three-year prior period end. The rates have not been adjusted for current and forward looking information, including macroeconomic factors affecting its customers, as the impact is immaterial to the group as a whole. Prior year restatement During the year ended 31 December 2018, the consideration for the acquisition of Retra Holdings Limited was ﬁ nalised. The previously disclosed purchase price of £18.36 million was reduced by £450,000, on delivery of a ﬁ nal EBITDA statement to the previous owners of Retra, resulting in a reduction in the goodwill ﬁ gure arising on acquisition from £7,469,000 to £7,019,000. The comparative ﬁ gures at 31 December 2017 have been adjusted retrospectively. This has no impact on the reserves or the shareholders’ funds. 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 signiﬁ cant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next ﬁ nancial 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. The Group makes a 50% provision for perishable items of stock that are greater than two years old. Should the Group increase the provision to 100% of perishable items that are greater than two years old, this would decrease proﬁ t by £130,000. b) Intangible assets acquired On acquisition of Marvin Leeds Marketing Services, Inc. (“LMS”) 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 cashﬂ ows 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. 47 Warpaint London P LC Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2018 2. Segmental information For management purposes, the Group is organised into two operating segments; Branded and close-out. The segment ‘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. 2018 2018 Own Brand Close-out Year ended 31 December Revenue Cost of sales Gross proﬁ t Administrative expenses Exceptional items Impairment losses Segment result Reconciliation of segment result to proﬁ t before tax: Segment result Finance expense Proﬁ t before tax Analysis of total revenue by geographical market: UK Europe USA Australia and New Zealand Rest of World Total £’000 40,875 (26,188) 14,687 (10,213) (327) (812) 3,335 3,335 (150) 3,185 18,430 15,121 4,227 1,282 1,815 40,875 2018 Total £’000 48,477 (31,263) 17,214 (11,183) (335) (812) 4,884 4,884 (150) 4,734 23,384 16,678 5,296 1,302 1,817 2017 Own Brand £’000 26,890 (16,012) 10,878 (4,423) (386) – 6,069 6,069 (37) 6,032 2017 Close-out £’000 5,659 (3,899) 1,760 (935) – – 825 825 – 825 2017 Total £’000 32,549 (19,911) 12,638 (5,358) (386) – 6,894 6,894 (37) 6,857 12,330 4,460 16,790 7,132 2,419 4,062 947 767 198 232 2 7,899 2,617 4,294 949 £’000 7,602 (5,075) 2,527 (970) (8) – 1,549 1,549 – 1,549 4,954 1,557 1,069 20 2 7,602 48,477 26,890 5,659 32,549 During the year ended 31 December 2018, the Group had no customers that exceeded 10% of total revenue. During the year ended 31 December 2017, the Group had one customer that exceeded 10% of total revenue being 11%. Information regarding segment assets and liabilities as at 31 December 2018 and capital expenditure for the period then ended: Total assets Total liabilities Tangible asset additions Intangible asset additions Total capital expenditure 2018 2018 2018 Own Brand Close–out Eliminations* £’000 79,925 (6,115) 292 786 1,078 £’000 4,172 (763) £’000 (34,038) (2,163) – – – – – – 2018 Total £’000 50,059 (9,041) 292 786 1,078 2017 2017 2017 Own Brand Close-out Eliminations* £’000 76,389 (5,112) 1,483 12,539 14,022 £’000 3,108 (817) £’000 (31,239) (1,905) – – – – – – 2017 Total £’000 48,258 (7,834) 1,483 12,539 14,022 * The eliminations are as a result of adjustments arising on consolidation of the ﬁ nancial statements. 348 Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2018 3. Operating proﬁ t Operating proﬁ t for the period is stated after charging/(crediting): Foreign exchange (gain)/loss Depreciation Amortisation Impairment Loss on disposal of ﬁ xed asset Operating lease costs – Land and buildings – Equipment Reversal of write-down inventories at net realisable value Reversal of stock provision Exceptional costs Annual Report 2018 Year ended 31 December 2018 £’000 (359) 529 2,272 812 7 557 71 114 335 2017 £’000 71 184 469 – 6 360 70 189 386 Exceptional costs in 2018 included £0.16 million of acquisition costs as they were one off legal and professional fees incurred in acquiring LMS USA on 2 August 2018, plus £0.10 million of professional fees relating to the acquisition of Retra in 2017, plus £0.08 million of staff restructuring costs at Retra (2017: £0.40 million of acquisition costs as they were legal and professional fees and commissions incurred in acquiring Retra on 30 November 2017. Total acquisition costs were £1.2 million of which £0.8 million related to the issue of new shares to fund the purchase of Retra and these were charged against the share premium account). Analysis of auditor’s remuneration is as follows: i F n a n c i a l S t a t e m e n t s Year ended 31 December 2018 £’000 36 78 114 7 3 – 10 2017 £’000 20 66 86 1 2 114 117 Year ended 31 December 2018 £’000 4,252 521 68 4,841 2017 £’000 2,789 243 19 3,051 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 advice Other assurance Transaction related services Total non-audit fees 4. Staff costs Wages and salaries Social security costs Pension costs 49 Warpaint London P LC Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2018 4. Staff costs (continued) 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 Pension contributions Remuneration in respect of Directors was as follows: Executive Directors C Garston S Bazini E Macleod N Rodol S Craig Non-executive Directors K Sadler P Hagon Year ended 31 December 2018 No. 6 40 3 45 6 12 112 2018 £’000 719 3 722 2017 No. 6 6 3 25 4 8 52 2017 £’000 653 – 653 Salary/fees Beneﬁ ts contribution £’000 £’000 £’000 2018 £’000 2017 £’000 Pension 60 200 200 150 29 40 40 719 – 8 6 – – – – 14 – – – 1 1 1 – 3 60 208 206 151 30 41 40 736 60 206 205 112 – 40 30 653 Number of Share Number of Share Number of share Number of Share options options Awarded options Lapsed options Earliest Exercise Exercise Expiry at January 2018 in the year in the year at December 2018 Exercise Price Date Date N Rodol 105,262 306,996 S Bazini E Macleod S Craig – – 10,000 1,534,986 1,534,986 – Total share options 115,262 3,376,968 The directors of the Group are the only key management personnel. – – – – – 350 412,258 1,534,986 1,534,986 105,262 @237.59p 306,996 @254.5p 254.5p 254.5p 29/06/2020 29/06/2027 21/09/2021 21/09/2028 21/09/2021 21/09/2028 21/09/2021 21/09/2028 10,000 237.59p 29/06/2020 29/06/2027 3,492,230 Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2018 5. Finance expense Loan interest Hire Purchase interest Other interest 6. Income tax Current tax expense Current tax on proﬁ ts for the period Adjustment in respect of previous periods Deferred tax expense Origination and reversal of temporary differences Total tax expense Annual Report 2018 Year ended 31 December 2018 £’000 28 59 63 150 2017 £’000 15 5 17 37 Year ended 31 December 2018 £’000 1,660 – 1,660 (501) 1,159 2017 £’000 1,473 (30) 1,443 (59) 1,384 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 proﬁ t for the year as follows: Proﬁ t for the period before tax Expected tax charge based on corporation tax rate of 19% (2017: 19.25%) Expenses not deductible for tax purposes Other adjustments Different tax rates applied in overseas jurisdiction Prior year adjustments Adjustment to deferred tax to average rate Total tax expense The UK corporation tax at the standard rate for the year is 19.0% (2017: 19.0%). Year ended 31 December 2018 £’000 4,734 899 47 12 20 – 181 1,159 2017 £’000 6,857 1,319 178 4 – (30) (87) 1,384 In the Finance Act 2016 the UK government announced its intention to reduce the standard corporation tax rate to 17% by 2020. The measure to reduce the rate to 17% for the ﬁ nancial year beginning 1 April 2020 was substantively enacted on 6 September 2016 and has, where applicable, been reﬂ ected in the ﬁ nancial statements. The Group’s effective tax rate for the year is 24.5% (2017 : 20.2%). i F n a n c i a l S t a t e m e n t s 51 Warpaint London P LC Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2018 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* Warpaint Cosmetics Inc. Retra Holdings Limited Badgequo Limited* Retra Own Label Limited* Badgequo Deutschland GmbH* Badgequo Hong Kong Limited* Nature of business Holding company Wholesaler Wholesaler Holding company Dormant Holding company Wholesaler Dormant Place of incorporation England and Wales England and Wales England and Wales England and Wales U.S.A. England and Wales England and Wales England and Wales Supply chain management Supply chain management Germany Hong Kong Jinhua Badgequo Cosmetics Trading Co., Ltd* Wholesaler People’s Republic of China Marvin Leeds Marketing Services, Inc. Wholesaler U.S.A. * indicates indirect interest Percentage owned 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% On 2 August 2018, the Company acquired 100% of the issued share capital of Marvin Leeds Marketing Services, Inc. All the other entities detailed above have been in existence for the whole of the reporting period. The registered ofﬁ ce for all UK incorporated subsidiaries is Units B&C, Orbital Forty Six, The Ridgeway Trading Estate, Iver, Bucks. SL0 9HW. The registered ofﬁ ce for Warpaint Cosmetics Inc.is 445 Northern Boulevard – Great Neck, New York 11021. The registered ofﬁ ce for Marvin Leeds Marketing Services, Inc. is 34W. 33rd St. – Suite 1015, New York NY 10001. The registered ofﬁ ce for Badgequo Deutschland GmbH is Robert-Bosch-Straße 10, Haus 1, 56410 Montabaur, Germany. The registered ofﬁ ce for Badgequo Hong Kong Limited is 12F, 3 Lockhart Road, Wanchai, Hong Kong. The registered ofﬁ ce for Jinhua Badgequo Cosmetics Trading Co., Ltd is Room 1401, Gongyuan Building No. 307 South Shuanglong Street, Wucheng District, Jinhua, Zhejiang, China 321000. 8. Acquisitions Marvin Leeds Marketing Services, Inc. On 2 August 2018, the Group acquired the entire share capital of Marvin Leeds Marketing Services, Inc. (“LMS”), the Group’s US distributor. The principal reason for acquiring LMS was to provide direct access to the Warpaint brand to some key existing customers and to open a number of new opportunities in the US and the Americas more widely. LMS has contributed £2,356,000 to revenue for the period between the date of acquisition and the balance sheet date. Had LMS been consolidated from 1 January 2018, the consolidated income statement for the year ended 31 December 2018 would show additional revenue of $5,500,000 (£4,093,000) and a loss before tax of $198,000 (£148,000). The provisional fair value of the net assets at the acquisition date is as follows: Book value Fair value adjustment Customer lists Property, plant and equipment Stock Trade and other receivables Cash and cash equivalents Trade and other payables Deferred tax asset Deferred tax liability Net assets acquired Goodwill arising on acquisition Consideration $’000 – 11 1,708 546 356 (2,228) 219 – 612 $’000 1,381 – – – – – – (346) 1,035 Book value Fair value adjustment £’000 – 8 1,307 418 272 (1,705) 168 – 468 £’000 1,057 – – – – – (265) 792 Total $’000 1,381 11 1,708 546 356 (2,228) 219 (346) 1,647 433 2,080 Total £’000 1,057 8 1,307 418 272 (1,705) 168 (265) 1,260 331 1,591 The gross contractual amount of trade receivables is equal to the fair value. The fair value adjustment is based on level 3 inputs. Goodwill comprises the value of expected synergies and other opportunities arising from the acquisition, management know how, the skilled work force employed by LMS and other intangible assets that do not qualify for separate recognition. None of the goodwill recognised is expected to be deductible for tax purposes. 352 Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2018 8. Acquisitions (continued) The fair value of consideration paid is as follows: Cash consideration Costs associated with the acquisition of LMS are £160,000 and are disclosed within exceptional costs in note 3. The proﬁ t and loss for LMS from the date of acquisition to 31 December 2018 is as follows: Revenue Cost of sales Gross proﬁ t Administrative expenses Loss before tax Tax expense Total comprehensive loss for the period Retra Holdings Limited Annual Report 2018 $’000 2,080 2,080 $’000 3,029 (2,935) 94 (442) (348) 75 (273) £’000 1,591 1,591 £’000 2,356 (2,284) 72 (344) (272) 58 (214) On 30 November 2017, the Group acquired the entire share capital of Retra Holdings Limited (“Retra” or “Retra Holdings”), a cosmetics wholesaler based in the UK. The principal reason for acquiring Retra Holdings was due to the company operating in the same industry, it also holds additional customer base, product ranges and brands. Retra has contributed £1,323,000 to revenue for the period between the date of acquisition and the balance sheet date, 31 December 2017. Had Retra Holdings been consolidated from 1 January 2017, the consolidated statement of comprehensive income for the year ended 31 December 2017 would show additional revenue of £18,944,000 and proﬁ t before tax of £1,849,000. The fair value of the net assets at the acquisition date is as follows: Brands Customer lists Property, plant and equipment Stock Trade and other receivables Cash and cash equivalents Trade and other payables Corporation tax Loans Deferred tax liability Net assets acquired Goodwill arising on acquisition (as restated) Consideration (as restated) The gross contractual amount of trade receivables is equal to the fair value. The fair value adjustment is based on level 3 inputs. Book value £’000 – – 929 4,088 8,698 242 (2,234) (74) (8,687) – 2,962 Fair value adjustment £’000 3,802 5,865 – – – – – – – (1,740) 7,927 Total £’000 3,802 5,865 929 4,088 8,698 242 (2,234) (74) (8,687) (1,740) 10,889 7,019 17,908 Goodwill comprises the value of synergies and other opportunities arising from the acquisition, management know how, the skilled work force employed by Retra Holdings and other intangible assets that do not qualify for separate recognition. None of the goodwill recognised is deductible for tax purposes. The fair value of consideration paid is as follows: Cash consideration (as restated) Share consideration 53 £’000 15,750 2,158 17,908 i F n a n c i a l S t a t e m e n t s Warpaint London P LC Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2018 8. Acquisitions (continued) Share consideration is based on the issue of 1,052,631 shares at a market value on 30 November 2017 at £2.05 per share. The ﬁ nal consideration amount was based on a completion statement according to the sale and purchase agreement terms and delivery of the statutory accounts of Retra Holdings. The purchase price was £17.7536 million (£15.75 million in cash and £2 million of consideration shares) which takes into account a reduction of up to £450,000 following the delivery of the ﬁ nal EBITDA statement, as a result the comparatives were restated by reducing Goodwill by £450,000 and the inclusion of a receivable for the same amount. The proﬁ t and loss for Retra Holdings from the date of acquisition to 31 December 2017 is as follows: Revenue Cost of sales Gross proﬁ t Administrative expenses Finance expense Proﬁ t before tax Tax expense Total comprehensive income for the period 9. Goodwill Cost At 1 January 2017 Arising on acquisition of Retra Holdings Limited At 31 December 2017 (as restated) Arising on acquisition of Marvin Leeds Marketing Services, Inc. At 31 December 2018 Impairment At 1 January 2017 and 2018 Impairment during the year At 31 December 2018 Net book value At 31 December 2018 At 31 December 2017 (as restated) £’000 1,323 (796) 527 (368) (20) 139 (21) 118 £’000 513 7,019 7,532 331 7,863 – 812 812 7,051 7,532 Goodwill represents the excess of consideration over the fair value of the Group’s share of the net identiﬁ able assets of the acquired subsidiary at the date of acquisition. The carrying value at 31 December 2018 includes Treasured Scents £513,000, Retra £6,207,000 and LMS £331,000. Goodwill arising on acquisition in the year ended 31 December 2017 relates to the Group’s acquisition of Retra Holdings. During the year ended 31 December 2018, the consideration for the acquisition of Retra Holdings was ﬁ nalised. The previously disclosed purchase price of £18.36 million was reduced by £450,000 resulting in a reduction in the goodwill ﬁ gure arising on acquisition from £7,469,000 to £7,019,000. The comparative ﬁ gures at 31 December 2017 have been adjusted retrospectively. Goodwill arising on acquisition in the year ended 31 December 2018 relates to the Group’s acquisition of LMS. Impairment is calculated by comparing the carrying amounts to the recoverable amount being the higher of value in use derived from discounted cash ﬂ ow projections or the fair value less costs to sell. A CGU is deemed to be an individual division, 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 ﬂ ow model (“DCF”) for the subsidiary, which discounts expected cash ﬂ ows over a ﬁ ve-year period using a pre-tax discount rate of 16.7% (2017: 15%) for Retra Holdings Limited and 20.1% for LMS. Cash ﬂ ows beyond the ﬁ ve-year period are extrapolated using a long term average growth rate of 2% (2017: 4.5%). The average growth rate beyond the ﬁ ve-year period is lower than current growth rates and is in line with Management’s expectations for the business. The fair value less costs to sell was based on a multiple of earnings less estimated costs to sell. Management have performed the annual impairment review as required by IAS 36 and have concluded that no impairment is indicated for Treasured Scents Limited or LMS as the recoverable amount exceeds the carrying value but that for Retra Holdings goodwill should be impaired by £812,000 as the recoverable amount was assessed as being £6,207,000 compared to the carrying value of £7,019,000. 354 Annual Report 2018 Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2018 9. Goodwill (continued) 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 – for LMS this is based on forecasts incorporating growth of approximately 75% for the ﬁ rst-year post-acquisition reducing to 10% growth rate for years two to ﬁ ve. For Retra, the growth rate over the next year is anticipated to be 9.1% reducing to approximately 4.3% in years 2 to 5. EBITDA percentages for both LMS and Retra are based on historical rates achieved. • Discount Rate – pre-tax discount rate of 16.7% for Retra Holdings and 20.1% for LMS reﬂ ects 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 2% for LMS and Retra. Sensitivity to changes in assumptions The impairment review of the Group is sensitive to changes in the key assumptions, most notably the pre-tax discount rate, the terminal growth rate and projected operating cash ﬂ ows. Reasonable changes to these assumptions are considered to be: • 1.0% increase in the pre-tax discount rate. • 1.0% reduction in the terminal growth rate. • 10.0% reduction in projected operating cash ﬂ ows. Reasonable changes to the assumptions used, considered in isolation, would not result in an impairment of goodwill for LMS. For LMS, the value-in- use exceeded the goodwill value by £3.3m. At 31 December 2018, Retra’s goodwill was impaired as its value-in-use fell below the goodwill value. A 1% increase in the pre-tax discount rate would increase the impairment by £1.25 million, a 1% reduction in the terminal growth rate would increase the impairment by £0.8 million and a 10% reduction in projected operating cash ﬂ ows would increase the impairment by £2.6m. i F n a n c i a l S t a t e m e n t s 10. Intangible assets Cost At 1 January 2017 On acquisition of subsidiaries Additions At 31 December 2017 On acquisition of subsidiaries Additions At 31 December 2018 Accumulated amortisation At 1 January 2017 Charge for the year At 31 December 2017 Charge for the year Impairment losses At 31 December 2018 Net book value At 31 December 2018 At 31 December 2017 At 1 January 2017 Patents £’000 Website £’000 Licences £’000 132 – 42 174 – 43 217 34 16 50 20 – 70 147 124 98 30 – 10 40 – 5 45 4 7 11 8 – 19 26 29 26 6 – – 6 – – 6 1 1 2 1 – 3 3 4 5 Total £’000 1,486 9,667 52 11,205 1,057 48 12,310 83 469 552 2,272 – 2,824 9,486 10,653 1,403 Brands £’000 – 3,802 – 3,802 – – 3,802 – 63 63 761 – 824 2,978 3,739 – Customer lists £’000 1,318 5,865 – 7,183 1,057 – 8,240 44 382 426 1,482 – 1,908 6,332 6,757 1,274 55 Warpaint London P LC Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2018 11. Property, plant and equipment Costs At 1 January 2017 Additions On acquisition of subsidiary Disposals At 31 December 2017 Additions On acquisition of subsidiary Disposals At 31 December 2018 Accumulated depreciation At 1 January 2017 Charge for year On disposals At 31 December 2017 Charge for year On disposals At 31 December 2018 Net book value At 31 December 2018 At 31 December 2017 At 1 January 2017 Plant and machinery Fixtures and ﬁ ttings Computer equipment Motor vehicles £’000 £’000 £’000 £’000 91 5 731 – 827 73 – (3) 897 40 25 – 65 170 (2) 233 664 762 51 73 440 60 – 573 192 6 – 771 12 122 – 134 194 – 328 443 439 61 68 22 137 – 227 114 2 (12) 331 12 16 – 28 137 (3) 162 169 199 56 80 88 – (40) 128 13 – – 141 11 21 (1) 31 28 – 59 82 97 69 Total £’000 312 555 928 (40) 1,755 392 8 (15) 2,140 75 184 (1) 258 529 (5) 782 1,358 1,497 237 The net book value of assets held under ﬁ nance leases or hire purchase contracts, included above are as follows: Plant and machinery Computer equipment 12. Inventories Finished goods Provision As at 31 December 2018 £’000 12 41 53 2017 £’000 21 67 88 As at 31 December 2018 £’000 15,472 (110) 15,362 2017 £’000 11,645 (114) 11,531 The cost of inventories recognised as an expense and included in ‘cost of sales’ amounted to £28,299,077 in the year ended 31 December 2018 (2017: £19,215,000). 356 Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2018 13. Trade and other receivables Trade receivables – gross Allowance for doubtful debts Trade receivables – net Other receivables Prepayments and accrued income Deferred tax asset Total Annual Report 2018 As at 31 December 2018 £’000 11,139 (114) 11,025 485 1,010 241 12,761 2017 (restated) £’000 12,076 (173) 11,903 1,022 751 – 13,676 The directors consider that the carrying value of trade and other receivables measured at book value and amortised cost approximates to fair value. Trade receivables amounting to £1,909,000 are pledged as collateral against an invoice ﬁ nancing facility. The individually impaired receivables relate to the supply of goods to customers. A provision is recognised for amounts not expected to be recovered. Movements in the accumulated impairment losses on trade receivables were as follows: Accumulated impairment losses at 1 January Additional impairment losses (released)/recognised during the year, net Amounts written off during the year as uncollectible Accumulated impairment losses at 31 December As at 31 December 2018 £’000 173 (14) (45) 114 2017 £’000 110 93 (30) 173 The impairment losses recognised during the year are net of a reversal of £14,000 (2017: loss of £93,000) relating to the recovery of amounts previously written off as uncollectable. 14. Cash and cash equivalents Cash and cash equivalents include the following for the purposes of the cash ﬂ ow statement: i F n a n c i a l S t a t e m e n t s Cash at bank and in hand 15. Trade and other payables Current Trade payables Social security and other taxes Other payables Accruals and deferred income Total As at 31 December 2017 £’000 3,369 3,369 As at 31 December 2017 £’000 1,671 568 41 1,257 3,537 2018 £’000 4,041 4,041 2018 £’000 1,435 476 847 731 3,489 The directors consider that the carrying value of trade and other payables measured at book value and amortised cost approximates to fair value. 57 57 Warpaint London P LC Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2018 16. Loans and borrowings Bank loans Repayable within 1 year Repayable within 2 – 5 years Hire purchase ﬁ nance Repayable within 1 year Repayable within 2 – 5 years Total Repayable within 1 year Repayable within 2 – 5 years The interest rates expected are as follows: Finance loans Bank loans Invoice ﬁ nancing Secured loans As at 31 December 2017 £’000 401 221 622 181 593 774 582 814 1,396 As at 31 December 2017 % 7 10 – 2018 £’000 1,992 139 2,131 177 414 591 2,169 553 2,722 2018 % 7 10 3.5 The borrowings of the group are secured by a debenture including a ﬁ xed charge over all present freehold and leasehold property, a ﬁ rst ﬁ xed charge over book and other debts and a ﬁ rst ﬂ oating charge over all assets. 17. Deferred tax Deferred tax is calculated in full on temporary differences under the liability method using tax rate of 17% – 25%. The movement on the deferred tax account is as shown below: Opening balance On acquisition of subsidiary Recognised in proﬁ t and loss: Tax expense Closing balance Deferred tax liability Year ended 31 December Deferred tax asset Year ended 31 December 2018 £’000 (1,959) (265) 428 (1,796) 2017 £’000 (278) (1,740) 59 (1,959) 2018 £’000 – 168 73 241 2017 £’000 – – – – The deferred tax liability has arisen due to the timing difference on accelerated capital allowances amounting to £51,000 (2017: £57,000) and on the intangible assets acquired in a business combination amounting to £1,057,000 (2017: £1,902,000). In the Finance Act 2016 the UK government announced its intention to reduce the standard corporation tax rate to 17% by 2020. The measure to reduce the rate to 17% for the ﬁ nancial year beginning 1 April 2020 was substantively enacted on 6 September 2016 and has, where applicable, been reﬂ ected in the ﬁ nancial statements. Deferred tax asset has arisen from loss carry forward for LMS amounting to £964,000 and recognised at a rate of 25%. 358 Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2018 18. Dividends Year to December 2018 Final dividend – 2017 Interim dividend – 2018 Year to December 2017 Final dividend – 2016 Interim dividend – 2017 19. Called up share capital Allotted and issued Ordinary shares of £0.25 each: At 1 January 2017 New share issue At 31 December 2017 and 2018 All ordinary shares carry equal rights. 20. Reserves Share premium Annual Report 2018 Paid Amount per share 10 Jul 18 13 Nov 18 2.6p 1.5p Paid Amount per share 13 Jul 17 13 Nov 17 1.5p 1.4p Date No of shares '000 30 Nov 17 64,538 12,211 76,749 Total £’000 1,995 1,150 3,145 Total £’000 968 904 1,872 £’000 16,135 3,052 19,187 i F n a n c i a l S t a t e m e n t s The share premium reserve contains the premium arising on the issue of equity shares, net of issue expenses incurred by the Company. Retained earnings Retained earnings represent cumulative proﬁ ts or losses, net of dividends and other adjustments. Merger reserve The merger reserve arose due to the group reconstruction in 2016. 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 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 31 December 2015 and as at the 1 January 2015. The corresponding entry being the merger reserve so the overall net assets as at the comparative dates are not affected. The 2016 movement on the merger reserve arose due to the acquisition of Treasured Scent (2014) Limited on 11 November 2016. The shareholders of Treasured Scent (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. The 2017 movement in merger reserve represents the difference between the issue price and the nominal value of shares issued as consideration for the acquisition of subsidiary undertaking. Other reserves ‘Other reserves’ have arisen from the share-based payment charge. The shares over which the options were issued are that of the parent company. ‘Other reserves’ have also arisen on translation of foreign subsidiaries. 59 Warpaint London P LC Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2018 21. Share based payments Movements in the number of options and their weighted average exercise prices are as follows: Outstanding at the beginning of the year Granted during the year Expired during the year Outstanding at the end of the year Weighted average Weighted average exercise price (pence) Number of options exercise price (pence) Number of options 2018 237.5 244.0 237.5 243.6 2018 255,892 3,837,462 (22,737) 4,070,617 2017 – 237.5 – 237.5 2017 – 277,788 (21,986) 255,892 The weighted average remaining contractual life of the options is 5.0 years. The following options over ordinary shares have been granted by the Company: 29 June 2017 21 September 2018 Exercise price Exercise period Pence 237.50 254.5 (years) Number of options 3 5 255,051 3,837,462 At the date of grant, the options were valued using the Black-Scholes option pricing model. The fair value per options granted and the assumptions used in the calculations were as follows: Expected volatility Expected life (years) Risk-free interest rate Expected dividend yield Fair value per option (£) 24 Sept 18 29 June 17 78% 10 1.61% 1.53% 0.422 64% 3 0.38% 2% 0.963 On 21 September 2018, share options with an exercise price of 254.5p, equal to the closing mid-market value immediately prior to the date of grant, and subject to the achievement of demanding Earnings Per Share (“EPS”) and Total Shareholder Return (“TSR”) performance conditions measured over a period of up to 5 years were granted to certain directors. The share options are exercisable up to 10 years from the date of grant. Vesting is subject to the performance conditions set out below: • 50% of the award is subject to an adjusted EPS growth performance condition. One third of this portion of the award will be tested and vest after three, four and ﬁ ve years. Vesting is based on adjusted EPS in the years ending Dec 2020, 2021 and 2022. Threshold vesting of 20% of the award is achieved at 12.5% compound annual EPS growth and full vesting at 22.5% compound annual EPS growth, measured from 31 December 2017. • 50% of the award is subject to an absolute TSR performance condition tested following the announcement of results for the years ending 31 December 2020, 2021 and 2022. Threshold vesting of 20% of the award is achieved at 8% compound annual TSR and straight line vesting up to 100% vesting at 18% compound annual TSR, measured from 31 December 2017. An additional grant of 460,494 share options with the same terms was made on the same date to three senior management individuals of the Company. On 29 June 2017, the Company granted in aggregate over 277,788 ordinary shares of 25 pence each in the Company under the Enterprise Management Incentive Scheme to all staff members, including the Company’s Chief Financial Ofﬁ cer, Neil Rodol, but excluding all other directors at that time. The Options are exercisable for a period of seven years from 29 June 2020, subject to certain performance conditions being met, including that the compound annual growth rate in the Company’s earnings per share must exceed 8 per cent over the three ﬁ nancial years commencing 1 January 2017, subject to the discretion of the Company’s remuneration committee. The charge in the statement of comprehensive income for the share based payments during the year was £116,000 (2017: £45,000). 360 Annual Report 2018 Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2018 22. Related party transactions Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation. Related party transactions are considered to be conducted at arm’s length. Key management personnel are considered to be the directors. Compensation of the directors is disclosed in note 4 with the exception of dividends and drawings which are disclosed in note 18. During 2018, Warpaint Cosmetics (2014) Ltd paid rent in the sum of £120,000 (2017: £120,000) to Direct Supplies Group Ltd, of which Mr S Bazini is a director. At the year end the amount due to Direct Supplies Group Ltd was £39,518 (2017: £80,000). During 2018, Warpaint Cosmetics (2014) Ltd paid rent in the sum of £120,000 (2017: £120,000) to Warpaint Cosmetics Ltd, of which Mr E Macleod and Mr S Bazini are directors. At the year end the amount due to Warpaint Cosmetics Ltd was £nil (2017: £36,000). During 2018, Retra Holdings Limited paid rent in the sum of £197,083 (2017: £nil) to Warpaint Cosmetics Ltd, of which Mr E Macleod and Mr S Bazini are directors. During the year, the Company advanced £nil (2017: £12,500) to Mr S Bazini, a director of the Company. During the year, the director repaid £100 (2017: £26,276). Mr S Bazini incurred expenses on behalf of the Company totalling £nil (2017: £1,804). At the year end the Company owed the sums of £100 (2017: £nil) to Mr S Bazini. During the year, the Company advanced £nil (2017: £12,500) to Mr E Macleod, a director of the Company. During the year, the director repaid £100 (2017: £17,711). Mr E Macleod was reimbursed expenses on behalf of the Company totalling £nil (2017: £4,071). At the year end the Company owed the sums of £100 (2017: £Nil) to Mr E Macleod. 23. 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 ﬂ exibility. The Group reports in Sterling. All funding requirements and ﬁ nancial 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 £37,550,000 as at 31 December 2018 (2017: £37,120,000) as shown in the statement of changes in equity. The Group maintains or adjusts its capital structure through the payment of dividends to shareholders and issue of new shares. i F n a n c i a l S t a t e m e n t s Year ended 31 December 2018 £’000 4,041 11,510 15,551 (3,013) (2,722) (5,735) 9,816 2017 (restated) £’000 3,369 12,925 16,294 (2,969) (1,396) (4,365) 11,929 Financial assets Financial assets at amortised cost (2017: loans and receivables) including cash and cash equivalents: Cash and cash equivalents Trade and other receivables Financial liabilities Financial liabilities at amortised cost: Trade and other payables Bank loan Net Financial assets measured at fair value through the income statement comprise cash and cash equivalents. Financial assets measured at amortised cost comprise trade receivables and other receivables. Financial liabilities measured at amortised cost comprise trade payables and other payables, and bank loans. 61 Warpaint London P LC Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2018 23. Financial instruments (continued) Cash and cash equivalents 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 ﬁ nancial 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 ﬁ nancial risks of the Group is in place to ensure appropriate risk management of its operations. The following represent the key ﬁ nancial risks that the Group faces: Market risk The Group’s activities expose it to the ﬁ nancial risk of interest rates. Interest rate risk The Group’s interest rate exposure arises mainly from its interest-bearing borrowings. Contractual agreements entered into a ﬂ oating rates expose the entity to cash ﬂ ow 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 ﬂ uctuations. An increase in the rate of interest by 100 basis points would decrease proﬁ ts by £18,000 (2017: £13,000) with an increase in proﬁ ts by the same amount for a decrease in the rate of interest by 100 basis points. Credit risk Credit risk is the risk of ﬁ nancial loss to the Group if a customer or a counterparty to a ﬁ nancial instrument fails to meet its contractual obligations. The Group’s principal ﬁ nancial 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 ﬁ nancial condition of accounts receivable using independent ratings where available or by assessment of the customer’s credit quality based on its ﬁ nancial 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 identiﬁ ed. The Group makes a provision in the ﬁ nancial statements for expected credit losses based on an evaluation of historical data and applies percentages based on the ageing of trade receivables. The maximum exposure to credit risk in respect of the above is the carrying value of ﬁ nancial assets recorded in the ﬁ nancial statements. At 31 December 2018, the Group has trade receivables of £11,025,000 (2017: £11,903,000). The following table provides an analysis of trade receivables that were due, but not impaired, at each ﬁ nancial year end. The Group believes that the balances are ultimately recoverable based on a review of past impairment history and the current ﬁ nancial status of customers. Current 1 – 30 days 31 – 60 days 61 – 90 days 91 + days Allowance for doubtful debts Total trade receivables – gross As at 31 December 2018 £’000 4,206 3,014 2,597 924 398 (114) 2017 £’000 4,241 3,550 2,623 868 794 (173) 11,025 11,903 The directors are unaware of any factors affecting the recoverability of outstanding balances at 31 December 2018 and, consequently, no further provisions have been made for bad and doubtful debts. The allowance for bad debts has been calculated using a 12 month expected credit loss model, as set out below, in accordance with IFRS 9. There are no receivables subject has been subject to a signiﬁ cant increase in credit risk. The ﬁ gures presented below for 2017 are for comparison purposes only. The actual doubtful debt allowance for 2017 was £173,000 and the comparatives have not been restated. 362 Annual Report 2018 Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2018 23. Financial instruments (continued) As at 31 December 2018 As at 31 December 2017 £’000 4,206 3,014 2,597 924 398 % 0.122 0.366 1.098 3.294 9.882 £’000 5 11 29 30 39 114 £’000 4,241 3,550 2,623 868 794 % 0.122 0.366 1.098 3.294 9.882 £’000 5 13 29 29 78 154 Current 1 – 30 days 31 – 60 days 61 – 90 days 91 + days Credit quality of ﬁ nancial assets Trade receivables, gross (Note 13): Receivable from large companies Receivable from small or medium-sized companies Total neither past due nor impaired Past due but not impaired: Less than 30 days overdue 30 – 90 days overdue Total past due but not impaired Individually determined to be impaired (gross): Less than 30 days overdue 30 – 90 days overdue Total individually determined to be impaired (gross) Less: Impairment provision Total trade receivables, net of provision for impairment Cash and cash equivalents, neither past due nor impaired (Moody’s ratings of respective counterparties): A rated AA rated BAA rated Total cash and cash equivalents For the purpose of the groups monitoring of credit quality, large companies or groups are those that, based on information available to management at the point of initially contracting with the entity, have annual turnover in excess of £100,000 (2017: £100,000). Liquidity risk Liquidity risk arises from the Group’s management of working capital. It is the risk that the Group will encounter difﬁ culty in meeting its ﬁ nancial obligations as they fall due. The Group’s policy is to ensure that it will always have sufﬁ cient 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 sufﬁ cient funds to meet the obligations as they fall due. The board receives regular forecasts which estimate cash ﬂ ows over the next eighteen months, so that management can ensure that sufﬁ cient funding is in place as it is required. 63 As at 31 December 2018 £’000 3,617 589 4,206 3,014 3,805 6,819 16 98 114 (114) 11,025 i F n a n c i a l S t a t e m e n t s 2017 £’000 3,929 312 4,241 3,550 4,112 7,662 – 173 173 (173) 11,903 As at 31 December 2018 £’000 434 1,086 2,521 4,041 2017 £’000 800 – 2,569 3,369 Warpaint London P LC Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2018 23. Financial instruments (continued) The tables below summarise the maturity proﬁ le of the combined group’s non-derivative ﬁ nancial liabilities at each ﬁ nancial year end based on contractual undiscounted payments, including estimated interest payments where applicable: Year ended 31 December 2018 Trade payables Other payables Accruals Bank loans Estimated interest Year ended 31 December 2017 Trade payables Other payables Accruals Bank loans Estimated interest Less than 6 months Between 6 months and 1 year £’000 1,435 847 731 1,910 50 4,973 £’000 – – – 259 125 384 Less than 6 months Between 6 months and 1 year £’000 1,671 41 1,257 – 102 3,071 £’000 – – – 582 63 645 Between 1 and 5 years £’000 – – – 553 491 1,044 Between 1 and 5 years £’000 – – – 814 201 1,015 Total £’000 1,435 847 731 2,722 666 6,401 Total £’000 1,671 41 1,257 1,396 366 4,731 The borrowings of the group are secured by a debenture including a ﬁ xed charge over all present freehold and leasehold property, a ﬁ rst ﬁ xed charge over book and other debts and a ﬁ rst ﬂ oating charge over all assets. Foreign exchange risk 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 ﬂ exible discount structure to offset any adverse foreign exchange movements and through the use of forward currency contracts. At December 2018, there were total sums of £72,345 (2017: £304,527) held in foreign currency. The Group is also exposed to currency risk as the assets of its subsidiary are denominated in US Dollars. At 31 December 2018 the net foreign assets were £0.3m (2017: £nil). Differences that arise from the translation of these assets from US dollar to sterling are recognised in other comprehensive income in the year and the cumulative effect as a separate component in equity. The Group does not hedge this translation exposure to its equity. A 5% weakening of sterling would result in a £4,000 increase in reported proﬁ ts and equity, while a 5% strengthening of sterling would result in £3,000 decrease in proﬁ ts and equity. Derivatives carried at fair value: Exchange (loss)/gain on forward foreign currency contracts 2018 £’000 – 2017 £’000 (3) The Group, along with other businesses, will face the risk of inﬂ ationary pressures through commodities cost increases, further driven by currency weakness post Brexit. 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 2018, the group has 4 (2017: 1) forward foreign exchange contracts outstanding. Derivative ﬁ nancial instruments are carried at fair value. 364 Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2018 23. Financial instruments (continued) The following table details the foreign currency contracts outstanding as at the balance sheet date. a) Contracted exchange 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 Annual Report 2018 2018 £/€ 1.1293 1.1275 2018 £’000 779 195 974 2018 €’000 880 220 1,100 2017 £/$ 1.3393 – 2017 £’000 359 – 359 2017 $’000 481 – 481 Fair value of ﬁ nancial assets and liabilities Financial instruments are measured in accordance with the accounting policy set out in Note 1. All ﬁ nancial instruments carrying value approximates its fair value with the exception of foreign currency forward contracts and options which are considered Level 2. The directors consider that there is no signiﬁ cant difference between the book value and fair value of the Group’s ﬁ nancial assets and liabilities and is considered to be immaterial. 24. Pension costs The Group operates a deﬁ ned 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 proﬁ t in each period was £62,900 (2017: £13,800). 25. Operating lease commitments – Group company as lessee The Group leases ofﬁ ces and warehouses under non-cancellable operating lease agreements. The lease terms are between 5 and 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 26. Controlling party In the opinion of the directors there is no ultimate controlling party. 27. Earnings per share 2018 £’000 700 2,800 2,345 5,845 2017 £’000 466 1,542 1,290 3,298 Basic earnings per share are calculated by dividing proﬁ t or loss attributable to ordinary equity holders by the weighted average number of ordinary shares in issue during the period. The weighted average number of shares for the current year includes the shares issued as consideration for the acquisition of Retra Holdings on 30 November 2017. 65 i F n a n c i a l S t a t e m e n t s Warpaint London P LC Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2018 27. Earnings per share (continued) Basic earnings per share (pence) Diluted earnings per share (pence) The calculation of basic and diluted earnings per share is based on the following data: Earnings Earnings for the purpose of basic earnings per share, being the net proﬁ t Number of shares Weighted number of ordinary shares for the purpose of basic earnings per share Potentially dilutive shares awarded Weighted number of ordinary shares for the purpose of diluted earnings per share 2018 4.66 4.66 2018 £’000 3,575 2017 8.34 8.34 2017 £’000 5,473 2018 2017 76,749,125 65,575,658 – – 76,749,125 65,575,658 The 4,092,513 share options (2017: 255,862) in issue during the year has not been included in the computation of diluted earnings per share, as per IAS 33, the share options are not dilutive as they are not likely to be exercised given that the exercise price is higher than the average market price. 28. Notes supporting statement of cash ﬂ ows Signiﬁ cant non-cash transactions from investing activities is the equity consideration for the business combination of £2,158,000 during the year ended 31 December 2017. The non-cash transactions arising on the acquisition of LMS during the year ended 31 December 2018 and Retra during the year ended 31 December 2017 are as follows: 2018 Total £’000 8 1,307 417 168 272 (1,704) – – 468 Current loans and borrowings £’000 – 7,855 (7,273) 582 261 1,326 2,169 2017 Total £’000 929 4,088 8,698 – 292 (2,234) (74) (8,687) 2,962 Total £’000 – 8,689 (7,293) 1,396 – 1,326 2,722 Non-current loans and borrowings £’000 – 834 (20) 814 (261) – 553 Property, plant and equipment Stock Trade and other receivables Deferred tax Cash and cash equivalents Trade and other payables Corporation tax Loans Non-cash transactions from ﬁ nancing activities are shown in the table below. At 1 January 2017 Non-cash ﬂ ows: Amounts recognised on business combinations Cash ﬂ ows At 31 December 2017 Non-cash ﬂ ows: reclassiﬁ cation of loans Cash ﬂ ows At 31 December 2018 366 Company Statement of Financial Position for the year ended 31 December 2018 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 Merger reserve Share option reserve Retained earnings Shareholders’ funds Annual Report 2018 2018 £’000 35,833 35,833 14,988 113 15,101 67 – 67 15,034 50,867 19,187 19,359 1,895 169 10,257 50,867 2017 (restated) £’000 34,248 34,248 11,249 149 11,398 189 – 189 11,209 45,457 19,187 19,359 1,895 45 4,971 45,457 i F n a n c i a l S t a t e m e n t s Note 3 4 5 6 7 8 As permitted by section 408 of the Companies Act 2006, the proﬁ t and loss account is not presented. The proﬁ t for the year amounted to £8,433,000 (2017: £4,592,000). The ﬁ nancial statements on pages 67 to 70 were approved and authorised for issue by the board of directors on 10 April 2019 and were signed on its behalf by: Neil Rodol Chief Financial Ofﬁ cer The notes on pages 42 to 70 form part of these ﬁ nancial statements. 67 Warpaint London P LC Company Statement of Changes in Equity for the year ended 31 December 2018 As at 31 December 2016 Shares issued during the year Shares issued for Retra Holdings Share issue costs Movement in other reserves Proﬁ t for the year Dividends paid Notes 6/7 6/7 Share Capital Share Premium Merger reserve £’000 16,135 2,789 263 – – – – £’000 1,806 18,410 – (857) – – – £’000 – – 1,895 – – – – As at 31 December 2017 19,187 19,359 1,895 Movement in other reserves Proﬁ t for the year Dividends paid – – – – – – – – – Share Option Reserve £’000 – – – – 45 – – 45 124 – – Retained Earnings £’000 2,251 – – – – Total Equity £’000 20,192 21,199 2,158 (857) 45 4,592 4,592 (1,872) (1,872) 4,971 45,457 – 8,433 124 8,433 (3,147) (3,147) As at 31 December 2018 19,187 19,359 1,895 169 10,257 50,867 The notes on pages 42 to 70 form part of these ﬁ nancial statements. 368 Annual Report 2018 Notes to the Company Financial Statements for the year ended 31 December 2018 1. Signiﬁ cant accounting policies Basis of preparation Where equity instruments are granted to persons other than employees, the proﬁ t and loss account is charged with the fair value of goods and services received. These separate ﬁ nancial 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 ﬁ nancial statements are presented in GBP. In preparing the separate ﬁ nancial statements of the parent company, advantage has been taken of the following disclosure exemptions available to qualifying entities: • Only one reconciliation of the number of shares outstanding at the beginning and end of the period has been presented as the reconciliations for the group and the parent company would be identical; • No cash ﬂ ow statement or net debt reconciliation has been presented for the parent company; • Disclosures in respect of the parent company’s income, expense, net gains and net losses on ﬁ nancial instruments measured at amortised cost have not been presented as equivalent disclosures have been provided in respect of the group as a whole; • Disclosures in respect of the parent company’s share-based payment arrangements have not been presented as equivalent disclosures have been provided in respect of the group as a whole; and • No disclosure has been given for the aggregate remuneration of the key management personnel of the parent company as their remuneration is included in the totals for the group as a whole. The ﬁ nancial 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 ﬁ nancial statements except as set out below. Investments Investments in subsidiaries are measured at cost less accumulated impairment. Share-based payments Where share options are awarded to employees, the fair value of the options at the date of grant is charged to proﬁ t or loss over the vesting period. Non- market vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each balance sheet date so that, ultimately, the cumulative amount recognised over the vesting period is based on the number of options that eventually vest. Market vesting conditions are factored into the fair value of the options granted. The cumulative expense is not adjusted for failure to achieve a market vesting condition. 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 ﬁ nancial statements. Critical accounting estimates and judgements The Company 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 signiﬁ cant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next ﬁ nancial year are discussed below. Judgements and accounting estimates and assumptions Impairment of investments An impairment test is undertaken where there are indicators of the value of the investment being impaired. The directors use judgement in assessing the value of investments held. Recoverability of intercompany balances The directors assess the recoverability of balances from group companies based on the estimated trading results of the subsidiary companies. Dividends Dividends are recognised when they become legally payable. In the case of interim dividends to equity shareholders, this is when declared by the directors. In the case of ﬁ nal dividends, this is when approved by the shareholders at the annual general meeting. Prior year restatement During the year ended 31 December 2018, the consideration for the acquisition of Retra Holdings Limited was ﬁ nalised. The previously disclosed purchase price of £18.36 million was reduced by £450,000, on delivery of a ﬁ nal EBITDA statement to the previous owners of Retra, resulting in a reduction in the investment and an increase in the other receivable. The comparative ﬁ gures at 31 December 2017 have been adjusted retrospectively. This has no impact on the reserves or the shareholders’ funds. 2. Staff costs i F n a n c i a l S t a t e m e n t s Year ended 31 December 2018 £’000 169 19 2 190 2017 £’000 147 16 – 163 The fair value of the award also takes into account non-vesting conditions. These are either factors beyond the control of either party (such as a target based on an index) or factors which are within the control of one or other of the parties (such as the company keeping the scheme open or the employee maintaining any contributions required by the scheme). Wages and salaries Social security costs Pension costs Where the terms and conditions of options are modiﬁ ed before they vest, the increase in the fair value of the options, measured immediately before and after the modiﬁ cation, is also charged to proﬁ t or loss over the remaining vesting period. 69 Warpaint London P LC Notes to the Company Financial Statements (continued) for the year ended 31 December 2018 2. Staff costs (continued) The average monthly number of employees during the period was as follows: Year ended 31 December 5. Creditors due within one year Directors Directors’ remuneration, included in staff costs Salaries 2018 No. 6 6 2018 £’000 169 169 2017 No. 6 6 2017 £’000 147 147 The directors are the only key management personnel. 3. Investments Trade payables Other taxation and social security Accruals and deferred income 6. Called up share capital Allotted and issued Ordinary shares of £0.25 each 2018 £’000 – 29 38 67 2017 £’000 135 27 27 189 No of shares Date ’000 £’000 Cost At January 2018 (as restated) Additions At December 2018 Net book value At 31 December 2018 At 31 December 2017 (as restated) At 31 December 2018 At 1 January £’000 New share issue 30 Nov 17 At 31 December 2017 and 2018 64,538 12,211 76,749 16,135 3,052 19,187 34,248 1,585 35,833 35,833 34,248 All ordinary shares carry equal rights. 7. Share premium Share premium 2018 £’000 19,359 2017 £’000 19,359 During the year ended 31 December 2018, the consideration for the acquisition of Retra Holdings Limited was ﬁ nalised. The previously disclosed purchase price of £18.36 million was reduced by £450,000 resulting in a reduction in the investment ﬁ gure by £450,000. The comparative ﬁ gures at 31 December 2017 have been adjusted retrospectively and the corresponding reductions is recognised in other debtors. 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 2017, the Company issued 11,157,894 ordinary £0.25 shares at a price of £1.90 for cash and 1,052,631 shares at a price of £2.05 per share as consideration for an acquisition, resulting in share premium of £20,216,000 less directly attributable share issue costs of £857,000. On 3 August 2018 Warpaint London PLC acquired the entire share capital in Marvin Leeds Marketing Services Inc. 8. Other reserves The Company subsidiaries, as at the period end are shown in note 8 of the consolidated ﬁ nancial statements. 4. Debtors (as restated) Due from group undertakings Other debtors Prepayments and accrued income 2018 £’000 14,975 1 12 14,988 2017 (restated) £’000 10,791 450 8 11,249 Amounts due from related undertakings are unsecured, non-interest bearing and payable on demand. The movement in merger reserve represents the difference between the issue price and the nominal value of shares issued as consideration for the acquisition of subsidiary undertaking. The share option represents share-based payment charges on the share options that were in issue. 9. 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 22 of the Consolidated Financial Statements. 370 Officers and Professional Advisers Directors Registered Ofﬁ ce C Garston S Bazini E Macleod N Rodol S Craig K Sadler P Hagon Chairman Joint Chief Executive Ofﬁ cer Joint Chief Executive Ofﬁ cer Chief Financial Ofﬁ cer General Counsel & Company Secretary Non-Executive Director Non-Executive Director 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 100 Wood Street London EC2V 7AN BDO LLP 55 Baker Street London W1U 7EU DAC Beachcroft LLP 25 Walbrook London EC4N 8AF Neville Registrars Limited Neville House Steel Park Road Halesowen West Midlands B62 8HD IFC Advisory Limited 24 Cornhill London EC3V 3ND Perivan Financial Print 254163 71 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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