Warpaint London PLC Annual Report 2020

Plain-text annual report

Warpaint London PLC Contents Strategic Report 03 Mission Statement 04 Headline Results 06 Chairman’s Statement 08 Chief Executive Statement 14 Financial Review 20 Risk Management Governance 23 Board of Directors 25 Corporate Governance Report 36 Section 172 Statement 38 Audit Committee Report 40 Remuneration Committee Report 43 Directors’ Report 47 Independent Auditor’s Report Financial Statements 53 Consolidated Statement of Comprehensive Income 54 Consolidated Statement of Financial Position 56 Consolidated Statement of Changes in Equity 57 Consolidated Statement of Cash Flows 58 Notes to the Consolidated Financial Statements 83 Company Statement of Financial Position 84 Company Statement of Changes in Equity 85 Notes to the Company Financial Statements Other Information 88 Officers and Professional Advisers 2 Annual Report 2020 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 provide access to an extensive range of high quality cosmetics at an affordable price.” We strive to fulfil our mission by: • Utilising marketing and advertising initiatives that are efﬁ cient • 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 high quality ingredients • 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 2020 Warpaint London plc (“Warpaint”, the “Company” or the “Group”) is made up of two divisions. The largest division sells branded cosmetics under the lead brand names of W7 and Technic. W7 is sold in the UK primarily to retailers and internationally to local distributors or retail chains. The Technic brand is sold in the UK and continental 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 our other own brand names of Man’stuff, Body Collection, Vintage, Very Vegan, and Chit Chat. The other division trades in close-out and excess inventory of branded cosmetics and fragrances from around the world. Revenue Proﬁ t / (loss) from operations Proﬁ t margin from operations PBT / (LBT) EPS / (LPS) Cash Revenue Adjusted proﬁ t from operations Adjusted proﬁ t margin from operations Adjusted PBT Adjusted EPS Cash Statutory Results Year ended 31 Dec 2020 Year ended 31 Dec 2019 £40.3m £49.3m £(0.9)m na £(1.1)m (1.3)p £4.9m £2.1m 4.3% £1.8m 1.8p £2.7m Adjusted Statutory Results Year ended 31 Dec 2020 Year ended 31 Dec 2019 £40.3m £49.3m £2.5m* 6.2%* £2.3m* 3.1p* £4.9m £5.6m* 11.4%* £5.2m* 6.3p* £2.7m * Adjusted for £0.24 million of staff restructuring and voluntary redundancy costs (2019: £0.07 million), and inventory relocation costs in the US of £nil (2019: £0.08 million) and £0.08 million of legal costs (2019: £0.03 million) and £2.4 million of amortisation of intangible assets (2019: £2.4 million) and share based payments of £0.7 million (2019: £0.8 million). Adjusted numbers are closer to the underlying cash ﬂ ow performance of the business which is regularly monitored and measured by management. 34 Annual Report 2020 2020 Financial Highlights • Group revenue of £40.3 million (2019: £49.3 million) in light of the Covid-19 pandemic and the impact of temporary closures of a number of customers’ retail outlets • Cash generated from operating activities increased by 70.7% to £7.5 million (2019: £4.4 million) • Adjusted proﬁ t from operations of £2.5* 1 million (2019: £5.6* 1 million) • Reported loss before tax of £1.1 million (2019: proﬁ t before tax £1.8 million) • Adjusted earnings per share of 3.1p *1 (2019: 6.3p* 1) • The Group continued to generate signiﬁ cant cash and cash at the year end increased by 81.5% to £4.9 million (31 December S t r a t e g i c R e p o r t 2019: £2.7 million) • Final dividend recommended of 3.0 pence per share, bringing the total dividend for the year to 5.8 pence per share, including a special dividend of 1.3 pence per share paid in November 2020 to reﬂ ect that no ﬁ nal dividend was declared for 2019 2020 Operational Highlights • Swift reaction to the impact of Covid-19 with a plan quickly formulated and successfully executed • Repositioned business to increase focus on mainstream high street stores and online • Commencement of sales of: (cid:190) W7 products in Tesco stores (cid:190) Technic and Body Collection products in wilko stores • Launch of Amazon FBA and e-Commerce revenue signiﬁ cantly accelerated in the UK and the USA • Rationalisation of brand and product range in line with focused strategy Post-Period End Highlights • Improved trading experienced in the ﬁ rst quarter of 2021 - sales for the ﬁ rst three months of 2021 9% ahead of the same period in 2020, a period that was only impacted by Covid-19 related lockdowns in its last few weeks, with sales increases seen in all the Group’s geographic regions • Product gross margin improved in the ﬁ rst quarter of 2021 versus the same period in 2020. • Further expansion in the number of Tesco stores stocking the Group’s products and the stocking of additional W7 product lines • Further product expansion in USA with W7 products now being stocked in over 1,000 Five Below stores • The Company is now debt free with the remaining loans and HP contracts totalling £0.3 million being repaid in full in April 2021. As at 27 April 2021 the Company had cash balances of £5.8 million *1 Adjusted for £0.3 million of exceptional costs (2019 £0.2 million),£2.4 million of amortisation of intangible assets (2019: £2.4 million) and share based payments of £0.7 million (2019: £0.8 million). Adjusted numbers are closer to the underlying cash ﬂ ow performance of the business which is regularly monitored and measured by management. 5 Warpaint London P LC Chairman’s Statement Clive Garston 2020 was a year dominated by the Covid-19 pandemic. Prior to the onset of the pandemic, trading in the ﬁ rst two months of the year was strong. However, with global lockdowns commencing in March the picture changed dramatically and the Group witnessed a signiﬁ cant reduction in sales as many of our customers’ retail outlets in the UK which were regarded as non-essential and in other markets were forced to close, in particular in the EU and the USA. These were unprecedented trading conditions, with the economy and industry facing some of its most signiﬁ cant challenges ever. Warpaint entered the pandemic in robust health, with a strong balance sheet and an agile management team capable of dealing with the challenges presented by the pandemic. During the year we took the opportunity to reposition the business to increase our focus on mainstream high street stores and to build our online presence. We also reviewed our brands and product lines with a subsequent reduction in the number of products. This enabled us to remove those that do not ﬁ t with our strategic goals and worked to ensure that our product range, pricing and customer base gives us the best possible opportunity for future growth as the world recovers. I believe the Group has weathered the pandemic well and has proved its ﬂ exibility and resilience in dealing with an unprecedented and unforeseeable situation. I am particularly pleased to note the progress we have made with the expansion of the number and type of UK retailers stocking the Group’s products and the growth of our online presence during 2020. Trading improved in the second half of the year and we are pleased to report this trend has continued into the ﬁ rst quarter of 2021. Results Revenue was signiﬁ cantly impacted as a consequence of the pandemic, with a corresponding impact on Group proﬁ tability. It is the board’s opinion that without the impact of the coronavirus pandemic 2020 would have been a year of recovery and improvement in ﬁ nancial performance for the Group, a statement which is supported by the robust trading we saw in the ﬁ rst two months of 2020. Adjusted proﬁ t from operations was £2.5 million (2019 £5.6 million) on revenue of £40.3 million (2019 £49.3 million) with basic earnings per share of (1.3)p (2019 1.8p) and adjusted earnings per share of 3.1p (2019 6.3p). Adjusted numbers exclude exceptional costs (staff restructuring and voluntary redundancy costs, certain legal costs and stock relocation costs), amortisation in relation to acquisitions and share based payments. During 2020, the Group took the opportunity to streamline and reduce stock levels, with cash generated from operations increasing by 70.7% . The balance sheet remains strong, with cash at 31 December 2020 of £4.9 million (31 December 2019 £2.7 million), and management are conﬁ dent Warpaint entered 2021 as a more efﬁ cient business with an improved focus. Dividend As announced in our results for 2019 the board decided in the interests of prudence given the considerable on-going uncertainty caused by Covid-19 at the time, and in order to further preserve its cash resources, not to recommend a ﬁ nal dividend for 2019. However, as the business adapted to the issues presented by Covid-19 and the outlook improved the Group resumed dividend payments at the time of the 2020 interim results with an interim dividend declared of 2.8p per share, maintaining the prior year interim dividend of 1.5p per share, together with a one off additional 1.3p per share, to reﬂ ect that no ﬁ nal dividend was declared for 2019. In accordance with the Group’s policy to continue to pay appropriate dividends, the board is pleased to recommend a ﬁ nal dividend of 3.0p per share which, if approved by shareholders at the AGM, will be paid on 5 July 2021 to shareholders on the register at 18 June 2021. The shares will go ex-dividend on 17 June 2021. Board and People The pandemic has dramatically impacted the personal and working lives of everyone. For the team at Warpaint this has required signiﬁ cant changes to working practices and personal uncertainties to be overcome. I am delighted with the way in which everyone has met these challenges and I would like to offer my particular thanks this year to my fellow board members and the Group’s employees for their exceptional efforts, good humour and resilience in these difﬁ cult times. As announced in November 2020 the Company has commenced a search for an additional non-executive director following Paul Hagon’s move to an executive role and I anticipate that we will be able to make an appointment during the ﬁ rst half of 2021. 36 Annual Report 2020 S t r a t e g i c R e p o r t We are growing sales in the UK, and the launch of our products in over 1,000 Five Below stores in the USA is a signiﬁ cant step for the Group. We anticipate adding further retailers in due course and with our growing online sales we are well positioned for the future. I am optimistic that these encouraging trends will continue and that we have the right strategy in place to deliver proﬁ table future growth. Clive Garston Chairman 27 April 2021 Annual General Meeting The Company’s annual general meeting will be held on 11 June 2021 at 10.00 a.m. In light of the continuing public health restrictions associated with the Covid-19 pandemic, further details of the annual general meeting arrangements will be provided when the notice of annual general meeting is sent to shareholders. Outlook I was pleased that despite much of the world having some level of lockdown during the ﬁ rst three months of 2021 and the continued enforced temporary closure of a number of the Group’s customers’ retail outlets, sales for the ﬁ rst three months of 2021 in all the Group’s geographic regions were ahead of the same period in 2020, a period that was only impacted by Covid-19 related lockdowns in its last few weeks. Product gross margin has also improved in the ﬁ rst quarter of 2021 versus the same period in 2020. 7 Warpaint London P LC Chief Executive’s Statement Sam Bazini The Covid-19 pandemic has had and is still having, a signiﬁ cant impact on people’s lives and businesses. Warpaint was not immune to its effects and whilst we continued to perform well with retailers that stayed open, the temporary closure of many retail outlets had a signiﬁ cant impact on our business. At the beginning of the outbreak, and before the impact was felt in the UK, our initial focus was around the supply of our colour cosmetic products sourced in China, this being the main region of supply to the Group and I am pleased to report we experienced no impact on the availability of our product. As the pandemic hit the UK the wellbeing of the Warpaint staff was our primary concern, whilst also continuing to ensure we traded to support the durability of our business for stakeholders. We took signiﬁ cant preventative measures across our business, both to protect the health of our staff and to minimise operational disruption. As countries began to lock down ﬁ rst in Europe, then in the UK and USA, consumer demand switched to essential items and food, and away from colour cosmetics, particularly as their social interactions were curtailed. In response we reduced discretionary spend, those staff not working because of the decrease in business activity were furloughed and we temporarily deferred rental payments. Those staff still working to maintain operations did so wherever possible from home, and for those staff working in our ofﬁ ces and warehouses social distancing practices were quickly put in place to ensure their safety. In the second half of the year, as the world adapted and some retail outlets reopened, demand returned for Warpaint’s products. As sales and orders returned nearer to expected levels, so too did our discretionary spend (with the exception of PR, exhibitions and travel costs), nearly all staff returned to work full time and rental payments were bought up to date and recommenced. The Group utilised minimal government Covid-19 related support other than the UK Government’s furlough scheme, which was used for a short period of time during the ﬁ rst lockdown and where affected staff continued to be paid in full, and a small amount of temporary support in the USA covering three employees. We also took the opportunity in 2020 to review our overall strategy, rationalise our product range and increase our focus on online sales. I believe this strategy is already bearing fruit and I am particularly pleased with the trends in the UK, highlighted by the commencement of sales in Tesco and wilko stores. W7 The Group’s most signiﬁ cant brand remains W7, with sales in 2020 accounting for 45% of total Group revenue (2019: 46%). Overall W7 sales reduced by 19% in 2020 compared to 2019. However, in the UK, W7 revenues in 2020 increased by 8%, despite the impact of the pandemic and an 18% reduction in H1 2020 sales compared to H1 2019. The UK is the most important market for W7, having grown in importance to account for 47% of sales in 2020, compared to 35% in 2019. We have implemented a strategy in the UK which we believe will increase sales of the W7 brand further and are seeing the fruits of this with the successful launch of the W7 brand into Tesco, including a further increase in both the number of Tesco stores stocking W7, and the number of W7 products being stocked, in the ﬁ rst quarter of 2021. We are in discussions with other major retailers in the UK with a view to them stocking W7 products. Internationally W7 sales were down in all reported regions due to the strict lockdowns imposed due to the Covid-19 pandemic, particularly in the ﬁ rst half of the year. In Europe sales fell by 29% compared to 2019, in the USA sales fell by 53% compared to 2019, and in the rest of the world sales fell by 34% compared to 2019. Towards the end of the year, as Covid-19 lockdowns eased, we saw a strong recovery for W7 in the UK, Europe and the rest of the world, with sales in the later months of the year in line with the board’s budget for the year, set prior to the Covid-19 pandemic. This trend has continued through the ﬁ rst quarter of 2021, with an especially positive performance for W7 in the UK, despite the reintroduction of lockdowns in the UK and elsewhere. We believe that W7 has a compelling brand proposition and will continue to beneﬁ t from consumers wanting a high quality but cost effective product. Technic The Technic brands comprise Technic, Body Collection and Man’stuff. Since the acquisition of the Technic brands, through the acquisition of Retra Holdings in November 2017, we have taken steps to improve the sales of the all year round 38 Annual Report 2020 S t r a t e g i c R e p o r t cosmetics sold under the brands, and to make the business proﬁ table throughout the whole year, not only in the second half when Christmas gifting is delivered. The split of gifting at 48% and single products at 52% remained the same as in 2019, although there was a shift to more all year round from speciﬁ c Christmas focus ed gifting product. Sales of branded Technic product in 2020 was 36% of total Group revenue (2019: 34%). Overall Technic sales only declined by 10% despite the Covid-19 impact, as the brands have a strong presence in essential retailers, although the largest customer for the Technic brands was closed for signiﬁ cant parts of the year. In 2020, UK revenues were 49% of Technic’s sales and they decreased by 11% over the year, despite being down 30% in the ﬁ rst half. The improved second half performance was predominantly a reﬂ ection of the successful launch in September of a range of Technic and Body Collection branded products in wilko, with Christmas gifting delivered to wilko from October. We anticipate sales will continue to grow through wilko, particularly as store footfall increases following the opening of non-essential retail on the high street. In Europe, Technic’s largest market in 2019, sales fell by 9% compared to 2019. As with W7, sales fell in Europe due to the strict lockdowns in the key countries. In the USA, sales increased by 11% compared to 2019, and in the rest of the world sales fell by 34% compared to 2019, albeit the sales were small in these regions in the context of the Group as a whole. The business encompassing the Technic brands also produces and sells own brand white label cosmetics for several major high street retailers, with such sales being 7% of Group revenue (2019: 5%). These sales grew by 7% in 2020, compared to 2019. We continue to assess private label opportunities on a case by case basis, based on the return they can deliver. As with W7 we saw a strong recovery in sales for Technic in the UK, Europe and the rest of the world since the easing of the Covid-19 lockdowns in the later part of 2020, with this trend continuing into 2021, despite the reintroduction of lockdowns in some territories. Close-out Whilst the Group’s close-out division continues to provide a good source of intelligence in the colour cosmetics market the focus on these activities further reduced in 2020, particularly with the decision taken to signiﬁ cantly reduce close-out sales in the USA, as the Group concentrated on selling its own brands there. Consequently, the close-out division represented 12% of Group revenue in 2020, down from 15% in 2019 and 16% in 2018. Close-out sales have been intentionally reduced further in the ﬁ rst quarter of 2021, as the Group focuses on sales of its brands. New Product Development New product development remained a key focus of the Group’s activity in 2020, despite the pandemic, and will continue to be core to the Group’s proposition to provide new products that are on trend, fast to market and that meet the consumer’s quickly changing needs. Our New Product Development Team continues to develop a strong pipeline of new products, focus ed on the demands of our customers. New products introduced in 2020 included the W7 skincare range, which has been extremely well received, with many positive online reviews, together with a revamping of the vegan range. Our new product development strategy continues to utilise manufacturing partners, predominantly in China and Europe, that provide the best product quickly, for the best price, and meet our legal and ethical compliance requirements. This process is supported by the Group’s Hong Kong based subsidiary sourcing ofﬁ ce and its China subsidiary (Jinhua Badgequo Cosmetics Trading Company Ltd), with local employees able to explore new factories and oversee quality control and ethical sourcing. The Group is also focus ed on the environmental impact of its products and has removed all plastics from the outer packaging of its gifting and all year-round products, and has virtually eliminated the use of single use packaging in its products completely. The Group’s product packaging therefore uses paper and cardboard wherever practicable, which enables the Group, the wholesaler and end user to recycle the waste effectively. In terms of the Group’s product casings, the use of plastic is sometimes practically unavoidable but recyclable packaging is used wherever possible. All new W7 brand products are being manufactured without parabens and the Company is reformulating existing products where feasible. The Group aims to be paraben free for all products in the next 24 to 36 months. e-Commerce During 2020 we placed an increased emphasis on driving online sales and ensuring that our online pricing was closely matched to that of our larger retailers. Whilst direct online sales remain a modest proportion of the Group’s overall sales, they more than doubled from £0.2 million in 2019 to over £0.5 million in 2020, and we anticipate further signiﬁ cant progress in 2021. In Q1 2021 the Group’s e-commerce sales were £0.24 million. 9 Warpaint London P LC Chief Executive’s Statement (continued) In 2020 we listed our brands in the UK, in May, and the USA, in August, on Amazon FBA (Fulﬁ lment by Amazon), in addition to using our own websites, which has helped accelerate our online sales. The strategy is to appropriately apply marketing spend in order to generate further sales momentum and a further launch on Amazon EU is planned to be implemented in the near future. Marketing and PR In 2020 we continued our focus on ensuring our marketing programmes were both fresh and innovative, in both the traditional and social media environment. In particular we instituted a loyalty programme and speciﬁ c social media programme targeted at driving website visit conversions into sales and increasing basket size. Strategy As previously outlined, in early 2018, the board adopted a three-year strategic plan for the business. This is measured, monitored and reviewed regularly and was updated by the board in 2021 with a view to it forming the basis of the Group’s development through to the end of 2024. The plan is designed to drive shareholder value and has deﬁ ned targets for sales, EBITDA, earnings per share and cash generation, with a particular emphasis on driving incremental EBITDA growth. The strategic plan comprises six key pillars: • Develop and build the Group’s brands and provide new product development that meets changing trend and consumer needs The Group continues to review, evaluate and develop the Group’s portfolio of brands to ensure there is a clear brand hierarchy; a clear proposition by brand; non-core brands and product stock are eliminated; and that the Group delivers new product development and gifting sets that meet customer needs. • Develop and nurture the current core business A major objective of the Group is to continue to develop and grow the presence of the Warpaint brands beyond their existing worldwide customer base. There is still, however, signiﬁ cant potential to be realised in the current customer base and the Group is committed to ensuring this potential is maximised. The Group is focused on ensuring there is a clarity of product offering to each customer segment and to supporting its customers with relevant new products; by using appropriate marketing to draw consumers into customer stores; and by cross selling the Group’s brands where appropriate. • Grow Market Share in the UK The business continues to focus on increasing the presence of the Group’s brands in channels that our consumers shop in, to increase accessibility and drive proﬁ table market share growth. As a result of this strategy, the Group has successfully launched the W7 brand into Tesco and the Technic brands into wilko. It continues to have active discussions with other major retailers who are currently in channels that the Group is yet to materially supply to and expanding the UK customer base is a key focus of management. This is particularly opportune as retailers across all sectors are increasingly looking to provide quality products to their customers at affordable prices. • Grow market share in the USA and China The USA and China continue to provide a major growth opportunity for the Group. In the USA, the Group continues to investigate the optimal route to market through established agency channels and/ or direct to retailers, and is establishing a core product range for the USA with minimum margin requirements. In China the Group conducts business locally through its Chinese subsidiary company. We are also continuing to register products for sale in China in order to grow our total offering and increase sales. This has led to the development of relationships with distributors in the region who have the capability to drive sales of the W7 brand there. • Develop the online/e- Commerce strategy for brand development and proﬁ table sales The Group aims to grow its proﬁ table sales across the Group’s online sales channels, ensuring the process is optimised and efﬁ cient. The Group continues to develop and build its brands by utilising brand ambassadors, inﬂ uencers and make-up artists to engage actively with its target audience. The Group wants to ensure that consumers are adequately inspired and educated on how the Group’s products can be used to experiment and achieve different looks. The Group has launched a loyalty programme that creates a W7 community of customers to drive sales conversion on the Company’s website. The aim of these activities is to create an interactive community of consumers and drive recommendation. Developing the social media strategy also directly impacts the Group’s online sales strategy. As an example, 45% of W7’s target customers are buying cosmetics online. • Develop the appropriate organisational structure, people strategy and organisational efﬁ ciency Warpaint continues to review the businesses’ structures, resources and capabilities with the objective of delivering the strategic plan, communicating the plan to ensure that all employees are engaged, and rewarding employees suitably for doing a good job. 310 Annual Report 2020 S t r a t e g i c R e p o r t Brands During 2020 we undertook a review of all our brands, removing from sale those small number of brands that were sub-scale and did not have a compelling market position. This exercise has enabled the Group to focus on its core W7, Technic, Body Collection, Man’stuff, Chit Chat and Very Vegan brands. We are also developing Body Collection as a key brand, which we believe has untapped potential given it is currently sold in only one UK retailer. Customers & Geographies UK The UK accounted for 52.5% of Group sales in 2020 (2019: 46.1%), with UK sales reducing by only 6.9% to £21.1 million (2019: £22.7 million) despite the effects of Covid-19 forcing temporary UK high street store closures. In the UK the Group performed better through the Covid-19 crisis than in our international regions because the imposed lockdown was not as severe and some of our UK customers were deemed “essential”, so they remained open for business. The top ten UK Group customers accounted for 63% of UK sales in 2020 (2019: 64%). Those customers that remained open through Covid-19 performed well in 2020. Additionally the Group beneﬁ ted in the second half of the year from the sales of W7 product in Tesco and the Technic brands in wilko, both of which were new retailers for the Group. Europe Europe has for some time been an area of excellent growth for the Group and accounted for 37.5% of Group sales in 2020 (2019: 38.2%). However the Covid-19 pandemic impacted sales severely once country wide lockdowns started in March 2020 and stores were forced to close. Sales for the Group’s brands into Europe are mainly to Spain, Denmark, Sweden and Germany. European sales for 2020 reduced 19.7% to £15.1 million (2019: £18.8 million). However, with Group sales overall in Europe decreasing in H1 2020 by 35% compared to the same period in 2019, there was a signiﬁ cant recovery in the second half of the year as the Covid-19 lockdowns were eased. Advance plans were made to ensure business continuity, as far as possible, whilst the nature of the UK’s future trading relationship with the EU remained uncertain. Following the UK trade deal with the EU at the end of the year there has been some disruption in early 2021, however, this has now largely been overcome. The Group is utilising the Company’s wholly owned subsidiary, Warpaint Cosmetics (ROI) Limited, in the Republic of Ireland, which was formed speciﬁ cally to facilitate the Group’s EU trading and to help mitigate against UK/ EU cross-border disruption. USA The USA was the hardest hit of any of the Group’s markets by the impact of Covid-19. USA sales, in sterling terms, reduced by 56.7% in 2020 to £2.1 million (2019: £5.0 million) and equated to 5.3% of overall 2020 Group sales. Current customers in the USA include Macys Backstage, Marshalls, and TJ Maxx, all of whom have been required to shut stores for periods during 2020. Post year end, following a successful trial with store group Five Below, W7 products are now being stocked in over 1,000 of their stores in the USA. The Group’s USA subsidiary, LMS, is now fully integrated into the Group. Prior to its acquisition in August 2018 two thirds of LMS revenue was from distributing W7 products, the remainder being the sale of other branded cosmetics through its close-out activities. Since the acquisition the focus has been more on own brands and leveraging the marketing and other synergies contributed at a Group level. The USA is the largest colour cosmetics market in the world and developing sales there is a strategic goal for the Group. As previously reported, we implemented a number of measures to improve margins in the USA business, including changing our third party warehousing arrangements to reduce costs and by restructuring the staff levels in the USA, saving US$0.4 million in 2020. Nevertheless, despite these actions, the impact of the Covid-19 lockdown on the USA business has been signiﬁ cant, and therefore we have re-evaluated our strategy for the USA and we have accelerated our online sales strategy via Amazon FBA, and reduced the locally sourced close-out. Rest of the World Sales in the rest of the world reduced from £2.8 million in 2019 to £1.9 million in 2020, accounting for 4.7% of overall Group sales. As with our other international regions, overall sales were down due to the Covid-19 pandemic. However, sales did recover in the later part of the year as Covid-19 lockdowns eased, although some countries retain signiﬁ cant restrictions. In Australia which is a key country in the rest of the world region sales increased slightly. 11 Warpaint London P LC Chief Executive’s Statement (continued) Summary and Outlook Whilst 2020 was undoubtably a challenging year and the pandemic had a signiﬁ cant impact on the Warpaint business, I am pleased with the progress that we were able to make and I believe Warpaint has emerged as stronger business. In particular, we made substantial advances with our retail presence in the UK, commencing signiﬁ cant sales through Tesco and wilko for the ﬁ rst time. Our W7 products are selling well at Tesco and we have further expanded the number of Tesco stores that are stocking our products, and the number of products being stocked, post period end. Likewise our Body Collection and Technic ranges have been very well received by wilko customers. We intend to further expand our UK retail presence in 2021. We have also taken the opportunity to review all elements of our strategy in 2020 and I believe that we have a compelling product proposition that is attractive to our global customer base. The late Brexit trade deal led to unexpected issues in the early part of 2021 for our sales into the EU, but I am pleased to say that these are now largely overcome. The USA remains a challenging market, but I believe we now have an appropriate strategy for proﬁ table growth in this region, including accelerating our online proposition. In the USA I am particularly pleased to see our W7 products now being stocked in over 1,000 Five Below stores following a successful trial. Trading in 2021 has started strongly with sales for the ﬁ rst three months of 2021 9% ahead of the same period in 2020, with sales increasing in all our geographic regions, despite the continuing lockdowns and enforced temporary customer store closures in many of our markets. I am encouraged by the outlook for the rest of the year and beyond as we seek to increase our high street penetration and online sales, together with looking to grow our sales through our existing customer outlets. In closing, I would like to thank all our staff for their efforts in 2020 and helping us to overcome the challenges of the pandemic. Sam Bazini Chief Executive Ofﬁ cer 27 April 2021 312 Annual Report 2020 Annual Report 2020 13 Warpaint London P LC Financial Review Neil Rodol The Covid-19 pandemic had a material impact on our ﬁ nancial performance in the year, resulting in lower than budgeted sales and proﬁ ts. Group revenue decreased in the year by 18%, and adjusted proﬁ t before tax decreased in the year by 56%. The actions we took as a business in response to Covid-19 enabled us to remain focused on margin, being net debt free, generating cash and safeguarding the business and the jobs of our employees. Headline results, shown below, represent the performance comparisons between the consolidated statements of income for the years ended 31 December 2019 and 31 December 2020. KPIs 2014 2015 2016 2017 2018 2019 2020 Revenue (£m) 2020: £40.3 million -18% Adjusted proﬁ t before tax* (£m) 2020: £2.3 million -56% 17.0 22.3 27.0 32.5 0 10 20 30 2014 2015 2016 2017 2018 2019 2020 50 0 48.5 49.3 40.3 40 4.1 5.4 5.2 6.8 7.7 8.3 2.3 2 4 6 8 10 *Adjusted for £0.24 million of staff restructuring and voluntary redundancy costs (2019: £0.07 million), and inventory relocation costs in the US of £nil (2019: £0.08 million) and £0.08 million of legal costs (2019: £0.03 million) and £2.4 million of amortisation of intangible assets (2019: £2.4 million) and share based payments of £0.7 million (2019: £0.8 million). 314 14 Annual Report 2020 S t r a t e g i c R e p o r t Covid-19 Stress Testing and Liquidity The lockdowns in 2020 throughout the world in response to Covid-19 meant the Group traded in a very uncertain and difﬁ cult time. In response, the board reacted swiftly and decisively with a plan to protect our staff, the business and to put in place measures to conserve cash, including not recommending a ﬁ nal dividend for 2019. In the second half of the year trade across the Group returned to near normal levels and consequently dividends were resumed against a background of good control of cash and continued cash generation, plus a testament to the response of the business through Covid-19. The board declared an interim dividend of 2.8p per share, maintaining the prior year interim dividend of 1.5p per share, together with a one off additional 1.3p per share, to reﬂ ect that no ﬁ nal dividend was declared for 2019. The dividend payment of 2.8p per share was paid on 20 November 2020. With Covid-19 still causing economic uncertainty in 2021 we have modelled a range of scenarios based on varying levels of annual sales revenue, through to the end of 2022. In each scenario, mitigating actions within the control of management have been modelled, each showing there are sufﬁ cient cash balances to meet liabilities as they fall due and so the board is conﬁ dent that the Group has sufﬁ cient ﬁ nancial strength to withstand the current disruption to its activities. The board therefore believes that it remains appropriate to prepare the ﬁ nancial statements on a going concern basis (see Note 1 to the ﬁ nancial statements). Revenue Group revenue for the year reduced by 18.3% from £49.3 million in 2019 to £40.3 million in 2020. The fall in sales year on year was due to the Covid-19 lockdowns in the UK and internationally. Company branded sales were £32.8 million in the year (2019: £39.2 million). Our W7 brand had sales in the year of £18.2 million (2019: £22.5 million). Our Technic brand contributed sales of £14.5 million in the year (2019: £16.7 million). In the UK Group sales reduced 6.9% from 22.7 million in 2019, to £21.1 million in 2020, with a strong recovery in the second half of the year. Internationally, Group revenue reduced 28.0% from £26.6 million in 2019, to £19.1 million in 2020. In Europe Group sales reduced by 19.7% to £15.1 million (2019: £18.8 million). In the rest of the world Group sales fell by 32.6% to £1.9 million (2019: £2.8 million). In the USA Group sales fell by 56.7% to £2.1 million (2019: £5.0 million), in part because of the decision to concentrate on the sale of our Group brands ahead of locally sourced close-out opportunities, and from the disruption caused by Covid-19. Our strategy for growth includes continuing to develop and build our Group brands and provide new product development that meets changing trends and consumer needs, to develop and nurture the current core business, to grow market share in the UK, USA and China, to develop an online strategy for brand development and sales and, to put in place appropriate organisational structure, people and efﬁ ciencies in the business. A detailed commentary on our sales growth strategy and trading performance is included in the Chief Executive Ofﬁ cer’s statement. Our Retra business had sales of retailer own brand white label cosmetics of £2.6 million in the year (2019: £2.5 million). The white label business is traditionally cost competitive and Retra chooses which projects to undertake based on commercial viability, and in particular margin. The close-out business revenue reduced by 36.2% from £7.7 million in 2019 to £4.9 million in 2020. Other income of £0.4 million was received from the UK Government’s furlough scheme in the year. Product Gross Margin Gross margin for the Group decreased by 2.4% from 33.5% to 31.1%. Gross margin reduced largely due to sales of inventory at lower than normal margin across the Group. This was in response to Covid-19 in order to maximise cash generated in the business and reduce overall inventory holding by the year end in the UK and USA. In the USA this was an acceleration of our strategy to exit sales of locally sourced close-out brands and to focus on the sale of our Group brands. A thorough review of inventory was carried out considering stock turn, margin, and stock age, so that those with the worst scores in each category and combined could be identiﬁ ed and sold off. In total £1.5 million of inventory identiﬁ ed in this process was sold in the year for £0.9 million. Without this action gross margin for the year would have been in line with 2019 at 33.4%. 15 Warpaint London P LC Financial Review (continued) During the year we did not experience pressure on the cost of inventory and made good use of our Hong Kong buying ofﬁ ce to ensure this continued. However, since the start of 2021 we have noticed slight price increases coming from our supply base in China and container freight rates have increased dramatically before falling back steadily, both these cost increases have been offset by a weakening dollar. To counter currency pressure we have in place a discount mechanism linked to the US dollar exchange rate from one of our key suppliers in China, although in 2020 this did not apply as buying volumes were greatly reduced because of Covid-19. When business levels return to normal, we expect to be making use of this US dollar discount mechanism again. We also continue to move production to new factories of equal quality to retain or improve margin and have a natural hedge from our US dollar revenue. We remain focused on improving gross margin in all our businesses. The Group brands segment had sales of £35.4 million at a margin of 31.1% (2019: £41.6 million at a margin of 34.9%). Margin reduced because of the inventory reduction plan implemented in response to Covid-19. The close-out segment of the Group had sales of £4.9 million at a margin of 31.2% (2019: £7.7 million at a margin of 25.7%). The inventory reduction plan also applied to close-out, however any negative effect on close-out margin was more than offset by the availability in the year of some high margin close-out parcels and consequently close-out margin improved in the year. At 31 December 2019 options were in place for the purchase of US$15 million at US$1.3142/£ and this helped to protect our margin through a turbulent period in the foreign exchange markets, in which the US dollar strengthened to US$1.15/£ during the peak of the Covid-19 pandemic. Similarly, at 31 December 2020 options were in place for the purchase of US$18 million at US$1.3260/£. Operating Expenses Total operating expenses before exceptional items, amortisation costs, depreciation, foreign exchange movements and share based payments, decreased by £0.8 million to £8.7 million in the year. This decrease was made up of a reduction in discretionary spend on travel, planned events and exhibitions totalling £0.9 million in response to Covid-19, an increase in cost in trading online of £0.1 million as sales online increased sharply in response to Co vid-19, an increase in the charge for bad debts of £0.2 million in the USA from a large retail customer entering Chapter 11 bankruptcy as a result of the pandemic, and a decrease in other overheads of £0.2 million. The most signiﬁ cant operating costs in the Group are wages and salaries of £5.5 million (2019: £5.5 million) and planned events and exhibitions for our brands of £0.6 million (2019: £1.2 million). Wages and salaries remained unchanged year on year. During the ﬁ rst Covid-19 lockdown in 2020 use was made of the government job retention scheme (and a similar grant scheme in the USA) giving rise to other operating income of £0.36 million. All staff were paid 100% of their salaries whilst furloughed. The reduction in planned events and exhibitions was in response to the Covid-19 pandemic, exhibitions were cancelled across the world and planned events and promotional activity had to be postponed or cancelled. 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. 316 Profit Before Tax In 2020 Group loss before tax was £1.1 million compared to a proﬁ t before tax of £1.8 million in 2019. The material changes in proﬁ tability between 2020 and 2019 were: • Reduction in Group gross margin of 2.4% for 2020 • Gross margin on decrease in sales for 2020 at 33.5% • Increase in other operating income in 2020 (job retention scheme) • Decrease in operating expenses (see above heading) • Increase in exceptional costs in the year • FX charge in the year £0.4 million (2019: £0.2 million) • Decrease in the cost of the LTIP and EMI share option schemes Annual Report 2020 S t r a t e g i c R e p o r t Effect on Proﬁ t (£1.0) million (£3.0) million £0.4 million £0.8 million (£0.1) million (£0.2) million £0.2 million Adjusted proﬁ t before tax (before exceptional items, amortisation costs, and share based payments) was £2.3 million compared to £5.2 million in 2019, a fall of 55.8%. Exceptional Items Exceptional costs in 2020 included £0.24 million of staff restructuring and voluntary redundancy costs and £0.08 million of legal costs (2019: £0.15 million of staff restructuring plus inventory relocation costs, and £0.03 million of legal costs). Tax The tax rate for the Group for 2020 was 10% compared to the UK corporation tax standard rate of 19% for the year. Since the acquisition of LMS, the Group is exposed to tax in the USA 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. Earnings Per Share The statutory basic earnings per share was a loss of 1.31p in 2020, compared to the 1.78p achieved in 2019. Adjusted earnings per share before exceptional items, amortisation costs and share based payment costs was 3.11p in 2020, a decrease of 50.3% on the 6.26p achieved in 2019. Dividends The board is recommending a ﬁ nal dividend for 2020 of 3.0 pence per share, making a total dividend for the year of 5.8 pence per share of which 2.8 pence per share, including a special dividend of 1.3 pence per share to reﬂ ect that no ﬁ nal dividend was declared for 2019, was paid on 20 November 2020 (2019: The board in the interests of prudence given the considerable on-going uncertainty due to Covid-19, and in order to further preserve the Company’s cash resources, resolved not to recommend a ﬁ nal dividend for 2019, making the interim dividend of 1.5 pence per share in effect the only dividend declared in respect of 2019). The dividend for the year was covered 0.5 times by adjusted earnings per share. 17 Warpaint London P LC Financial Review (continued) Cash Flow and Cash Position Net cash ﬂ ow generated from operating activities was £7.5 million (2019: £4.4 million), after payment of the £0.3 million (2019: £0.2 million) exceptional items previously referred to. The Group’s cash balance increased by £2.2 million to £4.9 million in 2019 (2019: £2.7 million). The cash generated was principally used to make dividend payments in the year. We expect capital expenditure requirements of the Group to remain low, however as part of our strategy to grow market share in the UK and USA there will be occasions where investment in store furniture is required to secure that business. In 2020 £0.66 million was spent on store furniture for Tesco and wilko (2019: £0.05 million), and £0.18 million was spent on new computer software and equipment, and other general ofﬁ ce ﬁ xtures and ﬁ ttings and plant upgrades (2019: 0.23 million). LTIP, EMI & CSOP Share Options On 20 May 2020 CSOP share options were granted over a total of 454,686 ordinary shares of 25p each in the Company under the Warpaint London PLC Company Share Option Plan. The options provide the right to acquire 454,686 ordinary shares at an exercise price of 49.5p per ordinary share. The LTIP, EMI & CSOP share options had no dilutive impact on earnings per share in the period. The share-based payment charge of the LTIP, EMI and CSOP share options for the year was £0.66 million (2019: £0.82 million) and has been taken to the share option reserve. Balance Sheet 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, excluding other receivables, were £7.7 million (2019: £10.3 million), the decrease on 2019 is mainly due to the fall in sales year on year because of the Covid-19 lockdowns. Apart from writing off a bad debt in the USA of £0.2 million, collection of cash was excellent in the year including payments from those customers that were in some distress because of the pandemic lockdowns in 2020. The provision at the year end for bad and doubtful debts carried forward is £0.04 million, 0.6% of gross trade receivables (2019: £0.04 million, 0.4%). Inventory was lower at the year end at £14.9 million (2019: £16.4 million). The fall in inventory was due to the action taken to reduce inventory across the group in response to Covid-19, and our strategy of exiting the sale of locally sourced close- out brands in the USA. The provision for old and slow inventory was £0.52 million, 3.5% at the year end (2019: £0.19 million, 1.2%). The increase in provision arises from the Group policy of providing for 50% of the cost of perishable items that are over two years old, and mainly from providing for inventory in our USA business, LMS, that has aged to over two years old, without the chance of a sale because of the Covid-19 crisis. However, we remain comforted by the fact that in reality many such items in the normal course of business are eventually sold through our close-out division without a loss to the Group. 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, and £1.1 million of term loans and HP contracts. At the year end £0.3 million of invoice ﬁ nance remained outstanding which was repaid in full by March 2021 (2019: £1.2 million). The balance outstanding on the term loans and HP contracts at the year end totalled £0.3 million (2019: £0.6 million). The remaining loans and HP contracts totalling £0.3 million were repaid in full in April 2021. Working capital decreased by £2.3 million in the year, to £25.4 million. The main components were a decrease in inventory of £1.8 million, a decrease in trade and other receivables of £0.2 million, an increase in cash at the year end of £2.1 million, and an increase in trade and other payables of £0.6 million. Free cash ﬂ ow remained strong at £6.6 million (2019: £4.1 million). The Group’s balance sheet remains in a very healthy position. Net assets totalled £37.4 million at 31 December 2020, a decrease of £2.4 million from 2019. The majority of the balance sheet is made up of liquid assets of inventory, trade receivables and cash. Included in the balance sheet is £7.3 million of goodwill (2019: £7.3 million) and £4.7 million of intangible ﬁ xed assets (2019: £7.1 million) arising from acquisition accounting. As at the year end cash totalled £4.9 million (31 December 2019: £2.7 million). 18 Annual Report 2020 S t r a t e g i c R e p o r t The Group has a natural hedge from sales to the US which are entirely in US dollars, in 2020 these sales were $2.74 million (2019: $6.32 million). Together with the discount mechanism available from one of our main suppliers in China, sourcing product from new factories where it makes commercial sense to do so and by buying dollars when rates are favourable, we are able to mitigate the effect of a strong US dollar against sterling. Induction materials provided on appointment include an explanation of directors’ duties, and the board is regularly reminded of the Section.172(1) Matters, including as a rolling agenda item at every main board meeting. Further information on how the directors have had regard to the Section.172(1) Matters can be found on pages 3 6 to 37. This information forms part of the strategic report and has been approved for issue by the board on 27 April 2021. Neil Rodol Chief Financial Ofﬁ cer 27 April 2021 Section 172(1) Statement The directors are well aware of their duty under section 172 of the Companies Act 2006 to act in the way which they consider, in good faith, would be most likely to promote the success of the Company for the beneﬁ t of its members as a whole, and in doing so have regard (amongst other matters) to: • the likely consequences of any decision in the long term; • the interests of the Company’s employees; • the need to foster the Company’s business relationships with suppliers, customers and others; • the impact of the Company’s operations on the community and the environment; • the desirability of the Company maintaining a reputation for high standards of business conduct, and • the need to act fairly as between members of the Company (the “Section 172 (1) Matters”). The balance sheet also includes £3.8 million of right-of-use assets. £3.5 million is the inclusion of the Group leasehold properties, now recognised as right-of-use assets as directed by IFRS 16. An equivalent lease liability is included of £3.7 million at the balance sheet date. Foreign Exchange The Group imports most of its ﬁ nished goods from China paid for in US dollars, which are purchased throughout the year at spot as needed, or by taking forward purchase foreign exchange options when rates are deemed favourable, and with consideration for the budget rate set by the board for the year. Similarly, foreign exchange options are taken to sell forward our expected Euro income in the year to ensure our sales margin is protected. We started 2020 with options in place for the purchase of US$15 million @ US$1.3142, this allowed us to purchase goods in the ﬁ rst half of the year at contracted dollar rates well above the spot rate which at one time fell as low as $1.1492. Around the time of Brexit being ﬁ nalised in 2020 when currency rates were favourable, we purchased 42 foreign exchange options which were outstanding at 31 December 2020 (31 December 2019: 33). In total at 31 December 2020 options were in place for the purchase of US$18 million at US$1.3260, and the sale of £5.1 million @ £1.1077 (31 December 2019: $15 million @ $1.3142 , and £4.4 million @ £1.1402). 19 Warpaint London P LC Risk Management Warpaint 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. Currency / Foreign Exchange (“FX”) 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. We have improved our processes within our hedging policy to ensure it remains robust while we look to increase our international business. There is a Group FX committee made up of senior management who communicate regularly. Whenever possible FX is purchased (using foreign exchange forward options) at, or as close as possible to, the budget rate to cover the annual needs of the business. Reliance on Key Suppliers In 2020 one key supplier from China was responsible for approximately 19% (2019: 15%) of the Group’s 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. Management retain close relations with suppliers with relatively short lead times, and the Group typically holds four to six months of stock at any one time, nevertheless the sourcing of new suppliers in a wider geographic location is ongoing. claims and potentially damaging the good reputation of the Group’s brands. The directors have every colour cosmetic ingredient independently checked by a qualiﬁ ed chemist for compliance with UK, EU and when necessary and any other relevant legislation, including in the USA, and maintain adequate product and public liability insurance so as to ensure that any claims have little impact on the Group’s proﬁ tability. The vast majority of the Group’s colour cosmetics are manufactured in China. Currently there is a possibility that global tensions between countries in the region could lead to a trade war, new tariffs or price increases. The identiﬁ cation of new low priced, but high quality, suppliers in other geographic locations remains under review on an ongoing basis. Any increased costs or duty would be passed on to the consumer where possible. Our supply base in China was temporarily affected by the Covid-19 virus at the start of 2020 with all our suppliers closed for a month. Whilst causing some initial delays to deliveries normal operating levels were soon resumed and there was no material impact on our inventory levels. Product Liability All products are manufactured in facilities approved by relevant authorities. The ingredients in each product are compliant with and meet the relevant standards required by the markets to which the products will be sold into. There is however always the risk that an end user could have an allergic or other reaction to an individual product leading to the possibility of compensation Significant Customers The Group has one customer in Denmark with over 240 stores across Denmark, Norway, Sweden, Holland and France. In 2020 this customer represented 9.7% (2019: 7.7%) 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 Denmark, Norway, Sweden, Holland and France. Location The Group has the majority of its operations and assets split across two locations in Iver and Silsden in the UK; if a ﬁ re were to befall either of the premises occupied by the Group, a signiﬁ cant amount of 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. Fire alarm systems are tested weekly, smoke detectors inspected quarterly, ﬁ re extinguishers tested 3 20 Annual Report 2020 S t r a t e g i c R e p o r t annually, and trained ﬁ re marshals are onsite. Staff have regular ﬁ re drills and ﬁ re risk assessments are carried out to ensure compliance with ﬁ re regulations. Brexit In December 2020 Brexit was ﬁ nalised. From 1 January 2021 new terms of trading with our EU customers have been in place using internationally recognised INCO terms. There is now an extra layer of cross border compliance and paperwork required which we are well prepared for having taken expert advice from customs experts and shippers. We have made good use since the start of 2021 of our wholly owned subsidiary Warpaint Cosmetics (ROI) Limited in the Republic of Ireland speciﬁ cally to help protect us against any UK/EU cross- border disruption, and to serve our European customers from a Euro Hub in order to provide an alternative supply route. The Group is closely watching developments in the movement of goods within the EU and adapting its strategy as the full 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. Covid-19 Pandemic Covid-19 or another similar virus pandemic will cause major disruption to the business. Staff will be absent either through illness or from isolation measures, the business strategy will be affected, delayed and perhaps will require reassessment, capital markets and foreign exchange markets will become volatile, and the supply chain and our customer base may temporarily close down. In a pandemic situation we will follow Government guidelines and enable staff to work remotely where possible, until such time that they can return to work with new workplace safety measures in place, we will explore and examine liquidity continuity measures and implement business continuity plans. The business protects against foreign exchange and credit risk through various ﬁ nancial instruments such as the forward purchase of foreign exchange and credit insurance of certain customer receivable balances, particularly those deemed higher risk. Our initial response to Covid-19 was to enhance our review of risks facing the group and focus on cash spend and ensure there was sufﬁ cient cash resource to secure the long term ﬁ nances of the Group. A committee made up of the Chief Executive Ofﬁ cer, the managing director of Retra and Keith Sadler, a non-executive director has been formed to formulate and implement a Group wide response in the event of a further pandemic or other similar disruptive event. This Strategic Report was approved by the board on 27 April 2021 and signed on its behalf. Neil Rodol Chief Financial Ofﬁ cer 27 April 2021 21 21 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 3223 22 Annual Report 2020 Board of Directors Clive Garston (76), 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 (58), 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 fragrances. 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 (58), Managing Director 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 fragrances 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 (58), 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 21 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 (60), 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 also the Corporate Finance, Legal and Regulatory Ofﬁ cer & Company Secretary of Diaceutics plc, an AIM quoted diagnostic commercialisation company for the precision medicine industry. 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. 23 23 Warpaint London P LC Board of Directors (continued) Paul Hagon (57), Executive Director Paul joined the Group as a Non-Executive Director in November 2016, subsequently becoming an executive director on 1 January 2021, the effective date of the renewal Company’s strategic consultancy agreement with Ward & Hagon Management LLP. 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 (62), Non-Executive Director (Audit Committee (Chair), Remuneration Committee (Chair)) Keith joined the Group as a Non-Executive Director in November 2016. He is also a non-executive director of Hawkwing plc (formerly TLA Worldwide plc, a global sports management and events business and now a cash shell listed on AIM), for which he chairs the audit committee. He is a non-executive director of HR Dept. Limited, a professional services business, and Silver Bullet Data Services Group Ltd, a contextual data management marketing organisation. Historically, Keith has been CEO or CFO of a number of quoted companies in the marketing services, telecoms and media industries. Keith is a chartered accountant and holds an honours degree in economics from the University of Kent. 324324 Annual Report 2020 G o v e r n a n c e Corporate Governance Report Chairman’s Introduction I am pleased to introduce the Corporate Governance Report for the year ended 31 December 2020. As an AIM quoted 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. The Company’s Corporate Governance Statement is available to view on the Company’s website at www.warpaintlondon.com their investment and that the Company is managed for the long-term beneﬁ t of 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 2 3 to 46 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 ten principles of the QCA Code. The instances where we do not comply are few and explanations for non-compliance are provided in the report below. Clive Garston Chairman 27 April 2021 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 that the Company protects and respects the interests of all stakeholders and in particular, is very focused upon creating the right environment for its employees. 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 Principle 1 - Establish a strategy and business model which promote long term value for shareholders Business Overview The Company is a producer and supplier of colour cosmetics. We are extremely creative and design-focused, aiming to provide our customers with an extensive range of high quality cosmetics at an affordable price, 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 retailers and internationally to local distributors or retail chains. The Technic brand is sold in the UK and continental Europe with a signiﬁ cant focus on the gifting market, principally to 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 our other own brand names of Man’stuff, Body Collection, Vintage, Very Vegan, and Chit Chat. The other division trades in close-out and excess inventory of branded cosmetics and fragrances from around the world. Strategy In early 2018, the Board adopted a three- year strategic plan for the business. This is measured, monitored and reviewed annually and reset using market insight and trend information in line with the budget process, and was updated by the board in 2021 with a view to it forming the basis of the Group’s development through to the end of 2024. The plan is designed to drive shareholder value and has deﬁ ned targets for sales, EBITDA, earnings per share and cash generation, with a particular emphasis on driving incremental EBITDA growth. The strategic plan is also outlined in the Strategic Report on page 1 0 and comprises six key pillars: • Develop and build the Group’s brands and provide new product development that meets changing trend and consumer needs The Group continues to review, evaluate and develop the Group’s portfolio of brands to ensure there is a clear brand hierarchy; a clear proposition by brand; non-core brands and product stock are eliminated; and that the Group delivers new product development and gifting sets that meet customer needs. • Develop and nurture the current core business A major objective of the business is to continue to develop and grow the 25 25 Warpaint London P LC Corporate Governance Report (continued) • presence of the Warpaint brands beyond their existing worldwide customer base. There is still however, signiﬁ cant potential to be realised in the current customer base and the Group is committed to ensuring this potential is maximised. The Group is focused on ensuring there is a clarity of product offering to each customer segment and to supporting its customers with relevant new products; by using appropriate marketing to draw consumers into customer stores; and by cross selling the Group’s brands where appropriate. Grow Market Share in the UK The business continues to focus on increasing the presence of the Group’s brands in channels that our consumers shop in, to increase accessibility and drive proﬁ table market share growth. As a result of this strategy, the Group has successfully launched the W7 brand into Tesco and the Technic brand into wilko. It continues to have active discussions with other major retailers who are currently in channels that the Group is yet to materially supply to and expanding the UK customer base is a key focus of management. This is particularly opportune as retailers across all sectors are increasingly looking to provide quality products to their customers at affordable prices. • Grow market share in the USA and China The USA and China continue to provide a major growth opportunity for the Group. In the USA, the Group continues to investigate the optimal route to market through established • agency channels and/or direct to retailers, and is establishing a core product range for the USA with minimum margin requirements. In China the Group conducts business locally through its Chinese subsidiary Company. We are also continuing to register products for sale in China in order to grow our total offering and increase sales. This has led to the development of relationships with distributors in the region who have the capability to drive sales of the W7 brand there. Develop the online/e- Commerce strategy for brand development and proﬁ table sales The Group aims to grow its proﬁ table sales across the Group’s online sales channels, ensuring the process is optimised and efﬁ cient. The Group continues to develop and build its brands by utilising brand ambassadors, inﬂ uencers and make-up artists to engage actively with its target audience. The Group wants to ensure that consumers are adequately inspired and educated on how the Group’s products can be used to experiment and achieve different looks. The Group has launched a loyalty programme that creates a W7 community of customers to drive sales conversion on the Company’s website. The aim of these activities is to create an interactive community of consumers and drive recommendation. Developing the social media strategy also directly impacts the Groups online sales strategy. As an example, 45% of W7’s target customers are buying cosmetics online. • Develop the appropriate organisational structure, people strategy and organisational efﬁ ciency The Company continues to review the businesses’ structures, resources and capabilities with the objective of delivering the strategic plan, communicating the plan to ensure that all employees are engaged, and rewarding employees suitably for doing a good job. Principle 2 - Seek to understand and meet shareholder needs and expectations The Company remains committed to communicating openly with all of our shareholders, both private and institutional. This enables the Company to ensure that its strategy, business model and performance are clearly understood. It also enables the Company to appreciate the needs and expectations of shareholders and respond to queries promptly and comprehensively. As previously announced, the board did not recommend a ﬁ nal dividend for 2019, due to the uncertainty surrounding Covid-19 and the decision to preserve cash in the business. However, dividend payments were resumed at the interim stage in 2020 with payment of an interim dividend, together with a one off additional dividend per share, to reﬂ ect that no ﬁ nal dividend was declared for 2019. In accordance with the Group’s policy to pay appropriate dividends, the board is recommending a ﬁ nal dividend for 2020. All individual investor queries should be addressed to the Company Secretary at: investors@warpaintlondonplc.com 326 26 Annual Report 2020 G o v e r n a n c e Private Investors The board recognises that the Annual General Meeting (AGM) is an important opportunity to meet private shareholders. Each substantially 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. In the light of the public health restrictions associated with Covid-19, this was not possible for the 2020 AGM. It will remain under review for the 2021 AGM which will be held in line with best practice and government guidelines. 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. Institutional Shareholders The Chief Executive Ofﬁ cer, the Managing Director and the Chief Financial Ofﬁ cer make presentations to institutional shareholders and participate in Investor Presentations 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. The board responds to and will take account wherever possible of recommendations made by proxy adviser companies. • The Covid-19 pandemic largely prevented face to face communication during 2020 but this was maintained virtually through the year wherever possible with both private and institutional shareholders. Principle 3 - Take into account wider stakeholder and social responsibilities and their implications for long-term success The key stakeholders for the Group are customers, distributors, suppliers, employees, shareholders and the community in which we live. Whilst interactions take place at all levels of the Group, the directors are aware of the importance of the relationships with key stakeholders and feedback is utilised wherever possible to sustain these relationships in order to drive the long term success of the business. Face to face communications were largely curtailed in 2020 due to Covid-19, and many interactions with our stakeholders have taken place virtually. This has not only maintained, but in many instances enhanced our relationships with several of our key stakeholders and will be continued for the foreseeable future, irrespective of the restoration of face to face interaction. Business relationships with the following stakeholders are described below. The effect of any such engagement on key decisions in the ﬁ nancial year to 31 December 2020 are set out below and detailed on pages 4 4 to 46. • Customers Feedback with trade customers is initially directed through dedicated account managers followed by engagement with our administration teams. For end user customers feedback is garnered through the peer to peer review site Yotpo, and social media such as Facebook, Twitter, Instagram and Pinterest. The Group’s consumer customers frequently contact the Company by writing, by email, direct calls to the head ofﬁ ce and through the website www.w7 makeup.co.uk where they are also able to leave comments. We endeavour to respond to all customers who contact us in a swift and efﬁ cient manner typically by email or direct calls with all responses followed up to seek to achieve a positive outcome. During 2020 we have sought to support our trade customers wherever possible throughout the Covid-19 lockdowns. Trends in the cosmetic business are dynamic and swift reaction to feedback is also vital in introducing new products and updating our product range. Distributors We seek to strengthen our relationships with our distributors to garner feedback and provide support with regular meetings, attendance at trade shows (which, during 2020 have been largely virtual) and by maintaining close contact with them through our sales representatives. During 2020, we have maintained our relationships with our distributors and supported them wherever possible. Our distributors provide feedback on product suitability including in regions of the world such as the Middle East where there may be cultural sensitivities in the product 27 Warpaint London P LC Corporate Governance Report (continued) • • packaging and branding. Different regions may also call for particular colour mixes and shades and such feedback enables us to optimise and tailor products in these regions. The aim is to align the interests of the distributor with those of the Group. Suppliers Suppliers are visited at least annually and regular contact maintained at other times through trade shows, meetings and other close communications, which during 2020 have been largely virtual. The Group’s principal suppliers are made to feel part of the organisation with an open and honest dialogue encouraged so that feedback can be communicated and a rapid response provided. The Group has an ofﬁ ce in Hong Kong enabling more frequent visits and enhanced supplier contact. A strong relationship with the Group’s suppliers is vital to the long term success of the Company. Employees The Group places enormous importance on the contributions of its employees and aims to keep them informed of developments in the Group 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 cer and the Managing Director engaging daily with employees across the business. Communication is encouraged both on an informal basis and through regular departmental meetings, where input from colleagues is welcomed in any area. Communication channels within the business are key and the open-door policy and regular meetings aid this. Where practicable, consideration is given to ﬂ exible working and this was increasingly important during 2020 to minimise the impact on our employees of the Covid-19 pandemic and lockdowns. Flexibility was offered wherever possible, with help with working from home and ﬂ exible working where practicable for mothers and fathers home schooling. All employees received 100% of their salaries when furloughed and safe working conditions were implemented. As always, the well-being of our staff is paramount and particularly so during the current climate. Shareholders The means of engagement with shareholders is detailed in Principle 2 above. Community Wherever possible we employ staff from the local area and encourage the use of car sharing and public transport to reduce the impact on local roads. We manage the times of our incoming and outgoing deliveries in order to limit any disturbance to residents in the local area. As a rule, we use local trade’s people for goods and services creating employment and income within the area. We often support local charities, including South Bucks Hospice and provide donations of our products for local school fairs and fetes, these requests coming via our local suppliers. • • • Environment The Group is focus ed on the environmental impact of its products and has removed all plastics from the outer packaging of its gifting and all year-round products, and has virtually eliminated the use of single use packaging in its products completely. The Group’s product packaging therefore uses paper and cardboard wherever practicable, which enables the Group, the wholesaler and end user to recycle the waste effectively. This means that the business consumes considerable amounts of paper and cardboard, and the Group utilises a regular recycling collection service. This programme will be extended to utilise sustainable or recycled packaging where feasible, and the Group aims to be a market leader in this area. In terms of the Group’s product casings, the use of plastic is sometimes practically unavoidable but recyclable packaging is used wherever possible. All new W7 brand products are being manufactured without parabens and the Company is reformulating existing products where feasible. The Group aims to be paraben free for W7 in the next 24 to 36 months and Technic/ Badgequo products are already paraben free. The environmental goals described above are embedded in the Group’s long term strategy. The Covid-19 pandemic necessarily resulted in a reduction of travel within the Group, with business being conducted with customers and others virtually, where practicable. This has had a positive impact on the Group with business and trading relationships improving as a result. Hence, travel, and particularly air travel, will be restricted in future with customer, supplier, management and employee meetings being held virtually where feasible. This will not detract from the need to hold face to face meetings where this is conducive to a more productive relationship. 328 Annual Report 2020 G o v e r n a n c e Principle 4 - Embed effective risk management, considering both opportunities and threats, throughout the organisation The Company 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. Internal 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 assessment and management of risk is primarily the function of the executive ofﬁ cers, most speciﬁ cally the Chief Executive Ofﬁ cer for strategic and business risk and the Chief Financial Ofﬁ cer for ﬁ nancial risk. The Group maintains a formal risk register which is reviewed periodically and, where appropriate, matters of risk are referred to the board for consideration. The principal risks identiﬁ ed by the board are set out in the Strategic Report on pages 2 0 to 2 1. Principle 5 - Maintain the board as a well-functioning, balanced team led by the Chair Composition, Role and Responsibilities 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 the Chairman, Clive Garston one non-executive director, Keith Sadler, and ﬁ ve executive directors, Sam Bazini, Eoin Macleod, Neil Rodol, Paul Hagon and Sally Craig, who is also the Company Secretary. From 1 January 2020 the positions of the two joint Chief Executives were split, Sam Bazini remained as Chief Executive Ofﬁ cer and Eoin Macleod was appointed to the newly created position of Managing Director, reﬂ ecting his more operational focus. There were no changes to the responsibilities of the non-executive directors during the year to 31 December 2020. However, as announced by the Company on 6 February 2020, Ward & Hagon Management Consulting LLP (“Ward & Hagon”) was appointed to provide additional strategic resource and to assist the Company in implementing its strategic growth plans. Paul Hagon, then a non-executive director, is a partner of Ward & Hagon and as part of the Ward & Hagon appointment, he fulﬁ lled the role of Interim Strategy and Business Development Director, a non-board role for an initial period of one year. During that period, he remained a non-executive member of the board, but was not independent. On 17 November 2020, the Company announced its intention to renew the contract with Ward & Hagon for a further 12 months. As a result of this, Paul Hagon would no longer be a non-executive director and his position changed to that of an executive director with effect from 1 January 2021, the effective date of the renewal of the Ward & Hagon contract. Although the UK Corporate Governance Code 2018 does not apply to the Company, under this code the Chairman would not be deemed independent and the board has therefore decided that only the non-executive director, Keith Sadler, is presently independent. No single director is dominant in the decision-making process. The Company has commenced a search for an additional independent non-executive director and hopes to make this appointment in the ﬁ rst half of 2021. Subject to this, 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. 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. 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. 29 Warpaint London P LC Corporate Governance Report (continued) 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. 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 in person 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 16 times during the ﬁ nancial year ended 31 December 2020, with two in person board meetings and 14 virtual board meetings. 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. The on-site Retra board meeting did not take place in 2020, primarily due to the Covid-19 restrictions. In addition, the board held a focused, dedicated meeting on strategy on 27 January 2020 and intends to schedule similar meetings annually. The strategy meeting for 2021, was held on 8 February 2021. 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. Board and Committee Meeting attendance for the year ended 31 December 2020 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 16/16 16/16 16/16 16/16 16/16 16/16 16/16 Audit 2/2 n/a n/a n/a n/a 2/2 2/2 Remuneration 2/2 n/a n/a n/a n/a 1/2 2/2 Insider 1/1 1/1 n/a 1/1 n/a n/a n/a The following directors are each required to commit at least the following number of days per week to their roles: The Chief Executive Ofﬁ cer and Managing Director, ﬁ ve days; the Chief Financial Ofﬁ cer, four days and the General Counsel & Company Secretary, three days (26 hours). Paul Hagon, executive director, and 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. Board Rotation 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 AGM immediately following their appointment. Directors are required to seek re-election once every three years. 330 Annual Report 2020 G o v e r n a n c e Principle 6 - Ensure that between them the Directors have the necessary up-to-date experience, skills and capabilities 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, e-commerce, marketing and public markets. The non-executive director has been appointed on merit and for his speciﬁ c areas of expertise and knowledge. This enables him to bring independent judgement on issues of strategy and performance and to debate matters constructively. The appointment of an additional non-executive director will be made upon the same grounds. The biographies of each of the directors, including the committees on which they serve and chair, are shown on pages 2 3 to 2 4. The skills brought to the board are as follows: Clive Garston (Chairman) Corporate ﬁ nance, legal, public companies and markets, corporate governance Sam Bazini (Chief Executive Ofﬁ cer) Co-Founder of W7, entrepreneurship, industry knowledge and experience Eoin Macleod (Managing Director) Co-Founder of W7, entrepreneurship, industry knowledge and experience Neil Rodol (Chief Finance Ofﬁ cer) Financial skills, industry and public company experience Sally Craig (General Counsel & Company Secretary) Legal, company secretarial and public company experience Paul Hagon (Executive Director) Retail and wholesale business experience and strategic planning Keith Sadler (Non-Executive Director) Financial skills, communications and public company experience Directors attend seminars and other regulatory and trade events where appropriate to ensure that their knowledge and industry sector contacts remain current. External and Internal 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. During the ﬁ nancial year ended 31 December 2020, advice was provided by BDO LLP in connection with the introduction in May 2020, of the Warpaint London plc Company Share Option Plan. 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. Principle 7 - Evaluate board performance based on clear and relevant objectives, seeking continuous improvement 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 remains at a relatively early stage in its development as a quoted 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. Principle 8 - Promote a corporate culture that is based on ethical values and behaviours The board maintains a corporate culture consistent with the Group’s strategic objectives which aims to promote an ethical and responsible business. The corporate culture is monitored by the Chief Executive Ofﬁ cer who appraises the board of any issues arising. The culture is implemented through a number of policies on Anti-Bribery, Whistleblowing and Modern Slavery. These policies, along with the Group’s approach to employees and equal opportunities, the environment, product testing, manufacture and 31 Warpaint London P LC Corporate Governance Report (continued) materials and charitable causes are regularly reviewed, and are described below: • 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. • 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. The Group’s statement pursuant to the Modern Slavery Act 2015 which contains further information, is available at www.warpaintlondonplc.com • Employees and Equal Opportunities • Environment The well-being of our staff is paramount and particularly so during 2020 where it was vital to minimise the impact on our employees of the Covid-19 pandemic and lockdowns. All employees received 100% of their salaries when furloughed and safe working conditions were implemented. Where practicable, assistance is given to ﬂ exible working and this was increasingly important in 2020. Flexibility was offered wherever possible, with help with working from home and ﬂ exible working where practicable for mothers and fathers home schooling. The Group has an extremely loyal work force with a low staff churn rate, promoting from within, offering staff mobility from the warehouse ﬂ oor to administrative roles and managerial positions. 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. Employee communication is encouraged throughout the Group both on an informal basis and through regular departmental meetings, where input from colleagues is welcomed in any area. Communication is key and the open- door policy operated by the Group and regular meetings aid this. The Group’s employment policy is set out in the Directors’ Report. At senior management level there are 13 female managers and 9 male managers, excluding the board. Throughout the Group, the proportion of female to male employees is approximately 67% to 33%. The Group is focus ed on the environmental impact of its products and has removed all plastics from the outer packaging of its gifting and all year-round products, and has virtually eliminated the use of single use packaging in its products completely. The Group’s product packaging therefore uses paper and cardboard wherever practicable, which enables the Group, the wholesaler and end user to recycle the waste effectively. This means that the business consumes considerable amounts of paper and cardboard, and the Group utilises a regular recycling collection service. This programme will be extended to utilise sustainable or recycled packaging where feasible, and the Group aims to be a market leader in this area. In terms of the Group’s product casings, the use of plastic is sometimes practically unavoidable but recyclable packaging is used wherever possible. All new W7 brand products are being manufactured without parabens and the Company is reformulating existing products where feasible. The Group aims to be paraben free for W7 in the next 24 to 36 months and Technic/ Badgequo products are already paraben free. The Covid-19 pandemic necessarily resulted in a reduction of travel within the Group, with business being conducted with customers and others virtually, where practicable. This has had a positive impact on the Group with business and trading relationships improving as a result. Hence, travel, and particularly air travel, will be restricted in future with customer, supplier, management 332 Annual Report 2020 G o v e r n a n c e and employee meetings being held virtually where feasible. This will not detract from the need to hold face to face meetings where this is conducive to a more productive relationship. • Product Testing, Manufacture and Materials The Group does not test any of its cosmetic products on animals and animal testing of cosmetics has been banned in Europe since 2013. The board is aware that in other parts of the world there is still a requirement to test on animals. Wherever and whenever the Group comes across this requirement and are given no choice, it withdraws from sales activity in the territory concerned. The board is keen for cruelty free alternatives to animal testing to become compulsory and animal testing overall to be ceased globally. Suppliers provide Good Manufacturing Practice certiﬁ cates for all of the factories used in the manufacture of the Group’s goods. The Group’s main suppliers also produce for worldwide brands, and comfort is taken from the public ethical and sustainability stance around the world of these brands. The Group’s suppliers are encouraged to share with the Group the results of their BSCI and Sedex audits when they have taken place. Heavy metals such as TBTO (preservative) and other ingredients of concern are not added to the Group’s colour cosmetic products and we ensure all raw materials comply with the strict regulations applicable in the EU, USA and Canada. • Charitable Causes Along with local charities and events, the Company supports a number of national charities. We invite our employees to choose charities and events that are close to their hearts and we collaborate with them. These events are often put out on our social media and are linked to the charity to raise their proﬁ le. In 2020 the number of charity events available to support was fewer than in previous years, but the Group supported several local charities and Save The Children - Christmas Jumper Day, nationally. A number of Retra employees will be participating in the Yorkshire Marathon in the coming year, raising funds for a local hospice. Principle 9 - Maintain governance structures and processes that are fit for purpose and support good decision-making by the board The Group’s governance structures have been reviewed in the light of the QCA Code. The board believes them to be in accordance with best practice as adapted to best comply with the Group’s circumstances and stage of development. The board has overall responsibility for implementing the Group’s strategy and promoting the long term success of the Group. The executive directors have overall responsibility for managing the day to day operational, commercial and ﬁ nancial activities. The non-executive directors are responsible for bringing independent and objective judgement to board decisions. The board is responsible for the long-term success of the Company. 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. 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 in person 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. 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. 33 Warpaint London P LC Corporate Governance Report (continued) The business reports monthly on its headline performance against its agreed budget, and the board reviews the monthly update on performance and any signiﬁ cant variances are reviewed at each scheduled meeting. The board challenges the executive directors and senior management on performance against budgets, forecasts and key business milestones. Monthly updates on performance are reviewed at each formal board meeting. The board have adopted a set of KPI’s against which the performance of the Company and therefore the board, can be measured. Roles of the Chairman, Chief Executive Officer, Managing Director, 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 Chief Executive Ofﬁ cer is primarily responsible for implementing and driving the Group strategy once it has been approved, investor relations and overseeing the management of the Company through the executive team. The Managing Director is responsible for driving sales operations and proﬁ tability. The Chief Financial Ofﬁ cer works closely with the Chief Executive Ofﬁ cer and Managing Director and is responsible for all the ﬁ nancial affairs of the Group. In particular, the oversight of cash ﬂ ow, 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 Group strategy 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. are set up by the board to consider speciﬁ c issues when the need arises. The General Counsel & Company Secretary is responsible for the oversight of legal issues and regulatory compliance along with executive share schemes, investor queries, 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. 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 Audit Committee and the Remuneration Committee each comprises two non-executive directors: Keith Sadler (Chair) and Clive Garston. During the year ended 31 December 2020, Paul Hagon was a member of both committees but stepped down as Chairman of the Remuneration Committee. He subsequently ceased to be a member of these committees on becoming an executive director with effect from 1 January 2021. The new non-executive director, proposed to be appointed will become a member of both the Audit Committee and the Remuneration Committee. 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 2020, the Audit Committee met twice, the Remuneration Committee twice and the Insider Committee met once. From time to time separate committees 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. In November 2020 the board formed an ad hoc nomination subcommittee comprising of Keith Sadler (Chair), Sam Bazini and Clive Garston, to identify and make a recommendation to the board for a candidate for a new non-executive director. Principle 10 - Communicate how the Company is governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders 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 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. In the light of the public health restrictions associated with Covid-19, this was not be possible for the 2020 334 Annual Report 2020 G o v e r n a n c e AGM. This will remain under review for the 2021 AGM which will be held in line with best practice and government guidelines. 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 Chief Executive Ofﬁ cer, the Managing Director 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. 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 The Company’s means of communicating with its other stakeholders are set out on pages 27 and 28. The Reports of the Audit Committee and the Remuneration Committee can be found on pages 38 and 40 and describe the responsibilities of those committees and the work undertaken throughout the year. 35 Warpaint London P LC Section 172 Statement Section 172 Companies Act 2006 The directors are well aware of their duty under section 172 of the Companies Act 2006 to act in the way which they consider, in good faith, would be most likely to promote the success of the Company for the beneﬁ t of its members as a whole, and in doing so have regard (amongst other matters) to: can only prosper over the long term if it understands and respects the views and needs of its customers, distributors, employees, suppliers and the wider community in which it operates. A ﬁ rm understanding of investor needs is also vital to the Company’s success along with a sustainable and environmentally responsible culture. • • • • • • the likely consequences of any decision in the long term; the interests of the Company’s employees; the need to foster the Company’s business relationships with suppliers, customers and others; the impact of the Company’s operations on the community and the environment; the desirability of the Company maintaining a reputation for high standards of business conduct, and the need to act fairly as between members of the Company The board always takes decisions for the long term, and collectively and individually aims to uphold the highest standards of conduct. Similarly, the board understands that the Company The directors are fully aware of their responsibilities to promote the success of the Company in accordance with Section 172 of the Companies Act 2006. An in-depth review of these responsibilities and how the Company engages with its stakeholders was considered at the Company’s board meeting on 3 April 2020. The text of Section 172 of the Companies Act 2006 has subsequently been set out by the General Counsel & Company Secretary on each main board agenda by way of a reminder. Relations with shareholders are detailed on pages 26 and 27, and 34 and 3 5. Relations with other key stakeholders such as employees, distributors, customers and suppliers are considered in more detail on pages 44 and 46. The board ensures that the requirements are met, and the interests of stakeholders are considered as referred to elsewhere in this report and through a combination of the following: • • • • A rolling agenda of matters to be considered by the board through the year, which includes an annual strategy review meeting, where the strategic plan for the following year is developed, which is implemented and supported by a budget and a medium term (three year) ﬁ nancial plan. Standing agenda points and papers presented at each board meeting, which report on customers, employees and other colleagues, health and safety matters and investors. A review of certain of these topics through the Audit Committee and the Remuneration Committee agenda items referred to in this report. Detailed consideration is given to of any of these factors where they are relevant to any major decisions taken by the board during the year. 336 Annual Report 2020 Key board decisions taken during the year ended 31 December 2020, all of which have long term implications for the ultimate success of the Company, and the Section 172 and stakeholder considerations are set out below. Key Board Decision Section 172 and Stakeholder Consideration Review in January 2020 of the Group’s three-year Strategic Plan and the update of KPIs In order to minimise the impact of Covid-19 and support the Group’s employees, the determination that all employees should receive 100% of their salaries when furloughed. Safe working conditions for employees and colleagues were implemented throughout to safeguard their safety and wellbeing and ﬂ exible working arrangements were offered where practicable, to support staff in the changes to family arrangements such as home schooling. This is aimed at optimising and promoting the success of the Company in the long term, whilst providing measures for success, both vital for the beneﬁ t of members and stakeholders Together, these actions and decisions were aimed at protecting employees and supporting them through the uncertainty of Covid-19. G o v e r n a n c e The accelerated development of the online business to support sales whilst “bricks and mortar” stores were in lockdown due to Covid-19, and the drive of sales in retail outlets, including Tesco and wilko, which remained open throughout lockdowns. These actions were important to optimise and develop the Group’s business during the uncertain period of the Covid-19 lockdowns, preserving and enhancing the Group’s business whilst driving the Group’s strategic plan for the beneﬁ t of members. Strong engagement with customers, suppliers and colleagues was maintained via virtual means to ensure that these relationships were not only unaffected but, in many cases, thrived through the Covid-19 pandemic For customers and suppliers, it was important to sustain these important relationships, maintaining and enhancing the Company’s high standards of business conduct and to support the Group’s employees through the uncertainty of Covid 19. The decision to extend credit terms and payment plans with certain customers during the year, whilst closely monitoring these situations to manage the risk to the business This enabled the Company to assist customers who were impacted by the Covid-19 restrictions and thereby maintaining good business conduct and supporting these customers. This decision was carefully managed to ensure that any risk to the business was minimised. The implementation of the Warpaint London plc Company Share Option Plan in May 2020 and the grant of options thereunder to Group employees This was implemented to incentivise the Group’s employees, rewarding their loyalty and success, whilst also contributing to the growth of the business and thereby enhancing shareholder value over the long term. The drive the ensure that the Retra Gift offering for 2021 will be the ﬁ rst range to be as plastic free as possible. Implementation of plans for products to be paraben free ahead of the legally required date. The decision to restrict travel (particularly air travel) in future and to conduct business virtually where practicable. To reduce the impact of the Company’s operations on the environment. The decision to declare an interim dividend in September to continue with the Company’s declared dividend policy and an enhanced interim dividend to take account of the Company’s ﬁ nancial position and given that the ﬁ nal 2019 dividend was cancelled. To reward all shareholders whilst protecting the long-term value of the Company with a prudent dividend payment of 2.8p in total (comprising a 1.5p interim dividend and a 1.3p enhanced interim dividend respectively). The decision made in November to renew the contract with Ward & Hagon Management Consultancy LLP, to provide continued strategic resource particularly to access new retail channels with a view to further growing UK market share and developing the USA business. This appointment will impact employees, customers and suppliers and maintain and enhance the Company’s high standards of business conduct and drive the Group’s strategic plan for the beneﬁ t of members. 37 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 2020. number of public limited companies in ﬁ nance roles including as chief ﬁ nancial ofﬁ cer, group ﬁ nance director and treasurer. The full terms of reference for the Committee can be found on the Company’s website at www.warpaintlondonplc.com 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. Paul Hagon subsequently stepped down as a member with effect from 1 January 2021 upon becoming an executive director. The Audit Committee is convened as required and met two times during the year ended 31 December 2020 to discharge its responsibilities inter alia in connection with the Group’s Financial Statements for the year ended 31 December 2019 and the Interim Financial Statements for the six months ended 30 June 2020. 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 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. 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. Key Activities during the Year During the year ended 31 December 2020, the Audit Committee has: • Reviewed and discussed with the external auditor the key accounting considerations, estimates and judgements reﬂ ected in the Group’s interim results for the six-month period ended 30 June 2020; Reviewed and agreed the external auditors audit strategy memorandum in advance of its audit for the year ended 31 December 2020, including a statement on it independence and objectivity; Agreed the terms of engagement and fees to be paid to the external auditor for the audit of the 2020 ﬁ nancial statements; Received and reviewed statements from management regarding their approach to key accounting considerations, estimates and judgements in the ﬁ nancial statements for the year ended 31 December 2020; Discussed the report received from the external auditor regarding its audit in respect of the year ended 31 December 2020; Reviewed the half-year and full-year ﬁ nancial statements; and Reviewed and approved the Group’s viability/going concern statement, including the approach and assumptions taken, giving consideration to key risks. • • • • • • 338 Annual Report 2020 G o v e r n a n c e External auditor BDO LLP was appointed by the board as the Company’s external auditor on 26 June 2020 for the 2020 reporting period and it is their intention to put themselves 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 £149,000 to BDO for audit services in 2020, 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 £29,000 to BDO in 2020, for advice in relation to the adoption of a Company Share Option Scheme, 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 27 April 2021. Keith Sadler Audit Committee Chairman 27 April 2021 39 Warpaint London P LC Remuneration Committee Report Keith Sadler On behalf of the board, I am pleased to present the Remuneration Committee Report for the year ended 31 December 2020. 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 cer) 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. In the year to 31 December 2020, the Remuneration Committee consisted of three non-executive directors: me (as Chairman), Clive Garston and Paul Hagon. Paul Hagon subsequently stepped down as a member with effect from 1 January 2021 upon becoming an executive director. The Remuneration Committee is convened not less than twice a year and otherwise as required. The Committee met two times during the year ended 31 December 2020. The full terms of reference for the Committee can be found on the Company’s website at www.warpaintlondonplc.com Key Activities during the Year During the year ended 31 December 2020, the Remuneration Committee: • • Recommended the introduction in May 2020, of the Warpaint London plc Company Share Option Plan (“CSOP”) in which all Group employees and certain executive directors are entitled to participate. The CSOP has been established to incentivise employees, reward success and increase shareholder value over the long term. Reviewed the salary and bonus proposals for the executive directors and senior management at or above the committee’s review threshold together with the director’s fee payable to Paul Hagon under his revised appointment letter effective from 1 January 2021. Paul Hagon was not present at the review meeting as his salary was one of the subjects of the review and, at the date of the meeting, Paul was moving towards his role as an executive director. External Advice The Remuneration Committee was assisted in meeting its responsibilities in relation to the recommendation of the CSOP by BDO LLP. In the year to 31 December 2020 BDO LLP received fees of £9,000 for this advice. The Remuneration Committee is satisﬁ ed that the advice it receives from BDO LLP is objective and independent. 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. 340 Annual Report 2020 Directors’ Remuneration for the year ended 31 December 2020 S Bazini E Macleod N Rodol S Craig C Garston P Hagon K Sadler Salary Pension Benefits 200,000 200,000 150,000 52,500 60,000 40,000 40,000 – – 1,314 1,314 – – – 9,773 7,818 – – – – – Bonus 30,000 30,000 30,000 5,000 – – – Total Remuneration 2020 £ Fair Value of Options £ Total Remuneration 2019 £ 239,773 237,818 181,314 58,814 60,000 40,000 40,000 1,749,884 1,749,884 441,553 10,800 – – – 208,960 206,952 151,188 51,188 60,000 40,000 40,000 G o v e r n a n c e Directors’ interests in share options for year ended 31 December 2020 As at 31 December 2020 the following directors held the following performance related share awards (Enterprise Management Incentive Scheme Options, LTIPs or CSOPs) over ordinary shares of 25p each under the Warpaint London plc Enterprise Management Incentive Scheme, the Long Term Incentive Plan and the Warpaint London plc Company Share Option Plan. For details of the share option schemes see Note 22 on pages 75 to 76. Type of Share Award LTIP LTIP EMI LTIP EMI CSOP – – – Date of Grant 21.09.2018 21.09.2018 29.06.2017 21.09.2018 29.06.2017 20.05.2020 – – – Number of Shares at 31 December 2020 1,534,986 1,534,986 105,262 306,996 10,000 10,000 – – – Exercise Price 254.5p 254.5p 237.5p 254.5p 237.5p 49.5P – – – Number of Shares at 31 December 2019 (or date of appointment if later) 1,534,986 1,534,986 105,262 306,996 10,000 – – – – End of Performance Period/First Exercise Date 31 Dec 2022 31 Dec 2022 29 June 2020 31 Dec 2022 29 June 2020 20 May 2020 – – – S Bazini E Macleod N Rodol S Craig P Hagon C Garston K Sadler 41 Warpaint London P LC Remuneration Committee Report (continued) The directors, who held ofﬁ ce at 31 December 2020, had the following interests in the ordinary shares of 25p each in the capital of the Company: Number of share options held at 31 December 2020(c) Number of Ordinary Shares held at 31 December 2020 Ordinary Shares as % of issued share capital Number of Ordinary Shares held at 31 December 2019 1,534,986 1,534,986 412,258 20,000 – – – 15,195,208 15,195,208 103,961 – 31,145 126,315 31,145 19.80 19.80 0.14 – 0.04 0.16 0.04 15,195,208 15,195,208 103,961 – 31,145 126,315 31,145 S Bazini(a) E Macleod(b) N Rodol S Craig P Hagon C Garston K Sadler In addition to the above holdings: (a) 4,250,000 (2019: 4,250,000) shares are held by the wife of S Bazini (b) 4,250,000 (2018: 4,250,000) shares are held by the wife of E Macleod (c) For details of the share option schemes see Note 22 on pages 75 to 76 . On 20 January 2021, Keith Sadler sold 10,526 ordinary shares of 25p each in the Company at a price of 90.10p per ordinary Share and acquired the same number of ordinary Shares in his ISA for 93.15p per ordinary share. As a result of the transfer, Keith’s holding remained unchanged at 31,145 ordinary shares. Save as mentioned above, there were no changes in the shareholdings of the directors between 31 December 2020 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 Chief Executive Ofﬁ cer and the Managing Director) and 6 months’ notice, in the case of Neil Rodol (Chief Financial Ofﬁ cer) and Sally Craig (General Counsel & Company Secretary). Paul Hagon (executive director), Clive Garston (Chairman) and Keith Sadler, (non-executive director) have each 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 2020 at the forthcoming Annual General Meeting. This resolution is advisory in nature. Keith Sadler Remuneration Committee Chairman 27 April 2021 342 Annual Report 2020 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 2020. The Corporate Governance statements on pages 2 3 to 46 form part of this report. Going concern The Company’s going concern statement can be found in the Consolidated Financial Statements on pages 58 to 59 . Results and dividends The directors recommend a ﬁ nal dividend of 3.0 pence per ordinary share to be paid on 5 July 2021 for the year ended 31 December 2020 which, when added to the interim dividend of 2.8 pence per share gives a total dividend for the year of 5.8 pence per share. In the year ended 31 December 2019 the ﬁ nal dividend per ordinary share was nil pence per share and the interim dividend 1.5 pence per share, giving a total dividend for the year ended 31 December 2019 of 1.5 pence per share. Directors The following directors who held ofﬁ ce during the year and to the date of authorisation of the accounts are as follows: G o v e r n a n c e Non-executive chairman C Garston Executive directors S Bazini E Macleod N Rodol S Craig P Hagon* Non-executive director K Sadler * During the ﬁ nancial year ended 31 December 2020, Paul Hagon was a non-executive director. He became an executive director with effect from 1 January 2021. In accordance with the Company’s Articles of Association Eoin Macleod and Keith Sadler will retire and stand for re-election at the forthcoming Annual General Meeting. Likely Future developments Details of the Group’s future developments are contained in the Strategic report set out on pages 3 to 2 1. Substantial shareholdings The Group is aware of the following shareholdings of 3% or more in the share capital as at 31 December 2020: Shareholder S Bazini (including connected parties) E Macleod (including connected parties) Schroders plc Number of Shares 19,445,208 19,445,208 10,941,410 % 25.34 25.34 14.26 Financial instruments The Group’s ﬁ nancial risk management objectives and policies are discussed in Note 24 to the Consolidated Financial Statements on pages 77 to 81. 43 Warpaint London P LC Directors’ Report (continued) Auditors In accordance with section 485 of the Companies Act 2006, a resolution proposing that BDO LLP be re-appointed as auditors of the Group will be put to the Annual General Meeting. Indemnity of Directors The Company has purchased and maintained directors’ and ofﬁ cers’ liability insurance for the board. 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 accounting standards in conformity with the requirements of the Companies Act 2006 (IFRSs), 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: to the ongoing integrity of the ﬁ nancial statements contained therein. • • • • 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 or 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. 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 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. Engagement with Key Stakeholders The key stakeholders for the Group are customers, distributors, suppliers, employees, shareholders and the community and environment in which we live. Whilst interactions take place at all levels of the Group, the directors are aware of the importance of the relationships with key stakeholders and feedback is utilised wherever possible to sustain these relationships in order to drive the long term success of the business. Business relationships with the following stakeholders are described below. Face to face communications were largely curtailed in 2020 due to Covid-19, and many interactions with our stakeholders have taken place virtually. This has not only maintained, but in many instances enhanced our relationships with several of our key stakeholders and will be continued for the foreseeable future, irrespective of the restoration of face to face interaction. The effect of any such engagement on key decisions in the ﬁ nancial year to 31 December 2020 are set out below and detailed on page 3 7. • Customers Feedback with trade customers is initially directed through dedicated account managers followed by 344 Annual Report 2020 engagement with our administration teams. For end user customers feedback is garnered through the peer to peer review site Yotpo, and social media platforms such as Facebook, Twitter, Instagram and Pinterest. The Group’s consumer customers frequently contact the Company in writing, by email, direct calls to the head ofﬁ ce and through the website www.w7 makeup.co.uk, where they are also able to leave comments. We endeavour to respond to all customers who contact us in a swift and efﬁ cient manner typically by email or direct calls with all responses followed up to seek to achieve a positive outcome. During 2020, it was vital to maintain close contact with our trade customers and this was primarily undertaken remotely. Trends in the cosmetics business are dynamic and swift reaction to feedback is vital in introducing new products and updating our product range. • Distributors We seek to strengthen our relationships with our distributors to garner feedback and provide support with regular meetings, attendance at trade shows which, during 2020 have been largely virtual, and maintaining close contact with them through our sales representatives. During 2020, we have maintained our relationships with our distributors and supported them wherever possible. Our Distributors provide feedback on product suitability including in regions of the world such as the Middle East where there may be cultural sensitivities in the product packaging and branding. Different regions may also call for particular colour mixes and shades and such feedback enables us to optimise and tailor products in these regions. The aim is to align the interests of the distributor with those of the Group. • Suppliers Suppliers are visited at least annually and regular contact maintained at other times through trade shows, meetings and other close communications which, during 2020 have been largely virtual. The Group’s principal suppliers are made to feel part of the organisation with an open and honest dialogue encouraged so that feedback can be communicated and a rapid response provided. The Group has an ofﬁ ce in Hong Kong enabling more frequent visits and enhanced supplier contact. A strong relationship with the Group’s suppliers is vital to the long term success of the Company. • Employees 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 cer and Managing Director engaging daily with employees across the business. Communication is encouraged both on an informal basis and through regular departmental meetings, where input from colleagues is welcomed in any area. Communication channels within the business are key and the open-door policy and regular meetings aid this. Where practicable, consideration is given to ﬂ exible working and this was increasingly important during 2020 to minimise the impact on our employees of the Covid-19 pandemic and lockdowns. Flexibility was offered wherever possible, with help with working from home and ﬂ exible working where practicable for mothers and fathers home schooling. All employees received 100% of their salaries when furloughed and safe working conditions were implemented. As always, the well-being of our staff is paramount and particularly so during this period. G o v e r n a n c e • Shareholders The means of engagement with shareholders is detailed on pages 34 and 35. Throughout the ﬁ nancial year to 31 December 2020, there has been ongoing engagement with shareholders by the means described. • Community Wherever possible we employ staff from the local area and encourage the use of car sharing and public transport to reduce the impact on local roads. We manage the times of our incoming and outgoing deliveries in order to limit any disturbance to residents in the local area. As a rule, we use local trade’s people for goods and services creating employment and income within the area. We often support local charities, including South Bucks Hospice and provide donations of our products for local school fairs and fetes, these requests coming via our local suppliers. 2020 has reduced the number of opportunities to participate in such events but contributions to local charities have been made in the year and this will continue. 45 Warpaint London P LC Directors’ Report (continued) • Environment The Group has removed all plastics from the outer packaging of its gifting and all year-round products, and has virtually eliminated the use of single use packaging in its products completely. The Group’s product packaging therefore uses paper and cardboard wherever practicable, which enables the Group, the wholesaler and end user to recycle the waste effectively. This means that the business consumes considerable amounts of paper and cardboard, and the Group utilises a regular recycling collection service. This programme will be extended to utilise sustainable or recycled packaging where feasible, and the Group aims to be a market leader in this area. In terms of the Group’s product casings, the use of plastic is sometimes practically unavoidable but recyclable packaging is used wherever possible. All new W7 brand products are being manufactured without parabens and the Company is reformulating existing products where feasible. The Group aims to be paraben free for W7 in the next 24 to 36 months and Technic/ Badgequo products are already paraben free. The Covid-19 pandemic necessarily resulted in a reduction of travel within the Group, with business being conducted with customers and others virtually, where practicable. This has had a positive impact on the Group with business and trading relationships improving as a result. Hence, travel, and particularly air travel, will be restricted in future with customer, supplier, management and employee meetings being held virtually where feasible. This will not detract from the need to hold face to face meetings where this is conducive to a more productive relationship. Streamline Energy and Carbon Reporting (“SECR”) The ﬁ nancial year 2020 is the ﬁ rst year we are required to report under the SECR framework. Our SECR covers the energy consumption and Greenhouse Gas (“GHG”) emissions for the period 1 January 2020 to 31 December 2020. The table below shows the energy and GHG emissions from business activities involving the combustion of gas, the purchase of electricity, and business mileage in both kWh and tCO2e. Energy Usage in kWh 103,860 289,748 68,988 Financial Year 2020 Scope 1 Scope 2 Scope 3 Total for 2020 462,596 Intensity ratio (tCO e per m2) 2 GHG Emissions in tCO2e 19,097 67,552 15,812 102,461 6.9 We have selected an intensity metric based on the energy consumption per square metre of area of our sites, this is of 6.9kg CO /m2. We will use this ratio to 2 monitor our energy efﬁ ciency performance over time. S ECR Methodology The ﬁ gures quoted include meter readings for electricity and gas, and mileage expense reimbursement claims for business mileage. Conversion factors used are taken from the ‘The Carbon Trust – Energy and carbon conversions 2020 update’ to calculate emissions for Scope 1,2 and 3. Refunded business mileage has been classed as Scope 3 as the Group do not own the assets. S ECR Materiality The data provided by the Group has been determined as accurate and complete and covers the Group’s operations in the United Kingdom, speciﬁ cally the operations of the two UK subsidiaries, Warpaint Cosmetics (2014) Limited and Badgequo Limited. 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. The Group has implemented a range of energy efﬁ ciency measures at our sites in the year. These include an upgrade to internal and external LED lighting with motion sensors in some areas and a reduction in business travel by making more use of online meetings. On behalf of the board Neil Rodol Chief Financial Ofﬁ cer 27 April 2021 We continue to consider new technologies to improve the environmental performance of our sites, to reduce energy consumption and improve energy efﬁ ciency. 346 Annual Report 2020 Independent Auditor’s Report to the members of Warpaint London P LC G o v e r n a n c e Opinion on the ﬁ nancial statements In our opinion: • 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 2020 and of the Group’s loss for the year then ended; Conclusions relating to going concern In auditing the ﬁ nancial statements, we have concluded that the Directors’ use of the going concern basis of accounting in the preparation of the ﬁ nancial statements is appropriate. Our evaluation of the Directors’ assessment of the Group and the Parent Company’s ability to continue to adopt the going concern basis of accounting included: • the Group ﬁ nancial statements have been properly prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006; • A critical evaluation of the Directors’ assessment of the entity’s ability to continue as a going concern, covering the period of at least 12 months from the date of approval of the ﬁ nancial statements by; • 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. 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 2020 which comprise the consolidated statement of comprehensive income, the consolidated and company statements 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 accounting standards in conformity with the requirements of the Companies Act 2006. 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). 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 believe that the audit evidence we have obtained is sufﬁ cient and appropriate to provide a basis for our opinion. Independence We remain 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. • Evaluating the process the Directors followed to make their assessment, including conﬁ rming the assessment and underlying projections were prepared by appropriate individuals with sufﬁ cient knowledge of the detailed ﬁ gures as well as an understanding of the entities markets, strategies and risks. Understanding, challenging and corroborating the key assumptions included in their cash ﬂ ow forecasts against prior year, our knowledge of the business and industry, and other areas of the audit. • We considered the potential impact on the statement of ﬁ nancial position, speciﬁ cally around trade receivables and assessed Director’s judgement around the recoverability of these balances. This included reviewing post year end, post lockdown sales values and cash receipts post year end. • Searching through enquiry with the Directors, review of board minutes and review of external resources for any key future events that may have been omitted from cash ﬂ ow forecasts and assessing the impact these could have on future cash ﬂ ows and cash reserves. • Assessing stress test scenarios, including those in respect of COVID-19 considerations, and challenging whether other reasonably possible scenarios could occur and including these where appropriate. • Considering the adequacy of the disclosures relating to going concern included within the annual report against the requirements of the accounting standards and consistency of the disclosures against the forecasts and going concern assessment. Based on the work we have performed, we have not identiﬁ ed any material uncertainties relating to events or conditions that, individually or collectively, may cast signiﬁ cant doubt on the group and company’s ability to continue as a going concern for a period of at least twelve months from when the ﬁ nancial statements are authorised for issue. Our responsibilities and the responsibilities of the Directors with respect to going concern are described in the relevant sections of this report. The directors’ assessment of going concern involves a number of highly subjective judgements, therefore, this was accordingly identiﬁ ed as a Key Audit Matter. 47 Warpaint London P LC Independent Auditor’s Report (continued) to the members of Warpaint London P LC Overview 87% (2019: 93%) of Group proﬁ t before tax Coverage1 94% (2019: 100%) of Group revenue 98% (2019: 99%) of Group total assets Key audit matters Impairment of intangible assets and goodwill Carrying value of inventory Going concern 2020 2019 ✔ ✔ ✔ ✓ ✓ ✓ Materiality Group ﬁ nancial statements as a whole £245,000 (2019: £248,000) based on capped 5% (2019: 5%) of average proﬁ t before interest, tax, amortisation, and exceptional items. 1 These are areas which have been subject to a full scope audit or speciﬁ c procedures by the group engagement team An overview of the scope of our audit Our Group audit was scoped by obtaining an understanding of the Group and its environment, including the Group’s system of internal control, and assessing the risks of material misstatement in the ﬁ nancial statements. We also addressed the risk of management override of internal controls, including assessing whether there was evidence of bias by the Directors that may have represented a risk of material misstatement. The group consists of three trading subgroups, all of which are run from the UK except for Marvin Leeds Marketing Services Inc. which is based on 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 as signiﬁ cant components, except for Marvin Leeds Marketing Services Inc, on which we performed speciﬁ c audit procedures on certain account balances. Marvin Leeds Marketing Services Inc. Is not deemed to be a signiﬁ cant component and so our work was tailored to focus on speciﬁ c risk areas. All audit work was carried out by BDO LLP. Key audit matters Key audit matters are those matters that, in our professional judgement, 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) that 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. Aside from the going concern key audit matter identiﬁ ed above, we identiﬁ ed the following areas as the key audit matters relevant to our audit of the ﬁ nancial statements. Key audit matter Impairment of intangibles assets and goodwill (with reference to notes 1, 9 and 10) The Directors perform annual impairment reviews of goodwill for all cash generating units (CGUs). We assessed management’s allocation of assets for each CGU based on our knowledge of the Group and its operations. How the scope of our audit addressed the key audit matter This review also covers the carrying value of other intangible assets, property plant and equipment, and other assets of the CGUs. The estimated recoverable amount of these balances is subjective due to the inherent uncertainty involved in forecasting and discounting future cash ﬂ ows, which form the basis of the Group’s value in use calculation and assessment of the carrying value of goodwill and intangible asset values. Due to the impact of Covid-19 on the Group there is increased uncertainty surrounding management’s trading assumptions. We have determined as part of our risk assessment that the value in use calculation used in the assessment of carrying value of goodwill and intangible assets has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the ﬁ nancial statements as a whole. The ﬁ nancial statements disclose the sensitivities estimated by the Group. We challenged management’s assumptions and assessed the achievability of the forecasts included in the impairment model using a number of techniques including assessing accuracy of historic forecasting, post year-end performance and industry trends, including the impact of COVID-19 on each CGU. We considered whether the revenue, and where relevant associated costs, used in the value in use calculations was reasonable in light of historic performance and industry projections. This included using our own sector experience in challenging the key assumptions made and performing sensitivity analysis on these assumptions. These areas included the projected economic growth and cost inﬂ ation, margin and known or probable changes in the business environment. 348 Annual Report 2020 Key audit matter Key assumptions include revenue, gross margin, and cash ﬂ ow forecast assumptions. The impairment test is also based on key assumptions in respect of the appropriate discount rates and longer-term growth rates. As a result of the review, management did not identify any impairments. Net realisable value of inventory (with reference to notes 1 and 13) The Group has signiﬁ cant levels of inventory and estimates are made in the valuation of slow moving and obsolete inventories, some of which have a limited shelf life. There is also some uncertainty over changes in consumer preferences and spending patterns, which are primarily driven by wider trends in the fashion industry as well as seasonality, which could impact the saleability of inventory. There is a recoverability risk associated with new product launches and judgement is required in forecasting demand which can lead to obsolete inventory. Given the level of judgement and estimation involved by management, the carrying value of inventory is considered to be a key audit matter. G o v e r n a n c e How the scope of our audit addressed the key audit matter We used our own valuation specialists to challenge the value in use and the fair value less cost to sell model. We assessed the competence, independence and expertise of the third-party expert used by management in formulating the value in use model. We also challenged management and their third- party experts regarding the assumptions made in the model including the cash ﬂ ow forecast, weighted average cost of capital and discount rate used. We benchmarked the key assumptions applied against a variety of similar businesses and considered whether these fell within our acceptable ranges. We assessed whether the selected price index was reasonable by comparing this to other data sources, including from a number of similar businesses. Key observations: Based on the procedures we performed, no issues arose from our work that suggested goodwill and intangible assets are materially misstated. Our procedures included assessing the carrying value of inventory as being appropriate at the lower of cost of net realisable value. This was done through testing a sample of items to their unit cost and then to the average sale price in the period leading up to and around the year end. Where there were indicators of negative margin or zero margin, we determined whether these balances were considered appropriately in the inventory provision balance. In addition, we considered 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. 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 yearend date. Further, we tested the unprovided inventory balance by reviewing sales volumes and values after the balance sheet date by testing a sample of items. Key observations: Based on the procedures we performed, no issues arose from our work that suggested net realisable value of inventories are materially misstated. 49 Warpaint London P LC Independent Auditor’s Report (continued) to the members of Warpaint London P LC Our application of materiality We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. We consider materiality to be the magnitude by which misstatements, including omissions, could inﬂ uence the economic decisions of reasonable users that are taken on the basis of the ﬁ nancial statements. In order to reduce to an appropriately low level the probability that any misstatements exceed materiality, we use a lower materiality level, performance materiality, to determine the extent of testing needed. Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also take account of the nature of identiﬁ ed misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the ﬁ nancial statements as a whole. Based on our professional judgement, we determined materiality for the ﬁ nancial statements as a whole and performance materiality as follows: Materiality Group ﬁ nancial statements Parent company ﬁ nancial statements 2020 £ 245,000 2019 £ 248,000 2020 £ 150,000 2019 £ 100,000 Basis for determining materiality 5% of adjusted proﬁ t before tax (2020: capped to lower than previous year). 1.5% of Total assets capped to address aggregation risk. We considered total assets to be the most appropriate measure for the basis of materiality as the Parent Company is primarily an investment holding company. Rationale for the benchmark applied We considered adjusted proﬁ t before tax (proﬁ t before interest, tax, amortisation, and exceptional items) to be the most appropriate measure for the basis of materiality given it is a key performance indicator of the Group and management. Adjustments are included in the consolidated statement of comprehensive income and note 4 to the ﬁ nancial statements. Adjusted measures have been used as a benchmark given the importance of underlying trading proﬁ t as a measure for users of the ﬁ nancial statements in assessing the performance of the Group. For 2020, the benchmark used is the average 3 years adjusted proﬁ t before tax to alleviate the ﬂ uctuations caused by Covid-19. Performance materiality Basis for determining performance materiality 183,750 186,000 112,500 75,000 75% of Group materiality, based on our overall risk assessment. In setting the level of performance materiality, we considered a number of factors including the control environment, our testing strategy, the expected total value of known and likely misstatements (based on past experience and other factors) and management’s attitude towards proposed adjustments. 75% of Company materiality, based on our overall risk assessment. In setting the level of performance materiality, we considered a number of factors including the control environment, our testing strategy, the expected total value of known and likely misstatements (based on past experience and other factors) and management’s attitude towards proposed adjustments. 350 Annual Report 2020 Component materiality We set materiality for each component of the Group based on a percentage of between 47% and 90% (2019: 40% to 90%) of Group materiality dependent on the size and our assessment of the risk of material misstatement of that component. Component materiality ranged from £116,000 to £221,000 (2019: £100,000 to £223,000). In the audit of each component, we further applied performance materiality levels of 75% of the component materiality to our testing to ensure that the risk of errors exceeding component materiality was appropriately mitigated. Reporting threshold We agreed with the Audit Committee that we would report to them all individual audit differences in excess of £12,250 (2019: £12,400). We also agreed to report differences below this threshold that, in our view, warranted reporting on qualitative grounds. Other information The directors are responsible for the other information. The other information comprises the information included in the Annual Report and Financial Statements 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. 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 course of 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 this gives rise to a material misstatement in the ﬁ nancial statements themselves. 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. Other Companies Act 2006 reporting Based on the responsibilities described below and our work performed during the course of the audit, we are required by the Companies Act 2006 and ISAs (UK) to report on certain opinions and matters as described below. G o v e r n a n c e Strategic report and Directors’ report In our opinion, based on the work undertaken in the course of the audit: Matters on which we are required to report by exception • 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. In the light of the knowledge and understanding of the Group and 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 by the Parent Company, 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, 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. 51 Warpaint London P LC Independent Auditor’s Report (continued) to the members of Warpaint London P LC 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. 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. Extent to which the audit was capable of detecting irregularities, including fraud Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below: • We obtained an understanding of the legal and regulatory frameworks that are applicable to the group and the industry in which it operates. We determined that the most signiﬁ cant laws and regulations which are directly relevant to speciﬁ c assertions in the ﬁ nancial statements are those related to the reporting framework, including international accounting standards in conformity with the requirements of the Companies Act 2006, and signiﬁ cant regulations relating to the sector in which the group operates are employment and taxation laws and regulations in the jurisdictions in which the Group operates. • We understood how the company is complying with those legal and regulatory frameworks, including those under industry regulation, by making enquiries of management and those responsible for legal and compliance procedures. We corroborated our enquiries through our review of board minutes and reviewing summary of claims, litigations and regulatory inquiries that we have obtained from the Group’s Compliance Ofﬁ cer. • We assessed the susceptibility of the Group’s ﬁ nancial statements to material misstatement, including how fraud might occur, by meeting with management from across the Group to understand where they considered there was a susceptibility to fraud. • Our audit planning identiﬁ ed fraud risks in relation to management override and revenue recognition. We considered the processes and controls that the Group has established to address risks identiﬁ ed, or that otherwise prevent, deter and detect fraud; and how management monitors that processes and controls. • We designed our audit procedures to detect irregularities, including fraud. Our procedures included journal entry testing, with a focus on large or unusual transactions based on our knowledge of the business; existence of revenue, enquiries with the Compliance Ofﬁ cer, the Group management; and focussed testing as referred to in the Key Audit Matters section above. Our audit procedures were designed to respond to risks of material misstatement in the ﬁ nancial statements, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery, misrepresentations or through collusion. There are inherent limitations in the audit procedures performed and the further removed non-compliance with laws and regulations is from the events and transactions reﬂ ected in the ﬁ nancial statements, the less likely we are to become aware of it. A further description of our responsibilities is available on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. Use of our report This report is made solely to the Parent 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 Parent 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 Parent Company and the Parent Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Kieran Storan (Senior Statutory Auditor) For and on behalf of BDO LLP, Statutory Auditor London, United Kingdom 27 April 2021 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). 352 Consolidated Statement of Comprehensive Income for the year ended 31 December 2020 Revenue Cost of sales Gross proﬁ t Administrative expenses Other operating income Analysed as: Adjusted proﬁ t from operations1 Amortisation Exceptional items Share based payment (Loss)/proﬁ t from operations Finance expense (Loss)/proﬁ t before tax Tax expense (Loss)/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/(loss) 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 2020 Year ended 31 December 2020 £’000 40,286 2019 £’000 49,282 (27,742) (32,780) 12,544 16,502 (13,807) (14,355) Note 2 2 4,5 3 361 2,514 4,10 (2,443) 4 22 6 7 27 27 (317) (656) (902) (212) (1,114) 111 (1,003) 53 (950) (1.31) (1.31) i F n a n c i a l S t a t e m e n t s 5,580 (2,439) (178) (816) 2,147 (370) 1,777 (409) 1,368 (12) 1,356 1.78 1.78 Note 1 – Adjusted proﬁ t from operations is calculated as earnings before interest, taxation, amortisation of intangible assets, any impairment costs, share based payments and exceptional items. The notes on pages 58 to 82 form part of these ﬁ nancial statements. 53 Warpaint London P LC Consolidated Statement of Financial Position As at 31 December 2020 Non-current assets Goodwill Intangibles Property, plant, and equipment Right-of-use assets Deferred tax assets Total non-current assets Current assets Inventories Trade and other receivables Cash and cash equivalents Derivative ﬁ nancial instruments Total current assets Total assets Current liabilities Trade and other payables Borrowings and lease liabilities Derivative ﬁ nancial instruments Corporation tax liability Total current liabilities Non-current liabilities Borrowings and lease liabilities Deferred tax liability Total non-current liabilities Total liabilities NET ASSETS The notes on pages 58 to 82 form part of these ﬁ nancial statements. 354 Note 9 10 11 12 18 13 14 15 24 16 17 24 17 18 As at 31 December 2020 £’000 7,274 4,651 1,149 3,799 581 2019 £’000 7,274 7,082 684 4,685 374 17,454 20,099 14,413 9,187 4,875 40 28,515 45,969 (3,121) (914) (400) (119) (4,554) (3,045) (1,000) (4,093) (8,599) 16,194 12,624 2,731 39 31,588 51,687 (3,933) (2,206) – (548) (6,687) (3,863) (1,324) (5,187) (11,874) 37,370 39,813 Consolidated Statement of Financial Position As at 31 December 2020 Equities Share capital Share premium Merger reserve Foreign exchange reserve Share option reserves Retained earnings TOTAL EQUITY Annual Report 2020 Note 20 21 As at 31 December 2020 £’000 19,187 19,359 2019 £’000 19,187 19,359 (16,100) (16,100) 89 1,633 13,202 37,370 36 977 16,354 39,813 The ﬁ nancial statements of Warpaint London PLC were approved and authorised for issue by the Board of Directors and were signed on its behalf by: Neil Rodol Chief Financial Ofﬁ cer 27 April 2021 i F n a n c i a l S t a t e m e n t s The notes on pages 58 to 82 form part of these ﬁ nancial statements. 55 Warpaint London P LC Consolidated Statement of Changes in Equity for the year ended 31 December 2020 Share Capital Share Premium Merger Reserve exchange reserve option reserve £’000 19,187 £’000 19,359 £’000 (16,100) £’000 48 £’000 161 Foreign Share Retained Earnings £’000 18,363 Total Equity £’000 41,018 At 1 January 2019 Comprehensive Income for the year On translation of foreign subsidiary Proﬁ t for the year Total comprehensive income for the year Transactions with owners Share based payment charge Dividends paid Total transactions with owners – – – – – – – – – – – – – – – – – – As at 31 December 2019 19,187 19,359 (16,100) Comprehensive Income for the year On translation of foreign subsidiary Loss for the year Total comprehensive income for the year Transactions with owners Share based payment charge Dividends paid Total transactions with owners – – – – – – – – – – – – (12) – (12) – – – 36 53 – 53 – – – – – 816 – 816 977 – – 656 – 656 – (12) 1,368 1,368 1,368 1,356 – 816 (3,377) (3,377) (3,377) (2,561) 16,354 39,813 – 53 (1,003) (1,003) (1,003) (950) – 656 (2,149) (2,149) (2,149) (1,493) As at 31 December 2020 19,187 19,359 (16,100) 89 1,633 13,202 37,370 The notes on pages 58 to 82 form part of these ﬁ nancial statements. 356 Annual Report 2020 Year ended 31 December Note 6 10 11/12 22 13 10 11 17 6 19 15 15 2020 £’000 (1,114) 212 2,443 1,252 2 656 3,437 1,781 (812) 399 53 8,309 (853) 7,456 (12) (869) 21 (860) (90) (810) (1,191) (212) (2,149) (4,452) 2,144 2,731 4,875 4,875 4,875 i F n a n c i a l S t a t e m e n t s 2019 £’000 1,777 370 2,439 1,194 39 816 (327) (832) 444 (39) (13) 5,868 (1,499) 4,369 (35) (284) – (319) (83) (811) (719) (370) (3,377) (5,360) (1,310) 4,041 2,731 2,731 2,731 Consolidated Statement of Cash Flows for the year ended 31 December 2020 Operating activities (Loss)/proﬁ t before tax Interest paid 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)/increase in trade and other payables Fair value loss/(gain) on derivative ﬁ nancial instruments Foreign exchange translation differences Cash generated from operations Tax paid Net cash ﬂ ows from operating activities Investing activities Purchase of intangible assets Purchase of property, plant, and equipment Sale of property, plant, and equipment proceeds Net cash used in by investing activities Financing activities Repayment of borrowings Lease payments Decrease in stock and invoice ﬁ nance facilities Interest paid Dividends Net cash used in ﬁ nancing activities Net increase/(decrease) 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 consist of: Cash and cash equivalents The notes on pages 58 to 82 form part of these ﬁ nancial statements. 57 Warpaint London P LC Notes to the Consolidated Financial Statements as at ended 31 December 2020 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 2020 were authorised for issue by the board of directors 27 April 2021. 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, Buckinghamshire, SL0 9HW. The Group’s ﬁ nancial statements have been prepared in accordance in accordance with international accounting standards and in conformity with the requirements of the Companies Act. 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 accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 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. 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. 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 pounds 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. 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 concluded that it is reasonable to adopt a going concern basis in preparing the ﬁ nancial statements. This is based on a reasonable expectation that the Group has adequate resources to continue in operational existence for at least twelve months from the date of signing of these accounts. The Group made a statutory loss of £1.0 million in the year to 31 December 2020 (2019: £1.4 million proﬁ t) and had net current assets of £24.0 million at 31 December 2020 (2019: £24.9 million). The Group occasionally makes use in its Retra subsidiary of a £10 million facility that can be used for conﬁ dential invoice discounting and stock ﬁ nance, the facility renews each year at the end of June, and contains certain covenants, including a minimum EBITDA for Retra to be tested on a cumulative quarterly basis. The Directors have prepared forecasts covering the period to December 2022, built from the detailed Board approved budget for 2021. The forecasts include a number of assumptions in relation to varying levels of sales revenue. Whilst the Group’s trading and cash ﬂ ow forecasts have been prepared using current trading assumptions, the operating environment presents a number of challenges which could negatively impact the actual performance achieved. Excluding the potential impact of COVID-19, which is considered below, these risks include, but are not limited to, achieving forecast levels of sales and order intake, the impact on customer conﬁ dence as a result of general economic conditions and leaving the European Union, achieving forecast margin improvements and the director’s ability to implement cost saving initiatives in areas of discretionary spend where required. The Group’s cash ﬂ ow forecasts and projections, taking account of reasonable and possible changes in trading performance excluding the potential impact of COVID-19 (which is considered below), offset by mitigating actions within the control of management including reductions in areas of discretionary spend, show that the Group will be able to operate comfortably through to the end of December 2022, and in Retra within the level of its facility and associated covenants. The uncertainty as to the future impact on the Group of the COVID-19 outbreak has been separately considered as part of the directors’ consideration of the going concern basis of preparation. The Group experienced a material impact in trading performance due to COVID-19 in 2020 and this has to a lesser extent continued into 2021 with many but not all customers closed at times in the UK and overseas. In the downside scenario analysis performed, the directors have considered the reasonably plausible impact of the ongoing COVID-19 outbreak on the Group’s trading and cash ﬂ ow forecasts. 358358 58 Annual Report 2020 Notes to the Consolidated Financial Statements (continued) as at ended 31 December 2020 Signiﬁ cant accounting policies (continued) 1. In preparing this analysis, a number of scenarios were modelled with the beneﬁ t of experience having come through the three lockdowns in the UK in 2020. The scenarios modelled were all based on varying levels of sales revenue, including no growth for 2021 and 2022, and more extreme falls in revenue of up to 30% in both years as a worst-case scenario. In each scenario, mitigating actions within the control of management have been modelled. Under each of the scenarios modelled, the Group has sufﬁ cient cash to meet its liabilities as they fall due and consequently, the directors believe that the Group has sufﬁ cient ﬁ nancial strength to withstand the possible disruption to its activities. Based on the above indications the directors believe that it remains appropriate to prepare the ﬁ nancial statements on a going concern basis. 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. Where the Group has entered into distributor arrangements the satisfaction of performance obligations and transfer of control to the distributor is 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. 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 probably of not reversing. Management monitors this estimate at each reporting date and adjusts it as necessary. 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. • 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 • expense the incremental costs of obtaining a contract when the amortisation period of the asset otherwise recognised would have been one year or less. 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 relating to a past event and where the amount of the obligation can be reliably estimated. 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 and Alternative performance measures Exceptional items which have been disclosed separately on the face of the income statement in order to summarise the underlying results. Exceptional items in the current period relate to restructuring costs and legal and professional fees. 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 a clearer presentation of the underlying ﬁ nancial performance of the Group. Alternative performance measures (APM’s) are used by the Board to assess the Group’s performance and are applied consistently from one period to the next. They therefore provide additional useful information for shareholders on the underlying performance and position of the Group. Additionally, adjusted proﬁ t from operations is used to determine adjusted EPS which is used as a key performance indicator for the Long- Term Incentive Plan (LTIP) and the Company Share Option Scheme (CSOP). These measures are not deﬁ ned by IFRS and are not intended to be a substitute for IFRS measures. The Group presents underlying operating proﬁ t, proﬁ t before tax and EPS which are calculated as the statutory measures stated before non-underlying items, including exceptional items, amortisation of intangible assets and share-based payments where applicable. i F n a n c i a l S t a t e m e n t s 59 59 Warpaint London P LC Notes to the Consolidated Financial Statements (continued) as at ended 31 December 2020 Signiﬁ cant accounting policies (continued) 1. Underlying results are used in the day-to-day management of the Group. They represent statutory measures adjusted for items which could distort the understanding of performance and comparability year on year. Non-underlying items include the amortisation of intangible assets, exceptional items and share-based payments. Exceptional items are those items which the group consider to be signiﬁ cant in nature and not in the normal course of business or are consistent with items that were treated as exceptional in prior periods. 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. 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. Intangible assets acquired separately 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. Amortisation is provided on Licences and Website costs so as to write off the carrying value over the expected useful economic life of ﬁ ve years. 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 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. 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. 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. 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. 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. Property, plant and equipment Items of property, plant and equipment are initially recognised at cost. As well as the purchase price, cost includes directly attributable costs. Depreciation is provided on all items of property, plant and equipment so as to write off their carrying value over the expected useful economic lives. It is provided at the following rates: Plant and machinery - 25% reducing balance and 20% Fixtures and ﬁ ttings - 25% reducing balance and 20% straight line Computer equipment - 25% reducing balance and 33.33% Motor vehicles straight line - 20% straight line straight line Right-of-Use Assets In the previous period, the Group only recognised lease assets and lease liabilities in relation to leases that were classiﬁ ed as “ﬁ nance leases” under IAS 17 “Leases”. The assets were presented in property, plant and equipment and the liabilities as part of the Group’s borrowings. For adjustments recognised on adoption of IFRS 16 on 1 January 2019, please refer to note 12. Right-of-use assets are measured at cost, which is made up of the initial measurement of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the asset at the end of the lease, less any lease incentives received. The Group depreciates the right-of-use assets on a straight-line basis from the lease commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The Group also assesses the right-of-use asset for impairment when such indicators exist. 360 Annual Report 2020 Notes to the Consolidated Financial Statements (continued) as at ended 31 December 2020 Signiﬁ cant accounting policies (continued) 1. The right-of-use assets are included in a separate line within non-current assets on the Consolidated Balance Sheet Financial liabilities 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: Financial 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 (e.g. 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. 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 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. 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. 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. 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 fair value and subsequently carried at amortised cost using the effective interest method. initially recognised at 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. 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. 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. i F n a n c i a l S t a t e m e n t s 61 61 Warpaint London P LC Notes to the Consolidated Financial Statements (continued) as at ended 31 December 2020 1. Signiﬁ cant accounting policies (continued) Leases All leases are accounted for by recognising a right-of-use asset and a lease liability except for: • Leases of low value assets; and • Leases with a duration of 12 months or less. Lease liabilities are measured at the present value of the contractual payments due to the lessor over the lease term, with the discount rate determined by reference to the rate inherent in the lease unless (as is typically the case) this is not readily determinable, in which case the group’s incremental borrowing rate on commencement of the lease is used. Variable lease payments are only included in the measurement of the lease liability if they depend on an index or rate. In such cases, the initial measurement of the lease liability assumes the variable element will remain unchanged throughout the lease term. Other variable lease payments are expensed in the period to which they relate. On initial recognition, the carrying value of the lease liability also includes: • amounts expected to be payable under any residual value guarantee; • the exercise price of any purchase option granted in favour of the group if it is reasonably certain to assess that option; • any penalties payable for terminating the lease, if the term of the lease has been estimated on the basis of termination option being exercised. Right of use assets are initially measured at the amount of the lease liability, reduced for any lease incentives received, and increased for: • lease payments made at or before commencement of the lease; • initial direct costs incurred; and • the amount of any provision recognised where the group is contractually required to dismantle, remove or restore the leased asset. Subsequent to initial measurement lease liabilities increase as a result of interest charged at a constant rate on the balance outstanding and are reduced for lease payments made. Right-of-use assets are amortised on a straight-line basis over the remaining term of the lease or over the remaining economic life of the asset if, rarely, this is judged to be shorter than the lease term. When the group revises its estimate of the term of any lease (because, for example, it re-assesses the probability of a lessee extension or termination option being exercised), it adjusts the carrying amount of the lease liability to reﬂ ect the payments to make over the revised term, which are discounted at the same discount rate that applied on lease commencement. The carrying value of lease liabilities is similarly revised when the variable element of future lease payments dependent on a rate or index is revised. In both cases an equivalent adjustment is made to the carrying value of the right-of-use asset, with the revised carrying amount being amortised over the remaining (revised) lease term. When the group renegotiates the contractual terms of a lease with the lessor, the accounting depends on the nature of the modiﬁ cation: • if the renegotiation results in one or more additional assets being leased for an amount commensurate with the standalone price for the additional rights-of-use obtained, the modiﬁ cation is accounted for as a separate lease in accordance with the above policy • in all other cases where the renegotiated increases the scope of the lease (whether that is an extension to the lease term, or one or more additional assets being leased), the lease liability is remeasured using the discount rate applicable on the modiﬁ cation date, with the right-of-use asset being adjusted by the same amount • if the renegotiation results in a decrease in the scope of the lease, both the carrying amount of the lease liability and right-of-use asset are reduced by the same proportion to reﬂ ect the partial of full termination of the lease with any difference recognised in proﬁ t or loss. The lease liability is then further adjusted to ensure its carrying amount reﬂ ects the amount of the renegotiated payments over the renegotiated term, with the modiﬁ ed lease payments discounted at the rate applicable on the modiﬁ cation date. The right-of-use asset is adjusted by the same amount. For contracts that both convey a right to the group to use an identiﬁ ed asset and require services to be provided to the group by the lessor, the group has elected to account for the entire contract as a lease, i.e. it does allocate any amount of the contractual payments to, and account separately for, any services provided by the supplier as part of the contract. Nature of leasing activities (in the capacity as lessee) The group leases a number of property, plant and equipment in the jurisdictions from which it operates with a ﬁ xed periodic rent over the lease term. The group has a total of 6 property leases and 1 plant and machinery lease. 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. The Group’s current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. Deferred taxation Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the combined statement of 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 • 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. 362 Annual Report 2020 Notes to the Consolidated Financial Statements (continued) as at ended 31 December 2020 Signiﬁ cant accounting policies (continued) 1. 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. Earnings per share 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. Share Capital The Group’s ordinary shares are classiﬁ ed as equity instruments. income over 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 the vesting period. Non-market vesting conditions are considered 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 New standards, 1 January 2020. interpretations and amendments effective from There were no new standards or interpretations impacting the Group that will be adopted in the annual ﬁ nancial statements for the year ended 31 December 2020, and which have given rise to changes in the Group’s accounting policies. 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. i F n a n c i a l S t a t e m e n t s 63 Warpaint London P LC Notes to the Consolidated Financial Statements (continued) as at ended 31 December 2020 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 £251,000. The Group does not provide any provision on its non-perishable goods that are greater than two years old on the basis that the products have long shelf life. Should the Group increase the provision to 100% of non-perishable items that are greater than two years old, this would decrease proﬁ t by £137,000. b) Impairment of goodwill The assessment of the recoverable amount of goodwill allocated to Retra Holdings Limited and Leeds Marketing Services, Inc., as detailed in note 10, 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 pre-tax discount rate for Retra Holdings Limited from 8.03% to 9.03% would reduce the recoverable amount by approximately £1.6 million and will still not result in any impairment, while a one percent increase in the pre-tax discount rate for Leeds Marketing Services, Inc. from 7.62% to 8.62% would reduce the recoverable amount by approximately £1.3 million and will still not result in any impairment. c) Deferred tax assets Deferred tax assets are recognised to the extent that it is probable that taxable proﬁ ts will be available against which deductible temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufﬁ cient taxable proﬁ ts will be available to allow all or part of the assets to be recovered. 1. Signiﬁ cant accounting policies (continued) Amendments updating a reference to the Conceptual Framework Effect annual periods beginning before or after 1st January 2022 Amendments regarding replacement issues in the context of the IBOR reform 1st January 2021 IFRS 3 IFRS 4, 7,9,16 IAS 39 IFRS 9 Amendments resulting from the annual improvements to IDRS Standards 2018- 2020 (fees in the ’10 per cent’ test for derecognition of ﬁ nancial liabilities) 1st January 2022 IFRS 17 Amendments to address concerns and 1st January 2023 implementation challenges that were identiﬁ ed after IFRS 17 was published IAS 1 Amendments to defer the effective date of January 2020 amendments 1st January 2023 Amendments regarding the disclosure of accounting policies IAS 8 Amendments regarding the deﬁ nition of accounting estimates 1st January 2023 IAS 16 Amendments prohibiting a company 1st January 2022 from deducting from the cost of property, plant and equipment amounts received from selling items while the company is preparing the asset for its intended use IAS 37 Amendments regarding the costs to 1st January 2022 include when assessing whether a contract is onerous 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. Government Grants Grants from the government are recognised at their fair value where there is reasonable assurance that the grant will be received and the group will comply with all attached conditions. Government grants which are revenue in nature are recognised on a systematic basis within Other operating income in the Statement of Comprehensive income over the period in which the group recognises as expenses the related costs for which the grants are intended to compensate. 364 Annual Report 2020 Notes to the Consolidated Financial Statements (continued) as at ended 31 December 2020 Segmental information 2. 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. Year ended 31 December Revenue Cost of sales Gross proﬁ t Administrative expenses Exceptional items Other operating income 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 Spain Denmark USA Australia and New Zealand Rest of World Total 2019 Own Brand 2019 Close-out 2020 2020 Own Brand Close-out £’000 35,397 (24,375) 11,022 (11,853) (279) 317 (793) (793) (212) (1,005) £’000 4,889 (3,367) 1,522 (1,637) (38) 44 (109) (109) – (109) 2020 Total £’000 40,286 (27,742) 12,544 (13,490) (317) 361 (902) (902) (212) (1,114) £’000 41,619 (27,086) 14,533 (13,110) (155) – 1,268 1,268 (370) 898 16,909 4,233 21,142 17,863 5,271 4,555 4,987 1,790 1,206 679 48 72 171 358 – 7 5,319 4,627 5,158 2,148 1,206 686 6,289 7,268 4,580 2,825 1,408 1,386 2019 Total £’000 49,282 (32,780) 16,502 (14,177) (178) – 2,147 2,147 (370) 1,777 22,701 6,969 7,268 4,580 4,956 1,410 1,398 i F n a n c i a l S t a t e m e n t s £’000 7,663 (5,694) 1,969 (1,067) (23) – 879 879 – 879 4,838 680 – – 2,131 2 12 35,397 4,889 40,286 41,619 7,663 49,282 During the year ended 31 December 2020, there was no single material external customer from which revenues were derived exceeding 10% of annual sales. During the year ended 31 December 2019, revenues of approximately £5,269,000 were derived from a single external customer based in Spain and £3,797,000 were derived from a single external customer based in Denmark. The Directors are not able to attribute the Group’s assets and liabilities by reportable business segment. Analysis of non -current assets by geographical market. Year ended 31 December Goodwill Intangibles Property, plant and equipment Right of use assets 2020 UK £’000 6,720 4,066 1,142 3,684 2020 USA £’000 554 585 7 115 2020 Total £’000 7,274 4,651 1,149 3,799 2019 UK £’000 6,720 6,286 675 4,399 2019 USA £’000 554 796 9 286 2019 Total £’000 7,274 7,082 684 4,685 15,612 1,261 16,873 18,080 1,645 19,725 65 Warpaint London P LC Notes to the Consolidated Financial Statements (continued) as at ended 31 December 2020 3. Other operating income Government grants receivable Year ended 31 December 2020 £’000 361 361 2019 £’000 – – The group applied for various government support Programs introduced in response to the global pandemic. Included within the consolidated statement of comprehensive income is £361,000 of government grants obtained relating to supporting the payroll of the Group’s employees. The Group has elected to present this government grant separately, rather than reducing the related expense. The Group had to commit to spending the assistance on payroll expenses, and not reduce employee headcount below prescribed levels for a speciﬁ ed period of time. The Group does not have any unfulﬁ lled obligations relating to this program. Operating (loss)/proﬁ t 4. Operating (loss)/proﬁ t for the period is stated after charging: Foreign exchange loss Depreciation Amortisation of right of use assets Amortisation of intangible assets Write-down inventories at net realisable value Exceptional costs The expenditure incurred within the table above falls wholly within Administrative expenses. Exceptional costs Non-recurring legal and professional fees Restructuring costs Auditor’s Remuneration Analysis of auditor’s remuneration is as follows: Fees payable to the Company’s auditor for the audit of the Group’s annual accounts Fees payable to the Company’s auditor for the audit of subsidiary companies Other services pursuant to legislation: Tax advice Other assurance Total non-audit fees 366 Year ended 31 December 2020 £’000 420 385 867 2,443 312 317 2019 £’000 227 326 868 2,439 83 178 Year ended 31 December 2020 £’000 76 241 317 2019 £’000 16 162 178 Year ended 31 December 2020 £’000 60 89 149 26 3 29 2019 £’000 49 102 151 12 3 15 Annual Report 2020 Year ended 31 December 2020 £’000 4,889 407 83 5,379 2019 £’000 4,576 449 81 5,106 Year ended 31 December 2020 No. 6 27 7 53 8 12 113 2020 £’000 838 545 18 3 1,404 2020 £’000 480 478 244 61 60 40 40 i F n a n c i a l S t a t e m e n t s 2019 No. 7 40 5 45 3 11 111 2019 £’000 740 674 16 2 1,432 2019 £’000 493 491 253 55 60 40 40 1,403 1,432 Notes to the Consolidated Financial Statements (continued) as at ended 31 December 2020 5. Staff costs Wages and salaries Social security costs Pension costs The average monthly number of employees during the period was as follows: Directors Administrative Finance Warehouse Sales Other Directors’ remuneration, included in staff costs Salaries Share based payments Beneﬁ ts Pension contributions Remuneration in respect of Directors was as follows: Executive Directors S Bazini E Macleod N Rodol S Craig Non-executive Directors C Garston K Sadler P Hagon Salary/fees £’000 Share based payment £’000 Pension Beneﬁ ts contribution £’000 £’000 10 8 – – – – – 18 – – 1 1 – – – 2 230 230 180 58 60 40 40 838 240 240 63 2 – – – 545 67 Warpaint London P LC Notes to the Consolidated Financial Statements (continued) as at ended 31 December 2020 5. Staff costs (continued) Number of Share Number of Share Number of Share Number of Share options options awarded options lapsed options Earliest Exercise Exercise Expiry at January 2020 in the year in the year at December 2020 Exercise Price Date Date N Rodol 412,258 S Bazini E Macleod S Craig 1,534,986 1,534,986 10,000 – – – 10,000 Total share options 3,492,230 10,000 The directors of the Group are the only key management personnel. – – – – – 105,262 @237.5p 306,996 @254.5p 254.5p 254.5p 10,000 @237.5p 10,000 @49.5p 412,258 1,534,986 1,534,986 20,000 3,502,230 29/06/2020 29/06/2027 21/09/2021 21/09/2028 21/09/2021 21/09/2028 21/09/2021 21/09/2028 29/06/2020 29/06/2027 20/05/2023 20/05/2030 6. Finance expense Loan interest Lease liability interest Other interest 7. 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 Year ended 31 December 2020 £’000 18 143 51 212 2019 £’000 26 225 119 370 Year ended 31 December 2020 £’000 429 – 429 (544) (111) 2019 £’000 1,102 (75) 1,027 (618) 409 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: (Loss)/Proﬁ t for the period before taxation Expected tax charge based on corporation tax rate of 19% (2019: 19%) Expenses not deductible for tax purposes Other adjustments Different tax rates applied in overseas jurisdiction Adjustments in relation to prior year Adjustment to deferred tax to average rate Total tax expense The UK corporation tax at the standard rate for the year is 19.0% (2019: 19.0%). The Group’s effective tax rate for the year is 19.30% (2019: 25.19%). 368 Year ended 31 December 2020 £’000 (1,114) (212) 29 2 (69) – 139 (111) 2019 £’000 1,777 337 170 5 86 (75) (114) 409 Annual Report 2020 Notes to the Consolidated Financial Statements (continued) as at ended 31 December 2020 Subsidiaries 8. 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 Dormant 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 Marvin Leeds Marketing Services, Inc. Warpaint Cosmetics (ROI) Limited Wholesaler Wholesaler Dormant People’s Republic of China U.S.A. Republic of Ireland * indicates indirect interest Percentage owned 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% All 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 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. 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 Warpaint Cosmetics (ROI) Limited is 6th Floor, South Bank House, Barrow Street, Dublin 4, D04 TR29. i F n a n c i a l S t a t e m e n t s 9. Goodwill Cost At 1 January 2020 At 31 December 2020 Impairment At 31 December 2019 Impairment during the year At 31 December 2020 Net book value At 31 December 2020 At 31 December 2019 £’000 8,086 8,086 812 – 812 7,274 7,274 Goodwill represents the excess of consideration over the fair value of the Group’s share of the net identiﬁ able assets of the acquired business/CGU at the date of acquisition. The carrying value at 31 December 2020 includes Treasured Scents Limited (Close-out business) of £513,000, Retra Holdings Limited £6,207,000 and Marvin Leeds Marketing Services, Inc. £554,000. 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 10.1% (2019: 15.6%) for Retra Holdings Limited and 8.0% (2019: 14.1%) for Marvin Leeds Marketing Services, Inc. Cash ﬂ ows beyond the ﬁ ve-year period are extrapolated using a long-term average growth rate of 2.0% (2019: 2.0%). 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. 69 Warpaint London P LC Notes to the Consolidated Financial Statements (continued) as at ended 31 December 2020 Goodwill (continued) 9. 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, Retra Holdings Limited or Marvin Leeds Marketing Services, Inc. as the recoverable amount exceeds the carrying value. Key Assumptions and sensitivity to changes in assumptions The key assumptions are based upon management’s historical experience. The calculation of VIU is most sensitive to the following assumptions: • Sales and EBITDA – for LMS this is based on forecasts incorporating growth of 15.6% in revenue over the next ﬁ ve years. For Retra, the growth rate over the next year is anticipated to be 9.8% increasing to approximately 10.0% 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 10.1% for Retra Holdings Limited and 8.0% for Marvin Leeds Marketing Services, Inc. reﬂ ects the Directors’ estimate of an appropriate rate of return, considering 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 2.0% 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, the projected operating cash ﬂ ows and the multiple applied in the fair value less cost to sell calculation. 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. • 10.0% reduction in valuation multiple. Reasonable changes to the assumptions used, considered in isolation, would not result in an impairment of goodwill for LMS or Retra. 10. Intangible assets Cost At 1 January 2019 Additions At 31 December 2019 Additions At 31 December 2020 Accumulated amortisation At 1 January 2019 Charge for the year At 31 December 2019 Charge for the year At 31 December 2020 Net book value At 31 December 2020 At 31 December 2019 At 1 January 2019 Brands £’000 3,802 – 3,802 – 3,802 824 761 1,585 765 2,350 1,452 2,217 2,978 Customer lists £’000 8,240 – 8,240 – 8,240 1,908 1,646 3,554 1,644 5,198 3,042 4,686 6,332 Patents £’000 Website £’000 Licences £’000 217 35 252 12 264 70 22 92 24 116 148 160 147 45 – 45 – 45 19 9 28 9 37 8 17 26 6 – 6 – 6 3 1 4 1 5 1 2 3 Total £’000 12,310 35 12,345 12 12,357 2,824 2,439 5,263 2,443 7,706 4,651 7,082 9,486 370 Annual Report 2020 Notes to the Consolidated Financial Statements (continued) as at ended 31 December 2020 11. Property, plant and equipment Costs At 1 January 2019 Reclassiﬁ cation to right-of-use assets Additions Disposals At 31 December 2019 Additions Disposals At 31 December 2020 Accumulated depreciation At 1 January 2019 Reclassiﬁ cation to right-of-use assets Charge for year On disposals At 31 December 2019 Charge for year On disposals At 31 December 2020 Net book value At 31 December 2020 At 31 December 2019 At 1 January 2019 12. Right-of-use assets Costs At 1 January 2019 Reclassiﬁ ed from property, plant and equipment Recognised on adoption of IFRS 16 At 31 December 2019 Additions Disposals At 31 December 2020 Accumulated amortisation At 1 January 2019 Reclassiﬁ ed from property, plant and equipment Charge for year At 31 December 2019 Charge for the year Disposals At 31 December 2020 Net Book Value At 31 December 2020 At 31 December 2019 Plant and machinery Fixtures and ﬁ ttings Computer equipment Motor vehicles £’000 £’000 £’000 771 – 119 (42) 848 825 – 1,673 328 – 205 (5) 528 257 – 785 888 320 443 331 (77) 49 (1) 302 42 – 344 162 (36) 56 (1) 181 70 – 251 93 121 169 £’000 141 – – – 141 – (21) 120 59 – 30 – 89 17 (2) 104 16 52 82 Leasehold property Plant and machinery Computer equipment £’000 £’000 £’000 – – 4,960 4,960 139 (303) 4,796 – – 729 729 702 (145) 1,286 3,510 4,231 – 760 760 – – 760 – 208 113 321 150 – 471 289 439 – 77 – 77 – – 77 – 36 26 62 15 – 77 – 15 897 (760) 116 (3) 250 2 – 252 233 (208) 35 (1) 59 41 – 100 152 191 664 71 i F n a n c i a l S t a t e m e n t s Total £’000 2,140 (837) 284 (46) 1,541 869 (21) 2,389 782 (244) 326 (7) 857 385 (2) 1,240 1,149 684 1,358 Total £’000 – 837 4,960 5,797 139 (303) 5,633 – 244 868 1,112 867 (145) 1,834 3,799 4,685 Warpaint London P LC Notes to the Consolidated Financial Statements (continued) as at ended 31 December 2020 13. Inventories Finished goods Provision As at 31 December 2020 £’000 14,934 (521) 14,413 2019 £’000 16,387 (193) 16,194 The cost of inventories recognised as an expense and included in ‘cost of sales’ amounted to £24.30 million in the year ended 31 December 2020 (2019: £29.11 million). 14. Trade and other receivables Trade receivables – gross Provision for impairment of trade receivables Trade receivables – net Other receivables Prepayments and accrued income Total As at 31 December 2020 £’000 7,750 (44) 7,706 600 881 9,187 2019 £’000 10,310 (44) 10,266 1,237 1,121 12,624 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 £Nil (2019: £506,000) 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 recognised/(released) during the year, net Amounts written off during the year as uncollectible Accumulated impairment losses at 31 December As at 31 December 2020 £’000 44 256 (256) 44 2019 £’000 114 (10) (60) 44 The impairment losses recognised during the year of £256,000 (2019: credit of £10,000 relating to the recovery of amounts previously written off as uncollectable). Contract Liabilities At 1 January Amounts included in contract liabilities that was recognised as revenue during the period Amounts settled during the period At 31 December As at 31 December 2020 £’000 321 611 (640) 292 2019 £’000 305 660 (644) 321 Contract liabilities are included within “trade and other receivables” in the face of the statement of ﬁ nancial position being settled net of the trade debtor balances. They arise from the group’s own brand segment, which enter into contracts with customers for early settlement discounts, marketing contributions and volume rebates, because the invoiced amounts to customers at each balance sheet date do not consider the amount or rebate and discounts the customers are entitled to until settlement of the debtor balance at a certain time. 372 Notes to the Consolidated Financial Statements (continued) as at ended 31 December 2020 Cash and cash equivalents 15. Cash and cash equivalents include the following for the purposes of the cash ﬂ ow statement: Cash at bank and in hand 16. Trade and other payables Current Trade payables Social security and other taxes Other payables Accruals and deferred income Total Annual Report 2020 As at 31 December 2019 £’000 2,731 2,731 As at 31 December 2019 £’000 957 546 58 2,372 3,933 2020 £’000 4,875 4,875 2020 £’000 1,439 523 32 1,127 3,121 The directors consider that the carrying value of trade and other payables measured at book value and amortised cost approximates to fair value. 17. Loans and borrowings Bank loans Repayable within 1 year Repayable within 2 – 5 years Lease liabilities Repayable within 1 year Repayable within 2 – 5 years Repayable in more than 5 years Total Repayable within 1 year Repayable within 2 – 5 years Repayable in more than 5 years Lease liabilities At 1 January 2019 Interest expense Lease payments As at 31 December 2019 Lease additions Lease disposals Interest expense Lease payments As at 31 December 2020 As at 31 December 2020 £’000 48 – 48 866 2,375 670 3,911 914 2,375 670 3,959 Leasehold property Plant and machinery Computer equipment As at 31 December £’000 4,960 168 (802) 4,326 139 (158) 97 (745) 3,659 £’000 550 53 (205) 398 – – 44 (190) 252 £’000 41 4 (29) 16 – – 2 (18) – 73 2019 £’000 1,281 48 1,329 925 2,584 1,231 4,740 2,206 2,632 1,231 6,069 Total £’000 5,551 225 (1,036) 4,740 139 (158) 143 (953) 3,911 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) as at ended 31 December 2020 17. Loans and borrowings (continued) Nature of lease liabilities The group leases a number of properties in the United Kingdom and United States of America as well as certain items of plant and equipment. An additional £2,617 has been expensed to the statement of comprehensive income in respect of low value operating leases. Interest payments of £4,501 have also been expensed in respect of leases that expired during the period. The interest rates expected are as follows: Finance loans Bank loans Invoice ﬁ nancing As at 31 December 2020 % 7.0 8.75 3.25 2019 % 7.0 8.75 3.25 Secured loans The borrowings of the subsidiary companies, Retra Holdings Limited and Badgequo Limited, are secured by a debenture including a ﬁ xed charge over the present leasehold property, a ﬁ rst ﬁ xed charge over book and other debts and a ﬁ rst ﬂ oating charge over all assets of those companies. Bank borrowings include stock and invoice ﬁ nancing facilities amounting to £Nil (2019: £1,086,000 invoice ﬁ nancing). The carrying value of assets pledged as collateral approximates to £Nil (2019: £1,086,000). 18. Deferred tax Deferred tax is calculated in full on temporary differences under the liability method using tax rate of 19% - 25%. The movement on the deferred tax account is as shown below: Opening balance Foreign exchange adjustment Recognised in proﬁ t and loss: Tax expense Closing balance Deferred tax liability Year ended 31 December Deferred tax asset Year ended 31 December 2020 £’000 (1,324) 3 321 (1,000) 2019 £’000 (1,796) – 472 (1,324) 2020 £’000 374 (16) 223 581 2019 £’000 241 (13) 146 374 The deferred tax liability has arisen due to the timing difference on accelerated capital allowances amounting to £42,000 (2019: £37,000) and on the intangible assets acquired in a business combination amounting to £1,057,000 (2019: £1,057,000). Deferred tax asset has arisen from loss carry forward for LMS amounting to £2,323,000 (2019: £1,497,000) and recognised at a rate of 25%. 19. Dividends Year to December 2020 Final dividend – 2019 Interim dividend – 2020 Year to December 2019 Final dividend – 2018 Interim dividend – 2019 Paid – Amount per share – 20 Nov 20 2.8p Paid 11 Jul 19 12 Nov 19 Amount per share 2.9p 1.5p Total £’000 – 2,149 2,149 Total £’000 2,226 1,151 3,377 374 74 Notes to the Consolidated Financial Statements (continued) as at ended 31 December 2020 20. Called up share capital Allotted and issued Ordinary shares of £0.25 each: At 1 January 2019 and 2020 At 31 December 2019 and 2020 All ordinary shares carry equal rights. 21. Reserves Annual Report 2020 No of shares ’000 £’000 76,749 76,749 19,187 19,187 Share premium 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 (the Company) as at the point Warpaint London PLC legally acquired Warpaint Cosmetics Group Limited is accounted for as if it had been in existence as at 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 Scents (2014) Limited on 11 November 2016. The shareholders of Treasured Scents (2014) Limited transferred their shares to Warpaint London PLC in exchange for shares in Warpaint London PLC, the difference in fair value of the consideration was £2,005,233. This is adjusted through the merger reserve as it is considered part of the consideration paid by Warpaint London PLC to acquire Treasured Scents (2014) Limited. 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. Share option reserves ‘Share option 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. i F n a n c i a l S t a t e m e n t s Share based payments 22. 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 Period adjustments Outstanding at the end of the year Weighted average Weighted average exercise price (pence) Number of options exercise price (pence) Number of options 2020 253.45 49.50 83.36 – 233.50 2020 4,088,302 454,686 (14,026) – 4,528,962 2019 253.52 – 237.50 237.50 253.45 2019 4,070,617 – (3,368) 21,053 4,088,302 The weighted average remaining contractual life of the options is 3.0 years (2019: 4.0 years). The following options over ordinary shares have been granted by the Company: 29 June 2017 24 September 2018 20 May 2020 Exercise price Exercise period Pence 237.50 254.50 49.50 (years) 3 Number of options 255,051 5 3 3,837,462 454,686 75 Warpaint London P LC Notes to the Consolidated Financial Statements (continued) as at ended 31 December 2020 Share based payments (continued) 22. 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 (£) 20 May 2020 24 Sept 18 29 June 17 76% 3 0.01% 2.08% 0.213 78% 2-4 1.61% 1.53% 0.422 64% 3 0.38% 2% 0.963 On 20 May 2020, the Company granted, in aggregate, 454,686 share options with an exercise price of 49.50 pence per Ordinary share under a Company Share Option Plan (CSOP). Key persons discharging managerial responsibilities (PDMR’s) were awarded a cumulative 112,106 share options as part of their annual remuneration and incentivisation packages. The remaining 342,580 options granted have been awarded to other members of the company’s workforce. No directors of the company were awarded options in relation to this CSOP. The options are exercisable for a period of seven years from 20 May 2023, subject to the same performance conditions dictated by the Enterprise Management Incentive Scheme detailed below. On 24 September 2018, share options with an exercise price of 254.50p, 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. 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 £656,000 (2019: £816,000). 23. Related party transactions Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation. Key management personnel are considered to be the directors. Compensation of the directors is disclosed in note 5 with the exception of dividends and drawings which are disclosed in note 19. During 2020, Warpaint Cosmetics (2014) Limited paid rent in the sum of £120,000 (2019: £120,000) to Direct Supplies (2014) Group Limited, of which S Bazini is a director. At the year end the amount due to Direct Supplies (2014) Group Limited was £Nil (2019: £Nil). During 2020, Warpaint Cosmetics (2014) Limited paid rent in the sum of £120,000 (2019: £120,000) to Trading Scents Group Limited, of which E Macleod is a director. At the year end the amount due from Trading Scents Group Limited was £1,000 (2019: £Nil). During 2020, Retra Holdings Limited paid rent in the sum of £340,000 (2019: £340,000) to Warpaint Cosmetics Limited, of which E Macleod and S Bazini are directors. During 2020, the Group renewed its contract with Ward & Hagon Management Consulting LLP for a further 12 months (“Ward & Hagon”). Ward & Hagon, a provider of practical business solutions, were initially appointed in February 2020 to assist the Group in implementing its strategic growth plan. The Contract has a total annual value of £210,000, and includes the services of Paul Hagon, an executive director of the Group and Martyn Ward, amongst other members of the Ward & Hagon team. During 2020, the Group paid £200,000 in consultancy fees and £7,299 in expenses. At the year end the amount due from Ward & Hagon was £Nil. In addition, Ward & Hagon will be paid a commission of 3% on all sales generated from their introductions in the 12-month period from the point of ﬁ rst sale, and 4% on all sales generated from their introductions in the 12-month period thereafter. Paul Hagon, an executive director of Warpaint London Plc, is a member of Ward & Hagon and therefore the contract renewal constitutes a related party transaction under the AIM Rules for Companies. 376 Annual Report 2020 Notes to the Consolidated Financial Statements (continued) as at ended 31 December 2020 24. 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 £32,389,000 as at 31 December 2020 (2019: £35,541,000) 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. Financial assets Financial assets at amortised cost: Trade and other receivables Financial assets measured at fair value through the proﬁ t and loss: Cash and cash equivalents Derivative ﬁ nancial instruments Financial liabilities Financial liabilities at amortised cost: Trade and other payables Loan and borrowings Financial liabilities measured at fair value through the proﬁ t and loss: Derivative ﬁ nancial instruments Net i F n a n c i a l S t a t e m e n t s Year ended 31 December 2020 £’000 2019 £’000 8,306 11,503 4,875 40 13,221 (2,598) (3,959) (400) (6,957) 6,264 2,731 39 14,279 (3,387) (6,069) – (9,456) 4,823 Financial assets measured at fair value through the proﬁ t and loss comprise cash and cash equivalents and derivative ﬁ nancial instruments. 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. 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. 77 Warpaint London P LC Notes to the Consolidated Financial Statements (continued) as at ended 31 December 2020 24. Financial instruments (continued) Interest rate risk The Group’s interest rate exposure arises mainly from its interest-bearing borrowings. Contractual agreements entered into a ﬂ oating rate 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 £7,000 (2019: £21,000) 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 2020, the Group has trade receivables of £7,706,000 (2019: £10,266,000). 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 Provision for impairment of trade receivables Total trade receivables - net As at 31 December 2020 £’000 4,682 1,801 944 220 103 (44) 2019 £’000 7,416 1,981 456 155 302 (44) 7,706 10,266 The Directors are unaware of any factors affecting the recoverability of outstanding balances at 31 December 2019 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 lifetime expected credit loss model, as set out below, in accordance with IFRS 9. Current 1 – 30 days 31 – 60 days 61 – 90 days 91 + days As at 31 December 2020 As at 31 December 2019 £’000 4,682 1,801 944 220 103 % 0.135 0.405 1.215 3.645 10.935 £’000 6 7 11 8 12 44 £’000 7,416 1,981 456 155 302 % 0.096 0.288 0.864 2.592 7.776 £’000 7 6 4 4 23 44 378 Notes to the Consolidated Financial Statements (continued) as at ended 31 December 2020 24. Financial instruments (continued) Credit quality of ﬁ nancial assets Trade receivables, gross (note 14): 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 Lifetime expected loss provision: Less than 30 days overdue 30 – 90 days overdue Total lifetime expected loss provision (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): AAA rated AA rated A rated BAA rated Total cash and cash equivalents Annual Report 2020 As at 31 December 2020 £’000 4,270 412 4,682 2019 £’000 6,561 855 7,416 As at 31 December 2020 £’000 1,801 1,223 3,024 – 44 44 (44) 7,706 2019 £’000 1,981 869 2,850 13 31 44 (44) 10,266 i F n a n c i a l S t a t e m e n t s As at 31 December 2020 £’000 10 303 1,115 3,447 4,875 2019 £’000 7 786 – 1,938 2,731 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 (2019: £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. 79 Warpaint London P LC Notes to the Consolidated Financial Statements (continued) as at ended 31 December 2020 24. 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 2020 Trade payables Other payables Accruals Loans and borrowings Year ended 31 December 2019 Trade payables Other payables Accruals Loans and borrowings Less than 6 months Between 6 months and 1 year Between 1 and 5 years Over 5 years £’000 1,439 32 1,127 491 3,089 £’000 – – – 444 444 £’000 – – – 2,526 2,526 £’000 – – – 686 686 Less than 6 months Between 6 months and 1 year Between 1 and 5 years Over 5 years £’000 957 58 2,372 1,667 5,054 £’000 – – – 477 477 £’000 – – – 2,755 2,755 £’000 – – – 1,271 1,271 Total £’000 1,439 32 1,127 4,147 6,745 Total £’000 957 58 2,372 6,170 9,557 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 2020, there were total sums of £375,000 (2019: £255,000) 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 2020, the net foreign liability was £0.4m (2019: £0.3m). 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 2020 £’000 (360) 2019 £’000 39 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 2020, the group has 42 (2019: 33) forward foreign exchange contracts outstanding. Derivative ﬁ nancial instruments are carried at fair value. 380 Annual Report 2020 Notes to the Consolidated Financial Statements (continued) as at ended 31 December 2020 24. 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 6 to 12 months b) Contract value 3 months or less 3 to 6 months 6 to 12 months c) Foreign currency 3 months or less 3 to 6 months 6 to 12 months 2020 £/$ 1.3353 1.3222 1.3265 2020 £/$ 2,620 7,008 3,766 13,394 2020 $’000 3,500 9,254 5,000 17,754 2019 £/$ 1.2953 1.3280 – 2019 £/$ 4,723 6,408 – 11,131 2019 $’000 6,175 8,500 – 14,675 2020 £/€ 1.1082 1.1099 1.1024 2020 £/€ 947 2,479 1,133 4,559 2020 €’000 1,050 2,750 1,250 5,050 2019 £/€ 1.1394 1.1405 – 2019 £/€ 904 2,899 – 3,803 2019 €’000 1,030 3,335 – 4,365 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. 25. 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 £91,019 (2019: £80,210). Controlling party 26. In the opinion of the directors there is no ultimate controlling party. 27. Earnings/(loss) per share 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 Limited on 30 November 2017. Basic earnings/(loss) per share (pence) Diluted earnings per/(loss) share (pence) 2020 (1.31) (1.31) 2019 1.78 1.78 i F n a n c i a l S t a t e m e n t s 81 Warpaint London P LC Notes to the Consolidated Financial Statements (continued) as at ended 31 December 2020 27. Earnings/(loss) per share (continued) The calculation of basic and diluted earnings/(loss) per share is based on the following data: Earnings Earnings for the purpose of basic earnings per share, being the net (loss)/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 2020 £’000 (1,098) 2019 £’000 1,368 2020 2019 76,749,125 76,749,125 67,040 – 76,816,165 76,749,125 The 4,088,302 share options (2019: 4,088,302) in issue throughout the year have 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. The additional 454,686 share options granted 20 May 2020 have been included in the computation of diluted earnings per share as the exercise price of the options is below the average annual market price of Ordinary shares. 28. Notes supporting statement of cash ﬂ ows Non-cash transactions from ﬁ nancing activities are shown in the table below. At 1 January 2019 Non-cash ﬂ ows: Amount recognised in respect of lease liabilities on adoption of IFRS 16. Cash ﬂ ows Reclassiﬁ cation from Non-current loans and borrowings to current loans and borrowings At 31 December 2019 Non-cash ﬂ ows: Cash ﬂ ows Reclassiﬁ cation from Non-current loans and borrowings to current loans and borrowings At 31 December 2020 Non-current loans and borrowings £’000 553 4,271 – (960) 3,864 – (819) 3,045 Current loans and borrowings £’000 2,169 688 (1,612) 960 2,205 (19) (2,091) 819 914 Total £’000 2,722 4,959 (1,612) – 6,069 (19) (2,091) – 3,959 382 Company Statement of Financial Position for the year ended 31 December 2020 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 2020 2020 £’000 35,833 35,833 2019 £’000 35,833 35,833 14,732 11,298 313 74 15,045 11,372 (184) – (184) 14,861 50,694 19,187 19,359 1,895 1,633 8,620 i F n a n c i a l S t a t e m e n t s (110) – (110) 11,262 47,095 19,187 19,359 1,895 977 5,677 50,694 47,095 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 £5,092,000 (2019: £1,231,000). The ﬁ nancial statements on pages 113 to 119 were approved and authorised for issue by the Board of Directors and signed on its behalf by: Neil Rodol Chief Financial Ofﬁ cer 27 April 2021 The notes on pages 85 to 87 form part of these ﬁ nancial statements. 83 Warpaint London P LC Company Statement of Changes in Equity for the year ended 31 December 2020 Share Capital Share Premium Merger Reserve Reserve Share Option As at 31 December 2018 Lapsed share option Share based payment charge Loss for the year Dividends paid £’000 19,187 £’000 19,359 £’000 1,895 – – – – – – – – – – – – As at 31 December 2019 19,187 19,359 1,895 Share based payment charge Proﬁ t for the year Dividends paid – – – – – – – – – £’000 169 (28) 836 – – 977 656 – – Retained Earnings £’000 10,257 28 – Total Equity £’000 50,867 – 836 (1,231) (1,231) (3,377) (3,377) 5,677 47,095 – 5,092 656 5,092 (2,149) (2,149) As at 31 December 2020 19,187 19,359 1,895 1,633 8,620 50,694 The notes on pages 85 to 87 form part of these ﬁ nancial statements. 384 Annual Report 2020 Notes to the Company Financial Statements for the year ended 31 December 2020 1. Signiﬁ cant accounting policies Basis of preparation 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. 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. 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. The Company’s ﬁ nancial statements are presented in GBP. Going Concern In preparing the separate ﬁ nancial statements of the parent company, advantage has been taken of the following disclosure exemptions available to qualifying entities: 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. • 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 considered 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. The fair value of the award also considers 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). i F n a n c i a l S t a t e m e n t s 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. 2. Staff costs Wages and salaries Share based payments Social security costs Pension costs Year ended 31 December 2020 £’000 288 545 18 3 854 2019 £’000 190 674 22 1 887 85 Warpaint London P LC Notes to the Company Financial Statements (continued) for the year ended 31 December 2020 Staff costs (continued) 2. The average monthly number of employees during the period was as follows: 6. Called up share capital Directors Directors’ remuneration, included in staff costs Salaries Share based payments Year ended 31 December 2020 No. 6 6 2020 £’000 288 544 832 2019 No. 6 6 2019 £’000 190 674 864 Allotted and issued Ordinary shares of £0.25 each At 1 January 2019 and 2020 At 31 December 2019 and 2020 All ordinary shares carry equal rights. 7. Share premium Share premium No of shares ’000 £’000 79,749 76,749 19,187 19,187 2020 £’000 19,359 2019 £’000 19,359 The directors are the only key management personnel. The share premium reserve contains the premium arising on the issue of equity shares, net of issue expenses incurred by the company. Other reserves 8. 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. Related party transactions 9. 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 23 of the Consolidated Financial Statements. 3. Investments Cost At January 2020 Additions At December 2020 Net book value At 31 December 2020 At 31 December 2019 4. Debtors Due from group undertakings Prepayments and accrued income 2020 £’000 14,634 98 14,732 At 31 December 2020 £’000 35,833 – 35,833 35,833 35,833 2019 £’000 11,237 61 11,298 Amounts due from related undertakings are unsecured, non-interest bearing and payable on demand. 5. Creditors due within one year Trade payables Other taxation and social security Accruals and deferred income 2020 £’000 19 25 140 184 2019 £’000 33 26 51 110 386 Annual Report 2020 Notes to the Company Financial Statements (continued) for the year ended 31 December 2020 Share based payments 10. Movements in the number of options and their weighted average exercise prices are as follows: i F n a n c i a l S t a t e m e n t s Weighted average exercise price (pence) Number of options Weighted average exercise price (pence) Number of options Outstanding at the beginning of the year Granted during the year Expired during the year Period adjustments 2020 253.45 49.50 – – 2020 4,088,302 454,686 – – Outstanding at the end of the year 233.03 4,542,988 The weighted average remaining contractual life of the options is 3.0 years (2019: 4.0 years). The following options over ordinary shares have been granted by the Company: 2019 253.52 – 237.50 237.50 253.45 2019 4,070,617 – (3,368) 21,053 4,088,302 29 June 2017 24 September 2018 20 May 2020 Exercise price Exercise period Number of options Pence 237.50 254.50 49.50 (years) 3 5 7 255,051 3,837,462 454,686 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 (£) 20 May 20 76% 3 0.01% 2.08% 0.213 24 Sept 18 78% 2-4 1.61% 1.53% 0.422 29 June 17 64% 3 0.38% 2% 0.963 On 20 May 2020, the Company granted, in aggregate, 454,686 share options with an exercise price of 49.50 pence per Ordinary share under a Company Share Option Plan (CSOP). Key persons discharging managerial responsibilities (PDMR’s) were awarded a cumulative 112,106 share options as part of their annual remuneration and incentivisation packages. The remaining 342,580 options granted have been awarded to other members of the company’s workforce. No directors of the company were awarded options in relation to this CSOP. The options are exercisable for a period of seven years from 20 May 2023, subject to the same performance conditions dictated by the Enterprise Management Incentive Scheme detailed below. On 24 September 2018, share options with an exercise price of 254.50p, 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. 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 £544,000 (2019: £674,000). 87 Warpaint London P LC Officers and Professional Advisers Directors Registered Ofﬁ ce C Garston S Bazini E Macleod N Rodol S Craig P Hagon K Sadler Chairman Chief Executive Ofﬁ cer Managing Director Chief Financial Ofﬁ cer General Counsel & Company Secretary Executive Director Non-Executive Director Units B&C Orbital Forty Six The Ridgeway Trading Estate Iver Buckinghamshire SL0 9HW Company Number 10261717 Nominated Adviser & Joint Broker Joint Broker Auditors Solicitors Registrars Financial PR Nplus1 Singer Capital Markets Limited 1 Bartholomew Lane London EC2N 2AX Shore Capital Cassini House 57 St James’s Street London SW1A 1LD 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 Birchin Court, 20 Birchin Lane London, EC3V 9DU Perivan 261093 388 O t h e r I n f o r m a t i o n Warpaint London PLC Contents Strategic Report 03 Mission Statement 04 Headline Results 06 Chairman’s Statement 08 Chief Executive Statement 14 Financial Review 20 Risk Management Governance 23 Board of Directors 25 Corporate Governance Report 36 Section 172 Statement 38 Audit Committee Report 40 Remuneration Committee Report 43 Directors’ Report 47 Independent Auditor’s Report Financial Statements 53 Consolidated Statement of Comprehensive Income 54 Consolidated Statement of Financial Position 56 Consolidated Statement of Changes in Equity 57 Consolidated Statement of Cash Flows 58 Notes to the Consolidated Financial Statements 83 Company Statement of Financial Position 84 Company Statement of Changes in Equity 85 Notes to the Company Financial Statements Other Information 88 Officers and Professional Advisers 2

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