Earnings Release • May 9, 2017
Earnings Release
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RNS Number : 5308E
Gear4music (Holdings) PLC
09 May 2017
9 May 2017
Gear4music (Holdings) plc
Preliminary unaudited results for the year ended 28 February 2017
A transformational year, with record growth in sales and profits
Gear4music (Holdings) plc, ("Gear4music" or "the Group") (LSE: G4M), the largest UK based online retailer of musical instruments and music equipment, today announces its unaudited financial results for the 12 months ended 28 February 2017.
Highlights:
| £'000 | 12 months ended 28 February 2017 | 12 months ended 29 February 2016 | Change |
| Revenue | 56,128 | 35,489 | +58% |
| Gross profit | 15,145 | 9,186 | +65% |
| Underlying EBITDA | 3,617 | 1,681 | +115% |
| Underlying operating profit | 2,616 | 895 | +192% |
| Pre-tax profit | 2,636 | 6 |
· Strong revenue growth across the business, particularly in International markets (+124%)
· Record profits driven by improved margin performance
· Active customers up 50% to 340,000
· Opened Distribution Centres in Sweden and Germany to enhance European customer proposition
· Acquisition of software development team to accelerate e-commerce platform development
Post-period Strategic Developments:
· The Group has exchanged contracts to acquire a 50,000 sq. ft. freehold property at Holgate Park in York for £5.3 million
· Completion scheduled for 30 June 2017 and will become the Group's long-term head office, providing capacity for further expansion as required
· The Purchase will be entirely debt-funded
Commenting on the results, Andrew Wass, Chief Executive Officer said:
"This has been a transformational year for the business, with further expansion of the Gear4music brand driving record sales and profits.
"In particular we have seen significant expansion in our International business where sales have been very strong. We have therefore accelerated investment in our European infrastructure to improve our customer proposition and reach, most notably through the opening of two new distribution hubs in Sweden and Germany.
"Our growth has been underpinned by the quality of our bespoke e-commerce platform and we continue to drive innovation in this area to further improve our systems and websites, both in the UK and overseas.
"We begin our current financial year with good momentum and continued appetite from customers around the world for our market leading service and product offering. We are well positioned to deliver further growth and have plans in place to continue investing in our operational facilities and systems to support our growth plans. The next 12 months will be exciting as we move into our new head office in York, scale up our European operations, and enhance our worldwide proposition, and we remain confident in the long-term growth prospects for the Group."
ENDS
Enquiries:
Gear4music +44 20 3128 8100
Andrew Wass, Chief Executive Officer
Chris Scott, Chief Financial Officer
Panmure Gordon +44 20 7886 2500
(Financial Adviser, Nominated Adviser and Broker)
Andrew Godber / Peter Steel - Investment Banking
Erik Anderson / Tom Salvesen - Corporate Broking
MHP Communications +44 20 3128 8100
(Financial PR)
Andrew Leach
Simon Hockridge
Pete Lambie
About Gear4music.com
Operating from a Head Office in York, showrooms in York and Sweden, and Distribution Centres in York, Sweden and Germany, the Group sells Own-brand musical instruments and music equipment alongside premium third party brands including Fender, Yamaha and Gibson, to customers ranging from beginners to musical enthusiasts and professionals, in the UK, Europe and, more recently, into the Rest of the World.
Having developed its own e-commerce platform, with multilingual, multicurrency and fully responsive design websites covering 19 countries, the Group has rapidly expanded its database and continues to build its overseas presence.
Chairman's statement
On behalf of the Board I am very pleased to report excellent progress in pursuit of our ambition to become a leading global retailer of musical instruments and equipment.
When writing this statement last year, our revenue growth expectation for the year ahead was 37%, and the 58% growth we actually achieved reflects the huge effort made by our staff right across the business, from the Board of Directors and senior management, through to our customer service and warehouse teams.
International growth of 124% has been particularly pleasing, and this is an area in which we will continue to invest significant effort and resource to improve and increase our global reach, building on the early success of our recently launched Swedish and German distribution operations.
Notwithstanding the investment necessary for our next phase of expansion, the Board remains focused on delivering profitable growth, and as such is pleased to announce an operating profit of £2.6m which is a £1.7m (+192%) improvement on FY16's underlying operating profit (adjusted to remove one-off IPO costs). This translates into net profit of £2.3m and earnings per share of 11.5p.
In many ways, this has been a transformational year for the business, and to effectively manage further growth and operational complexities the Group formed an Operational Board on 1 March 2017 to support and complement the plc Board, comprising a wide breadth and depth of operational and commercial experience.
To ensure we remain positioned for further growth, the Group requires additional head office capacity, and the Board is delighted to announce a property acquisition that provides an excellent long-term solution to our growth needs in our home city of York.
In 2012, private equity firm Key Capital Partners invested in the business, and in October 2016 sold its final shareholding. On behalf of the Board I would like to thank them and Peter Armitage, who represented Key Capital on our Board, for their efforts and support over the last four years. I'm also delighted to welcome new institutions and individuals onto our share register as we embark on the next chapter in the Gear4music growth story.
Given the investments scheduled for the current year to support continued growth, the Board has decided not to declare a dividend for FY17, but will review its dividend policy again in the next financial year.
Finally, I would like to express my sincere thanks and appreciation to the extended Gear4music team for their commitment and hard work. It is their passion and knowledge that provides such strong proposition for our customers and has helped to make our second year as a public company such a success.
Ken Ford
Chairman
Chief Executive's Statement
Introduction
When we joined AIM in June 2015, we were very confident that, with continued targeted investment of the funds raised from our IPO, we could build on the £24m revenues we had achieved in FY15, by improving our customer proposition through strategic investment into staff, systems, inventory and marketing, and expanding our presence in Europe. I am thrilled that we have surpassed those expectations, having more than doubled our revenues to £56m, whilst increasing profitability to an all-time high.
Business Review
We continue to make good progress on both our Financial and Commercial KPIs in our second year as a listed business:
| Financial KPIs | FY17 | FY16 |
| Revenue (note 2) | £56.1m | £35.5m (+58%) |
| UK Revenue (note 2) | £34.8m | £26.0m (+34%) |
| International Revenue (note 2) | £21.3m | £9.5m (+124%) |
| EBITDA * | £3.6m | £1.1m (+236%) |
| Underlying EBITDA * | £3.6m | £1.7m (+112%) |
| Operating profit * | £2.6m | £0.3m |
| Underlying operating profit * | £2.6m | £0.9m (+192%) |
| Cash at year end | £3.0m | £3.5m (-14%) |
| Commercial KPIs | FY17 | FY16 |
| Website visitors | 12.6m | 10.1m |
| Conversion rate | 2.75% | 2.28% |
| Average order value | £124 | £116 |
| Active customers | 340,000 | 226,000 |
| Products listed | 37,100 | 31,500 |
* Underlying profit measures for FY16 are shown before £0.6m of IPO related costs - see note 3 for reconciliation to IFRS profit measures
These results have been delivered by the successful execution of the Group's strategy, and continued investment in our platform, people and operations, with much more to come.
Investing for the future
Our recent focus has been on improving our customer proposition alongside removing the next layer of barriers to growth, by ensuring our operational facilities and systems can support our medium and long-term ambitions.
Office space
Our staff are central to our success, and in order to build our teams and support the expansion of the business, we have an immediate requirement for additional UK office space. As such we are very pleased to announce the £5.3m freehold acquisition of a 50,000 sq ft property at Holgate Park in York, which will become our long-term UK headquarters. The new site will provide the flexibility and capacity we require for ongoing growth, whilst causing minimal upheaval for existing staff.
The acquisition will be 100% debt funded with new debt facilities, providing significant cost savings when compared with leasing an equivalent building (should one have been available), and allowing for further expansion as required. To ease the transitional impact as we grow into the property, we have agreed a short-term lease-back arrangement with the vendor CPPGroup Plc for half of the building and the Board expects this will cover our interest costs for the first 12 months following completion on 30 June 2017.
The estimated financial impact has been considered in more detail in the Chief Financial Officer's report.
Distribution Expansion
Vacating our current office will increase our space for UK warehousing related activities, enabling the business to continue to extract good value from the existing site until the lease expires in June 2020.
A core part of our growth strategy has been to invest in expanding our presence and further enhancing the customer service proposition in Europe. Having delivered 124% growth in European revenues during the year, now representing 38% of the Group's revenue, we remain committed to continued investment, thereby underlining our confidence in the region's long term strategic value to the Group in helping us to build scale and shareholder value.
Our Swedish distribution centre became operational in November 2016, and I am pleased to report is performing well. We have successfully reduced our delivery timescales across Scandinavia and reduced our courier costs across a wide range of products, improving the overall customer offer. Our German distribution centre began dispatching orders at the end of February 2017, and will be scaled up throughout the year to enhance our proposition across central Europe, whilst providing additional distribution capacity.
Showrooms
On 8 May 2017 we opened a showroom attached to our Swedish distribution centre, and in addition to serving the local Stockholm market, it is already helping us to secure new procurement opportunities. For example, we have recently been appointed as the Scandinavian distributer for Behringer, one of the world's largest music equipment brands. We expect to open our German showroom by Autumn 2017.
Systems development
The acquisition of our software development team completed on 1 January 2017, and is already allowing us to achieve more, react faster to developing trends, and further scale our systems to ensure our growth is underpinned by a robust, class leading e-commerce platform.
Examples of new features deployed during FY17 include the integration of multiple hubs across many countries to automatically select the most appropriate dispatch location, international 'click & collect', shopping basket and checkout enhancements, mobile website improvements, and website cloudification. Our objective is continual innovation, and we have a pipeline of new features and upgrades to deploy during the next 12 months.
International expansion
In addition to launching our European distribution network, we have enabled delivery to another 150 countries during the last year, and whilst at the early stages of development, it is clear our business model is relevant to customers all around the world. As the year progresses we will develop our world-wide proposition and increase our international presence wherever there is an opportunity.
Product range extension
Own-brand products continue to be a key component of our success and I am extremely pleased with the progress we have made, adding new products and building on existing ranges to increase our own-brand revenue by 58% during the year to £14.5m.
Across all our ranges we currently list more than 37,000 products, up 37% since IPO, but still see opportunities to grow this significantly and will achieve this by further expanding our team of specialist buyers.
Intelligent marketing
With in excess of 12 million website visitors, conversion rates improving by 47 bps, active customer numbers increasing to more than 339,000, and 39% growth in repeat customers than a year earlier, our marketing strategy has been highly effective.
However, there is much more to achieve and our focus for the year ahead will be on improving our social media activities, particularly on mobile, and delivering a more personalised experience for our existing customers and website visitors.
Current trading and outlook
We have a strong record of targeted investment driving growth and shareholder returns. Our momentum across the Group, but particularly in Europe, gives us the confidence to accelerate investment in infrastructure in order to scale-up further. The associated additional investment of c.£1 million will mean profitability will be more H2 weighted for the current financial year. The business continues to trade in line with our expectations and our current investment strategy reinforces the confidence we have in our prospects for this year and beyond.
Andrew Wass
Chief Executive Officer
Chief Financial Officer's statement
Overview
The Group has delivered another strong financial performance, with underlying operating profit of £2.62m being £1.72m ahead of FY16. Profit growth has been achieved while the Group has continued to invest in people and operations, including the part-year cost of the Swedish and German Distribution Centres that are expected to generate tangible returns from the second half of this year.
Revenue
| FY17 | FY16 | Change | |
| £000 | £000 | % | |
| UK Revenue | 34,865 | 26,016 | 34% |
| International Revenue | 21,263 | 9,473 | 124% |
| Revenue | 56,128 | 35,489 | 58% |
Revenue increased by £20.6m (58%) on FY16, building on growth of 46% and 37% in the previous two years. Revenue growth was 73% in the first half of the year and 50% in the second half when growth began to be measured against H2 FY16 revenue growth, by which time the IPO-growth capital deployed in the business was having a positive impact. As such the Board also monitors two-year revenue growth and going forward will report on this metric. Revenue growth from FY15 to FY17 was 132% compared to 100% between FY14 and FY16.
Growth in the well-established UK market continues to be strong at 34% (FY16: 39%) but was out-stripped by international growth which increased 124% and accounted for 38% of Group revenues compared to 27% in FY16 and 23% in FY15. In FY17 the Group began shipping outside of Europe as part of our plans to identify potential areas of new opportunity, with these revenues accounting for less than 0.5% of total revenue.
The UK's EU Referendum vote and subsequent weakening of sterling created currency-related revenue and margin opportunities as our products became cheaper in Europe, although our European revenue had already grown at 138% over the first four months of FY17 that preceded the vote.
| FY17 | FY16 | Change | |
| £000 | £000 | % | |
| Other-brand product revenue | 39,351 | 24,842 | 58% |
| Own-brand product revenue | 14,449 | 9,164 | 58% |
| Other revenue | 2,328 | 1,483 | 57% |
| Revenue | 56,128 | 35,489 | 58% |
We are particularly pleased with the progress made in our own-brand business. Sourcing own-brand products takes time and the opportunity was highlighted as a medium-term aspiration upon IPO, so it is reassuring to see revenue growth catch up and match the growth in other-branded product revenue. Own-brand revenue growth has increased from 27% in FY15, to 33% in FY16, and 58% this year, and the proportion of revenue that came from own-brand products in FY17 was flat at 25.7% (FY16: 25.8%).
Other revenue comprises carriage income, warranty revenue, and commissions earned on facilitating point-of-sales credit for retail customers.
Gross profit
| FY17 | FY16 | Change | |
| £000 | £000 | % | |
| Gross profit | 15,145 | 9,186 | +65% |
| Gross margin (%) | 27.0% | 25.9% | +1.1ppts |
The strong revenue performance contributed to a £6.0m gross profit increase on last year, with the gross margin improving from 25.9% to 27.0%, buoyed by improved own-brand product revenue growth and exchange rate fluctuations creating pricing and margin opportunities.
Some product-intake prices increased during FY17 due to the weakening of sterling relative to the US$. However strong revenue growth enabled further negotiations with suppliers and the leveraging of economies of scale to reduce the impact. Other-branded products are predominantly purchased in sterling and are therefore less affected by fluctuations in exchange rates.
Local Distribution Centres will reduce delivery costs to customers in those home countries and adjacent territories, although reinvestment in our customer proposition will mean these savings will be largely passed on to the customer.
Administrative expenses and Operating profit
| FY17 | FY16 | Change | |
| £000 | £000 | % | |
| Recurring Administrative expenses | (12,529) | (8,291) | (51%) |
| Exceptional Administrative expenses | - | (606) | |
| Reported Operating profit | 2,616 | 289 | 805% |
| Underlying Operating profit | 2,616 | 895 | 192% |
Recurring administrative expenses increased 51% compared to the 58% increase in revenue as the Group invested in European Distribution Centres and its people. These investments are central to delivering the Group's strategy and critical to medium and long term prospects. As referred to in the Chief Executive's statement, there will be an initial 'overhead investment' phase involving upfront additional costs being incurred that take time to generate added value. These costs will be evident in H1 FY18.
Marketing costs in FY17 increased 51% on FY16 to £4.66m (FY16: £3.08m) compared with the 58% increase in revenue. This includes investment into European markets to build brand recognition where the return is lower than in the UK. Marketing expenses as a percentage of revenue reduced from 8.7% to 8.3%.
In FY17 labour costs increased 55% to £4.29m (FY16: £2.77m) as headcount increased to support current and future growth, with investment across the central functions, in Europe, and in senior management appointments. Total labour costs as a percentage of revenue reduced from 7.8% to 7.6% and this will increase in H1 FY18 based on current labour cost run rates.
The European Distribution Centres incurred £0.48m of costs expensed as they became operational part-way through the year and began to scale up. The full year cost effect of these investments and associated benefits will be evident in FY18.
FY17 underlying EBITDA of £3.62m equates to 6.4% of total revenue, compared to 4.7% last year. Exceptional administrative expenses of £606,000 in FY16 related to costs incurred in relation to the IPO, and as such did not repeat in FY17.
Financial expenses in FY16 included £233,000 of interest on private-equity loan notes that were settled in full on IPO in June 2015.
Reported PBT performance improved from break-even last year to a £2.64m profit this year, which translates into an EPS of 11.5p (diluted EPS of 11.4p).
Cash-flow and net debt
The cash flow statement for the financial year reflects the Group continuing to deploy the growth capital raised on IPO to generate returns by investing in stock and the ecommerce platform to improve the customer proposition and drive revenue.
| FY17 | FY16 | |
| £000 | £000 | |
| Opening cash | 3,548 | 916 |
| Profit/(loss) post exceptional expenses | 2,314 | (43) |
| Movement in working capital | (3,518) | (1,416) |
| Depreciation and amortisation | 1,001 | 786 |
| Financial expense | 47 | 280 |
| Other operating adjustments | 267 | 58 |
| Net cash from operating activities: | 111 | (335) |
| Net cash from investing activities: | (2,295) | (1,509) |
| Net cash from financing activities: | 1,637 | 4,476 |
| (Decrease)/increase in cash in the year | (547) | 2,632 |
| Closing cash | 3,001 | 3,548 |
The business generated a good level of trading cash in the year and actively invested in working capital. Stock increased by £4.8m (69%) to fuel revenue growth and leverage buying economies of scale, whilst continuing to take all available supplier early-payment discounts. This was partly funded by a £2.5m increase in stock-loans and a £933,000 increase in trade payables.
Net cash from investing activities includes a £1.48m investment in the Group's software platform and £711,000 of capital expenditure on warehouse assets and improvements, mainly in Europe. No finance leases were drawn against any of this expenditure, and £194,000 finance lease capital was repaid.
Cash from financing activities includes a £1.9m net increase in stock finance drawn against own-brand stock.
Balance sheet and net assets
The Group had a strong year-end balance sheet, with net assets of £11.7m (FY16: £9.4m), and £3.0m cash (FY16: £3.5m).
| FY17 | FY16 | |
| £000 | £000 | |
| Software platform | 3,407 | 2,483 |
| Other intangible assets | 2,130 | 755 |
| Property, plant and equipment | 1,565 | 1,239 |
| Total non-current assets | 7,102 | 4,477 |
| Stock | 11,686 | 6,906 |
| Cash | 3,001 | 3,548 |
| Other current assets | 1,348 | 740 |
| Total current assets | 16,035 | 11,194 |
| Trade payables | (4,651) | (3,718) |
| Deferred consideration | (1,331) | - |
| Other current liabilities | (4,018) | (2,304) |
| Total current liabilities | (10,000) | (6,022) |
| Total non-current liabilities | (1,415) | (290) |
| Net assets | 11,722 | 9,359 |
The investment in the software platform in the year was £1.48m (FY16: £0.93m) to further develop functionality and resilience. This takes total cumulative spend on the platform to the end of the year to £4.8m.
The Group had net cash (being cash less bank debt and finance lease liabilities) of £0.36m compared to £2.59m at last financial year end, as the business invested in stock and fixed assets.
Non-adjusting event after the reporting period
On 8 May 2017 the Group exchanged contracts to acquire the freehold of a 50,000 sq ft property at Holgate Park in York, with completion agreed for 30 June 2017. The purchase price is £5.3m with 70% of the price funded by a mortgage at 2.04% above LIBOR on an initial 5-year term. A second 5-year term loan will be drawn for £1.8m at 2.85% above LIBOR.
Dividends
The Board remains confident in the cash generative nature of the core business, but in light of the debt-financed acquisition of the freehold head office premises and other planned investments to support future growth, the Board does not consider it appropriate to declare a dividend at this time. However the Board will review the shareholder distribution policy during the financial year ending 28 February 2018.
Chris Scott
Chief Financial Officer
Consolidated Statement of Profit and Loss and Other Comprehensive Income
| Note | Year ended 28 February 2017 |
Year ended 29 February 2016 |
||||
| Unaudited | Audited | |||||
| £000 | £000 | |||||
| Revenue | 2 | 56,128 | 35,489 | |||
| Cost of sales | (40,983) | (26,303) | ||||
| Gross profit | 15,145 | 9,186 | ||||
| Administrative expenses before exceptional items | 3,4 | (12,529) | (8,291) | |||
| Administrative expenses - exceptional items | 3,4 | - | (606) | |||
| Administrative expenses | 3,4 | (12,529) | (8,897) | |||
| Operating profit | 3 | 2,616 | 289 | |||
| Financial income | 6 | 67 | - | |||
| Financial expense | 6 | (47) | (283) | |||
| Profit before tax | 2,636 | 6 | ||||
| Taxation | 7 | (322) | (49) | |||
| Profit/(loss) for the year Other comprehensive income Items that are or may be reclassified subsequently to profit or loss: Foreign currency translation differences - foreign operations Total comprehensive income for the year |
2,314 10 2,324 |
(43) - (43) |
||||
| Basic profit/(loss) per share | 5 | 11.5p | (0.2p) | |||
| Diluted profit/(loss) per share | 5 | 11.4p | (0.2p) |
The accompanying notes form an integral part of the consolidated financial report.
Consolidated Statement of Financial Position
| Year ended 28 February 2017 |
Year ended 29 February 2016 |
||||
|---|---|---|---|---|---|
| Unaudited | Audited | ||||
| --- | --- | --- | --- | --- | --- |
| Note | £000 | £000 | |||
| --- | --- | --- | --- | --- | --- |
| Non-current assets | |||||
| Property Plant and Equipment | 8 | 1,565 | 1,239 | ||
| Intangible assets | 9 | 5,537 | 3,238 | ||
| 7,102 | 4,477 | ||||
| Current assets | |||||
| Inventories | 10 | 11,686 | 6,906 | ||
| Trade and other receivables | 11 | 1,348 | 740 | ||
| Cash and cash equivalents | 12 | 3,001 | 3,548 | ||
| 16,035 | 11,194 | ||||
| Total assets | 23,137 | 15,671 | |||
| Current liabilities | |||||
| Other interest bearing loans and borrowings | 13 | (2,621) | (834) | ||
| Trade and other payables | 14 | (7,379) | (5,188) | ||
| (10,000) | (6,022) | ||||
| Non-current liabilities | |||||
| Other interest-bearing loans and borrowings | 13 | (24) | (127) | ||
| Other payables | 14 | (1,069) | (59) | ||
| Deferred tax liability | (322) | (104) | |||
| (1,415) | (290) | ||||
| Total liabilities | (11,415) | (6,312) | |||
| Net assets | 11,722 | 9,359 | |||
| Equity | |||||
| Share capital | 2,016 | 2,016 | |||
| Share premium | 8,933 | 8,933 | |||
| Foreign currency translation reserve | 10 | - | |||
| Retained earnings | 763 | (1,590) | |||
| Total equity | 11,722 | 9,359 | |||
The accompanying notes form an integral part of the consolidated financial report.
Company registered number: 07786708
Consolidated Statement of Changes in Equity
| Note | Year ended 28 February 2017 |
Year ended 29 February 2016 |
||||
| Unaudited | Audited | |||||
| £000 | £000 | |||||
| Share capital | ||||||
| Opening | 2,016 | 1,266 | ||||
| Issue of share capital | - | 750 | ||||
| At 28th February 2017 | 2,016 | 2,016 | ||||
| Share premium | ||||||
| Opening | 8,933 | - | ||||
| Issue of shares | - | 9,255 | ||||
| Share issue costs | - | (322) | ||||
| ______ | ______ | |||||
| At 28th February 2017 | 8,933 | 8,933 | ||||
| ______ | _______ | |||||
| Foreign currency translation reserve | ||||||
| Opening | - | - | ||||
| Other comprehensive income | 10 | - | ||||
| ______ | ______ | |||||
| At 28th February 2017 | 10 | - | ||||
| ______ | _______ | |||||
| Retained earnings | ||||||
| Previous periods | (1,590) | (1,555) | ||||
| Share based payment charge | 15 | 39 | 8 | |||
| Profit/(loss) for the year | 2,314 | (43) | ||||
| At 28th February 2017 | 763 | (1,590) | ||||
| Total equity | 11,722 | 9,359 | ||||
The accompanying notes form an integral part of the consolidated financial report.
Consolidated Statement of Cash Flows
| Note | Year ended 28 February 2017 |
Year ended 29 February 2016 |
||||
|---|---|---|---|---|---|---|
| Unaudited | Audited | |||||
| --- | --- | --- | --- | --- | --- | --- |
| £000 | £000 | |||||
| --- | --- | --- | --- | --- | --- | --- |
| Cash flows from operating activities | ||||||
| Profit/(loss) for the year | 2,314 | (43) | ||||
| Adjustments for: | ||||||
| Depreciation and amortisation | 3,8,9 | 1,001 | 786 | |||
| Foreign exchange losses | 10 | - | ||||
| Financial expense | 6 | 47 | 280 | |||
| Loss on sales of property, plant and equipment | - | 1 | ||||
| Share based payment charge | 39 | 8 | ||||
| Taxation | 7 | 322 | 49 | |||
| 3,733 | 1,081 | |||||
| Increase in trade and other receivables | 11 | (608) | (524) | |||
| Increase in inventories | 10 | (4,780) | (1,581) | |||
| Increase in trade and other payables | 14 | 1,870 | 689 | |||
| 7 | 215 | (335) | ||||
| Tax paid | (104) | - | ||||
| Net cash from operating activities | 111 | (335) | ||||
| Cash flows from investing activities | ||||||
| Proceeds from sale of property, plant and equipment | - | 1 | ||||
| Acquisition of property, plant and equipment | 8 | (717) | (578) | |||
| Capitalised development expenditure | 9 | (1,478) | (932) | |||
| Acquisition of a business | 9 | (100) | - | |||
| Net cash from investing activities | (2,295) | (1,509) | ||||
| Cash flows from financing activities | ||||||
| Proceeds from pre-IPO issue of shares | - | 32 | ||||
| Net proceeds from IPO | - | 8,351 | ||||
| Proceeds from new borrowings | 13 | 1,878 | 253 | |||
| Interest paid | (47) | (130) | ||||
| Repayment of redemption premium on loan notes | - | (602) | ||||
| Repayment of loan notes | - | (2,848) | ||||
| Repayment of other borrowings | - | (755) | ||||
| Payment of finance lease liabilities | (194) | (189) | ||||
| Net cash from financing activities | 1,637 | 4,476 | ||||
| Net (decrease)/increase in cash and cash equivalents | (547) | 2,632 | ||||
| Cash and cash equivalents at beginning of year | 3,548 | 916 |
| Cash and cash equivalents at end of year | 12 | 3,001 | 3,548 | |||
The accompanying notes form an integral part of the consolidated financial report.
Notes
(forming part of the financial report)
Gear4music (Holdings) plc is a public limited company, is incorporated and domiciled in the United Kingdom, and is listed on the Alternative Investment Market ('AIM') of the London Stock Exchange.
The principal activity of the Group is the retail of musical instruments and equipment.
The registered office of Gear4music (Holdings) plc (company number: 07786708), Gear4music Limited (company number: 03113256) and Cagney Limited (dormant subsidiary; company number: 04493300) is Kettlestring Lane, Clifton Moor, York, YO30 4XF.
On 15th July 2016, the Group set-up a Swedish subsidiary, 'Gear4music Sweden AB', as a 100% subsidiary of Gear4music Limited.
On 7th October 2016, the Group set-up a German subsidiary, 'Gear4music GmbH', as a 100% subsidiary of Gear4music Limited.
On 10th October 2016, the Group set-up a Norwegian subsidiary, 'Gear4music Norway AS', as a 100% subsidiary of Gear4music Limited. At 28th February 2017 this company was dormant.
The Group prepares its annual consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretations Committee (IFRIC) interpretations endorsed by the European Union EU) and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial information contained within this preliminary announcement is unaudited and has been prepared under the historical cost convention. The financial information included in this preliminary announcement does not include all the disclosures required by IFRS or the Companies Act 2006 and accordingly it does not itself comply with IFRS or the Companies Act 2006.
The unaudited consolidated financial information in this report has been prepared in accordance with the accounting policies disclosed in the Group's 2016 Annual report and accounts.
The financial information set out in this announcement does not constitute the company's statutory accounts within the meaning of Section 434 of the companies Act 2006 for the years ended 29 February 2016 or 28 February 2017. The financial information for the year ended 29 February 2016 is derived from the statutory accounts for that year, which have been delivered to the Registrar of Companies. The auditors' report on those accounts was unqualified and did not contain a statement under Section 498 of the Companies Act 2006. The statutory accounts for the year ended 28 February 2017 will be finalised on the basis of the financial information presented by the Directors in this unaudited preliminary announcement and will be delivered to the Registrar of Companies following the Annual General Meeting.
The financial information contained within this preliminary announcement was approved by the Board on 8 May 2017 and has been agreed with the Company's auditors for release.
Selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in financial position and performance of the Group since the last annual consolidated financial statements which is available on the Group's investor website.
The preliminary announcement will be published on the Company's website. The maintenance and integrity of the website is the responsibility of the directors. The work carried out by the auditors does not involve consideration of these matters. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Accounting period
The financial statements presented cover the years ended 28 February 2017 and 29 February 2016.
Measurement convention
The financial statements have been prepared on the historical cost basis.
Going concern
The Directors believe that given the Group has significant financial resources, and has demonstrated good growth in revenue and underlying profitability from operating activities, the Group is well placed to manage its business risks.
The Group's policy is to ensure that it has sufficient facilities to cover its future funding requirements. Short term flexibility is available through trade finance and overdraft facilities. At 28 February 2017 the Group had £3.0m of cash and bank balances and HSBC have indicated they are supportive of renewing the Group's facilities in July 2017.
The Group is committed to completing a £5.325m property and has approved debt-funding in place, and will continue to invest in European Distribution centres.
Having duly considered all of these factors and having reviewed the forecasts for the coming year including the investments outlined in the CEO's statement, the Directors have a reasonable expectation that the Group has adequate resources to continue trading for the foreseeable future, and as such continue to adopt the going concern basis of accounting in preparing the financial statements.
2 Segmental reporting
The Group's revenue and profit was derived from its principal activity which is the sale of musical instruments and equipment.
In accordance with IFRS 8 'Operating segments', the Group has made the following considerations to arrive at the disclosure made in these financial statements. IFRS 8 requires consideration of the 'Chief Operating Decision Maker ('CODM') within the Group. Operating segments have been identified based on the internal reporting information and management structures with the Group. Based on this information it has been noted that the CODM reviews the business as one segment, and receives internal information on this basis. Therefore, it has been concluded that there is only one reportable segment.
| Year ended 28 February 2017 |
Year ended 29 February 2016 |
||||
| Unaudited | Audited | ||||
| £000 | £000 | ||||
| UK | 34,865 | 26,016 | |||
| Europe and Rest of the World | 21,263 | 9,473 | |||
| 56,128 | 35,489 | ||||
| Year ended 28 February 2017 |
Year ended 29 February 2016 |
||||
| Unaudited | Audited | ||||
| £000 | £000 | ||||
| Other-brand products | 39,351 | 24,842 | |||
| Own-brand products | 14,449 | 9,164 | |||
| Other | 2,328 | 1,483 | |||
| 56,128 | 35,489 | ||||
Included in profit/loss are the following:
| Year ended 28 February 2017 |
Year ended 29 February 2016 |
||||
| Unaudited | Audited | ||||
| £000 | £000 | ||||
| Depreciation of tangible fixed assets | 391 | 328 | |||
| Amortisation of intangible assets | 610 | 458 | |||
| Amortisation of government grants | 31 | 35 | |||
| Loss/(profit) on disposal of property, plant and equipment | - | 1 | |||
| Rentals under operating leases - land & buildings | 466 | 262 | |||
| Rentals under operating leases - plant & machinery | 11 | 16 | |||
| Auditor remuneration - audit of financial statements | 40 | 28 | |||
| Auditor remuneration - other | 60 | 140 | |||
| Exceptional items: | |||||
| Exceptional deal costs | - | 606 | |||
Exceptional costs in FY16 related to professional fees incurred in relation to the Group's admission to the Alternative Investment Market ('AIM') on 3rd June 2015, and a reconciliation is shown below and is useful in identifying the evolving profitability of the underlying business.
Reconciliation of operating profit to adjusted earnings before interest, taxation, depreciation and amortisation ('EBITDA') and adjusted profit before tax:
| Year ended 28 February 2017 |
Year ended 29 February 2016 |
||||
| Unaudited | Audited | ||||
| £000 | £000 | ||||
| Operating profit | 2,616 | 289 | |||
| Adjusted for: | |||||
| Exceptional costs within operating expenses | - | 606 | |||
| ______ | ______ | ||||
| Underlying Operating profit | 2,616 | 895 | |||
| Adjusted for: | |||||
| Amortisation and depreciation | 1,001 | 786 | |||
| ______ | ______ | ||||
| Underlying EBITDA | 3,617 | 1,681 | |||
| Adjusted for: | |||||
| Amortisation and depreciation | (1,001) | (786) | |||
| Net financial income/(expenses) | 20 | (283) | |||
| ______ | ______ | ||||
| Underlying PBT | 2,636 | 612 | |||
| ______ | ______ | ||||
The average number of persons employed (full time equivalents) by the Group (including directors) during the period, analysed by category, was as follows:
| Year ended 28 February 2017 |
Year ended 29 February 2016 |
||||
| Unaudited | Audited | ||||
| No. | No. | ||||
| Administration | 87 | 59 | |||
| Selling and Distribution | 123 | 79 | |||
| 210 | 138 | ||||
The aggregate payroll costs of these persons were as follows:
| Year ended 28 February 2017 |
Year ended 29 February 2016 |
||||
| Unaudited | Audited | ||||
| £000 | £000 | ||||
| Wages and salaries | 3,808 | 2,546 | |||
| Equity-settled share based payments (see note 19) | 39 | 8 | |||
| Cash-settled share based payments (see note 19) | 57 | - | |||
| Social security costs | 333 | 198 | |||
| Contributions to defined contribution plans | 33 | 13 | |||
| Amounts paid to third parties in respect of director's service | 19 | 32 | |||
| 4,289 | 2,797 | ||||
| Year ended 28 February 2017 |
Year ended 29 February 2016 |
||||
| Unaudited | Audited | ||||
| £000 | £000 | ||||
| Directors remuneration | 501 | 451 | |||
| Company contributions to money purchase pension schemes | 5 | 4 | |||
| Amounts paid to third parties in respect of directors' service | 19 | 32 | |||
| 525 | 487 | ||||
There are four directors (2016: 4) for whom retirement benefits are accruing under a money purchase pension scheme.
The aggregate remuneration of the highest paid director was £189,000 (2016: £179,000), including company pension contributions of £840 (2016: £1,680) were made to a money purchase scheme on their behalf.
Diluted loss per share is calculated by dividing the net profit for the period attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period plus the weighted average number of ordinary shares that would be issued on the conversion of all dilutive potential ordinary shares into ordinary shares.
| Year ended 28 February 2017 |
Year ended 29 February 2016 |
||||
| Unaudited | Audited | ||||
| Profit/(loss) attributable to equity shareholders of the parent (£'000) | 2,314 | (43) | |||
| Basic weighted average number of shares | 20,156,339 | 18,236,293 | |||
| Dilutive potential ordinary shares | 79,288 | 25,226 | |||
| Diluted weighted average number of shares | 20,235,627 | 18,261,519 | |||
| Basic profit/(loss) per share | 11.5p | (0.2p) | |||
| Diluted profit/(loss) per share | 11.4p | (0.2p) | |||
| Year ended 28 February 2017 |
Year ended 29 February 2016 |
||||
| Unaudited | Audited | ||||
| £000 | £000 | ||||
| Finance income | |||||
| Net foreign exchange gain | 67 | - | |||
| Total finance income | 67 | - | |||
| Finance expense | |||||
| Bank interest | 29 | 26 | |||
| Loan note interest measured at amortised cost | - | 233 | |||
| Finance leases | 18 | 21 | |||
| Net foreign exchange loss | - | 3 | |||
| Total finance expense | 47 | 283 | |||
Recognised in the income statement
| Year ended 28 February 2017 |
Year ended 29 February 2016 |
|||||
| Unaudited | Audited | |||||
| £000 | £000 | |||||
| Current tax expense | ||||||
| UK Corporation tax | 104 | - | ||||
| Adjustments for prior periods | - | - | ||||
| Current tax expense | 104 | - | ||||
| Deferred tax expense | ||||||
| Origination and reversal of temporary differences | 203 | 188 | ||||
| Deferred tax rate change impact | (7) | (13) | ||||
| Adjustments for prior periods | 22 | (126) | ||||
| Deferred tax expense | 218 | 49 | ||||
| Total tax expenses | 322 | 49 | ||||
The corporation tax rate applicable to the company was 20% in the years ending 28th February 2017 and 29th February 2016. Reductions to 19% (effective from 1st April 2017) and to 18% (effective 1st April 2020) were substantively enacted on 26th October 2015, and an additional reduction to 17% (effective 1st April 2020) was substantively enacted on 6th September 2016. This will reduce the company's future current tax charge accordingly. The deferred tax asset at 28th February 2017 has been calculated based on these rates.
Reconciliation of effective tax rate
| Year ended 28 February 2017 |
Year ended 29 February 2016 |
||||
| Unaudited | Audited | ||||
| £000 | £000 | ||||
| Profit/(loss) for the period | 2,314 | (43) | |||
| Total tax charge | 322 | 49 | |||
| Profit/(loss) excluding taxation | 2,636 | 6 | |||
| Current tax at 20.00% (2016: 20.00%) | |||||
| Tax using the UK corporation tax rate for the relevant period: | 527 | 1 | |||
| Non-deductible expenses | (189) | 115 | |||
| Rate change | (38) | 59 | |||
| Adjustments relating to prior year - deferred tax | 22 | (126) | |||
| Total tax charge | 322 | 49 | |||
| | Plant and
equipment | Fixtures and fittings | | | Motor
Vehicles | Computer equipment | Total |
| --- | --- | --- | --- | --- | --- | --- |
| | £000 | £000 | | | £000 | £000 | £000 |
| --- | --- | --- | --- | --- | --- | --- |
| | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- |
| Cost | | | | | | | |
| At 1 March 2015 | 193 | 1,252 | | | - | 239 | 1,684 |
| | | | | | | | |
| Additions | 270 | 218 | | | - | 90 | 578 |
| Disposals | - | (6) | | | - | - | (6) |
| | | | | | | | |
| Balance at 29 February 2016 & 1 March 2016 | 463 | 1,464 | | | - | 329 | 2,256 |
| | | | | | | | |
| Additions | 90 | | 443 | 64 | | 120 | 717 |
| Disposals | - | | - | - | | - | - |
| | | | | | | | |
| Balance at 28 February 2017 (unaudited) | 553 | 1,907 | | | 64 | 449 | 2,973 |
| | | | | | | | |
| Depreciation and impairment | |||||
| At 1 March 2015 | 82 | 437 | - | 174 | 693 |
| Depreciation charge for the year | 98 | 185 | - | 45 | 328 |
| Disposals | - | (4) | - | - | (4) |
| Balance at 29 February 2016 & 1 March 2016 | 180 | 618 | - | 219 | 1,017 |
| Depreciation charge for the period | 113 | 218 | 6 | 54 | 391 |
| Disposals | - | - | - | - | - |
| Balance at 28 February 2017 (unaudited) | 293 | 836 | 6 | 273 | 1,408 |
| Net book value as at 28 February 2017 (unaudited) | 260 | 1,071 | 58 | 176 | 1,565 |
| Net book value as at 29 February 2016 | 283 | 846 | - | 110 | 1,239 |
Leased assets
At 28th February 2017, the net carrying amount of leased tangible fixed assets was £232,000 (2016: £423,000), and the accumulated depreciation against leased assets was £265,000 (2016: £284,000).
Security
The Group's bank borrowings are secured by fixed and floating charges over the Group's assets.
The amortisation charge is recognised in Administrative expenses profit and loss account.
| Goodwill | Software platform | Brand | Total | |||
|---|---|---|---|---|---|---|
| £000 | £000 | £000 | £000 | |||
| --- | --- | --- | --- | --- | --- | --- |
| --- | --- | --- | --- | --- | --- | --- |
| Cost | ||||||
| At 1 March 2015 | 417 | 2,435 | 564 | 3,416 | ||
| Additions | - | 932 | - | 932 | ||
| Balance at 29 February 2016 & 1 March 2016 | 417 | 3,367 | 564 | 4,348 | ||
| Additions | 1,431 | 1,478 | - | 2,909 | ||
| Balance at 28 February 2017 (unaudited) | 1,848 | 4,845 | 564 | 7,257 | ||
| Amortisation | ||||||
| At 1 March 2015 | - | 483 | 169 | 652 | ||
| Amortisation for the year | - | 401 | 57 | 458 | ||
| Balance at 29 February 2016 & 1 March 2016 | - | 884 | 226 | 1,110 | ||
| Amortisation for the year | - | 554 | 56 | 610 | ||
| Balance at 28 February 2017 (unaudited) | - | 1,438 | 282 | 1,720 | ||
| Net book value as at 28 February 2017 (unaudited) | 1,848 | 3,407 | 282 | 5,537 | ||
| Net book value as at 29 February 2016 | 417 | 2,483 | 338 | 3,238 | ||
Acquisitions in the current period
On 1st January 2017, the Group acquired a software development business for £1.45m, satisfied in cash on a deferred consideration basis. The acquisition brings the out-sourced software development team responsible for the Group's bespoke ecommerce platform, into the Group.
The amounts recognised in respect of the purchase consideration and goodwill are set out below and subject to fair value adjustment on the date of acquisition, as the consideration was £18,000 for identifiable PPE assets payable on completion, and £1.5m payable in 15 quarterly instalments beginning on 1st January 2017. The fair value has been determined using a discount rate equal to the prevailing market rate for a similar instrument.
Effect of acquisition
The acquisition had the following effect on the Group's assets and liabilities:
| Recognised values on acquisition |
|||
| Unaudited | |||
| £000 | |||
| Assets acquired: | |||
| Property, plant and equipment | 18 | ||
| Identifiable assets | 18 | ||
| Goodwill | 1,431 | ||
| 1,449 | |||
| Consideration paid: | |||
| Initial cash price paid | 118 | ||
| Deferred consideration at fair value | 1,331 | ||
| Total consideration | 1,449 | ||
Goodwill has arisen on the acquisition as the principal value-creating asset being acquired is the team. No other intangible assets arose on acquisition.
Contingent consideration
The £1.5m deferred consideration is contingent upon the team leader not performing services or being otherwise engaged by the vendor. The consideration is not automatically forfeited if the team leader leave the employment of the Group. The Directors believe 100% of the consideration will be payable.
Acquisition related costs
The Group incurred acquisition related costs of £25,000 relating to legal advice. These costs have been included in Administrative expenses in the Group's consolidated statement of comprehensive income.
Goodwill
On 19th March 2012 goodwill arose on the acquisition of the entire share capital of Gear4music Limited (formerly known as Red Submarine Limited).
On 1st January 2017 goodwill arose on the acquisition of a software development team from Venditan Limited, the team responsible for the development of the group's proprietary software platform.
Goodwill balances are denominated in Sterling:
| Year ended 28 February 2017 |
Year ended 29 February 2016 |
||||
| Unaudited | Audited | ||||
| £000 | £000 | ||||
| Gear4music Limited (formerly known as Red Submarine Limited) | 417 | 417 | |||
| Software development team | 1,431 | - | |||
| 1,848 | 417 | ||||
Impairment testing
In accordance with IAS 36 Impairment of Assets, the Group reviews the carrying value of its intangible assets. A detailed review was undertaken at 28 February 2017 to assess whether the carrying value of assets was supported by the net present value in use calculations based on cash-flow projections from formally approved budgets and longer-term forecasts.
Intangible assets comprise Goodwill, the Gear4music brand name, and the proprietary software platform.
A Cash Generating Unit ("CGU") is defined as the smallest group of assets that generate cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups thereof. The Group is deemed to have a single CGU to which the goodwill, the software platform and the brand are allocated. An impairment review has been performed on this CGU. The recoverable amount of this CGU has been determined based on value-in-use calculations. In assessing value in use, a five-year forecast to 28th February 2022 was used to provide cash-flow projections that have been discounted at a pre-tax discount rate of 10%. The cash flow projections are subject to key assumptions in respect of revenue growth, gross margin performance, overhead expenditure, and capital expenditure. Management has reviewed and approved the assumptions inherent in the model:
· Revenue forecasts based on growth by geographical market, at a range of growth levels based on market size and estimate of opportunity, trends, specific projects underway, and Management's experience and expectation.
· Product costs are assumed to be broadly flat and gross margins are forecast to be retained at current levels over the five-year management forecast period.
· Wage increases are a function of recruitment and a person-by-person review of current staff, with a range of % increases.
No impairment loss was identified in the current year (2016: £nil). The valuations indicate significant headroom and therefore a terminal growth rate assumption has not been needed to be applied in order to support the valuation of this CGU. Any reasonably possible change in other key assumptions, including the discount rate, would not result in an impairment of the related goodwill or other intangible assets.
| Year ended 28 February 2017 |
Year ended 29 February 2016 |
||||
| Unaudited | Audited | ||||
| £000 | £000 | ||||
| Finished goods | 11,686 | 6,906 | |||
The cost of inventories recognised as an expense and included in cost of sales in the period amounted to £38.0m (£24.7m in the year ended 29th February 2016).
Management has included a provision of £69,500 (29th February 2016: £15,000), representing a 100% against returns stock subsequently found to be faulty, that is retained to be used for spare parts on the basis there is no direct NRV value, and a provision based on the expected product loss on dealing with returns stock.
| Year ended 28 February 2017 |
Year ended 29 February 2016 |
||||
| Unaudited | Audited | ||||
| £000 | £000 | ||||
| Trade receivables | 1,123 | 581 | |||
| Prepayments | 225 | 159 | |||
| 1,348 | 740 | ||||
| Year ended 28 February 2017 |
Year ended 29 February 2016 |
||||
| Unaudited | Audited | ||||
| £000 | £000 | ||||
| Cash and cash equivalents per balance sheet | 3,001 | 3,548 | |||
| Cash and cash equivalents per cash flow statements | 3,001 | 3,548 | |||
This note contains information about the Group's interest bearing loans and borrowing which are carried at amortised cost.
| Year ended 28 February 2017 |
Year ended 29 February 2016 |
||||
| Unaudited | Audited | ||||
| £000 | £000 | ||||
| Non-current liabilities | |||||
| Bank loans | - | - | |||
| Finance lease liabilities | 24 | 127 | |||
| 24 | 127 | ||||
| Current liabilities | |||||
| Bank loans | 2,520 | 642 | |||
| Finance lease liabilities | 101 | 192 | |||
| 2,621 | 834 | ||||
| Total liabilities | |||||
| Bank loans | 2,520 | 642 | |||
| Finance lease liabilities | 125 | 319 | |||
| 2,645 | 961 | ||||
Bank loans comprise a Trade Finance facility provided by the Group's bankers, HSBC, and are secured against the by fixed and floating charges over the Group's assets. The interest rate on 180-day import loans drawn under the Trade Finance agreement is 2.45% per annum over HSBC's Sterling Base Rate, and on an overdraft if and when drawn, is 3.25% over base. Interest on import loans is paid at the maturity of the relevant loan. Interest on an overdraft would be paid monthly in arrears. The Trade finance facilities are due for review and renewal on or before 18th July 2017.
The head office freehold acquisition scheduled to complete on 30th June 2017 is debt-funded with HSBC, and this is in addition to the trading facilities outlined above.
All borrowings are denominated in Sterling.
| Year ended 28 February 2017 |
Year ended 29 February 2016 |
||||
| Unaudited | Audited | ||||
| £000 | £000 | ||||
| Current | |||||
| Trade payables | 4,970 | 3,718 | |||
| Accruals and deferred income | 1,151 | 956 | |||
| Contingent consideration | 393 | - | |||
| Government grants | 28 | 28 | |||
| Other taxation and social security | 837 | 486 | |||
| 7,379 | 5,188 | ||||
| Non-current | |||||
| Accruals and deferred income | 100 | - | |||
| Contingent consideration | 938 | - | |||
| Government grants | 31 | 59 | |||
| 1,069 | 59 | ||||
Accruals at 28th February 2017 include:
- £630,000 (2016: £672,000) of rent accrued but not paid as per the commercial agreement reached with the landlord and the legal form of the property lease. This accrual started to unwind in 2017 with £42,000 unwinding in the year, and a further £147,000 due to unwind within one year as the cash paid exceeds the expense, and £441,000 will unwind in subsequent years to the end of the lease in June 2020; and
- £100,000 bonus accrual relating to the estimated cash bonuses accrued relating to the Employee and Director EMI schemes, and Director Cash Plan (see note 19).
Contingent consideration is due in relation to the acquisition of the software development team outlined in note 9.
Government grants being spread over the useful economic life of the associated asset, relate to Regional Growth Fund Grants towards the acquisition of various capital items. Grant conditions exist linked to job creation, and these criteria have been satisfied.
The Directors consider the carrying amount of trade and other payables approximates their fair value.
There are three incentive schemes in place - an Employees EMI scheme, a Directors EMI scheme relevant to Chris Scott and Gareth Bevan, and a Directors cash bonus plan relevant to Andrew Wass who, by virtue of his 39% shareholding, is cash rather than equity rewarded.
The equity settled share option plans are for qualifying employees of the Group, and options are settled in equity in the Company and subject to vesting conditions.
All equity-settled share options have an exercise price equal to the nominal value of the shares (10p) that the Company will subsidise by way of a bonus provided there are sufficient distributable reserves, and subject to certain conditions will vest on the third anniversary of the date of grant for initial awards on IPO, and the second anniversary thereafter.
The fair value of the cash-settled liability is re-measured at each balance sheet date and settlement date.
Employee EMI Plan
The Board has responsibility for the operation of the Employee EMI Plan and may grant share options over shares to eligible employees. The Board has discretion to select participants in the Employee EMI Plan from eligible employees of the Group. Eligible employees will generally have been employed by the Group for more than three years at the time of award, but could be a shorter period at the discretion of the Board.
Awards under the Employee EMI plan awards are only subject to service conditions.
Subject to continued employment, awards will normally be deemed to have been exercised at the end of the relevant vesting period.
Awards will be satisfied by the issue of new shares. The Company will grant a cash bonus to option holders in the month of exercise, the net value of which will be equivalent to the income tax, employee national insurance and the exercise price arising in relation to the awards.
Director EMI Plan
The Remuneration Committee has responsibility for the operation of the Director EMI Plan and may grant share options over shares to eligible employees, and retains discretion as to the operation of the plan.
Executive Directors of the Company are eligible to participate in the Director EMI Plan. Participation is at the discretion of the Remuneration Committee.
Awards under the Director EMI may be exercisable at the end of the vesting period subject to meeting EPS-based targets between the date of grant and vest, and subject to service conditions.
Awards will be satisfied by the issue of new shares. The Company will grant a discretionary cash bonus to option holders of up to 25% of their annual salary at the time of award, deferred for a period of two-years.
Director Cash Plan
The Remuneration Committee has responsibility for the operation of the Director Cash Plan and may grant cash bonus awards over shares to eligible employees, and retains discretion as to the operation of the plan.
Executive Directors of the Company are eligible to participate in the Director EMI Plan. An executive director who participates in the Director EMI Plan is not eligible to participate in the Director Cash Plan. Participation is at the discretion of the Remuneration Committee.
Awards under the Cash plan are not subject to any performance conditions. Awards will be exercisable at the end of the relevant vesting period subject to EPS-based performance conditions and continued employment.
Awards will be settled in cash.
The terms and conditions of specific grants are as follows:
| Grant date / employees entitled | Method of settlement accounting | Number of Instruments |
Vesting conditions | Contractual life of options | |
| Employee EMI Award 1 - Equity settled award to eight key employees on IPO, granted by parent on 3rd June 2015 | Equity | 23,381 | Continued employment | 3rd June 2018 | |
| Employee EMI Award 2 - Equity settled award to one key employee, granted by parent on 17th February 2016 | Equity | 1,845 | Continued employment | 17th February 2018 | |
| Employee EMI Award 3 - Equity settled award to two key employees, granted by parent on 26th May 2016 | Equity | 9,433 | Continued employment | 26th May 2018 | |
| Employee EMI Award 4 - Equity settled award to 44 employees on IPO, granted by parent on 31st May 2016 | Equity | Initially 27,406; 2,795 forfeit; now 24,611 | Continued employment | 31st May 2018 | |
| Director EMI Award 1a - Equity settled award to Chris Scott and Gareth Bevan, granted by parent on 31st May 2016 | Equity | 19,956 | EPS-based performance criteria and Continued employment | 31st May 2018 | |
| Director Award 1b - Cash settled award to Andrew Wass, granted by parent on 31st May 2016 | Cash | Cash equivalent to result in the same monetary result as for the other two directors | EPS-based performance criteria and Continued employment | 31st May 2018 |
The number and weighted average exercise prices of share options are as follows:
| Weighted average exercise price | Number of options |
Weighted average exercise price | Number of options |
|
| Unaudited | Unaudited | Audited | Audited | |
| 2017 | 2017 | 2016 | 2016 | |
| Outstanding at the beginning of the year | Nil | 25,226 | - | - |
| Forfeited during the year | Nil | (2,795) | - | - |
| Exercised during the year | - | - | - | - |
| Granted during the year | Nil | 56,795 | Nil | 25,226 |
| Lapsed during the year | - | - | - | |
| Outstanding at the end of the year | Nil | 79,226 | Nil | 25,226 |
| Exercisable at the end of the year | - | - | - | - |
No share options were exercised in the year. The first award to be eligible for exercise is on 17th February 2018.
The options outstanding at the year-end have a nil exercise price and a weighted average contractual life of 1.25 years.
The fair values of employee share options were calculated using a Black-Scholes model along with the assumptions detailed below:
| Date of grant | Share price on date of grant (pence) | Exercise price (pence) | Volatility (%) | Vesting period (yrs) | Dividend yield (%) | Risk free rate of interest (%) | Fair value (pence) |
| 3rd Jun 2015 | 143.0 | 0.0 | 1% | 3 | 0% | 0.70% | 143.0 |
| 17th Feb 2016 | 135.0 | 0.0 | 1% | 2 | 0% | 0.70% | 135.0 |
| 26th May 2016 | 132.5 | 0.0 | 11.8% | 2 | 0% | 0.45% | 132.5 |
| 31st May 2016 | 132.5 | 0.0 | 11.8% | 2 | 0% | 0.43% | 132.5 |
| 31st May 2016 | 132.5 | 0.0 | 11.8% | 2 | 0% | 0.43% | 132.5 |
The total expenses recognised for the year and the total liabilities recognised at the end of the year arising from share based payments are as follows:
| 2017 | 2016 | |
| Unaudited | Audited | |
| £000 | £000 | |
| Equity settled share based payment expense | 39 | 8 |
| Cash-settled share based payment expense | 57 | - |
| 96 | 8 | |
| Opening at 1 March | 8 | - |
| Recognised in equity | 47 | 8 |
| Recognised as a liability | 57 | - |
| 104 | 8 | |
Capital commitment
At 29th February 2016 there was a contractual minimum spend arrangement in place for £458,000 relating to a contract for software development services of the Group's ecommerce platform. On 1st January 2017 this arrangement was terminated on acquisition of the software development team.
Operating lease commitment
Non-cancellable operating lease rentals are payable as follows:
| Year ended 28 February 2017 |
Year ended 29 February 2016 |
||||
| Unaudited | Audited | ||||
| £000 | £000 | ||||
| Less than one year | 887 | 283 | |||
| Between one and five years | 3,103 | 1,603 | |||
| More than five years | - | ||||
| 3,990 | 1,886 | ||||
In FY16 immediately prior to admission to AIM in June 2015, Chris Scott (CFO) and Gareth Bevan (CCO) were allotted an aggregate of 259,600 10p shares further to their exercise of pre-existing options, and Andrew Wass was allotted 64,920 10p shares in accordance with the investor agreement with Key Capital Partners. These shares had a market value of £451,083 on IPO.
In FY17 48 employees including Chris Scott and Gareth Bevan were granted a total of 56,795 equity-settled share options (2016: 25,226 options to 9 employees), and Andrew Wass was awarded a cash-settled option (see note 19).
Transactions with key management personnel
The compensation of key management personnel is as follows:
| Year ended 28 February 2017 |
Year ended 29 February 2016 |
||||
| Unaudited | Audited | ||||
| £000 | £000 | ||||
| Key management emoluments including social security costs | 470 | 421 | |||
| Company contributions to money purchase pension plans | 5 | 4 | |||
| 475 | 425 | ||||
Four directors are accruing retirement benefits under a money purchase scheme (2016: 4).
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR SSSESAFWSEII
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