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INSPECS GROUP PLC Earnings Release 2021
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Earnings Release
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National Storage Mechanism | Additional information 
RNS Number : 5487Q
Inspecs Group PLC
29 June 2022
29 June 2022
INSPECS Group plc
("INSPECS" or "the Group")
Final Results
INSPECS Group plc, a leading designer, manufacturer and distributor of eyewear frames, announces its Final Results for the year ended 31 December 2021.
Key Financials
| • | Group revenue increased 420% to $246.5m (2020: $47.4m) |
| • | Adjusted Underlying EBITDA increased 376% to $27.6m (2020: $5.8m) |
| • | Gross profit up 465% to $115.8m (2020: $20.5m) |
| • | Loss after tax decreased 39% to $5.4m (2020: $8.9m) |
| • | Diluted EPS of $(0.05)c (2020: $(0.13)c) |
| • • |
Net current assets of $48.1m (2020: $56.2m) Net cash from operating activities up $20.8m to $20.0m (2020: $(0.8)m) |
| • | Maiden dividend proposed of 1.25p per share (2020: Nil) |
Operational Highlights
| • | Acquisition of EGO Eyewear Limited and its subsidiaries in December 2021 who distributes brands to major optical chains known for its innovative and creative designs |
| • | Acquisition of BoDe Design Vertriebs GmbH in December 2021, who distributes eyewear to chains and online retailers principally in the German and Austrian markets |
| • | Purchased the trademarks, rights and licences to Hardy Amies, a leading British fashion brand in October 2021 |
| • | Successfully completed construction and fit out of Norville's new state-of-the-art lens-making facility in Gloucester, now fully operational |
| • | Number of eyewear units sold globally increased 112% to 10.4 million (2020: 4.9m) |
| • | Enhanced Vietnam operations with a second plant, increasing total production facility to 8,800 sqm2 and increasing supply by 72% from 2.18m to 3.75m units |
| • | Manufacturing in China (Torkai) increased from 1.59m to 1.82m units |
| • | Manufacturing in Vietnam (Neo) increased from 2.18m to 3.75m units |
| • | Two new in-house brands added in 2021 |
| • | 11 new global branded licences added to the brand portfolio |
| • | Awarded multiple Red Dot awards and the SILMO d'Or |
Robin Totterman, CEO of INSPECS said:
"2021 marked another successful year for Inspecs as we continued to gain momentum through our proven vertically-integrated business model. Whilst we were not immune from the well-documented global supply chain challenges and the regional lockdowns relating to COVID-19, we were able to navigate market conditions and deliver an exceptional performance.
Our ability to more than double our revenue, EBITDA and gross profit in the year is a reflection of our continued strategic investments in the period, coupled with organic growth. The acquisitions of BoDe, EGO Eyewear and Hardy Amies have diversified our brand portfolio and broadened the distribution of our products around the world. In addition, we have invested in our manufacturing facilities in order to enhance our production capabilities. During the period, we opened Norville's new state-of-the-art lens manufacturing facility on time and within budget, scaled-up our operations in Vietnam, and looking ahead, we have advanced our plans to build a new factory in Portugal.
Our commitment to sustainability has been integral to the business and this can be reflected though the launch of the new sustainable, eco-friendly BOTANIQ™ range, as well as our investment in cutting-edge technologies that will enable us to explore and create sustainable products. I look forward to rolling out further initiatives in the years to come.
Despite the current macro-environment, we are fortunate to be operating in a resilient market and I am pleased to report that we experienced strong trading in the first three months of the FY22 fiscal year. The significant progress we are making proves that our growth strategy is the right one, and I am confident that we will continue to deliver shareholder value in the long term."
The Annual Report for the year ended 31 December 2021 will shortly be available on the Group's website (www.inspecs.com/investors-results-and-reports/) and will be sent to shareholders. The INSPECS Annual General Meeting will be held at 11am on 11 August 2022, at Kelso Place, Bath, UK.
For further information please contact:
| INSPECS Group plc Robin Totterman, CEO Chris Kay, CFO |
via FTI Consulting Tel: +44 (0) 20 3727 1000 |
| Peel Hunt (Nominated Adviser and Broker) Adrian Trimmings Andrew Clark Lalit Bose |
Tel: +44 (0) 20 7418 8900 |
| FTI Consulting (Financial PR) Alex Beagley Harriet Jackson Alice Newlyn |
Tel: +44 (0) 20 3727 1000 |
About INSPECS Group plc
INSPECS is a Bath-based designer, manufacturer and distributor of eyewear frames and optically advanced spectacle lenses. The Group produces a broad range of frames and lenses, covering optical, sunglasses and safety, which are either "Branded" (either under licence or under the Group's own proprietary brands), or "OEM" (including private label on behalf of retail customers and un-branded).
INSPECS aims to be the leader in eyewear solutions through its vertically-integrated business model and has adopted a three pillar growth strategy to achieve this: (i) continue to grow organically; (ii) undertake further acquisitions (and drive value through leveraging the Group's internal capabilities); and (iii) extend the Group's manufacturing capacity.
The Group has completed a number of significant acquisitions since its IPO in February 2020. In December 2020, INSPECS acquired Eschenbach, a leading global eyewear supplier, headquartered in Nuremberg, Germany, which includes the American company Tura. This followed the acquisition of lens maker Norville in July 2020, whereby INSPECS combined two heritage brands in British optical, Savile Row frame maker, and Norville lens maker, further enhancing its vertically integrated business model. In December 2021 the Group acquired Ego Eyewear, a design and licensing company which uses third party eyewear manufacturers to produce premium fashion brands, and BoDe, a distributor of optical and sunglasses frames principally to the German market.
INSPECS customers include global optical and non-optical retailers, global distributors and independent opticians, with its distribution network covering over 80 countries and reaching approximately 75,000 points of sale.
INSPECS has operations across the globe: with offices in the UK, Portugal, Scandinavia, the US and China (Hong Kong, Macau and Shenzhen), and manufacturing facilities in Vietnam, China, the UK and Italy. With the acquisition of Eschenbach, the Group's international reach further extends across Europe and the American markets.
More information is available at: https://inspecs.com
CHAIRMAN'S STATEMENT
The Group has continued to deliver in what has been another challenging year due to restrictions from COVID-19 and has produced a strong set of results following on from the acquisition of Eschenbach in December of 2020. I would like to thank all those across our various businesses who have worked tremendously hard, in difficult circumstances, to deliver these results for our stakeholders.
Gathering momentum
Although our results for the year to 31 December 2021 include a full year of varying COVID-19 restrictions around the globe that affected our business, I am pleased to report that our employees rose to the challenge and were able to continue to deliver a strong performance for the year.
The acquisitions of Eschenbach and TURA have given the Group a better balance, by expanding into the independent optical market where we had previously been focused primarily on large global chains. The 12 months following the acquisition have produced positive results and there is no doubt that we have a robust platform for future growth.
As a result, our performance for the year has produced turnover of $246.5m and an Adjusted Underlying EBITDA of $27.6m, compared to turnover of $47.4m and an Adjusted Underlying EBITDA of $5.8m in 2020.
I am also particularly pleased that the Group has managed to obtain, despite cost pressures, a gross margin increase from 43% in 2020, to 47% for the year to 31 December 2021.
The Group has reduced its loss before tax position from $11.2m to $9.1m. This performance was achieved despite incurring one-off costs of $17.4m (2020: $6.1m). On the supply side, we suffered continual disruption in logistical supply and production in our factories, but despite these issues, the teams in Vietnam and China worked tirelessly to ensure that production disruption was kept to a minimum.
The Group's plans for further expansion in Vietnam and a major new European facility will ensure stability of the supply chain and increased capacity overall, fuelling the Group's growth.
Continuing Investment
The acquisition of Norville in 2020 was part of the strategy to enter into the lens market and in doing so be able to offer frame and lens packages.
I would like to thank the team at Norville who, in a very difficult year, have managed to keep production going even while moving from their original plant to a new state-of-the-art lens-making facility in Gloucester, UK. Moving a production plant at any time is challenging, but this was achieved with great efficiency. Although there was disruption to our trade, the long-term benefits of an efficient and modern manufacturing plant will lay a solid foundation for the future.
Two further acquisitions were made in 2021, and I'd like to welcome BoDe and EGO Eyewear to the INSPECS Group family. I look forward to seeing the positive impact these new members bring to the company. Additionally, developing the Hardy Amies brand through licensing and eyewear will further add to our premium offering.
Dividend
The Board intends to propose the Group's first dividend of 1.25p per share for 2021 and continue with a progressive dividend policy in future years.
Our people
I am always impressed by the dedication and enthusiasm of our global teams who continue to make great strides in delivering the Group's strategy.
Our policy of sustainable expansion has proved to be successful despite the continued pandemic disruption, global energy crisis and general turmoil.
Finally, I would like to thank all of our stakeholders, who have supported the Group over the last few years.
Outlook
I know that both the management team and all our employees are excited about the prospects for 2022 and beyond, and therefore I look with confidence over the medium and long-term prospects for the Group as a whole and further development of its strategy that is proving to be successful.
Lord MacLaurin
Chairman
29 June 2022
CHIEF EXECUTIVE'S REPORT
In the past year, the Group has continued its program of integrating new businesses into the Group and working on synergies to further build on its strengths. Our results for the year show a turnover of $246.5m and an Adjusted Underlying EBITDA of $27.6m compared to turnover in 2020 of $47.4m and an Adjusted Underlying EBITDA of $5.8m. I am also particularly pleased that the Group's margin, despite cost pressures in 2021, increased to 47.0% (43.3% in 2020).
I am delighted that the Group has once again won a number of prestigious awards for innovation and design, including multiple Red Dot awards and the SILMO d'Or, the industry's highest accolade.
The Group is performing well, notably our US businesses and our Vietnam based factory, NEO, where both plants are now fully up and running. The move from Norville's old premises to a state-of-the- art facility was successfully completed in the year, and we expect to see improving results from the increase in automation and upgrades through 2022. Eschenbach in Europe has had another strong year, circumnavigating the various COVID-19 restrictions by increasing its B2B online platform, coupled with in person meetings when restrictions allowed.
Acquisitions
Adding to INSPECS Group's premium heritage eyewear offering, I am delighted with our acquisition of iconic Savile Row couturier brand Hardy Amies, in October 2021. Sir Hardy was official dressmaker to Queen Elizabeth ll for more than 40 years, and one of the most innovative and influential British designers of all time. We look forward to working with existing and new licensees, as well as launching an eyewear collection.
At the end of 2021, we acquired our German distributors BoDe Design, who have been our long-term partner in Germany, distributing to chains and online retailers. This energetic team's focus complements the Eschenbach business, which primarily sells to independent opticians.
In December 2021, the Group also acquired EGO Eyewear Limited and its subsidiaries, who have the licences for Barbour Eyewear, Liberty London, Viktor & Rolf and Lyle & Scott, among others. EGO mainly distributes brands to major optical chains and is known for its innovative and creative designs. EGO's design studio in Stockholm adds to our existing teams in the UK, Portugal, Hong Kong, Germany and New York.
Skunk works
Perhaps the most exciting future development at INSPECS is the progress on our cutting-edge technologies. The focus is on new material generation, smart eyewear, lens technology and sustainability, with truly ground-breaking and world-changing results. Agreements have been signed with Bosch for the collaborative development of smart eyewear. The Group has also started to supply lenses directly to Amazon.
Environmental, Social and Governance (ESG)
Over the last 12 months our sustainability framework has been developed, clearly demonstrating the roadmap to our commitment to addressing critical environmental issues along with maintaining a positive environment for all our employees around the globe. Our Group vision of 'Always Looking Forward' embeds itself into our ESG strategy and our purpose of innovation, commitment and integrity are reflected throughout. We consider ESG to be fundamental to the Group and further details regarding our sustainability framework are available on pages 40 to 53 within our 2021 Annual Report.
Manufacturing Investment
Our Vietnam operation is now enhanced with a second plant, and our total production facility is now 8,800 square meters. The second factory came on stream during 2021, and we were able to increase supply by 72%. Our new sustainable, eco-friendly BOTANIQ™ range is being produced there.
We are actively engaged in the design and planning of a third facility to be completed by the end of 2023, that will add a further 8,000 square meters and increase our production capability in Vietnam from 7 million to over 12 million units.
We have also advanced our plans in building a factory in Portugal, close to our existing Lisbon offices with a planned completion date of 2023. This facility will give us an attractive major European manufacturing base.
Outlook
The economic landscape improved during 2021, but I would note that there was increased disruption within our Group as we entered the late winter months of 2021. At present it would not seem reasonable to second guess what measures Governments around the world may have to resort to should the pandemic continue on in 2022, or further variants emerge.
However, the Group has a well-balanced platform and operates in a resilient market and I am pleased to report that the first three months of trading were ahead of our expectations. Our Q1 sales for 2022 amounted to $75.1m, compared to $67.2m in 2021, an increase of 11.8%.
We will continue to pursue our strategy of organic and acquisitive growth. I am confident we will be able to meet our targets and continue to grow in a sustainable and manageable way despite continued supply chain challenges. We will also continue to integrate the newly acquired companies across the Group, generating further opportunities for growth.
I'm pleased to announce that the Group intends to pay its first dividend of 1.25p for the year and continue with a progressive dividend policy in future years.
Robin Totterman
Chief Executive Officer
29 June 2022
FINANCIAL REVIEW
The Group has continued to build on its enlarged base in 2021 and has delivered a good set of results overall in challenging circumstances. Our order books for 2022 are positively placed, and together with our strategic acquisitions in 2021, the Group is well positioned for further growth in 2022.
Our FY21 results showed an increase in sales of $199.1m to $246.5m. The Group delivered Adjusted Underlying EBITDA of $27.6m (FY20: $5.8m). Reported loss before tax of $9.1m (FY20: $11.2m) is after incurring a purchase price adjustment ($6.0m), exchange adjustments on borrowings ($5.4m) and impairment of intangible assets ($3.4m).
Revenue
Total revenue for the year was $246.5m, an increase of $199.1m from $47.4m in 2020. The increase in revenue was in part driven by the acquisition of Eschenbach in late 2020, which contributed $186.7m of revenue in 2021. Excluding the Eschenbach and Norville acquisitions, revenue grew from $40.3m to $52.1m, an increase of $11.8m or 29%.
Gross margin
The Group's gross margin overall was 47.0% compared to 43.3% in 2020, an increase of 3.7 points from the previous year. This increase was partly due to the mix of sales between independent opticians and our traditional chain business.
Adjusted Underlying EBITDA
The Group targets Adjusted Underlying EBITDA as its key operating performance indicator. Our Adjusted Underlying EBITDA increased by $21.8m, from $5.8m to $27.6m, an increase of 375% in 2021.
The below table shows how Underlying EBITDA is calculated:
| 2021 $'000 |
2020 $'000 |
|
| Revenue | 246,471 | 47,415 |
| Gross profit | 115,771 | 20,522 |
| Operating and distribution expenses, net of other operating income | (114,230) | (23,462) |
| Operating profit/(loss) | 1,541 | (2,940) |
| Movement in fair value on derivative | - | (740) |
| Operating profit/(loss) after movement in fair value on derivative | 1,541 | (3,680) |
| Add back: Amortisation and impairment on intangible assets | 11,020 | 1,607 |
| Add back: Depreciation | 7,430 | 2,299 |
| EBITDA | 19,991 | 226 |
| Add back: Share-based payment expense | 1,484 | 1,706 |
| Add back: Restructuring costs | - | 185 |
| Add back: Foreign exchange on funding for acquisitions | - | 1,085 |
| Add back: Post-acquisition insurance costs | - | 563 |
| Add back: Movement in fair value on derivative | - | 740 |
| Underlying EBITDA | 21,475 | 4,505 |
| Operating profit/(loss) | 1,541 | (2,940) |
| Non-underlying costs | (2,588) | (5,763) |
| Negative goodwill on bargain purchase | - | 506 |
| Movement in fair value on derivative | - | (740) |
| Exchange adjustment on borrowings | (5,418) | (382) |
| Less: Net finance costs | (2,657) | (1,844) |
| Add: Share of (loss)/profit of associate | (10) | - |
| Loss before income tax | (9,132) | (11,163) |
| Tax | 3,697 | 2,250 |
| (Loss)/profit for the year | (5,435) | (8,913) |
| Underlying EBITDA | 21,475 | 4,505 |
| Add back: Purchase Price Allocation ('PPA') release on Eschenbach inventory through cost of sales | 5,991 | - |
| Add back: Underlying EBITDA (loss) for acquisitions in the period | 90 | 1,295 |
| Adjusted underlying EBITDA | 27,556 | 5,800 |
Operating expenses
Our operating expenses increased from $23.5m in 2020 to $114.2m in 2021. The increase was driven primarily by the additional operating expenses of Eschenbach and Norville. A more detailed analysis of these expenses is shown below:
| Year Ended 31 December 2021 $'000 |
Acquisition Eschenbach & Norville $'000 |
Adjusted Year Ended 31 December 2021 $'000 |
Adjusted Year Ended 31 December 2020 excluding Eschenbach & Norville $'000 |
Percentage Change | ||||||
| Revenue | 246,471 | 194,290 | 52,181 | 40,298 | 29% | |||||
| Gross Profit | 115,771 | 91,940 | 23,831 | 17,532 | 36% | |||||
| Distribution | (7,795) | (6,640) | (1,155) | (451) | 156% | |||||
| Wages&Salaries | (62,160) | (51,716) | (10,444) | (9,280) | 13% | |||||
| Admin | (44,275) | (31,035) | (13,240) | (9,080) | 46% | |||||
| Total Operating expenses | (114,230) | (89,391) | (24,839) | (18,811) | 32% |
The table below sets out our operating costs adjusted for the acquisition of Eschenbach as a percentage of revenue driven in the year adjusted.
| Adjusted Year Ended 31 December 2021 $'000 |
Percentage of revenue | Adjusted Year Ended 31 December 2020 $'000 |
Percentage of revenue | Percentage change | ||||
| Revenue | 52,181 | - | 40,298 | - | - | |||
| Cost of Sales | (23,831) | 46% | (17,532) | 44% | ↑2% | |||
| Distribution | (1,155) | 2% | (451) | 1% | ↑1% | |||
| Wages& Salaries | (10,444) | 20% | (9,280) | 23% | ↓3% | |||
| Admin | (13,240) | 25% | (9,080) | 23% | ↑2% |
Loss before tax
In 2021 the Group made a statutory loss before tax of $9.1m (FY20: loss $11.2m), a reduction in loss of $2.1m. The Group made an Adjusted Underlying EBITDA of $27.6m (FY20: $5.8m). The Group strategy is to grow the business by making strategic earnings enhancing acquisitions, and also to improve the performance of the organic businesses. Acquisitions affect the difference between our Adjusted Underlying EBITDA and the loss before tax in the form of one-off items which are included in the reconciliation below:
| 2021 | 2020 | |
| $m | $m | |
| Adjusted Underlying EBITDA | 27.6 | 5.8 |
| Non-cash adjustments | ||
| 1. Depreciation and amortisation | (15.0) | (3.9) |
| 2. Purchase pricing adjustments | (6.0) | - |
| 3. Intangible asset impairment | (3.4) | - |
| 4. Exchange adjustments on borrowings | (5.4) | (0.4) |
| 5. Share based payment | (1.5) | (1.7) |
| 6. Other | (0.1) | (3.4) |
| SUB TOTAL | (3.8) | (3.6) |
| Non-underlying costs | (2.6) | (5.8) |
| Net finance costs | (2.7) | (1.8) |
| Loss before tax | (9.1) | (11.2) |
Key items impacting the current year's results are as follows:
Purchase pricing adjustment
On 16 December 2020 following the acquisition of the Eschenbach Group of companies, finished goods acquired were revalued to their fair value in accordance with IFRS3. This inventory has sold through in 2021 and has given rise to an additional one-off charge of $5.99m.
Impairment of intangible assets
During the year, the Board reviewed Group activities in order to consider any indicators of impairment which may affect the carrying value of intangible assets. It was noted that an indicator of impairment arose relating to a customer relationship with a carrying value of $3.7m as at 31 December 2021. As a result, an impairment review was completed to compare the recoverable amount of the asset against its carrying value. This review has given rise to a non-cash impairment charge of $3.45m.
Exchange adjustments on borrowings
Following the acquisition of Eschenbach in December 2020, INSPECS Ltd acquired the shareholder loans of Eschenbach which are denominated in Euros. The functional currency of INSPECS Ltd is GBP giving rise to exchange adjustments recognised in the year.
Tax
Following the acquisition of the Killine Group of companies in 2017, the Group provided an uncertain tax reserve for potential challenges in relation to transfer pricing. During 2021, a further transfer pricing review was undertaken by our external advisors and following this review, part of the uncertain tax provision amounting to $2.2m has been released. During 2022, a further review of uncertain tax provisions is being carried out in relation to the remaining balance of $0.6m.
Prior year adjustments
During the current period it was determined that certain balances reported as cash balances in 2020 that pertained to Eschenbach, did not meet the requirement that they are readily convertible into cash. A prior year adjustment has therefore been made to reclassify $6.3m from cash and cash equivalents to trade and other receivables in the comparative balance sheet.
During the year, a detailed review of TURA Inc., a subsidiary of the Eschenbach Group that was acquired in December 2020, was undertaken. Adjustments have been made to the acquisition balance sheet in 2020 following this review. The net impact of these adjustments resulted in a increase to goodwill of $744k (see note 2 of the financial statements for further details).
Cash position
During the year the Group generated $25.2m in cash flows from operating activities (2020: $403k). The Group has used the cash generated to continue to invest in new plant and equipment, further acquisitions and enhancing the Group's long term growth strategy. An analysis of how the Group has deployed its free cash flow in the year is set out below.
| 31 December 2021 $'000 |
31 December 2020 $'000 |
|
| Cash and cash equivalents at the beginning of year | 23,776 | 6,502 |
| Net cash from/used in operating activities | 20,017 | (748) |
| Net cash used in investing activities | (15,661) | (110,658) |
| Net cash from financing activities | 1,704 | 128,712 |
| Increase in cash and cash equivalent | 6,060 | 17,306 |
| Foreign exchange movements in the year | (77) | (32) |
| Cash and cash equivalents including overdrafts at the year end | 29,759 | 23,776 |
| The breakdown of net cash used in investing activities: | ||
| Purchase of intangible fixed assets | (1,508) | (167) |
| Purchase of property, plant and equipment | (6,137) | (2,452) |
| Acquisition of subsidiaries, net of cash acquired | (8,134) | (108,075) |
| Interest received | 118 | 36 |
Working capital
The Group closely monitors its working capital position to ensure that it has sufficient resources to meet its day-to-day requirements and to fund further investing activities to supply its customer base. The Group's working capital position is set out below.
| Year Ended 31 December 2021 | Year Ended 31 December 2020 | |||||||
| Total | >30 Days | >60 Days | >90 Days | Total | >30 Days | >60 Days | >90 Days | |
| Debtors | 29.4m | 18.4m | 6.6m | 4.4m | 25.1m | 11.8m | 6.9m | 6.4m |
| Percentage | 100% | 63% | 22% | 15% | 100% | 47% | 28% | 25% |
Inventory
Our sales to inventory ratio adjusted for the Eschenbach acquisition increased from 3.8 to 4.4.
| 31 December 2021 | 31 December 2020 Less Eschenbach | 31 December 2020 | |
| Turnover | 246.5m | 44.4m | 47.4m |
| Inventory | 55.7m | 11.6m | 55.5m |
| Sales to inventory ratio | 4.4 | 3.8 | 0.9 |
Current asset ratio
The current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations, or those due within one year.
In December 2021 the Group acquired two entities and the worldwide trademarks, rights and licences to the Hardy Amies brand, this resulted in an increase in current liabilities. The acquisitions are for the ongoing benefit of the Group, and not the short-term position.
| Year Ended 31 December 2021 |
Year Ended 31 December 2020 |
|
| Current Assets | 131.1m | 124.7m |
| Current Liabilities | 82.9m | 68.4m |
| Ratio | 1.6 | 1.8 |
Quick ratio
The quick ratio is an indicator of a company's short-term liquidity position and measures a company's ability to meet its short-term obligations with its most liquid assets. The small reduction in the ratio is due to the acquisitions made at the end of the year, as noted in the current asset ratio.
| Year Ended 31 December 2021 |
Year Ended 31 December 2020 |
|
| Current Assets | 131.1m | 124.7m |
| Less Inventory | (55.7)m | (55.5)m |
| 75.4m | 69.2m | |
| Current Liabilities | 82.9m | 68.4m |
| Ratio | 0.9 | 1 |
Net debt
During the year the Group increased its $35.0m Revolving Credit Facility (RCF) with HSBC by $1.5m, which was drawn down to $35.3m at 31 December 2021. A new multi-currency term loan of $18.7m was agreed with HSBC. An additional $10.0m RCF was agreed with HSBC, which was drawn down to $6.0m at 31 December 2021.
The additional financing received during the period allowed the consolidation of loans from across the Group, this included the repayments of loans within the Eschenbach Group, repayment of COVID-19 support loans, and the acquisitions of BoDe and EGO Eyewear.
The Group has significant cash reserves, resulting in the net debt position as set out below.
| Year Ended 31 December 2021 |
Year Ended 31 December 2020 |
|
| Cash at Bank | 29.8 | 26.4 |
| Borrowings | (62.5) | (59.6) |
| Leasing | (22.4) | (20.3) |
| Net Debt | (55.1) | (53.5) |
| Net Debt (excluding leasing) | (32.7) | (33.2) |
Depreciation and amortisation
The increase in depreciation and amortisation is driven by a full year of the charge on the assets of the Eschenbach Group acquired on the 16 December 2020.
| 31 December 2021 | 31 December 2020 | |
| Depreciation | 7.4m | 2.3m |
| Amortisation | 7.6m | 1.6m |
| Total | 15.0m | 3.9m |
Leverage (using debt to equity ratio)
The Group's leverage position is shown below including and excluding leasing finance:
| 2021 | 2020 | |
| Including leasing finance | 1.9 | 1.6 |
| Excluding leasing finance | 1.2 | 1.4 |
| Required ratio | 2.0 | 2.5 |
The Group's leverage is constantly updated, and a rolling projection for 12 months is reviewed to ensure compliance with the Group's covenants.
Earnings per share
The Group's loss per share decreased from $(0.13) in 2020, to $(0.05) in 2021, a reduction of 62% per share. On an Adjusted Underlying EBITDA basis, earning per share increased from $0.08 in 2020 to $0.27 in 2021, an increase of 225% per share.
Dividend
The Group intends to propose a dividend of 1.25p per share.
Subject to approval by shareholders at the Annual General Meeting to be held on 11 August 2022, the dividend will be paid on 6 October 2022. The ex-dividend date is 1 September 2022 and the record date is 2 September 2022.
Chris Kay
Group Chief Financial Officer
29 June 2022
CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2021
| Notes | 2021 $'000 |
2020 $'000 |
|
| Revenue | 4 | 246,471 | 47,415 |
| Cost of sales | 7,10 | (130,699) | (26,893) |
| Gross profit | 115,772 | 20,522 | |
| Distribution costs | (7,795) | (787) | |
| Administrative expenses | 7,10 | (106,436) | (22,675) |
| Operating profit/(loss) | 1,541 | (2,940) | |
| Non-underlying costs | 8 | (2,588) | (5,763) |
| Negative goodwill on bargain purchase | - | 506 | |
| Movement in derivatives | - | (740) | |
| Exchange adjustment on borrowings | (5,418) | (382) | |
| Finance costs | 9 | (2,775) | (1,880) |
| Finance income | 9 | 118 | 36 |
| Share of profit of associate | (10) | - | |
| Loss before income tax | (9,132) | (11,163) | |
| Income tax credit | 11 | 3,697 | 2,250 |
| Loss for the year | (5,435) | (8,913) | |
| Attributable to: Equity holders of the Parent |
(5,435) | (8,913) | |
| Earnings per share | |||
| Basic loss for the year attributable to the equity holders of the Parent | 12 | $(0.05) | $(0.13) |
| Diluted loss for the year attributable to the equity holders of the Parent | 12 | $(0.05) | $(0.13) |
CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME
For the year ended 31 December 2021
| 2021 $'000 |
2020 $'000 |
|
| Loss for the year | (5,435) | (8,913) |
| Other comprehensive income/(loss) | ||
| Exchange differences on translation of foreign operations | 2,907 | (194) |
| Other comprehensive income/(loss) for the year, net of income tax | 2,907 | (194) |
| Total comprehensive loss for the year | (2,528) | (9,107) |
| Attributable to: Equity holders of the Parent | (2,528) | (9,107) |
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at 31 December 2021
| Notes | 2021 $'000 |
2020 Restated $'000 |
|
| ASSETS | |||
| Non-current assets | |||
| Goodwill | 81,359 | 72,708 | |
| Intangible assets | 54,454 | 56,305 | |
| Property, plant and equipment | 24,569 | 22,460 | |
| Right-of-use asset | 22,269 | 20,379 | |
| Investment in associate | 48 | 57 | |
| Deferred tax | 12,540 | 12,771 | |
| 195,239 | 184,680 | ||
| Current assets | |||
| Inventories | 55,664 | 55,495 | |
| Trade and other receivables | 42,229 | 41,186 | |
| Tax receivables | 3,468 | 1,556 | |
| Cash and cash equivalents | 29,759 | 26,418 | |
| 131,120 | 124,655 | ||
| Total assets | 326,359 | 309,335 | |
| EQUITY | |||
| Shareholders' equity | |||
| Called up share capital | 1,389 | 1,384 | |
| Share premium | 122,291 | 121,940 | |
| Foreign currency translation reserve | 2,818 | (89) | |
| Share option reserve | 2,001 | 867 | |
| Merger reserve | 7,296 | 7,296 | |
| Retained earnings | 9,429 | 14,429 | |
| Total equity | 145,224 | 145,827 |
| Notes | 2021 $'000 |
2020 Restated $'000 |
|
| LIABILITIES | |||
| Non-current liabilities | |||
| Financial liabilities - borrowings | |||
| Interest-bearing loans and borrowings | 69,194 | 70,391 | |
| Contingent and deferred consideration | 14 | 8,505 | - |
| Deferred tax | 20,517 | 24,678 | |
| 98,216 | 95,069 | ||
| Current liabilities | |||
| Trade and other payables | 53,317 | 42,902 | |
| Right of return liabilities | 4 | 11,100 | 12,145 |
| Financial liabilities - borrowings | |||
| Interest-bearing loans and borrowings | 13,289 | 6,830 | |
| Bank overdrafts | - | 2,642 | |
| Invoice discounting | 2,433 | - | |
| Tax payable | 2,780 | 3,920 | |
| 82,919 | 68,439 | ||
| Total liabilities | 181,135 | 163,508 | |
| Total equity and liabilities | 326,359 | 309,335 |
The financial statements were approved by the Board of Directors on 29 June 2022.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2021
| Called up share capital $'000 |
Share premium $'000 |
Foreign currency translation reserve $'000 |
Share option reserve $'000 |
Retained earnings $'000 |
Merger reserve $'000 |
Total equity $'000 |
|
| Balance at 1 January 2020 | 62 | 21,628 | 1,031 | 2,840 | 5,787 | - | 31,348 |
| Changes in equity | |||||||
| Loss for the year | - | - | - | - | (8,913) | - | (8,913) |
| Other comprehensive loss | - | - | (194) | - | - | - | (194) |
| Total comprehensive loss | - | - | (194) | - | (8,913) | - | (9,107) |
| Issue of share capital | 603 | 119,215 | - | - | - | (22) | 119,796 |
| Exercise of share options | 99 | 2,725 | - | (3,140) | 2,973 | - | 2,657 |
| Share-based payment | - | - | - | 1,133 | - | - | 1,133 |
| Share for share exchange and creation of merger reserve | 620 | (21,628) | (926) | 34 | (46,902) | 68,802 | - |
| Capital reduction | - | - | - | - | 61,484 | (61,484) | - |
| Balance at 31 December 2020 | 1,384 | 121,940 | (89) | 867 | 14,429 | 7,296 | 145,827 |
| Changes in equity | |||||||
| Loss for the year | - | - | - | - | (5,435) | - | (5,435) |
| Other comprehensive income | - | - | 2,907 | - | - | - | 2,907 |
| Total comprehensive loss | - | - | 2,907 | - | (5,435) | - | (2,528) |
| Exercise of share options | 5 | 351 | - | (350) | 435 | - | 441 |
| Share-based payments | - | - | - | 1,484 | - | - | 1,484 |
| Balance at 31 December 2021 | 1,389 | 122,291 | 2,818 | 2,001 | 9,429 | 7,296 | 145,224 |
CONSOLIDATED STATEMENT OF CASHFLOWS
For the year ended 31 December 2021
| Notes | 2021 $'000 |
2020 Restated $'000 |
|
| Cash flows from operating activities | 13 | 24,895 | 403 |
| Interest paid | (1,968) | (1,144) | |
| Tax paid | (2,910) | (7) | |
| Net cash from/(used in) operating activities | 20,017 | (748) | |
| Cash flows from investing activities | |||
| Purchase of intangible fixed assets | (1,508) | (167) | |
| Purchase of property, plant and equipment | (6,137) | (2,452) | |
| Acquisition of subsidiaries, net of cash acquired | 6 | (8,134) | (108,075) |
| Interest received | 9 | 118 | 36 |
| Net cash used in investing activities | (15,661) | (110,658) | |
| Cash flow from financing activities | |||
| Proceeds from the issue of shares | - | 115,761 | |
| Proceeds from the exercise of share options | 355 | - | |
| New bank loans in the year | 26,751 | 17,187 | |
| Bank loan principal repayments in year | (22,873) | (39) | |
| Transaction costs on debt refinancing | (782) | (810) | |
| Movement in invoice discounting facility | 2,477 | (2,577) | |
| Principal payments on leases | (4,224) | (810) | |
| Net cash from financing activities | 1,704 | 128,712 | |
| Increase in cash and cash equivalents | 6,060 | 17,306 | |
| Cash and cash equivalents including overdraft at beginning of the year | 23,776 | 6,502 | |
| Effect of foreign exchange rate changes | (77) | (32) | |
| Cash and cash equivalents including overdraft at end of year | 29,759 | 23,776 |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2021
1. GENERAL INFORMATION
INSPECS Group plc is a public company limited by shares and is incorporated in England and Wales (company number 11963910). The address of the Company's principal place of business is 7-10 Kelso Place, Upper Bristol Road, Bath BA1 3AU.
The principal activity of the Group in the year was that of design, production, sale, marketing and distribution of high fashion eyewear, lenses and OEM products worldwide. The principal activity of the Company was that of a holding company.
2. ACCOUNTING POLICIES
Basis of preparation
The Consolidated Financial Statements have been prepared in accordance with UK adopted international accounting standards, and those parts of the Companies Act 2006 applicable to companies reporting under International Financial Reporting Standards ('IFRS').
The Consolidated Financial Statements have been prepared on a historical cost basis, except where fair value measurement is required under IFRS as described below in the accounting policies.
The presentational currency for the Consolidated and Parent Company Financial Statements is the United States Dollar (USD) rounded to the nearest thousand. The consolidated Financial Statements provide comparative information in respect of the year ended 31 December 2020.
Going concern
The financial statements have been prepared on the going concern basis as the Directors have assessed that there is a reasonable expectation that the Group will be able to continue in operation and meet its commitments as they fall due over the going concern period to 31 December 2023.
The Board considered a base case, two downside scenarios and a reverse stress test to assess the effect of further COVID-19 restrictions on the supply chain, increased costs of living and reduced consumer demand, sales, profitability, and cash generation. The scenarios were as follows:
· The base case is the board approved budget which has been updated to April 2022. The budget was prepared assuming that some COVID-19 restrictions, consistent with those in place in January 2021, are in place in 2022 and 2023. The restrictions in place at this time resulted in reduced footfall on the high streets and at airports resulting in reduced sales of non-prescription items. Consideration has also been made of increased costs and challenges in fulfilling orders because of the risk of disruptions in the supply chain.
· The budget does not assume any acquisition expenditure.
· The budget was prepared before the Ukrainian/Russian conflict. However, the Group does not currently have any operations in Russia or Ukraine or source materials from these locations. The main effect from the current crisis is on raw material costs driven by the increase in the price of oil. The Group expects to be able to maintain its budgeted margin throughout 2022 and 2023.
· A downside scenario updated the base case scenario with a further 10% reduction in sales from October 2022 as the Group has certainty over its customer orders up to this point. We have also assumed some cost saving at a conservative level by reducing expected bonus payments to senior employees. A second downside scenario was performed which used the same assumptions but made consideration of the poor trading in April 2022 due to a lockdown in Shanghai which resulted in a significant number of orders being held at the port.
· A reverse stress test scenario updated our base case scenario with a further 22% reduction in sales and 3% reduction in gross margin from October 2022 which results in a covenant breach in June 2023. We also assumed some controllable cost saving by a reduction in employee expenses and removed discretionary CAPEX spending.
The Group's borrowings with HSBC, amounting to $54.8m, contains three covenants; leverage ratio, cashflow cover and interest cover. Compliance on these covenants is based on 12 monthly rolling EBITDA results and 12 month rolling interest payments respectively. In June 2022, the Group successfully renegotiated an amendment to the covenants with HSBC whereby the required leverage ratio was increased to December 2022 and the lease on the new Norville factory is treated as a 10-year lease for the purposes of calculating the net debt figure used in the leverage ratio. This increased the headroom available to the business in response to adverse trading conditions in April 2022 as mentioned above that saw the headroom reduced. The cash available to the business means that the covenants are more sensitive than liquidity.
The Group has considered the reasonably plausible downside scenarios which are informed by the degree of headroom on covenants at December 2021 and March 2022 which were limited. These scenarios do not result in any covenant breach throughout the going concern period. The group mitigates this risk by having diverse delivery routes and has the ability to withstand further increases in freight costs. Because of the aggregate improvement in the past 12 months trading since COVID restrictions were lifted across the UK and Europe, we forecast that headroom will increase to 27.9% at the next covenant test in June 2022.
Further, the Group has considered the reverse stress test scenario, which models a breach in the leverage ratio covenant test in June 2023. In this case, the Directors have available the cost saving strategies that were implemented in 2020 that could be reintroduced with no support from the Government. However, such a scenario would see 2023 underlying EBITDA being less than half of that achieved in 2021, a year that was impacted by COVID-19 and when the Group had fewer revenue and profit generating entities. As a result, the directors consider that this scenario is a remote possibility.
On this basis and as outlined in the Director's report, the Board has reasonable expectations that the Group and Company has adequate resources to continue as a Going Concern to 31 December 2023.
Basis of consolidation
The consolidated financial information incorporates the Financial Statements of the Group and all of its material subsidiary undertakings. The Financial Statements of all Group companies are adjusted, where necessary, to ensure the use of consistent accounting policies. Acquisitions are accounted for under the acquisition method from the date control passes to the Group. On acquisition, the assets and liabilities of a subsidiary are measured at their fair values. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recorded as goodwill.
Business combinations and goodwill
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, which is measured at acquisition date fair value, and the amount of any non-controlling interests in the acquiree. Acquisition-related costs are expensed as incurred.
When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date.
Goodwill is initially measured at cost (being the excess of the aggregate of the consideration transferred over the net identifiable assets acquired and liabilities assumed). If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the Group reassesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognised at the acquisition date. If the reassessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognised in profit or loss.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is tested annually for impairment. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group's cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.
Investment in associate
An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not in control or joint control over those policies.
The considerations made in determining significant influence or joint controls are similar to those necessary to determine control over subsidiaries. The Group's investment in its associate is accounted for using the equity method.
Under the equity method, the investment in an associate is initially recognised at cost. The carrying amount of the investment is adjusted to recognise changes in the Group's share of net assets of the associate since the acquisition date.
The income statement reflects the Group's share of the results of operations of the associate. Any change in OCI of those investees is presented as part of the Group's OCI.
Current and non-current classifications
The Group presents assets and liabilities in the statement of financial position based on current/non-current classification.
An asset is considered current when it is:
· Expected to be realised or intended to be sold or consumed within the usual parameters of trading activity and as a minimum within 12 months after the reporting period;
Or
· Cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period.
The Group classifies all other assets as non-current.
A liability is current when:
· It is expected to be settled in the normal parameters of trading activity and as a minimum is due to be settled within 12 months after the reporting period;
Or
· There is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting period.
The Group classifies all other liabilities as non-current.
Deferred tax assets and liabilities are classified as non-current assets and liabilities.
Revenue recognition
Revenue from the sales of goods is recognised at the point in time when control of the asset is transferred to the customer, generally on delivery of the goods. Revenue is recognised at the fair value of the consideration received or receivable for sale of goods to external customers in the ordinary nature of the business. The fair value of the consideration takes into account trade discounts, settlement discounts, volume rebates and the right of return.
Rights of return
Under IFRS 15 a sale with right of return is recognised if the customer receives any combination of the following:
· A full or partial refund of any consideration paid;
· A credit that can be applied against amounts owed, or that will be owed, to the entity; and
· Another product in exchange.
The Group includes within the liability arrangements where the Group has historically accepted a right to return with the combination of a credit being applied against amounts owed or where another product is offered in exchange. The Group estimates the impact of potential returns from customers based on historical data on returns. A refund liability is recognised for the goods that are expected to be returned (i.e. the amount not included in the transaction price). A right of return asset (and corresponding adjustment to cost of sales) is also recognised for the right to recover the goods from the customer, to the extent that these goods are not considered impaired.
Intangible assets (other than goodwill)
Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses. Internally generated intangibles are not capitalised and the related expenditure is reflected in profit or loss in the period in which the expenditure is incurred.
Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are considered to modify the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the profit or loss in the expense category that is consistent with the function of the intangible assets.
An intangible asset is derecognised upon disposal (i.e. at the date the recipient obtains control) or when no future economic benefits are expected from its use or disposal. Any gain or loss arising upon derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the profit or loss.
Amortisation is calculated on a straight-line basis over the estimated useful lives of the assets as follows:
Patents and licences 1-4 years
Computer software 3 years
Trademarks 5-10 years
Customer relationships 8-20 years
Customer order book 6 months
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses. The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use.
Expenditure incurred after items of property, plant and equipment have been put into operation, such as repairs and maintenance, is charged to profit or loss in the period in which it is incurred. In situations when it is probable that future economic benefits associated with the item will flow to the Group and the cost can be measured reliably then the expenditure for a major inspection is capitalised in the carrying amount of the asset as a replacement. Where significant parts of property, plant and equipment are required to be replaced at intervals, the Group recognises such parts as individual assets with specific useful lives and depreciates them accordingly.
Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets as follows:
Freehold Property 33 years
Leasehold Improvements over the lease term
Fixtures and Fittings 5 years
Computer Equipment 3-5 years
Plant and Machinery 3-7 years
Construction in Progress is not depreciated
The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable.
Where parts of an item of property, plant and equipment have different useful lives, the cost of that item is allocated on a reasonable basis among the parts and each part is depreciated separately. Residual values, useful lives and the depreciation method are reviewed, and adjusted if appropriate, at least at each financial year-end.
An item of property, plant and equipment including any significant part initially recognised is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss on disposal or retirement recognised in profit or loss in the year the asset is derecognised is the difference between the net sales proceeds and the carrying amount of the relevant asset.
Leases
The Group applied a single recognition and measurement approach for all leases for which it is the lessee, except for short-term leases and leases of low-value assets. The Group recognises right-of-use assets representing the right to use the underlying assets and lease liabilities to make lease payments.
Right-of-use asset
The Group recognises right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and the estimated useful lives of the assets, as follows:
Leasehold Property 2-5 years
Plant and Machinery 3 years
Motor Vehicles 3 years
Lease liabilities
At the commencement date of the lease, the Group recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in substance fixed payments) less any lease incentives receivable. They also include any amounts expected to be paid under residual value guarantees.
In calculating the present value of lease payments, the Group uses its incremental borrowing rate at the lease commencement date because the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the lease payments or a change in the assessment of an option to purchase the underlying asset.
The Group's lease liabilities are included in interest-bearing loans and borrowings.
The Group applies the short-term lease recognition exemption to its short-term leases of machinery and equipment (i.e. those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases of office equipment that are considered to be low value. Lease payments on short-term leases and leases of low-value assets are recognised as expenses on a straight-line basis over the lease term.
Inventories
Inventories are stated at the lower of cost and estimated selling price less costs to sell after making due allowance for obsolete and slow-moving items. Inventories are recognised as an expense in the period in which the related revenue is generated.
Cost is determined on an average cost basis. Cost includes the purchase price and other directly attributable costs to bring the inventory to its present location and condition.
At the end of each period, inventories are assessed for impairment. If an item of inventory is impaired, the identified inventory is reduced to its selling price less costs to complete and sell and an impairment charge is recognised in the income statement.
Royalties
Royalties payable reflect balances owed to brand owners for the right to use the brand name. The royalty is payable based on a pre-agreed percentage of sales volumes, with some arrangements also having minimum royalty payments for specific periods. Royalties payable are recognised on delivery of the products covered by such arrangements, with an additional accrual made where it is considered that the sales level required to meet the minimum payment will not be met.
Financial instruments - initial recognition and subsequent measurement
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
Financial assets
Initial recognition and measurement
Financial assets are classified at initial recognition and subsequently measured at amortised cost.
Subsequent measurement
For purposes of subsequent measurement, the financial assets of the Group are classified as financial assets at amortised cost (debt instruments).
Financial assets at amortised cost (debt instruments)
Financial assets at amortised cost are subsequently measured using the effective interest ('EIR') method and are subject to impairment. Gains and losses are recognised in profit or loss when the asset is derecognised, modified or impaired.
The Group's financial assets at amortised cost include trade receivables, other receivables and loans to Group undertakings.
The Group does not have any financial assets at fair value through OCI or financial assets at fair value through profit or loss.
Derecognition
A financial asset (or, where applicable, a part of a financial asset or part of a Group of similar financial assets) is primarily derecognised (i.e. removed from the Group's consolidated statement of financial position) when the rights to receive cash flows from the asset have expired.
When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if, and to what extent, it has retained the risks and rewards of ownership.
When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the Group continues to recognise the transferred asset to the extent of its continuing involvement. In that case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained.
Financial liabilities
Initial recognition and measurement
Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings or payables, as appropriate.
All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs.
The Group's financial liabilities include trade and other payables, loans and borrowings including bank overdrafts.
Subsequent measurement
For purposes of subsequent measurement, financial liabilities are classified in two categories:
· Financial liabilities at fair value through profit or loss.
· Financial liabilities at amortised cost (loans and borrowings).
As at 31 December 2021 and 31 December 2020, the Group has not designated any financial liability as at fair value through profit or loss.
Financial liabilities at amortised cost (loans and borrowings)
After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the EIR method. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the EIR amortisation process.
Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance costs in the income statement. This category generally applies to interest-bearing loans and borrowings.
Derecognition
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the income statement.
Refinancing
Where a loan arrangement is replaced with a subsequent facility which is materially different in relation to repayment structure or interest rate, any capitalised loan arrangement fees in respect of the previous loan are expensed, with transaction costs relating to the new loan capitalised and held against the value of the related liability.
Impairment of financial assets
The Group recognises an allowance for expected credit losses ('ECLs') for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive.
For trade receivables and contract assets, the Group applies a simplified approach in calculating ECLs. Therefore, the Group does not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date.
The Group considers a financial asset in default when internal or external information indicates that the Group is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Group. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows.
Cash and cash equivalents
For the purpose of the consolidated statement of cash flows, cash and cash equivalents comprise cash on hand and demand deposits, and short-term highly liquid investments that are readily convertible into known amounts of cash, that are subject to an insignificant risk of changes in value, and have a short maturity of generally within three months when acquired, less bank overdrafts which are repayable on demand and form an integral part of the Group's cash management.
For the purpose of the consolidated statement of financial position, cash and cash equivalents comprise cash on hand and at banks, including term deposits, and assets similar in nature to cash, which are not restricted as to use.
Classification of shares as debt or equity instruments
Financial instruments issued by the Group are classified as equity only to the extent that they do not meet the definition of a financial liability. An equity instrument is a contract that evidences a residual interest in assets or an entity after deducting all its liabilities. Accordingly, a financial instrument is treated as equity if:
· there is no contractual obligation to delivery cash or other financial assets or to exchange financial assets or liabilities on terms that may be unfavourable; and
· the instrument is a non-derivative that contains no contractual obligation to deliver a variable number of shares or is a derivative that will be settled only by the Company exchanging a fixed amount of cash or other assets for a fixed number of the Company's own equity instruments.
Costs associated with the issue or sale of equity instruments are allocated against equity to the extent that the issue is a new issue, or expensed to the profit and loss for existing equity instruments.
Share-based payments
Employees (including senior executives) of the Group receive remuneration in the form of share-based payments, whereby employees render services as consideration for equity instruments (equity-settled transactions).
The cost of equity-settled transactions is determined by the fair value at the date when the grant is made using an appropriate valuation model, further details of which are given in the detailed notes to the accounts. That cost is recognised in employee benefits expense together with a corresponding increase in share option reserve, over the period in which the service and, where applicable, the performance conditions are fulfilled (the vesting period).
The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group's best estimate of the number of equity instruments that will ultimately vest. The expense or credit in the income statement for a period represents the movement in cumulative expense recognised as at the beginning and end of that period.
Service performance conditions are not taken into account when determining the grant date fair value of awards, but the likelihood of the conditions being met is assessed as part of the Group's best estimate of the number of equity instruments that will ultimately vest. Any other conditions attached to an award, but without an associated service requirement, are considered to be non-vesting conditions. Non-vesting conditions are reflected in the fair value of an award and lead to an immediate expensing of an award unless there are also service and/or performance conditions.
No expense is recognised for awards that do not ultimately vest because service conditions have not been met. Where awards include a non-vesting condition, the transactions are treated as vested irrespective of whether the non-vesting condition is satisfied, provided that all other performance and/or service conditions are satisfied.
If the terms of an equity-settled award are modified, the minimum expense recognised is the grant date fair value of the unmodified award provided the original vesting terms of the award are met. An additional expense, measured as at the date of modification, is recognised for any modification that increases the total fair value of the share-based payment transaction or is otherwise beneficial to the employee. Where an award is cancelled by the entity or by the counterparty, any remaining element of the fair value of the award is expensed immediately through profit or loss. The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share, to the extent that they are dilutive.
Taxation
Income tax comprises current and deferred tax. Income tax relating to items recognised outside profit or loss is recognised outside profit or loss, either in other comprehensive income or directly in equity.
Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period, taking into consideration interpretations and practices prevailing in the countries in which the Group operates.
Tax liabilities are recognised when it is considered probable that there will be a future outflow of funds to a taxing authority. Uncertainties regarding availability of tax losses, in respect of enquiries raised and additional tax measurements issued, may be measured using the expected value method or single best estimate approach, depending on the nature of the uncertainty. Tax provisions are based on management's interpretation of country-specific tax law and the likelihood of settlement. Management uses professional firms and previous experience when assessing tax risks.
Deferred tax is provided, using the liability method, on all temporary differences at the end of the reporting period between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognised for all taxable temporary differences, except:
· when the deferred tax liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
· in respect of taxable temporary differences associated with investments in subsidiaries, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred tax assets are recognised for all deductible temporary differences, the carry forward of unused tax credits and any unused tax losses. Deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, the carryover of unused tax credits and unused tax losses can be utilised, except:
· when the deferred tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
· in respect of deductible temporary differences associated with investments in subsidiaries, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.
The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at the end of each reporting period and are recognised to the extent that it has become probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.
Deferred tax assets and deferred tax liabilities are offset if and only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to income taxes levied by the same taxation authority on either the same taxable entity and the same taxation authority or different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.
Foreign currencies
These Financial Statements are presented in USD, which is the Group's presentational currency. Each entity in the Group determines its own functional currency and items included in the Financial Statements of each entity are measured using that functional currency. Foreign currency transactions recorded by the entities in the Group are initially recorded using their respective functional currency rates prevailing at the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency rates of exchange ruling at the end of the reporting period. Differences arising on settlement or translation of monetary items are recognised in profit or loss.
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was measured.
The gain or loss arising on translation of a non-monetary item measured at fair value is treated in line with the recognition of the gain or loss on change in fair value of the item (i.e., translation difference on the item whose fair value gain or loss is recognised in other comprehensive income or profit or loss is also recognised in other comprehensive income or profit or loss, respectively).
The functional currency of INSPECS Group plc is GBP. The functional currencies of certain overseas subsidiaries are currencies other than the GBP. At the end of the reporting period, the assets and liabilities of these entities are translated into GBP at the exchange rates prevailing at the end of the reporting period and their income statements are translated into GBP at the average exchange rates for the year.
The resulting exchange differences are recognised in other comprehensive income and accumulated in the foreign currency translation reserve. On disposal of a foreign operation, the component of other comprehensive income relating to that particular foreign operation is recognised in profit or loss. On translation to USD for presentation, the assets and liabilities of the consolidated entity are translated into USD at the exchange rates prevailing at the end of the reporting period, equity balances are translated at historic exchange rates and the income statement is translated into USD at the average exchange rates for the year.
Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on acquisition are treated as assets and liabilities of the foreign operation and translated at the closing rate at the period end.
For the purpose of the consolidated statement of cash flows, the cash flows of overseas subsidiaries are translated at the average exchange rates for the year.
Pensions and other post-employment benefits
The Group operates defined contribution pension schemes, where the amounts charged to the statement of comprehensive income are the contributions payable in the year. Differences between contributions payable in the year and the contributions actually paid are shown as either accruals or prepayments.
Provisions
A provision is required when a present obligation (legal or constructive) has arisen as a result of a past event and it is probably that a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation. When the effect of discounting is material, the amount recognised for a provision is the present value at the end of the reporting period. Warranty provisions are held in relation to returns that are as a result of quality issues, whereby a replacement is provided to the customer free of charge.
Non-underlying items
Non-underlying items are those that in the Directors' view should be separately disclosed due to their nature to enable a full understanding of the Group's financial performance. These include income and expenditure that is considered outside of the usual course of business and therefore is separately identified to allow the users of the Financial Statements comparability versus prior periods.
Prior year adjustments
Material prior period errors are corrected retrospectively in the first set of Financial Statements authorised for issue after their discovery by restating the comparative amounts for the prior periods presented. A reconciliation between the corrected figures and those reported for key statements is also provided. During the year, prior year errors have been identified in relation to the Eschenbach Group acquired in December 2020. These errors and the required adjustments are detailed below:
A: Prior year adjustment - Classification of cash and cash equivalents
Under IAS 7, cash and cash equivalents must be readily convertible to known amounts of cash. During the current period it has been determined that certain balances receivable under debt factoring arrangements within the Eschenbach Group are not readily convertible as at the year-end date. A prior year adjustment has therefore been made to reclassify $6,254,000 from cash and cash equivalents to trade and other receivables.
B: Prior year adjustment - Tura Inc. Prepayments and accruals
Under IAS 1 the Group accounts are prepared on an accruals basis. During 2021 it was identified that there were items held as prepayments which related to expenses incurred in the previous period. This resulted in trade and other receivables being overstated by $716,000, trade and other payables being understated by $7,000, goodwill being understated by $552,000 and tax payable being overstated by $171,000.
C: Prior year adjustment - Tura Inc. Right of return
Under IFRS 15 a right of return liability is recognised for the goods that are expected to be returned for a refund. This was incorrectly calculated excluding discounts and rebates, however the liability should reflect the amount to be refunded. A prior year adjustment has therefore been made to reduce the liability by $945,000 and reducing the corresponding right of return asset by $66,000. Deferred tax has been overstated by $208,000, with goodwill overstated by $671,000.
D: Prior year adjustment - Tura Inc. Inventory
In accordance with IAS 2 inventories should comprise all costs of purchase and other costs incurred in bringing inventories to their present location and condition. During the year errors were identified in relation to the treatment of freight costs and scrappage adjustments within inventory. A detailed review of inventory reconciliations was performed resulting in a reduction in inventory of $1,132,000, an increase in goodwill of $864,000 and a reduction in tax payable of $268,000.
The above adjustments B to D all relate to before the acquisition date of Tura Inc. as part of the Eschenbach Group on 16 December 2020 and therefore there is no impact on the Consolidated Income Statement for the year ended 31 December 2020. These adjustments arose due to a lack of review processes in place at Tura Inc. prior to the acquisition, which have since been rectified.
These prior year restatements have the following impact on the key Financial Statements as at 31 December 2020:
| 31 December 2020 after PPA adjustments | Prior year adjustments |
Restated 31 December 2020 |
||
| $'000 | $'000 | $'000 | ||
| BALANCE SHEET | ||||
| Non-current assets | ||||
| Goodwill | 71,964 | 744 | 72,708 | |
| Deferred tax | 12,995 | (224) | 12,771 | |
| Current assets | ||||
| Inventories | 56,693 | (1,198) | 55,495 | |
| Trade and other receivables | 35,648 | 5,538 | 41,186 | |
| Cash and cash equivalents | 32,672 | (6,254) | 26,418 | |
| Non-current liabilities | ||||
| Deferred tax | 24,694 | (16) | 24,678 | |
| Current liabilities | ||||
| Trade and other payables | 42,895 | 7 | 42,902 | |
| Right of return liabilities | 13,090 | (945) | 12,145 | |
| Tax payable | 4,360 | (440) | 3,920 | |
| TOTAL NET ASSETS | 145,827 | - | 145,827 | |
| STATEMENT OF CASH FLOWS | ||||
| Acquisition of subsidiaries, net of cash acquired | (101,821) | (6,254) | (108,075) | |
| Increase in cash and cash equivalents | 23,560 | (6,254) | 17,306 | |
| Cash and cash equivalents including overdraft at end of year | 30,030 | (6,254) | 23,776 | |
New and amended standards and interpretations
The following standards have been published and are mandatory for accounting periods beginning after 1 January 2022 but have not been early adopted by the Group or Company and could have an impact on the Group and Company Financial Statements:
· Amendments to IAS 1: Presentation of Financial Statements: Classification of Liabilities as Current or Non-current and Amendments to IAS 1: Classification of Liabilities as Current or Non-current - Deferral of Effective Date - effective 1 January 2023
· Amendments to IFRS 3: Business Combinations - Reference to the Conceptual Framework - effective 1 January 2022
· Amendments to IAS 16: Property, Plant and Equipment - effective 1 January 2022
· Amendments to IAS 37: Provisions, Contingent Liabilities and Contingent Assets - effective 1 January 2022
· Annual Improvements to IFRS Standards 2018-2020 Cycle - 1 January 2022
None of the new standards not yet in issue are expected, once adopted, to give rise to a significant change in the reported results or financial position of the Group or Company.
3. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY
The preparation of the Group's Financial Statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and their accompanying disclosures, and the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amounts of the assets or liabilities affected in the future.
Estimates involve the determination of the quantum of accounting balances to be recognised. Judgements typically involve decisions such as whether to recognise an asset or liability.
The key assumptions concerning the future and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below:
Impairment of goodwill
The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating units and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The carrying amount of goodwill at 31 December 2021 was $81,359,000 (2020 restated: $72,708,000). No provision for impairment of goodwill was made as at the end of the reporting period.
Impairment of intangible assets
The carrying values of intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable in accordance with the accounting policies as disclosed in the Financial Statements. The recoverable amount is the higher of its fair value less costs of disposal and its value in use, the calculations of which involve the use of estimates about the future cash flows generated by each asset or the relevant cash-generating units to which the asset belongs. When value in use calculations are undertaken, management must estimate the expected future cash flows from the asset or cash-generating unit and choose a suitable discount rate in order to calculate the present value of those cash flows.
Right of return liability
Management apply assumptions in determining the right of return liability and the associated right of return asset. These assumptions are based on analysis of historical data trends, but require estimation of appropriate time periods and expected return rates. The right of return liability at the period end is $11,100,000 (2020 restated: $12,145,000) with an offsetting right of return asset of $1,581,000 (2020 restated: $1,493,000). If the provision were to increase by 5%, this would lead to an additional charge to the income statement of $476,000, with it being considered that a movement in the right of return liability having an offsetting impact on the right of return asset.
Uncertain tax positions
Tax authorities could challenge and investigate the Group's transfer pricing or tax domicile arrangements. As a growing, international business, there is an inherent risk that local tax authorities around the world could challenge either historical transfer pricing arrangements between other entities within the Group and subsidiaries or branches in those local jurisdictions, or the tax domicile of subsidiaries or branches that operate in those local jurisdictions.
As a result, the Group has identified that it is exposed to uncertain tax positions, which it has measured using an expected value methodology. Such methodologies require estimates to be made by management including the relative likelihood of each of the possible outcomes occurring, the periods over which the tax authorities may raise a challenge to the Group's transfer pricing or tax domicile arrangements; and the quantum of interest and penalties payable in additions to the underlying tax liability. The provision held in relation to uncertain tax liabilities as at 31 December 2021 is $623,000 (2020: $2,839,000).
Judgements made by management which are considered to have a material impact on the Financial Statements are as follows:
Recognition of intangible assets
In recognising the intangible assets arising on acquisition of subsidiary entities, the intangible assets must first be identified. This requires management judgement as to the value drivers of the acquired business and its interaction with the marketplace and stakeholders. In calculating the fair value of the identified assets, management must use judgement to identify an appropriate calculation technique and use estimates in deriving appropriate forecasts and discount rates as required. Management have used external experts to mitigate the risk of these judgements and estimates on the intangible assets identified and valued.
Deferred tax
Deferred tax assets are recognised for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits, together with future tax planning strategies.
4. REVENUE
The revenue of the Group is attributable to the one principal activity of the Group.
a) Geographical analysis
The Group's revenue by destination is split in the following geographic areas:
| 2021 $'000 |
2020 $'000 |
|
| United Kingdom | 30,248 | 14,014 |
| Europe (excluding UK) | 121,930 | 14,097 |
| North America | 82,114 | 12,040 |
| South America | 517 | 450 |
| Asia | 3,281 | 4,032 |
| Africa | 3,034 | - |
| Australia | 5,347 | 2,782 |
| 246,471 | 47,415 |
For the year ended 31 December 2021 the Group had no customers which accounted for more than 10% of the Group's revenue. For the year ended 31 December 2020 the Group had one customer which accounted for more than 10% of the Group's revenues, with the revenue generated from this customer amounting to $9,483,000.
b) Right of return assets and liabilities
| 2021 $'000 |
2020 Restated $'000 |
|
| Right of return asset | 1,581 | 1,493 |
| Right of return liability | (11,100) | (12,145) |
The right of return asset is presented as a component of inventory and the right of return liability is presented separately on the face of the balance sheet.
5. SEGMENT INFORMATION
The Group operates in three operating segments, which upon application of the aggregation criteria set out in IFRS 8 Operating Segments results in three reporting segments:
· Frames and Optics product distribution.
· Wholesale - being OEM and manufacturing distribution.
· Lenses - being manufacturing and distribution of lenses.
The criteria applied to identify the operating segments are consistent with the way the Group is managed. In particular, the disclosures are consistent with the information regularly reviewed by the CEO and the CFO in their role as Chief Operating Decision Makers, to make decisions about resources to be allocated to the segments and to assess their performance.
The reportable segments subject to disclosure are consistent with the organisational model adopted by the Group during the financial year ended 31 December 2021 and are as follows:
| Frames and Optics $'000 |
Wholesale $'000 |
Lenses $'000 |
Total before adjustments & eliminations $'000 |
Adjustments & eliminations $'000 |
Total $'000 |
|
| Revenue | ||||||
| External | 211,527 | 27,437 | 7,507 | 246,471 | - | 246,471 |
| Internal | 3,438 | 4,664 | 90 | 8,192 | (8,192) | - |
| 214,965 | 32,101 | 7,597 | 254,663 | (8,192) | 246,471 | |
| Cost of sales | (115,964) | (16,922) | (4,977) | (137,863) | 7,164 | (130,699) |
| Gross profit | 99,001 | 15,179 | 2,620 | 116,800 | (1,028) | 115,772 |
| Expenses | (84,672) | (6,857) | (4,797) | (96,326) | 545 | (95,781) |
| Depreciation | (5,669) | (1,209) | (552) | (7,430) | - | (7,430) |
| Amortisation and impairment | (6,386) | (4,632) | (2) | (11,020) | - | (11,020) |
| Operating profit/(loss) | 2,274 | 2,481 | (2,731) | 2,024 | (483) | 1,541 |
| Exchange adjustment on borrowings | (5,418) | |||||
| Non-underlying costs | (2,588) | |||||
| Finance costs | (2,775) | |||||
| Finance income | 118 | |||||
| Share of loss of associate | (10) | |||||
| Taxation | 3,697 | |||||
| Loss for the year | (5,435) | |||||
| Total assets | 436,102 | 75,568 | 13,986 | 525,656 | (211,837) | 313,819 |
| Total liabilities | (327,303) | (7,444) | (10,813) | (345,560) | 270,205 | (75,355) |
| Deferred tax asset | 12,540 | |||||
| Current tax liability | (2,780) | |||||
| Deferred tax liability | (20,517) | |||||
| Borrowings | (82,483) | |||||
| Group net assets | 145,224 | |||||
| Other disclosures | ||||||
| Capital additions | 2,471 | 1,300 | 3,874 | 7,645 | - | 7,645 |
The reportable segments subject to disclosure are consistent with the organisational model adopted by the Group during the financial year ended 31 December 2020 and are as follows (restated):
| Frames and Optics $'000 |
Wholesale $'000 |
Lenses $'000 |
Total before adjustments & eliminations $'000 |
Adjustments & eliminations $'000 |
Total $'000 |
|
| Revenue | ||||||
| External | 21,259 | 21,979 | 4,177 | 47,415 | - | 47,415 |
| Internal | 2,204 | 2,381 | 59 | 4,644 | (4,644) | - |
| 23,463 | 24,360 | 4,236 | 52,059 | (4,644) | 47,415 | |
| Cost of sales | (14,987) | (13,678) | (2,203) | (30,868) | 3,975 | (26,893) |
| Gross profit | 8,476 | 10,682 | 2,033 | 21,191 | (669) | 20,522 |
| Expenses | (12,898) | (5,594) | (1,634) | (20,126) | 570 | (19,556) |
| Depreciation | (636) | (1,422) | (241) | (2,299) | - | (2,299) |
| Amortisation | (514) | (1,093) | - | (1,607) | - | (1,607) |
| Operating (loss)/profit | (5,572) | 2,573 | 158 | (2,841) | (99) | (2,940) |
| Exchange adjustment on borrowings | (382) | |||||
| Movement in derivatives | (740) | |||||
| Non-underlying costs | (5,763) | |||||
| Negative goodwill on bargain purchase | 506 | |||||
| Finance costs | (1,880) | |||||
| Finance income | 36 | |||||
| Share of profit of associate | - | |||||
| Taxation | 2,250 | |||||
| Loss for the year | (8,913) | |||||
| Total assets | 400,982 | 72,021 | 7,409 | 480,412 | (183,848) | 296,564 |
| Total liabilities | (303,805) | (6,809) | (6,185) | (316,799) | 259,110 | (57,689) |
| Deferred tax asset | 12,771 | |||||
| Current tax liability | (3,920) | |||||
| Deferred tax liability | (24,678) | |||||
| Borrowings | (77,221) | |||||
| Group net assets | 145,827 | |||||
| Other disclosures | ||||||
| Capital additions | 203 | 1,864 | 736 | 2,803 | - | 2,803 |
Total assets are the Group's gross assets excluding deferred tax asset. Total liabilities are the Group's gross liabilities excluding loans and borrowings, current and deferred tax liabilities and derivative liabilities.
Non-underlying costs, as well as net finance costs and taxation are not allocated to individual segments as they relate to Group-wide activities as opposed to individual reporting segments.
Deferred tax and borrowings are not allocated to individual segments as they are managed on a Group basis.
Adjusted items relate to elimination of all intra-group items including any profit adjustments on intra-group sales that are eliminated on consolidation, along with the profit and loss items of the Parent Company.
Adjusted items in relation to segmental assets and liabilities relate to the elimination of all intra-group balances and investments in subsidiaries, and assets and liabilities of the Parent Company.
Non-current operating assets
| 2021 $'000 |
2020 Restated $'000 |
|
| United Kingdom | 9,795 | 3,256 |
| Europe | 129,441 | 116,472 |
| North America | 4,589 | 10,686 |
| Asia | 36,580 | 41,441 |
| 180,405 | 171,855 |
Non-current assets for this purpose consist of property, plant and equipment, right-of-use assets, goodwill and intangible assets.
6. BUSINESS COMBINATIONS
Acquisition of BoDe Design GmbH
BoDe Design GmbH was incorporated on 14 October 2021 with INSPECS Limited as its immediate parent. On 6 December 2021 this entity acquired the partnership assets of BoDe Design Vertriebs GmbH & Co. KG, a limited partnership under German law for an initial cash consideration of $1,987,000 with a further contingent consideration based on financial performance over the next three years.
Assets acquired and liabilities assumed
The fair values of the identifiable assets and liabilities of BoDe Design GmbH as at the date of acquisition were:
| Fair value recognised on acquisition $000 |
|
| Assets | |
| Property, plant and equipment | 24 |
| Intangible assets | 1,813 |
| Right-of-use asset | 269 |
| Cash and cash equivalents | 33 |
| Trade and other receivables | 178 |
| Inventories | 919 |
| Total identifiable assets at fair value | 3,236 |
| Liabilities | |
| Trade and other payables | 1,010 |
| Interest-bearing loans and borrowings | 170 |
| Overdraft | 39 |
| Lease liability | 269 |
| Income tax payable | 109 |
| Deferred tax liability | 353 |
| Total identifiable liabilities at fair value | 1,950 |
| Total identifiable net assets at fair value | 1,286 |
| Goodwill arising on acquisition | 2,221 |
| Purchase consideration transferred | |
| Initial purchase price | 1,987 |
| Contingent deferred consideration | 1,520 |
| Total consideration | 3,507 |
From the date of acquisition, BoDe Design GmbH contributed $75,000 of revenue and a loss of $106,000 to the Group loss before tax from continuing operations. If the partnership assets of BoDe Design Vertriebs GmbH & Co. KG were acquired at the beginning of the year, revenue from continuing operations for the Group would have been $250,216,000 and loss before tax from continuing operations for the Group would have been $8,637,000.
Transaction costs of $395,000 were expensed and are included within 'Non-underlying costs - Acquisitions'.
Acquisition of EGO Eyewear Limited
On 22 December 2021, INSPECS Limited acquired the entire share capital of EGO Eyewear Limited and its subsidiaries, for an initial cash consideration of $8,251,000 with a further deferred consideration partly based on performance over the next three years.
Assets acquired and liabilities assumed
The fair values of the identifiable assets and liabilities of EGO Eyewear as at the date of acquisitions were:
| Fair value recognised on acquisition $000 |
|
| Assets | |
| Property, plant and equipment | 1 |
| Intangible assets | 8,605 |
| Right-of-use asset | 142 |
| Cash and cash equivalents | 2,110 |
| Trade and other receivables | 3,213 |
| Total identifiable assets at fair value | 14,071 |
| Liabilities | |
| Trade and other payables | 3,824 |
| Lease liability | 135 |
| Deferred tax liability | 2,070 |
| Total identifiable liabilities at fair value | 6,029 |
| Total identifiable net assets at fair value | 8,042 |
| Goodwill arising on acquisition | 7,122 |
| Purchase consideration transferred | |
| Initial purchase price | 8,251 |
| Deferred consideration | 2,712 |
| Contingent deferred consideration | 4,201 |
| Total consideration | 15,164 |
From the date of acquisition, EGO Eyewear contributed $163,000 of revenue and a loss of $15,000 to loss before tax from continuing operations. If the combination had taken place at the beginning of the year, revenue from continuing operations for the Group would have been $256,084,000 and loss before tax from continuing operations for the Group would have been $7,234,000.
Transaction costs of $881,000 were expensed and are included within 'Non-underlying costs - Acquisitions'.
Analysis of cash flows on acquisitions
The combined impact on cash flow of the two acquisitions made during the year was as follows:
| $'000 | |
| Initial purchase price for BoDe Design GmbH | (1,987) |
| Initial purchase price for EGO Eyewear Limited | (8,251) |
| Acquired with BoDe Design GmbH: | |
| Cash and cash equivalents | 33 |
| Overdraft | (39) |
| Acquired with EGO Eyewear Limited: | |
| Cash and cash equivalents | 2,110 |
| Net cash flow on acquisition | (8,134) |
Prior period business combinations
Acquisition of Eschenbach Holdings GmbH
On 16 December 2020, INSPECS Limited acquired the entire share capital of Eschenbach Holdings GmbH and its subsidiaries, for a cash consideration of $115,496,000. Eschenbach held shareholder loans which were purchased at fair value, with the residual consideration for the remaining net assets of Eschenbach.
The initial accounting for the acquisition of Eschenbach Holdings GmbH had previously been provisionally determined and were based on a provisional assessment of the fair value of the assets and liabilities acquired. The information needed to assess the provision required against certain inventory categories was not available by the date the Financial Statements for 31 December 2020 were approved for issue by the Board of Directors. During 2021, the information needed to determine an appropriate estimate for this inventory provision was made available and an increase in the inventory provision was deemed required, therefore decreasing the fair value of inventory. The comparative statements as at 31 December 2020 were adjusted to reflect the new available information on the provisional amounts (see note 15). As a result, there was a decrease in inventories of $2,258,000.
Information needed to assess the right of return liability and associated right of return asset for certain sales entities within the Eschenbach Group was not available by the date of approval of the Financial Statements for 31 December 2020. Further analysis has enabled this information to be obtained during 2021, with the resultant adjustments increasing the warranty provision by $495,000, decreasing the right of return liability by $229,000 and decreasing the right of return asset by $344,000.
In addition, prior period adjustments have been identified relating to the acquisition balance sheet of Eschenbach Holdings GmbH, as discussed in note 2. These adjustments led to an increase in goodwill on acquisition to $58,677,000, with the impact of these adjustments to the balance sheet as at 31 December 2020 shown in note 15 and the restated acquisition balance sheet shown below.
Assets acquired and liabilities assumed
The fair values of the identifiable assets and liabilities of Eschenbach Holdings GmbH as at the date of acquisition is as follows:
| Fair value $000 |
|
| Assets | |
| Property, plant and equipment | 8,466 |
| Intangible assets | 39,407 |
| Right-of-use asset | 19,552 |
| Cash and cash equivalents | 13,118 |
| Trade and other receivables | 29,970 |
| Tax receivable | 2,452 |
| Inventories | 44,578 |
| Deferred tax assets | 8,952 |
| Total identifiable assets at fair value | 166,495 |
| Liabilities | |
| Trade and other payables including right of return liability | 43,954 |
| Interest bearing loans and borrowings | 21,462 |
| Overdraft | 2,620 |
| Lease liability | 19,552 |
| Income tax payable | 905 |
| Deferred tax liability | 21,183 |
| Total identifiable liabilities at fair value | 109,676 |
| Total identifiable net assets at fair value | 56,819 |
| Goodwill arising on acquisition | 58,677 |
| Purchase consideration transferred | 115,496 |
7. EMPLOYEES AND DIRECTORS
| 2021 $'000 |
2020 $'000 |
|
| Included in cost of sales | ||
| Wages and salaries | 7,178 | 4,899 |
| Social security costs | 376 | 102 |
| Pension costs | 51 | 39 |
| 7,605 | 5,040 | |
| Included in administration costs | ||
| Wages and salaries | 50,536 | 8,238 |
| Social security costs | 9,626 | 955 |
| Pension costs | 515 | 360 |
| Share-based payment expense | 1,484 | 1,706 |
| 62,161 | 11,259 | |
| 69,766 | 16,299 |
The average number of employees during the year was as follows:
| 2021 | 2020 | |
| Administration | 348 | 153 |
| Selling and operations | 411 | 72 |
| Production | 913 | 873 |
| 1,672 | 1,098 |
Directors' remuneration during the year was as follows:
| 2021 $'000 |
2020 $'000 |
|
| Directors' salaries | 811 | 455 |
| Directors' pension contributions | 35 | 33 |
| Share options | 373 | 159 |
| 1,219 | 647 |
Information regarding the highest paid Director is as follows:
| 2021 $'000 |
2020 $'000 |
|
| Total remuneration | 523 | 311 |
The number of Directors to whom employer pension contributions were made by the Group during year is 2 (2020: 2). This was in the form of a defined contribution pension scheme.
8. NON-UNDERLYING COSTS
Non-underlying items are those that in the Directors' view should be separately disclosed by virtue of their size, nature or incidence to enable a full understanding of the Group's financial performance in the year and business trends over time. Non-underlying costs incurred during the year are as follows:
| 2021 $'000 |
2020 $'000 |
|
| Initial public offering | - | 2,709 |
| Acquisition costs | 1,352 | 3,054 |
| Other professional service costs | 1,236 | - |
| 2,588 | 5,763 |
Acquisition costs of $395,000 and $881,000 were incurred during the period relating to the purchase of BoDe Design GmbH and EGO Eyewear Limited respectively (see note 6). A further $76,000 was incurred in relation to the acquisition of assets of Hardy Amies. Other professional service costs of $1,236,000 relate to accounting transition and valuation following the acquisition of Eschenbach Holdings GmbH at the end of the prior year. Non-underlying costs incurred in the year to 31 December 2020 include $2,709,000 relating to the listing of existing shares on to the AIM of the London Stock Exchange. An additional $3,054,000 were incurred in relation to the acquisitions of Eschenbach Holdings GmbH and Norville (20/20) Limited.
9. FINANCE COSTS AND FINANCE INCOME
| 2021 $'000 |
2020 $'000 |
|
| Finance costs | ||
| Bank loan interest | 1,785 | 516 |
| Other loan interest | - | 39 |
| Invoice discounting interest and charges | 57 | 50 |
| Loan transaction costs | 477 | 1,249 |
| Lease interest | 456 | 26 |
| Total finance costs | 2,775 | 1,880 |
| Finance income | ||
| Interest receivable | 118 | 36 |
10. LOSS BEFORE INCOME TAX
The loss before income tax is stated after charging/(crediting):
| 2021 $'000 |
2020 $'000 |
|
| Cost of inventories recognised as expense | 95,628 | 21,045 |
| Short-term leases | 486 | 83 |
| Depreciation own assets | 3,423 | 1,539 |
| Depreciation - Right-of-use assets | 4,007 | 760 |
| Amortisation and impairment - Intangibles | 11,020 | 1,607 |
| Restructuring costs | - | 185 |
| Post-acquisition insurance costs | - | 563 |
| Foreign exchange on funding for acquisitions | - | 1,085 |
| Other foreign exchange differences (gain)/loss | (1,171) | 305 |
| 2021 $'000 |
2020 $'000 |
|
| Fees payable to the Company's auditor for audit services: | ||
| Audit of the Company and Group accounts | 574 | 929 |
| Audit of the subsidiaries | 830 | 310 |
| Fees payable to the Company's auditor for non-audit services: | ||
| Costs associated with IPO | - | 285 |
The disclosure of the 2020 fees payable to the Company's auditor for audit services has been reapportioned.
11. INCOME TAX
Analysis of tax expense
| 2021 $'000 |
2020 $'000 |
|
| Current tax: | ||
| Current tax on profits for the year | 1,618 | 24 |
| Overseas current tax expense | 469 | 208 |
| Adjustment in respect of prior years | (128) | - |
| Total current tax | 1,959 | 232 |
| Deferred tax: | ||
| Deferred tax income relating to the origination and reversal of timing differences | (4,430) | (2,478) |
| Effect of changes in tax rates | (1,122) | (4) |
| Adjustment in respect of prior years | (104) | - |
| Total deferred tax | (5,656) | (2,482) |
| Total tax credit reported in the consolidated income statement | (3,697) | (2,250) |
Factors affecting the tax expense
The tax assessed for the year is (higher)/lower than the standard rate of corporation tax in the UK. The difference is explained below:
| 2021 $'000 |
2020 $'000 |
|
| Loss before income tax | (9,132) | (11,163) |
| Loss multiplied by standard rate of corporation tax in the UK of 19.00% (2020: 19.00%) | (1,735) | (2,121) |
| Effects of: | ||
| Non-deductible expenses - Amortisation of intangible assets | 853 | 184 |
| Non-deductible expenses - Other expenses | 517 | 1,622 |
| (Decrease)/increase in provision for uncertain tax liabilities | (2,224) | 381 |
| Income taxed in nil rate regime | - | (404) |
| Share-based payment | (136) | (1,924) |
| Different tax rate for overseas subsidiaries | (1,313) | (84) |
| Transfer pricing adjustments | 1,017 | 51 |
| Tax rate changes | (1,122) | (4) |
| Income not taxable | - | (176) |
| Effects of Group relief | 156 | 70 |
| Amounts not recognised on deferred tax | 520 | 155 |
| Adjustments in respect of prior year | (230) | - |
| Tax credit | (3,697) | (2,250) |
Income not taxable for tax purposes relates to income generated in jurisdictions within which there is a nil taxation rate. Movements in other comprehensive income relating to foreign exchange on consolidation are not taxable.
12. EARNINGS PER SHARE ('EPS')
Basic EPS is calculated by dividing the profit or loss for the year attributable to ordinary equity holders of the Parent by the weighted average number of Ordinary Shares outstanding during the year.
Diluted EPS is calculated by dividing the profit or loss attributable to ordinary equity holders of the Parent by the weighted average number of Ordinary Shares outstanding during the year plus the weighted average number of Ordinary Shares that would be issued on conversion of all the dilutive potential Ordinary Shares into Ordinary Shares, to the extent that the inclusion of such shares is not anti-dilutive. A loss has been made in the year to 31 December 2021 and the comparative period. In accordance with IAS 33, potential ordinary shares shall be treated as dilutive when, and only when, their conversion to Ordinary Shares would decrease earnings per share, or increase loss per share from continuing operations. As a loss is made, including the dilution of potential Ordinary Shares reduces the loss per share and therefore the outstanding options should not be treated as dilutive when calculating EPS. Basic earnings per share is therefore $(0.05) loss (2020: $(0.13) loss), with diluted earnings per share $(0.05) loss (2020: $(0.13) loss).
The following table reflects the income and share data used in the basic and diluted EPS calculations:
| ORDINARY SHARES | 2021 $'000 |
2020 $'000 |
| Loss attributable to the ordinary equity holders of the Parent for basic earnings |
(5,435) | (8,913) |
| Number of shares | Number of shares | |
| Weighted average number of Ordinary Shares for basic EPS | 101,309,670 | 69,227,355 |
| Effect of dilution from: | ||
| Share options | 5,025,903 | 3.624.059 |
| Weighted average number of Ordinary Shares adjusted for the effect of dilution where appropriate |
106,335,573 | 72,851,414 |
13. ANALYSIS OF CASH FLOWS GIVEN IN THE STATEMENT OF CASH FLOWS
A reconciliation of profit for the year to cash generated from operations is shown below:
| 2021 $'000 |
2020 $'000 |
|
| (Loss)/profit before income tax | (9,132) | (11,163) |
| Adjustments for: | ||
| Depreciation | 7,430 | 2,299 |
| Amortisation and impairment of intangible assets | 11,020 | 1,607 |
| Share of loss of associate | 10 | - |
| Gain on bargain purchase | - | (506) |
| Share-based payment | 1,484 | 1,706 |
| Movement in fair value of derivatives | - | 740 |
| Exchange adjustment on borrowings | 5,418 | 382 |
| Exchange adjustment on trading | (1,171) | - |
| Finance costs | 2,775 | 1,880 |
| Finance income | (118) | (36) |
| Changes in working capital | ||
| (Increase)/decrease in inventories | 149 | 648 |
| Decrease in trade and other receivables | 1,923 | 3,005 |
| Increase/(decrease) in trade and other payables | 5,107 | (159) |
| Cash flows from operating activities | 24,895 | 403 |
14. CONTINGENT AND DEFERRED CONSIDERATION
Contingent and deferred considerations payable relate to the acquisitions of BoDe Design GmbH and EGO Eyewear Limited (see note 6). In relation to BoDe Design GmbH, the full balance of $1,529,000 is contingent based on the performance of the entity each year until the end of 2025. In relation to EGO Eyewear Limited, $2,747,000 is deferred consideration payable in equal instalments in 2023, 2024 and 2025. The remaining balance is contingent based on the performance of the entity each year until the end of 2024. The split of the contingent and deferred consideration between each entity is as follows:
| 2021 $'000 |
2020 $'000 |
|
| BoDe Design GmbH | 1,529 | - |
| EGO Eyewear Limited | 6,976 | - |
| 8,505 | - |
15. PRIOR YEAR ADJUSTMENT AND PURCHASE PRICE ALLOCATION ADJUSTMENT
Prior year adjustments were required as discussed in note 2. In addition, the balance sheet as at 31 December 2020 has been restated to include the impact of adjustments to the acquisition balance sheet of Eschenbach Group GmbH, as discussed in note 6. The Group reconciliation of equity as at 31 December 2020 is shown below:
| 31 December 2020 | Eschenbach acquisition balance sheet adjustment |
Note | Adjusted | Prior year adjustments |
Note | Restated 31 December 2020 |
||||
| $'000 | $'000 | $'000 | $'000 | $'000 | ||||||
| ASSETS | ||||||||||
| Non-current assets |
||||||||||
| Goodwill | 69,087 | 2,877 | A | 71,964 | 744 | B | 72,708 | |||
| Intangible assets | 56,305 | - | 56,305 | - | 56,305 | |||||
| Property, plant and equipment | 22,460 | - | 22,460 | - | 22,460 | |||||
| Right-of-use asset | 20,379 | - | 20,379 | - | 20,379 | |||||
| Investment in associate | 57 | - | 57 | - | 57 | |||||
| Deferred tax | 12,995 | - | 12,995 | (224) | B | 12,771 | ||||
| 181,283 | 2,877 | 184,160 | 520 | 184,680 | ||||||
| Current assets |
||||||||||
| Inventories | 59,294 | (2,601) | A | 56,693 | (1,198) | B | 55,495 | |||
| Trade and other receivables | 35,648 | - | 35,648 | 5,538 | B | 41,186 | ||||
| Tax receivable | 1,556 | - | 1,556 | - | 1,556 | |||||
| Cash and cash equivalents | 32,672 | - | 32,672 | (6,254) | B | 26,418 | ||||
| 129,170 | (2,601) | 126,569 | (1,914) | 124,655 | ||||||
| Total assets | 310,453 | 276 | 310,729 | (1,394) | 309,335 | |||||
| EQUITY | ||||||||||
| Called up share capital | 1,384 | - | 1,384 | - | 1,384 | |||||
| Share premium | 121,940 | - | 121,940 | - | 121,940 | |||||
| Foreign currency translation reserve | (99) | 10 | A | (89) | - | (89) | ||||
| Share option reserve | 867 | - | 867 | - | 867 | |||||
| Merger reserve | 7,296 | - | 7,296 | - | 7,296 | |||||
| Retained earnings | 14,429 | - | 14,429 | - | 14,429 | |||||
| Total equity | 145,817 | 10 | 145,827 | - | 145,827 | |||||
| LIABILITIES | ||||||||||
| Non-current liabilities | ||||||||||
| Financial liabilities - borrowings | 70,391 | - | 70,391 | - | 70,391 | |||||
| Deferred tax | 24,694 | - | 24,694 | (16) | B | 24,678 | ||||
| 95,085 | - | 95,085 | (16) | 95,069 | ||||||
| Current liabilities | ||||||||||
| Trade and other payables | 42,895 | - | 42,895 | 7 | B | 42,902 | ||||
| Right of return liabilities | 12,824 | 266 | A | 13,090 | (945) | B | 12,145 | |||
| Financial liabilities - borrowings | 6,830 | - | 6,830 | - | 6,830 | |||||
| Overdraft | 2,642 | - | 2,642 | - | 2,642 | |||||
| Tax payable | 4,360 | - | 4,360 | (440) | B | 3,920 | ||||
| 69,551 | 266 | 69,817 | (1,378) | 68,439 | ||||||
| Total liabilities | 164,636 | 266 | 164,902 | (1,394) | 163,508 | |||||
| Total equity and liabilities |
310,453 | 276 | 310,729 | (1,394) | 309,335 | |||||
A: Eschenbach acquisition balance sheet adjustment
Following the acquisition of Eschenbach Holdings GmbH, the assets and liabilities acquired and the goodwill arising were provisionally determined for the Financial Statements as of 31 December 2020. During the year, this has been finalised (see note 6) with the impact of the required adjustment on the balance sheet as at 31 December 2020 shown above. This results in an increase in goodwill of $2,877,000, a decrease in inventories (following an increase in inventory provisioning) of $2,601,000 and an increase in right of return liabilities of $266,000 with the movement in foreign exchange rates between the date of acquisition and the year-end resulting in a movement through the foreign currency translation reserve of $10,000.
B: Prior year adjustments
Refer to note 2.
16. POST BALANCE SHEET EVENTS
Since the balance sheet date, but before these Financial Statements were approved, there were no material events that the Directors consider material to the users of these Financial Statements.
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