KMD BRANDS LIMITED — Interim / Quarterly Report 2021

Mar 22, 2021

KATHMANDU HOLDINGS LIMITED INTERIM REPORT 2021

KATHMANDU HOLDINGS LIMITED - INTERIM REPORT 2021

DIRECTORS’ REPORT

The Directors of Kathmandu Holdings Limited present the Interim Report for the Company and its controlled entities for the half year ended 31 January 2021.

Review of Operations

The consolidated net profit after tax for the period was NZ$22.3 million (2020: NZ$7.6 million). Sales for the period were NZ$410.7 million (2020: NZ$363.7 million).

A review of the operations of the Company and its controlled entities is set out in the accompanying Company’s media release of 23 March 2021. The key line items in the half year results were:

• Sales up 12.9% to NZ$410.7m

• EBIT up NZ$16.6m to NZ$39.2m

• NPAT up NZ$14.7m to NZ$22.3m

Seasonality

Due to the seasonal nature of the Company and its controlled entities’ activities, the activities in the second half of the year historically provide a larger portion of the sales and net profit for the full year.

Impact of COVID-19

The Group has reviewed the impact on the business from the continually evolving COVID-19 situation. During the half year, trade at a number of the Group’s stores continued to be disrupted by COVID-19 related travel restrictions and government mandated lockdowns and closures. Refer to note 4 of the Financial Statements for further disclosure about the impact of COVID-19.

Signed in accordance with a resolution of the Directors:

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David Kirk Director

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Xavier Simonet Director

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KATHMANDU HOLDINGS LIMITED - INTERIM REPORT 2021

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

	Note	Unaudited	Unaudited	Audited
		Six Months	Six Months	Year
		Ended	Ended	Ended
		31 January	31 January	31 July
		2021	2020	2020
		NZ$’000	NZ$’000	NZ$’000
Sales revenue	5	410,713	363,654	801,524
Cost of sales		(168,196)	(144,754)	(334,493)
Gross profit		242,517	218,900	467,031
Other income	5	20,891	628	27,369
Selling expenses	3, 6	(82,296)	(78,980)	(169,272)
Administration and general expenses	3, 6	(85,757)	(73,284)	(175,670)
		(147,162)	(151,636)	(317,573)
Earnings before interest, tax, depreciation, and amortisation		95,355	67,264	149,458
Depreciation and amortisation	3, 6	(56,168)	(44,666)	(103,585)
Earnings before interest and tax		39,187	22,598	45,873
Finance income		453	29	449
Finance expenses		(9,648)	(9,147)	(23,822)
Finance costs - net	3, 6	(9,195)	(9,118)	(23,373)
Profit before income tax		29,992	13,480	22,500
Income tax expense	3	(7,713)	(5,902)	(13,632)
Profit after income tax		22,279	7,578	8,868
Profit for the period attributable to:
Shareholders of the company		21,962	6,912	8,134
Non-controlling interest		317	666	734
Other comprehensive income/(loss) that may be recycled through profit and loss:
Movement in cash flow hedge reserve		(4,194)	(407)	(9,259)
Movement in foreign currency translation reserve		(16,648)	(2,877)	258
Movement in other reserves		14	-	(61)
Other comprehensive (loss) for the period, net of tax		(20,828)	(3,284)	(9,062)
Total comprehensive income for the period		1,451	4,294	(194)
Total comprehensive income for the period attributable to:
Owners of the company		1,165	3,769	(932)
Non-controlling interest		286	525	738
Basic earnings per share(restated)	3	3.1 cps	1.9 cps	1.8 cps
Diluted earnings per share(restated)	3	3.1 cps	1.9 cps	1.8 cps
Weighted average basic ordinary shares outstanding (‘000) (restated)	3	709,001	394,363	493,347
Weighted average diluted ordinary shares outstanding (‘000) (restated)	3	711,578	395,472	494,582

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KATHMANDU HOLDINGS LIMITED - INTERIM REPORT 2021

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Balance as at 31 July 2019 Profit after tax Other comprehensive income Dividends paid Issue of share capital Share based payment expense Deferred tax on share-based payment transactions Non-controlling interest on acquisition Disposal of non-controlling interest Transition to NZ IFRS 16 Balance as at 31 July 2020 Profit after tax Other comprehensive income Dividends paid Issue of share capital Share based payment expense Deferred tax on share-based payment transactions Balance as at 31 January 2021	Share Capital Cash Flow Hedge Reserve Foreign Currency Translation Reserve Share Based Payments Reserve Other Reserves Retained Earnings Non- controlling Interest Total Equity NZ$’000 NZ$’000 NZ$’000 NZ$’000 NZ$’000 NZ$’000 NZ$’000 NZ$’000
	251,113 4,118 (12,272) 1,983 - 197,120 - 442,062 - - - - - 8,134 734 8,868 - (9,259) 254 - (61) - 4 (9,061) - - - - - (27,209) - (27,209) 375,267 - - (1,666) - - - 373,601 - - - 378 - - - 378 - - - (87) - - - (87) - - - - - - 3,335 3,335 - - - - - - (66) (66) - - - - - (12,630) - (12,630)
	626,380 (5,141) (12,018) 608 (61) 165,415 4,007 779,190
	- - - - - 21,962 317 22,279 - (4,194) (16,617) - 14 - (31) (20,828) - - - - - - - - - - - - - - - - - - - 667 - - - 667 - - - (269) - - - (269)
	626,380 (9,335) (28,635) 1,006 (47) 187,377 4,293 781,039

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KATHMANDU HOLDINGS LIMITED - INTERIM REPORT 2021

CONSOLIDATED BALANCE SHEET

CONSOLIDATED BALANCE SHEET
Note ASSETS Current assets Cash and cash equivalents Trade and other receivables 8 Inventories Derivative financial instruments 12 Current tax asset Other current assets Total current assets Non-current assets Trade and other receivables 8 Property, plant, and equipment 9 Intangible assets Right-of-use assets 10 Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Derivative financial instruments 12 Current tax liabilities Current lease liability 10 Total current liabilities Non-current liabilities Derivative financial instruments 12 Non-current trade and other payables Interest bearing liabilities 11 Deferred tax Non-current lease liability 10 Total non-current liabilities Total liabilities Net assets EQUITY Issued capital Reserves Retained earnings Non-controlling interest Total equity	Unaudited As at 31 January 2021 Unaudited As at 31 January 2020 Audited As at 31 July 2020 NZ$’000 NZ$’000 NZ$’000
	228,471 40,259 231,885 57,831 80,404 73,668 229,641 251,881 228,793 93 5,677 53 2,028 16,966 3,790 2,779 2,803 2,799
	520,843 397,990 540,988 3,639 3,957 3,945 82,647 90,836 88,458 679,476 681,076 688,181 238,218 274,988 258,699
	1,003,980 1,050,857 1,039,283
	1,524,823 1,448,847 1,580,271
	123,211 133,128 149,850 11,775 186 7,414 1,823 11,256 8,060 74,997 79,211 78,100
	211,806 223,781 243,424 - 13 - 13,596 8,204 14,413 238,566 313,425 241,270 78,702 91,396 81,452 201,114 232,644 220,522
	531,978 645,682 557,657
	743,784 869,463 801,081
	781,039 579,384 779,190
	626,380 425,762 626,380 (37,011) (10,730) (16,612) 187,377 160,515 165,415 4,293 3,837 4,007
	781,039 579,384 779,190

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KATHMANDU HOLDINGS LIMITED - INTERIM REPORT 2021

CONSOLIDATED STATEMENT OF CASH FLOWS

Cash was provided from: Receipts from customers Government grants received Interest received Income tax received Cash was applied to: Payments to suppliers and employees Income tax paid Interest paid Net cash inflow from operating activities Cash flows from investing activities Cash was provided from: Proceeds from sale of property, plant, and equipment Proceeds from sale of non-controlling interest Cash was applied to: Purchase of property, plant, and equipment Purchase of intangibles Acquisition of subsidiaries Net cash (outflow) from investing activities Cash flows from financing activities Cash was provided from: Proceeds of loan advances Proceeds from share issue Cash was applied to: Dividends Repayment of loan advances Repayment of lease liabilities Net cash (outflow) / inflow from financing activities Net (decrease) / increase in cash held Opening cash and cash equivalents Effect of foreign exchange rates Closing cash and cash equivalents	Unaudited Six Months Ended 31 January 2021 Unaudited Six Months Ended 31 January 2020 Audited Year Ended 31 July 2020 NZ$’000 NZ$’000 NZ$’000
	424,918 378,631 823,951 18,223 - 21,266 453 29 449 8 - 1,379
	443,602 378,660 847,045
	368,268 302,250 637,828 13,881 15,071 16,897 7,621 6,665 21,979
	389,770 323,986 676,704
	53,832 54,674 170,341
	24 - 61 - - 141
	24 - 202 6,125 8,337 15,399 6,141 2,228 4,463 - 378,794 376,121
	12,266 389,359 395,983
	(12,242) (389,359) (395,781)
	- 451,338 506,746 - 140,081 340,646
	- 591,419 847,392
	- 27,209 27,209 - 160,516 293,757 43,161 33,769 77,290
	43,161 221,494 398,256
	(43,161) 369,925 449,136
	(1,571) 35,240 223,696 231,885 6,230 6,230 (1,843) (1,211) 1,959
	228,471 40,259 231,885

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KATHMANDU HOLDINGS LIMITED - INTERIM REPORT 2021

RECONCILIATION OF NET PROFIT AFTER TAXATION WITH CASH INFLOW FROM OPERATING ACTIVITIES

Profit after income tax Movement in working capital: (Increase) / decrease in trade and other receivables (Increase) / decrease in inventories Increase / (decrease) in trade and other payables Increase / (decrease) in tax liability Add non-cash items: Depreciation of property, plant, and equipment Amortisation of intangibles Depreciation of right-of-use assets Impairment of right-of-use assets Paycheck Protection Program (PPP) loan forgiveness Foreign currency translation of working capital balances Increase / (decrease) in deferred taxation Employee share-based remuneration Loss on disposal of property, plant, and equipment Cash inflow from operating activities	Unaudited Six Months Ended 31 January 2021 Unaudited Six Months Ended 31 January 2020 Audited Year Ended 31 July 2020 NZ$’000 NZ$’000 NZ$’000
	22,279 7,578 8,868 15,219 17,155 24,027 (3,015) (10,108) 20,305 (25,596) (8,049) 9,732 (4,474) (8,353) 1,526
	(17,866) (9,355) 55,590 10,358 8,316 19,666 4,457 3,271 7,539 41,353 33,079 76,380 - - 2,050 (684) - - (5,062) 12,078 214 (1,686) (816) (3,413) 667 116 378 16 407 3,069
	49,419 56,451 105,883
	53,832 54,674 170,341

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KATHMANDU HOLDINGS LIMITED - INTERIM REPORT 2021

1 GENERAL INFORMATION

Kathmandu Holdings Limited (the Company) and its subsidiaries (together the Group) is a designer, marketer, retailer and wholesaler of apparel, footwear and equipment for surfing and the outdoors. It operates in New Zealand, Australia, North America, Europe, South East Asia, and Brazil.

The Company is a limited liability company incorporated and domiciled in New Zealand. Kathmandu Holdings Limited is a company registered under the Companies Act 1993 and is an FMC reporting entity under Part 7 of the Financial Markets Conduct Act 2013. The address of its registered office is 223 Tuam Street, Christchurch.

These consolidated interim financial statements have been approved for issue by the Board of Directors on 23 March 2021, and have been reviewed, not audited.

Seasonality – due to the seasonal nature of the Company and its controlled entities’ activities, the activities in the second half of the year historically provide a larger portion of the sales and net profit for the full year.

2 BASIS OF PREPARATION OF FINANCIAL STATEMENTS

These general-purpose financial statements for the six months ended 31 January 2021 have been prepared in accordance with NZ IAS 34, Interim Financial Reporting. In complying with NZ IAS 34, these consolidated interim financial statements also comply with IAS 34.

These consolidated interim financial statements do not include all the notes of the type normally included in an annual financial report. Accordingly, this report should be read in conjunction with the audited financial statements of Kathmandu Holdings Limited for the year ended 31 July 2020 which have been prepared in accordance with the New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) and International Financial Reporting Standards (IFRS).

The Group is designated as a profit-oriented entity for financial reporting purposes.

3 ACCOUNTING POLICIES

Other than the earnings per share and segment restatement noted below, the consolidated interim financial statements have been prepared using the same accounting policies and methods of computation as those used in the audited financial statements of Kathmandu Holdings Limited for the year ended 31 July 2020.

The Group has restated the basic and diluted EPS for the prior period ending 31 January 2020 to reflect the impact of the implied bonus element on shares issued during the year. In April 2020 shares were issued as result of an institutional and retail entitlement offer and share placement at an issue price of NZ$0.50, representing a 51.0% discount to the NZ$1.02 NZX closing price on 30 March 2020, and a 30.6% discount to the theoretical ex-entitlement price of NZ$0.72.

The Group has now finalised the Rip Curl purchase price allocation as disclosed in note 16. As a result of finalising the purchase price allocation the statement of comprehensive income for the period ending 31 January 2020 has been revised as follows:

• Selling expenses decreased by $8.2 million

• Administration and general expenses increased by $9.3 million

• Depreciation and amortisation increased by $0.1 million

• Finance expenses decreased by $0.4 million

• Income tax benefit decreased by $0.2 million

The adjustments primarily relate to the following:

• a) Finalisation of Rip Curl lease accounting which included assessing all leases for completeness, assessing fair value of certain leases at acquisition date, assessment of future rights of renewal in accordance with Group policy and the application of country specific discount rates. In addition, we identified a reclassification of $9.4 million, reducing selling expenses and increasing administration expenses by the same amount for the period ended 31 January 2020. This restatement has been made to correct the previously reported allocation of leases on a lease-by-lease basis in the Rip Curl Group for the period ended 31 January 2020. This change had no impact on total operating expenses. The classification was correct at 31 July 2020.

• b) Finalisation of the fair value ascribed to fixed assets and definite life intangible assets and the associated depreciation and amortisation.

The adjustments above are the cumulative impact of all adjustments to the acquired balance sheet reported at 31 January 2020. The net profit after tax for the period ended 31 January 2020 is $0.6 million lower than previously reported.

The Group has also restated the January 2020 segment disclosure in note 7 to reflect the changes identified above as a result of the finalised purchase price allocation.

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KATHMANDU HOLDINGS LIMITED - INTERIM REPORT 2021

4 IMPACT OF COVID-19

COVID-19 continues to have an impact on the Group, with local and global restrictions on movement, travel and gatherings resulting in a significant reduction in footfall. Stores across our network continue to open and close based on government mandated lockdowns and closures.

As outlined in the 2020 Annual Report, there continues to be uncertainties due to the COVID-19 pandemic that affects the Group’s key estimates and judgements, including:

Intangible assets and goodwill – the ability to achieve future forecasts and the consequential impact on the carrying value of goodwill and other finite life intangibles. The Group have considered whether there are any events or changes in circumstances since 31 July 2020 and the signing of the 2020 consolidated financial statements that may be an impairment indicator as at 31 January 2021.

Factors considered include:

• The trading performance of each cash generating unit (CGU) for the period has exceeded the impairment models prepared at 31 July 2020;

• The trading performance of each CGU is expected to exceed our impairment models prepared at 31 July 2020 for the full year; and

• The Group market capitalisation remains above the net assets of the Group at 31 January 2021, this is further supported by an increase in the share price since year end.

Having considered the above factors the Group is comfortable that there are no material adverse events or changes in circumstances that would require impairment testing to be performed at 31 January 2021.

Trade receivables – the ability of wholesale customers to pay. The Group continues to actively monitor payment collection rates and the level of provisions across the Group. The receivable ageing continues to improve and as a result the expected credit loss has been adjusted (refer note 8).

Despite the continuing impact of COVID-19, the Directors are satisfied that there will be adequate cash flows generated from operating and financing activities to meet the obligations of the Group for a period of at least 12 months from the date of approving the consolidated interim financial statements. The Group was fully compliant with all banking covenants during the period and, based on the current cash flow forecasts, the Group expects to remain compliant with all covenants for at least 12 months from the date of approving the consolidated interim financial statements.

Taking into consideration the current trading results, the net debt of $10 million and liquidity of $375 million at 31 January 2021 (refer note 11), the financial statements continue to be prepared on a going concern basis.

5 REVENUE

REVENUE
Sale of goods Royalty revenue Commission revenue	Unaudited Six Months Ended 31 January 2021 Unaudited Six Months Ended 31 January 2020 Audited Year Ended 31 July 2020 NZ$’000 NZ$’000 NZ$’000
	406,679 361,300 797,410 3,885 2,354 3,848 149 - 266
	410,713 363,654 801,524

Other income includes government grants of $20,503,000 (2020: nil) related to wage and other subsidies received in response to the impact of COVID-19, of which $1,596,000 is receivable at period end.

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KATHMANDU HOLDINGS LIMITED - INTERIM REPORT 2021

6 EXPENSES

EXPENSES
Profit before tax includes the following expenses: Depreciation of property, plant, and equipment Amortisation Depreciation of right-of-use assets Employee benefit expense Rental expense Acquisition costs Finance costs – net consist of: Interest income Interest expense on term debt Interest on lease liabilities Other finance costs Net exchange loss/(gain) on foreign currency borrowings	Unaudited Six Months Ended 31 January 2021 Unaudited Six Months Ended 31 January 2020 Audited Year Ended 31 July 2020 NZ$’000 NZ$’000 NZ$’000
	10,358 8,316 19,666 4,457 3,271 7,539 41,353 33,079 76,380 99,717 77,594 176,168 5,558 9,036 21,595 - 10,073 11,895 (453) (29) (449) 1,411 2,197 4,780 4,493 4,092 8,874 3,929 1,803 9,246 (185) 1,055 922
	9,195 9,118 23,373

Other finance costs relate to facility fees on banking arrangements and debt underwriting costs.

7 SEGMENTAL INFORMATION

The Group has three operating segments.

Outdoor includes the Kathmandu and Oboz brands. This segment designs, markets, retails and wholesales apparel, footwear and equipment for outdoor travel and adventure.

Surf includes the Rip Curl brand. For the period ended 31 January 2020 only three months of trading is included in the Surf segment, compared to a full six months in the current period. This segment designs, manufactures, wholesales and retails surfing equipment and apparel.

The Corporate segment represents group costs, holding companies and consolidation eliminations and constitutes other business activities that do not fall within outdoor or surf segments.

These operating segments have been determined based on the reports reviewed by the Group Chief Executive Officer and Group Executive Management team.

EBITDA represents earnings before income taxes (a non-GAAP measure), excluding interest income, interest expense, depreciation, and amortisation, as reported in the financial statements. EBIT represents EBITDA less depreciation and amortisation.

Costs recharged between Group companies are calculated on an arms-length basis. The default basis of allocation is percentage of revenue with other bases being used where appropriate.

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KATHMANDU HOLDINGS LIMITED - INTERIM REPORT 2021

31 January 2021 Sales from external customers EBITDA Depreciation and software amortisation EBIT Income tax expense Total segment assets Total assets include: Non-current assets Additions to non-current assets Total segment liabilities 31 January 2020 Sales from external customers EBITDA Depreciation and software amortisation EBIT Income tax expense Total segment assets Total assets include: Non-current assets Additions to non-current assets Total segment liabilities	Outdoor Surf Corporate Total NZ$’000 NZ$’000 NZ$’000 NZ$’000 159,633 251,080 - 410,713
	32,065 67,775 (4,485) 95,355
	(30,889) (22,673) (2,606) (56,168)
	1,176 45,102 (7,091) 39,187
	726 (12,007) 3,568 (7,713)
	518,382 332,667 673,774 1,524,823
	219,634 122,704 661,642 1,003,980 20,578 16,213 21 36,812
	242,388 178,459 322,937 743,784
	Outdoor Surf Corporate Total NZ$’000 NZ$’000 NZ$’000 NZ$’000 228,747 134,907 - 363,654
	50,780 27,820 (11,336) 67,264
	(31,559) (11,786) (1,321) (44,666)
	19,221 16,034 (12,657) 22,598
	3,251 4,827 (2,176) 5,902
	390,866 381,484 676,497 1,448,847
	234,586 146,755 669,516 1,050,857 19,596 162,573 302,658 484,827
	290,199 263,051 316,213 869,463

8 TRADE AND OTHER RECEIVABLES

TRADE AND OTHER RECEIVABLES
Current: Trade receivables Allowance for expected credit losses Other receivables and prepayments Non-current: Other receivables	Unaudited Six Months Ended 31 January 2021 Unaudited Six Months Ended 31 January 2020 Audited Year Ended 31 July 2020 NZ$’000 NZ$’000 NZ$’000
	52,805 66,095 62,143 (9,845) (5,912) (10,329) 14,871 20,221 21,854
	57,831 80,404 73,668
	3,639 3,957 3,945

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KATHMANDU HOLDINGS LIMITED - INTERIM REPORT 2021

9 PROPERTY PLANT & EQUIPMENT

PROPERTY PLANT & EQUIPMENT
Additions Acquisition of businesses Disposals	Unaudited Six Months Ended 31 January 2021 Unaudited Six Months Ended 31 January 2020 Audited Year Ended 31 July 2020 NZ$’000 NZ$’000 NZ$’000
	6,125 8,337 15,399 - 35,276 35,276 (41) (407) (3,128)

10 LEASES

Right-of-use assets

The movements in right of use assets for the six months ended 31 January 2021 were as follows:

Opening net book value Movements on transition Additions Right-of-use assets recognised on acquisition (note 16) Depreciation for the period Impairment for the period Exchange differences Closing net book value	Unaudited Six Months Ended 31 January 2021 Unaudited Six Months Ended 31 January 2020 Audited Year Ended 31 July 2020 NZ$’000 NZ$’000 NZ$’000
	258,699 - - - 178,774 178,774 24,546 15,198 37,941 - 118,457 118,457 (41,352) (33,079) (76,380) - - (2,050) (3,675) (4,362) 1,957
	238,218 274,988 258,699

Lease liabilities

The movements in lease liabilities for the six months ended 31 January 2020 were as follows:

Opening lease liabilities Movements on transition Additions Lease liabilities recognised on acquisition (note 16) Interest expense on lease liabilities Repayment of lease liabilities (including interest) Exchange differences Closing net book value	Unaudited Six Months Ended 31 January 2021 Unaudited Six Months Ended 31 January 2020 Audited Year Ended 31 July 2020 NZ$’000 NZ$’000 NZ$’000
	298,622 - - - 215,389 215,389 24,082 15,038 37,886 - 119,725 119,725 4,493 4,092 8,874 (47,189) (37,723) (86,110) (3,897) (4,666) 2,858
	276,111 311,855 298,622

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KATHMANDU HOLDINGS LIMITED - INTERIM REPORT 2021

11 INTEREST BEARING LIABILITIES

1 INTEREST BEARING LIABILITIES
Interest bearing liabilities	Unaudited Six Months Ended 31 January 2021 Unaudited Six Months Ended 31 January 2020 Audited Year Ended 31 July 2020 NZ$’000 NZ$’000 NZ$’000
	238,566 313,425 241,270

Group Facility Agreement

The Group has a multi-option syndicated facility agreement, with a term loan facility of A$220 million, a revolving cash advances facility of NZ$58 million and A$37 million, a trade finance sub-facility of A$30 million and NZ$10 million, and instruments sub-facility of A$20 million. All facilities are repayable in full on 30 November 2022.

Interest is payable based on the BKBM rate (NZD borrowings), the BBSY rate (AUD borrowings), or the applicable short-term rate for interest periods less than 30 days, plus a margin of up to 1.05%. The debt is secured by the assets of the guaranteeing group in accordance with the Security Trust Deed dated 25 October 2019.

The covenants entered into by the Group require specified calculations of Group earnings (excluding one-off transaction costs) before interest, tax, depreciation and amortisation (EBITDA) plus lease rental costs to exceed total fixed charges (net interest expense and lease rental costs) at the end of each half during the financial year. Similarly, EBITDA (excluding one-off transaction costs) must be no less than a specified proportion of total net debt at the end of each six-month interim period. The calculations of these covenants are specified in the bank facility agreement of 25 October 2019. The Group has obtained a waiver from its banking syndicate of the current covenants until the 31 July 2021 measurement point; however, the Group has continued to comply with all covenants at each measurement point since the waiver was obtained.

The current interest rate, prior to hedging, on the term loans is at 0.96% (2020: ranged from 1.89% - 2.30%).

Paycheck Protection Program (PPP) loans

As part of the US government response to COVID-19 the Group’s US resident companies applied for Paycheck Protection Program (PPP) loans of US $2,814,000 in the year ended 31 July 2020. The Group believes that these entities met the criteria to qualify for the loans at the date of the application. The eligibility is subject to a possible audit by the federal government at which time the entities may be deemed not to be eligible. In the event of an unfavourable outcome of the forgiveness application the Group would be required to repay the PPP loan as well as 1% interest on that loan from the period it was received until the date it was repaid.

The PPP loan was initially recognised as a loan and once various criteria are met the Group can apply for forgiveness of that loan. During the period, the Group applied for and received forgiveness of the PPP loan for one of the US resident entities and consequently a $684,000 gain was recognised in the consolidated statement of comprehensive income in the current period. The Group believes that the remaining US resident entity also meets the criteria to qualify for future forgiveness. At 31 January 2020 the remaining PPP loan balance was $3,272,000 (2020: $4,201,000) and forgiveness has not yet been applied for nor granted at this date.

12 FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS

(a) Financial risk factors

The Group’s activities expose it to a variety of financial risks, market risk (including currency risk and interest rate risk), credit risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group uses derivative financial instruments such as foreign exchange contracts and interest rate swaps to manage certain risk exposures. Derivatives are exclusively used for economic hedging purposes, i.e. not as trading or other speculative instruments, however not all derivative financial instruments qualify for hedge accounting.

Risk management is carried out based on policies approved by the Board of Directors. The Group treasury policy provides written principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk.

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KATHMANDU HOLDINGS LIMITED - INTERIM REPORT 2021

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group manages this risk by actively managing working capital and ensuring flexibility in funding arrangements. Refer to note 11 for details of the funding arrangements in place as at 31 January 2021. Also refer to note 4 for the liquidity risk in relation to the impact of COVID-19.

The consolidated interim financial statements do not include all financial risk management information and disclosures required in the annual financial statements; they should be read in conjunction with the Group’s annual financial statements as at 31 July 2020. There have been no changes in the risk management department or in any risk.

(b) Fair value estimation

The only financial instruments held by the Group that are measured at fair value are over-the-counter derivatives. These derivatives have all been determined to be within level 2 (for the purposes of NZ IFRS 13) of the fair value hierarchy as all significant inputs required to ascertain the fair value of these derivatives are observable.

There were no changes in valuation techniques during the period.

The following methods and assumptions were used to estimate the fair values for each class of financial instrument.

Trade debtors, trade creditors and bank balances

The carrying value of these items is equivalent to their fair value.

Term liabilities

The fair value of the Group's term liabilities is approximately carrying value.

Foreign exchange contracts and interest rate swaps

The forward foreign exchange contracts have been fair valued using forward exchange rates that are quoted in an active market. Interest rate swaps are fair valued using forward interest rates extracted from observable yield curves. The effects of discounting are insignificant for these derivatives.

Guarantees and overdraft facilities

The fair value of these instruments is estimated on the basis that management do not expect settlement at face value to arise. The carrying value and fair value of these instruments is approximately nil. All guarantees are repayable on demand.

The following table presents the Group’s assets and liabilities that are measured at fair value at balance date:

Assets Derivative financial instruments Total assets Liabilities Derivative financial instruments Total liabilities	Unaudited Six Months Ended 31 January 2021 Unaudited Six Months Ended 31 January 2020 Audited Year Ended 31 July 2020 NZ$’000 NZ$’000 NZ$’000
	93 5,677 53
	93 5,677 53
	11,775 186 7,414
	11,775 186 7,414

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KATHMANDU HOLDINGS LIMITED - INTERIM REPORT 2021

13 COMMITMENTS

Capital commitments

Capital commitments contracted for at balance date are:

apital commitments contracted for at balance date are:
Property, plant, and equipment Intangible assets	Unaudited Six Months Ended 31 January 2021 Unaudited Six Months Ended 31 January 2020 Audited Year Ended 31 July 2020 NZ$’000 NZ$’000 NZ$’000
	2,945 5,300 975 13,669 1,433 709

Intangible asset commitments as at 31 January 2021 relate to various projects across the Group to upgrade information technology software and systems.

14 CONTINGENT LIABILITIES

The Group is subject to litigation incidental to its business, none of which is expected to be material. No provision has been made in the Group’s consolidated interim financial statements in relation to any current litigation and the Directors believe that such litigation will not have a material effect on the Group’s consolidated interim financial position, results of operations or cash flows.

15 CONTINGENT ASSETS

There are no contingent assets as at 31 January 2021 (2020: nil).

16 ACQUISITION OF RIP CURL GROUP PTY LTD

On 31 October 2019 Kathmandu Holdings Limited through its wholly owned subsidiary Barrel Wave Holdings Pty Limited acquired 100% of the equity interests in Rip Curl Group Pty Limited and its controlled entities based out of Australia. The total purchase price was A$350,000,000. The non-controlling interest on acquisition relates to the interest acquired by the Group in Rip Curl joint ventures in New Zealand, Thailand, and Europe.

Rip Curl is a designer, manufacturer and retailer of surfing equipment and apparel, and has a global presence across Australia, New Zealand, North America, Europe, South East Asia, and Brazil. The acquisition creates a global outdoor and action sports company anchored by two iconic Australian brands and provides the opportunity for Kathmandu to considerably diversify its geographic footprint, channels to market and seasonality profile.

The acquisition accounting fair value adjustments were on a provisional basis in the Group’s 31 January 2020 consolidated interim financial statements and 31 July 2020 consolidated financial statements. The acquisition accounting adjustments have now been finalised and updated to reflect independent valuations performed on the net assets recognised on acquisition.

As a result, the following adjustments have been recognised in the finalised purchase price allocation; an increase in other current assets of $2,803,000, a decrease in property, plant, and equipment of $2,253,000, an increase in the right of use asset and lease liability of $1,161,000, an increase in trade and other payables of $6,158,000 and a corresponding increase in goodwill $5,608,000.

The comparatives presented in these financial statements reflect these changes and the resultant cumulative impact as at 31 July 2020 is $11,000.

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KATHMANDU HOLDINGS LIMITED - INTERIM REPORT 2021

Final Purchase Price Allocation

inal Purchase Price Allocation
Purchase price Less net indebtedness adjustment Plus working capital settlement adjustments Total net consideration Carrying amounts of identifiable assets acquired and liabilities assumed: Current assets Cash and cash equivalents Trade and other receivables Inventories Derivative financial instruments Current tax asset Other current assets Non-current assets Other receivables Property, plant, and equipment Right-of-use assets Brand Customer relationships Other intangibles Current liabilities Trade and other payables Current tax liability Current lease liabilities Non-current liabilities Non-current trade and other payables Non-current lease liabilities Interest bearing liabilities Deferred tax Less non-controlling interest acquired Net assets acquired Goodwill on acquisition Total net consideration Less cash and cash equivalents acquired Less consideration paid as shares Plus indebtedness settled on acquisition Net cash outflow on acquisition	NZD$’000
	377,562 (78,147) 23,437
	322,852
	29,142 83,361 124,675 990 6,216 2,803 4,496 35,276 118,457 169,687 39,697 3,800 (84,164) (2,224) (33,788) (7,571) (85,937) (115,366) (53,245) (3,335)
	232,970 89,882
	322,852
	(29,142) (32,955) 115,366
	376,121

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KATHMANDU HOLDINGS LIMITED - INTERIM REPORT 2021

17 RELATED PARTY DISCLOSURES

No amounts owed to related parties have been written off or forgiven during the period.

18 EVENTS OCCURRING AFTER BALANCE DATE

There are no events after balance date which materially affect the information within the financial statements.

19 NEW ACCOUNTING STANDARDS

(a) New standards first applied in the period

There are no new standards first applied in the period.

(b) Standards, interpretations, and amendments to published standards that are not yet effective

There are no standards or amendments published but not yet effective that are expected to have a significant impact on the Group.

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KATHMANDU HOLDINGS LIMITED - INTERIM REPORT 2021

STATUTORY INFORMATION

GROUP STRUCTURE

Kathmandu Holdings Limited owns 100% of the following companies unless otherwise stated: Milford Group Holdings Limited

Kathmandu Limited Kathmandu Pty Limited Kathmandu (UK) Limited Kathmandu US Holdings LLC Oboz Footwear LLC Rip Curl Group Pty Ltd Rip Curl International Pty Ltd PT Jarosite Rip Curl Pty Ltd Onsmooth Thai Co Ltd Rip Curl Investments Pty Ltd Blue Surf Pty Ltd RC Surf Pty Ltd Rip Curl Airport & Tourist Stores Pty Ltd JRRC Rundle Mall Pty Ltd Rip Curl (Thailand) Ltd (Group owns 50%) RC Airports Pty Ltd Ozmosis Pty Ltd RC Chermside Pty Ltd Bondi Rip Pty Ltd Rip Curl Japan Curl Retail No 1. Pty Ltd RC Surf Pty Ltd RC Surf South Pty Ltd RC Surf NZ Limited (Group owns 50%) Rip Curl Finance Pty Ltd Rip Curl Europe S.A.S Rip Curl Spain S.A.U Rip Curl Suisse S.A.R.L Rip Surf LDA Rip Curl UK Ltd Rip Curl Germany GMBH Rip Curl Italy SRL Rip Curl Nordic AB Rip Curl Inc Rip Curl Canada Inc Rip Curl Brazil LTDA

DIRECTORS’ DETAILS

David Kirk Chairman, Non-Executive Director Xavier Simonet Managing Director and Group Chief Executive Officer John Harvey Non-Executive Director Philip Bowman Non-Executive Director Brent Scrimshaw Non-Executive Director Andrea Martens Non-Executive Director

EXECUTIVES’ DETAILS

Xavier Simonet Group Chief Executive Officer Chris Kinraid Group Chief Financial Officer

DIRECTORY

The details of the Company’s principal administrative and registered office in New Zealand are:

223 Tuam Street Christchurch Central PO Box 1234 Christchurch 8011

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KATHMANDU HOLDINGS LIMITED - INTERIM REPORT 2021

SHARE REGISTRY

In New Zealand:	Link Market Services (LINK)
Physical Address:	Level 11 Deloitte Centre
	80 Queen Street
	Auckland 1010
	New Zealand
Postal Address:	PO Box 91976
	Auckland, 1142
	New Zealand
Telephone:	+64 9 375 5999
Investor enquiries:	+64 9 375 5998
Facsimile:	+64 9 375 5990
Internet address:	www.linkmarketservices.co.nz
In Australia:	Link Market Services (LINK)
Physical Address:	Level 1, 333 Collins Street
	Melbourne, VIC 3000
	Australia
Postal Address:	Locked Bag A14
	Sydney, South NSW 1235
	Australia
Telephone:	+61 2 8280 7111
Investor enquiries:	+61 2 8280 7111
Facsimile:	+61 2 9287 0303
Internet address:	www.linkmarketservices.com.au

STOCK EXCHANGES

The Company’s shares are listed on the NZX and on the ASX as a foreign exempt listing.

INCORPORATION

The Company is incorporated in New Zealand.

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To the shareholders of Kathmandu Holdings Limited

Report on the consolidated interim financial statements

Our conclusion

We have reviewed the consolidated interim financial statements of Kathmandu Holdings Limited (the Company) and its controlled entities (the Group), which comprise the consolidated balance sheet as at 31 January 2021, and the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the six month period ended on that date, and significant accounting policies and other explanatory information.

Based on our review, nothing has come to our attention that causes us to believe that the accompanying consolidated interim financial statements of the Group do not present fairly, in all material respects, the financial position of the Group as at 31 January 2021, and its financial performance and cash flows for the six month period then ended, in accordance with International Accounting Standard 34 Interim Financial Reporting (IAS 34) and New Zealand Equivalent to International Accounting Standard 34 Interim Financial Reporting (NZ IAS 34).

Basis for conclusion

We conducted our review in accordance with the New Zealand Standard on Review Engagements 2410 (Revised) Review of Financial Statements Performed by the Independent Auditor of the Entity (NZ SRE 2410 (Revised)). Our responsibility is further described in the review of the financial statements section of our report.

We are independent of the Group in accordance with the relevant ethical requirements in New Zealand relating to the audit of the annual financial statements, and we have fulfilled our other ethical responsibilities in accordance with these ethical requirements. In addition to our role as auditor, our firm carries out other services for the Group in the areas of store turnover certificates, a covenant compliance audit, tax compliance and advisory services. The provision of these other services has not impaired our independence.

responsibility for the financial statements

The of the Company are responsible on behalf of the Company for the preparation and fair presentation of these consolidated interim financial statements in accordance with IAS 34 and NZ IAS 34 and for such internal control as the Directors determine is necessary to enable the preparation and fair presentation of consolidated interim financial statements that are free from material misstatement, whether due to fraud or error.

Our responsibility is to express a conclusion on the consolidated interim financial statements based on our review. NZ SRE 2410 (Revised) requires us to conclude whether anything has come to our attention that causes us to believe that the consolidated interim financial statements, taken as a whole, are not prepared in all material respects, in accordance with IAS 34 and NZ IAS 34. A review of consolidated interim financial statements in accordance with NZ SRE 2410 (Revised) is a limited assurance engagement. We perform procedures, primarily consisting of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.

PricewaterhouseCoopers, PwC Centre, 60 Cashel Street, PO Box 13-244, Christchurch 8141 New Zealand T: +64 3 374 3000, www.pwc.co.nz

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The procedures performed in a review are substantially less than those performed in an audit conducted in accordance with International Standards on Auditing and International Standards on Auditing (New Zealand) and consequently does not enable us to obtain assurance that we might identify in an audit. Accordingly, we do not express an audit opinion on these consolidated interim financial statements.

Who we report to

This report is made solely to the Co shareholders as a body. Our review work has been undertaken so that we might state to the Company shareholders those matters which we are required to state to them in our review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the shareholders, as a body, for our review procedures, for this report, or for the conclusion we have formed.

Leopino

Foliaki.

For and on behalf of:

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Chartered Accountants 23 March 2021

Christchurch

PwC

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