THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should consult your licensed securities dealer, bank manager, solicitor, professional accountant or other professional advisers.

If you have sold or transferred all your shares in Lion Rock Group Limited , you should at once hand this circular to the purchaser(s) or the transferee(s) or to the bank, licensed securities dealer or registered institution in securities or other agent through whom the sale or transfer was effected for transmission to the purchaser(s) or the transferee(s).

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this circular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.

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LION ROCK GROUP LIMITED 獅子山集團有限公司 *

(Incorporated in Bermuda with limited liability) (Stock code: 1127)

MAJOR TRANSACTION

ACQUISITION OF QUARTO SHARES

A letter from the Board is set out on pages 4 to 13 of this circular.

The Acquisition has been approved by written Shareholders’ approval obtained from Lion Rock Group Limited, pursuant to Rule 14.44 of the Listing Rules in lieu of holding a general meeting of the Company. This circular is being despatched to the Shareholders for information only.

25 May 2022

		page
DEFINITIONS	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
LETTER FROM THE BOARD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		4
APPENDIX I	–FINANCIAL INFORMATION OF THE GROUP AND
	THE ENLARGED GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	14
APPENDIX II	–FINANCIAL INFORMATION OF QUARTO GROUP. . . . . . . . . . . . . . . .	17
APPENDIX III	–UNAUDITED PRO FORMA FINANCIAL INFORMATION
	OF THE ENLARGED GROUP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	171
APPENDIX IV	–MANAGEMENT DISCUSSION AND ANALYSIS OF
	QUARTO GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	188
APPENDIX V	–GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	194

DEFINITIONS

In this circular, unless the context requires otherwise, the following expressions have the following meanings:

“A$” Australian dollars, the lawful currency of Australia “£” British pound, the lawful currency of the UK “1010 Printing” 1010 Printing Limited, a company incorporated in Hong Kong and an indirect wholly-owned subsidiary of the Company
“2021 Acquisition” the acquisition of 1,679,743 Quarto Shares by 1010 Printing from Mr. Lau for a consideration of £1,511,769 (equivalent to approximately HK$15.6 million) (excluding stamp duty and related expenses) on 11 October 2021
“Acquisition” the acquisition of 1,875,000 Quarto Shares by 1010 Printing from Mr. Zen Wei Peu on 1 April 2022 (after trading hours of the Stock Exchange) at a consideration of £2,250,000 (equivalent to approximately HK$23,175,000) (excluding stamp duty and related expenses)
“Board” the board of Directors “City Apex” City Apex Ltd., a company incorporated in the British Virgin Islands with limited liability
“Company” Lion Rock Group Limited (獅子山集團有限公司*), an exempted company incorporated in Bermuda with limited liability, the shares of which are listed on the main board of the Stock Exchange (stock code: 1127)
“Director(s)” the director(s) of the Company “Enlarged Group” The Group and Quarto Group “ER2” ER2 Holdings Limited, a company incorporated in Hong Kong with limited liability
“First Open Market Acquisitions” the acquisition of an aggregate of 1,185,000 Quarto Shares in the open market of the London Stock Exchange by 1010 Printing between 6 August 2021 and 6 January 2022 (both dates inclusive) for an aggregate consideration of approximately £1,404,950 (equivalent to approximately HK$14.5 million) (excluding stamp duty and related expenses)

DEFINITIONS

“Great Eagle” The Great Eagle Company, Limited, a company incorporated in Hong Kong with limited liability and a Shareholder “Great Eagle Holdings” Great Eagle Holdings Limited, a company listed on the Stock Exchange (Stock code: 0041.HK) “Group” the Company and its subsidiaries “HK$” Hong Kong dollars, the lawful currency of Hong Kong “Hong Kong” the Hong Kong Special Administrative Region of the PRC “Independent Third Party(ies)” third party(ies) independent of the Company and its connected persons “Latest Practicable Date” 18 May 2022, being the latest practicable date prior to the printing of this circular for the purpose of ascertaining certain information contained in this circular “Listing Rules” the Rules Governing the Listing of Securities on the Stock Exchange “Mr. Lau” Mr. Lau Chuk Kin, an executive Director and substantial Shareholder and an executive director of Quarto “Ms. Lam” Ms. Lam Mei Lan, an executive Director, a Shareholder and a non-executive director of Quarto “PRC” or “China” the People’s Republic of China “Quarto” The Quarto Group, Inc., incorporated in the United States and the issued shares of which are listed on the London Stock Exchange (LSE: QRT) “Quarto Group” Quarto and its subsidiaries “Quarto Share(s)” share(s) of US$0.1 each in the issued share capital of Quarto “Relevant Shareholders” Mr. Lau, City Apex, ER2, Ms. Lam and Great Eagle “Second Open Market Acquisitions” the acquisition of an aggregate of 398,000 Quarto Shares in the open market of the London Stock Exchange by 1010 Printing between 7 January 2022 and 26 January 2022 (both dates inclusive) for an aggregate consideration of approximately £497,488 (equivalent to approximately HK$5.1 million) (excluding stamp duty and related expenses)

DEFINITIONS

“Share(s)”	the ordinary Share(s) of HK$0.10 each in the share capital of the
	Company
“Shareholder(s)”	shareholder(s) of the Company
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“Takeovers Code”	The Codes on Takeovers and Mergers and Share Buy-backs
“UK”	The United Kingdom of Great Britain and Northern Ireland
“US$”	United States dollars, the lawful currency of the United States
“United States” or “US”	the United States of America
“%”	per cent.

For the purpose of illustration only and unless otherwise stated, conversion of £ to HK$ in this circular is based on the exchange rate of £1.00 to HK$10.3. Such conversion should not be construed as a representation that any amounts have been, could have been, or may be, exchanged at this or any other rate.

For identification purpose only

LETTER FROM THE BOARD

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LION ROCK GROUP LIMITED 獅子山集團有限公司 *

(Incorporated in Bermuda with limited liability) (Stock code: 1127)

Executive Directors: Lau Chuk Kin Lam Mei Lan Chu Chun Wan

Non-Executive Directors: Li Hoi, David Guo Junsheng

Independent Non-Executive Directors: Yeung Ka Sing (Chairman) Lee Hau Leung Ng Lai Man, Carmen

Registered office: Clarendon House 2 Church Street Hamilton HM 11 Bermuda

Principal place of business

in Hong Kong: Level 11 East Wing NEO, 123 Hoi Bun Road Kwun Tong Kowloon Hong Kong

25 May 2022

To the Shareholders

Dear Sir or Madam,

MAJOR TRANSACTION ACQUISITION OF QUARTO SHARES

INTRODUCTION

Reference is made to the announcement of the Company dated 1 April 2022 in relation to the Acquisition.

The purpose of this circular is to provide you with, among other things, (i) information of the Acquisition; (ii) financial information of the Group; (iii) financial information of Quarto Group; (iv) unaudited pro forma financial information of the Enlarged Group; and (v) other information as required under the Listing Rules.

LETTER FROM THE BOARD

THE ACQUISITION

On 1 April 2022 (after trading hours of the Stock Exchange), 1010 Printing, an indirect wholly-owned subsidiary of the Company, acquired 1,875,000 Quarto Shares, representing approximately 4.6% of the issued share capital of Quarto, from Mr. Zen Wei Peu at a price of £1.20 per Quarto Share (equivalent to approximately HK$12.36) (excluding stamp duty and related expenses). To the best of the knowledge, information and belief of the Directors, having made all reasonable enquiries, Mr. Zen Wei Peu is an Independent Third Party.

BASIS OF DETERMINATION OF THE CONSIDERATION

The total consideration for the Acquisition was £2,250,000 (equivalent to approximately HK$23,175,000) (excluding stamp duty and related expenses). The consideration for the Acquisition was determined after arm’s length negotiations and with reference to the net asset value of Quarto Group and the closing price of £1.35 per Quarto Share quoted on the London Stock Exchange’s Main Market on 31 March 2022.

The consideration for the Acquisition (1,875,000 Quarto Shares at a price of £1.20 per Quarto Share) represents:

(a) a discount of approximately 11.1% to the closing price of £1.35 of Quarto’s stock as quoted on the London Stock Exchange on 31 March 2022, which is the business day immediately preceding the date of the Acquisition;
(b) a discount of approximately 3.0% to the average closing price of approximately £1.24 of Quarto’s stock as quoted on the London Stock Exchange for the one month preceding 31 March 2022; and
(c) a discount of approximately 5.5% to the average closing price of approximately £1.27 of Quarto’s stock as quoted on the London Stock Exchange for the three months preceding 31 March 2022.

The consideration of the Acquisition has been funded by the Group’s internal resources.

PREVIOUS ACQUISITIONS

Reference is made to (i) the Company’s announcement dated 11 October 2021 in relation to the acquisition of 1,679,743 Quarto Shares by 1010 Printing from Mr. Lau, an executive Director and substantial Shareholder, at a consideration of £1,511,769 (equivalent to approximately HK$15.6 million) (excluding stamp duty and related expenses) (the “ 2021 Acquisition ”); and (ii) the Company’s announcement dated 7 January 2022 in relation to the acquisition of 1,185,000 Quarto Shares by 1010 Printing in the open market of the London Stock Exchange for an aggregate consideration of approximately £1,404,950 (equivalent to approximately HK$14.5 million) (excluding stamp duty and related expenses) (the “ First Open Market Acquisitions ”).

LETTER FROM THE BOARD

Between 7 January 2022 and 26 January 2022 (both dates inclusive), 1010 Printing acquired an aggregate of 398,000 Quarto Shares in the open market of the London Stock Exchange for an aggregate consideration of approximately £497,488 (equivalent to approximately HK$5.1 million) (the “ Second Open Market Acquisitions ”). The Second Open Market Acquisitions do not constitute any notifiable transaction of the Company under Chapter 14 of the Listing Rules and, when aggregated with the 2021 Acquisition and the First Open Market Acquisitions, constitute a discloseable transaction of the Company under Chapter 14 of the Listing Rules.

SHARES ACQUIRED IN THE ACQUISITION

SHARES ACQUIRED AFTER THE ACQUISITION

Between 1 April 2022 and the Latest Practicable Date (both dates inclusive), 1010 Printing acquired an aggregate of 280,000 Quarto Shares in the open market of the London Stock Exchange for an aggregate consideration of approximately £450,000 (equivalent to approximately HK$4.6 million) (excluding stamp duty and related expenses).

On 19 April 2022 (after trading hours of the Stock Exchange), 1010 Printing acquired a total of 40,000 Quarto Shares, representing approximately 0.1% of the issued share capital of Quarto, from Mr. Michael Mousley and Ms. Diane Mousley at a consideration of £68,000 (equivalent to approximately HK$700,400) (excluding stamp duty and related expenses). Mr. Michael Mousley (i) was the former chief financial officer of Quarto from 17 May 2018 until 10 February 2020; (ii) was an executive director of Quarto from 17 May 2018 until 30 April 2019; (iii) was a non-executive director of Quarto from 1 May 2020 until 10 February 2020; and (iv) has been retained as an advisor to the board of directors of Quarto since his stepping down from the board of directors of Quarto. Ms. Diane Mousley is the wife of Mr. Michael Mousley. To the best of the knowledge, information and belief of the Directors, having made all reasonable enquiries, Mr. Michael Mousley and Ms. Diane Mousley are Independent Third Parties.

On 5 May 2022 (after trading hours of the Stock Exchange), 1010 Printing acquired a total of 2,000 Quarto Shares, from Mr. Frederick Delon at a consideration of £3,200 (equivalent to approximately HK$32,960) (excluding stamp duty and related expenses). To the best of the knowledge, information and belief of the Directors, having made all reasonable enquiries, Mr. Frederick Delon is an Independent Third Party.

The above acquisitions, on a standalone basis, do not constitute any notifiable transaction of the Company under Chapter 14 of the Listing Rules and, when aggregated with the 2021 Acquisition, the First Open Market Acquisitions, the Second Open Market Acquisitions and the Acquisition, constitute a major transaction of the Company under Chapter 14 of the Listing Rules.

As at the Latest Practicable Date, 1010 Printing holds approximately 50.02% of the issued share capital of Quarto.

LETTER FROM THE BOARD

INFORMATION OF QUARTO

Quarto is a company incorporated in the United States and the issued shares of which are listed on the Main Market of the London Stock Exchange (LSE: QRT). Quarto is principally engaged in illustrated book publishing.

Set out below is a summary of certain audited consolidated financial information of Quarto Group extracted from the published documents of Quarto for the year ended 31 December 2020 and 2021, respectively:

	For the year	ended
	31 December
	2021	2020
	(audited)	(audited)
	US$ million	US$ million
Revenue	151.5	126.9
Profit before tax	14.2	6.6
Profit after tax	9.9	4.6

Based on the audited consolidated financial statements of Quarto for the year ended 31 December 2020 and 2021, the net asset value of Quarto Group as at 31 December 2020 and 2021 was approximately US$43,713,000 and US$53,209,000, respectively.

REASONS FOR AND BENEFITS OF THE ACQUISITION

The Group is principally engaged in the provision of printing services to international book publishers, trade, professional and educational publishing conglomerates and print media companies. One of the driving forces for the Group in moving forward is diversification.

Quarto is a leading global illustrated non-fiction book publisher and one of the Group’s top five customers which has been trading with the Group since 2007.

The Acquisition enables the Group to further increase its shareholding in Quarto in order to maximize the economic benefits through the Group’s interest in Quarto. With Quarto Group’s improving financial performance and return to financial health in the past year, Directors believe that it is the right time for the Group to obtain control in Quarto to become a subsidiary of the Group.

The Acquisition is an important part of the Group’s diversification strategy to establish the publishing business as one of our three revenue engines. The Group will look for ‘bolt-on’ acquisitions of publishers or imprints that could generate synergistic value by leveraging Quarto Group’s procurement, operations, and sales platform. This in turn will bring in additional potential revenue for the print manufacturing segment of the Group.

LETTER FROM THE BOARD

The Acquisition will also allow the Group to strengthen the supply chain capability by gaining visibility of the end-to-end supply chain of the book industry and tighter integration of planning, procurement, production and logistics functions across the publishing and print manufacturing segments. The strengthening of the supply chain capability will serve as a key differentiator for us versus our competitors.

The Directors (including the independent non-executive Directors) are of the view that the consideration of the Acquisition is fair and reasonable and it is the appropriate timing to further increase the Group’s equity interest in Quarto. The Directors (including the independent non-executive Directors) consider that the terms of the Acquisition are fair and reasonable and the Acquisition is on normal commercial terms and in the interest of the Company and the Shareholders as a whole. If a general meeting were to be convened for the approval of the Acquisition, the Board would recommend the Shareholders to vote in favour of the resolution to approve the Acquisition and the transaction contemplated thereunder at such general meeting.

IMPLICATIONS OF THE ACQUISITION UNDER THE LISTING RULES

As one or more of the applicable percentage ratios under Rule 14.07 of the Listing Rules in respect of the Acquisition, on a standalone basis and when aggregated with previous acquisitions (which include the 2021 Acquisition; the First Open Market Acquisitions and the Second Open Market Acquisitions) over the past 12 months, are more than 25% but less than 100%, the Acquisition constitutes a major transaction of the Company under Rule 14.06 of the Listing Rules and is subject to the reporting, announcement, circular and Shareholders’ approval requirements under Chapter 14 of the Listing Rules.

Under Rule 14.44 of the Listing Rules, Shareholders’ approval for the Acquisition may be obtained by way of written Shareholders’ approval in lieu of holding a general meeting if (a) no Shareholder is required to abstain from voting if the Company were to convene a general meeting to obtain such Shareholders’ approval; and (b) written Shareholder’s approval has been obtained from a Shareholder or a closely allied group of Shareholders who together hold more than 50% of the entire issued share capital of the Company having the right to attend and vote at that general meeting to approve such transactions.

The Directors confirmed that, to the best of their knowledge, information and belief after having made all reasonable enquiries, no Shareholders or any of their respective close associates have any material interest in the Acquisition. As such, no Shareholders would be required to abstain from voting in favour of the resolution approving the Acquisition.

LETTER FROM THE BOARD

As at 1 April 2022, the following closely allied group of Shareholders are directly interested in approximately 51.05% of the entire issued share capital of the Company:

Name of Shareholder Mr. Lau_(Note i) City Apex(Note i) ER2(Note i) Ms. Lam(Note ii) Great Eagle(Note iii)_ Total	No. of Shares held 78,701,906 258,135,326 8,297,391 16,568,688 31,387,503 393,090,814	Approximate percentage of shareholding in the Company 10.22% 33.52% 1.08% 2.15% 4.08% 51.05%

Notes:

i. ER2 directly holds 77% equity interest in City Apex and Mr. Lau directly owns approximately 69.76% of the issued share capital of ER2. Accordingly, Mr. Lau is interested in 345,134,623 Shares, representing approximately 44.82% of the issued share capital of the Company. ER2 and City Apex are deemed as parties acting in concert with Mr. Lau for the purpose of the Takeovers Code and Rule 14.45(4) of the Listing Rules.
ii. Ms. Lam and Mr. Lau have an established long term past and present business association with each other since 1996. Ms. Lam has become a Shareholder since 2011.
iii. Great Eagle is a wholly-owned subsidiary of Great Eagle Holdings, which indirectly holds 23% of issued share capital of City Apex. Great Eagle is deemed as a party acting in concert with Mr. Lau, City Apex and ER2 for the purpose of the Takeovers Code and Rule 14.45(4) of the Listing Rules.

The aforesaid Relevant Shareholders have given its written approval for the Acquisition pursuant to Rule 14.44 of the Listing Rules. Accordingly, such written approval has been accepted in lieu of convening a special general meeting of the Company to approve the Acquisition as permitted under Rule 14.44.

WAIVER FROM STRICT COMPLIANCE WITH RULE 14.67(6)(A)(I) OF THE LISTING RULES

Pursuant to Rule 14.67(6)(a)(i) of the Listing Rules, the Company is required to include in this circular an accountants’ report on Quarto prepared in accordance with Chapter 4 of the Listing Rules. The accountants’ report of Quarto needs to include the financial information of Quarto for each of the three financial years ended 31 December 2021 prepared using accounting policies which should be materially consistent with those of the Company.

The Company has applied for a waiver from strict compliance with the requirement for an accountants’ report on Quarto under Rule 14.67(6)(a)(i) of the Listing Rules on the following grounds:

LETTER FROM THE BOARD

Quarto was incorporated in Delaware and listed on the Main Market of London Stock Exchange (LSE: QRT). The audited the financial statements of Quarto Group for the three financial years ended 31 December 2021 comprising the consolidated income statements, the consolidated statements of comprehensive income, the consolidated balance sheets, the consolidated statements of changes in equity, the consolidated cash flow statements, Quarto’s balance sheets, Quarto’s statements of comprehensive income, Quarto’s statements of changes in equity and notes to the financial statements, including a summary of significant accounting policies.

Quarto Group’s audited consolidated financial statements for the year ended 31 December 2021 have been properly prepared in accordance with UK-adopted International Accounting Standards; and Quarto Group’s audited consolidated financial statements for the two years ended 31 December 2020 have been properly prepared in accordance with International Financial Reporting Standards (“ IFRSs ”) as adopted by the European Union. The transition on the use of the financial reporting standards from IFRSs as adopted by the European Union to UK-adopted International Accounting Standards did not have significant impact to the financial reporting of Quarto Group. The accounting policies and disclosures used by Quarto Group for the three years ended 31 December 2021 comply with IFRS. The audit of Quarto Group’s consolidated financial statements for the three years ended 31 December 2021 have been conducted in accordance with International Standards on Auditing (UK) (ISAs (UK)).

Quarto has also been publishing financial information to the market on a regular basis to enable investors to assess its activities and financial position. Apart from its audited annual results, Quarto publishes its unaudited half-year (for the six months ended 30 June) results on the London Stock Exchange.

The consolidated financial statements of Quarto Group for each of the three financial years ended 31 December 2021 have been audited by Quarto’s auditors, Grant Thornton UK LLP, which has been the independent auditors of Quarto since 2017 and has extensive experience in auditing financial information of public companies. It is a chartered firm of the Institute of Chartered Accountants in the UK and a member firm of Grant Thornton global network. Grant Thornton is one of the leading professional services networks in the world providing assurance, tax and advisory services with offices in 130 countries and has an international name and reputation. Considering the above, the Directors are of the view that the Company complies with the requirements under Rule 4.03(2) of the Listing Rules.

The Directors are of the view that given (i) Grant Thornton UK LLP (a) has knowledge about the operations, accounting and reporting systems of Quarto Group, (b) is familiar with the financial information of Quarto Group and (ii) the audited consolidated financial statements comply with IFRS, it will be more cost and time effective for the Group to use such financial statements for the purpose of this circular.

Grant Thornton’s opinions on the consolidated financial statements of Quarto Group for the three financial years ended 31 December 2021 are unmodified.

LETTER FROM THE BOARD

Quarto, an associate corporation of the Company since 2018, whose financial results was already equity-accounted for into the audited consolidated financial results of the Group for the past three years. The Company is not aware of any material difference between the accounting policies adopted by Quarto and those adopted by the Company.

BDO Limited was engaged by the Company to conduct work in accordance with the Hong Kong Standard on Assurance Engagements 3000 “Assurance Engagements Other Than Audits or Reviews of Historical Financial Information” (“ HKSAE3000 ”) issued by the HKICPA. The work consisted primarily of:

(i) comparing the unadjusted financial information of the Quarto Group with the Quarto Group’s published accounts (“ Unadjusted Financial Information ”);
(ii) considering the adjustments made and evidence supporting the adjustments made in arriving at the Unaudited Adjusted Financial Information of the Quarto Group under the Company’s Accounting Policies, which includes examining the differences between the Quarto Group’s accounting policies and the Company’s accounting policies; and
(iii) checking the arithmetical accuracy of the compilation of the Unaudited Adjusted Financial Information of the Quarto Group under the Company’s Accounting Policies.

BDO Limited engagement did not involve independent examination of any of the underlying financial information. The work carried out in accordance with HKSAE3000 is different in scope from an audit or a review conducted in accordance with Hong Kong Standards on Auditing or Hong Kong Standards on Review Engagements issued by the HKICPA and consequently, BDO Limited did not express an audit opinion nor a review conclusion. BDO Limited’s engagement was intended solely for the use of the Directors in connection with this circular and may not be suitable for another purpose. Based on the work performed, BDO Limited has concluded that:

(i) the Unadjusted Financial Information under UK-adopted International Accounting Standards and IFRSs as adopted by the European Union of the Quarto Group has been properly extracted from the Quarto’s audited account for the three years ended 31 December 2019, 2020 and 2021 (“ Quarto Historical 3 Years’ Accounts ”);
(ii) in all material respects, there were no differences between the accounting policies of the Quarto as set out in Quarto Historical 3 Years’ Accounts and the accounting policies presently adopted by the Company for the year ended 31 December 2019, 2020 and 2021 requiring adjustments to the Unadjusted Financial Information to arrive at the Unaudited Financial Information under HKFRS; and
(iii) the computation of the Unaudited Financial Information under HKFRS is arithmetically accurate.

LETTER FROM THE BOARD

Quarto has subsidiaries having business in the UK and the US. Complying with the strict requirements of Rule 14.67(6)(a)(i) of the Listing Rules in having to produce an accountants’ report on Quarto Group based on HKFRS would create practical difficulties, and require Quarto to undertake a considerable amount of work, which would have significant timing, resource and cost implications for the parties involved.

The Company is prepared to make alternative disclosure as described in detail below to ensure the Shareholders to have sufficient financial information of Quarto Group.

Alternative Disclosure

The following information will be included in place of an accountants’ report on Quarto Group based on HKFRS in this circular:

Quarto Group’s audited financial statements for the year ended 31 December 2021 which have been properly prepared in accordance with UK-adopted International Accounting Standards; and Quarto’s audited financial statements for the two years ended 31 December 2020 which have been properly prepared in accordance with IFRSs as adopted by the European Union;
supplemental financial information of Quarto Group for each of the three financial years ended 31 December 2021, which is required for an accountants’ report under the Listing Rules but has not been disclosed in the published accounts of Quarto Group excluding the information required under Rule 4.08(3) of the Listing Rules; and
to the Company’s understanding, insofar as disclosures in compliance with the Listing Rules are concerned, the following information is absent from the financial reports of Quarto Group for the three financial years ended 31 December 2021: (i) ageing analysis on trade receivables by invoice date; (ii) ageing analysis on trade payables by invoice date; (iii) five highest paid individuals and directors remuneration; and (iv) an analysis as at the date of statement of financial position in relation to loans and borrowings, firstly of bank loans and overdrafts and, secondly of other borrowings, showing the aggregate amounts repayable: (a) on demand or within a period not exceeding one year; (b) within a period of more than one year but not exceeding two years; (c) within a period of more than two years but not exceeding five years; and (d) within a period of more than five years. The above items will be disclosed as required under the Listing Rules in this circular. The Company has no intention to exclude in this circular any information disclosed in the financial reports of Quarto Group for three financial years ended 31 December 2021.

LETTER FROM THE BOARD

The Directors considered that the published financial disclosure concerning Quarto Group and the additional financial disclosure as mentioned above will afford the Shareholders with all material information necessary to assess the financial performance of Quarto Group throughout the past three financial years, such information being broadly commensurate in all material respects to the disclosure that would otherwise have been provided if an accountants’ report on Quarto Group is produced under Rule 14.67(6)(a)(i) of the Listing Rules.

Based on the above, the Stock Exchange granted to the Company the waiver from strict compliance with the requirements under Rule 14.67(6)(a)(i) of the Listing Rules.

ADDITIONAL INFORMATION

Your attention is drawn to the additional information set out in the Appendices to this circular.

By order of the Board Lion Rock Group Limited Yeung Ka Sing Chairman

FINANCIAL INFORMATION OF THE GROUP AND THE ENLARGED GROUP

APPENDIX I

1. FINANCIAL INFORMATION OF THE GROUP

Financial information of the Group for each of the three financial years ended 31 December 2019, 2020 and 2021 are disclosed in the following documents which have been published on the websites of the Stock Exchange (www.hkexnews.com.hk) and the Company (https://www.lionrockgrouphk.com/):

(a) on pages 30 to 119 of the annual report of the Company for the year ended 31 December 2019 published on 2 April 2020
(https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0402/2020040202030.pdf);
(b) on pages 32 to 123 of the annual report of the Company for the year ended 31 December 2020 published on 12 April 2021
(https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0412/2021041201104.pdf); and
(c) on pages 30 to 123 of the annual report of the Company for the year ended 31 December 2021 published on 13 April 2022
(https://www1.hkexnews.hk/listedco/listconews/sehk/2022/0413/2022041301170.pdf).

2. INDEBTEDNESS

At the close of business on 31 March 2022, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the Enlarged Group had outstanding indebtedness of approximately HK$395,536,000, consisting of (1) bank borrowings of approximately HK$298,680,000; (2) other borrowings of approximately HK$1,161,000 and (3) lease liabilities of approximately HK$95,695,000. Bank borrowings of approximately HK$255,326,000 were secured by the corporate guarantee provided by the Company; bank borrowings of approximately HK$43,354,000 were secured by the joint guarantee and the charge of assets over Quarto and its subsidiaries, namely Quarto Publishing Plc, Quarto Publishing Group USA Inc. and Quarto Inc. Other borrowings represented unsecured and wholly guaranteed loan provided by the government of the US given under the Coronavirus Aid, Relief and Economic Security Act.

At the close of business on 31 March 2022, the Group also had pledged deposits of approximately HK$0.2 million as a security for the banking guarantee facilities of a subsidiary.

Save as aforesaid and apart from intra-group liabilities and normal trade payables, at the close of business on 31 March 2022, the Enlarged Group did not have any loan capital issued or agreed to be issued, bank overdrafts, loans or other similar indebtedness, liabilities under acceptances (other than normal trade bills) or acceptance credits, debentures, mortgages, charges, financial lease, hire purchases commitments, guarantees or other material contingent liabilities.

FINANCIAL INFORMATION OF THE GROUP AND THE ENLARGED GROUP

APPENDIX I

3. FINANCIAL IMPACT OF THE ACQUISITION

There is no variation regarding the aggregate remuneration payable to and benefits in kind receivable by the directors of Quarto and its subsidiaries in consequence of the Acquisition.

Assets and Liabilities

Based on the unaudited supplementary financial information of the Enlarged Group as set out in section C of Appendix III to the Circular, after taking into account the acquisition of Quarto Shares from 1 January 2022 till the date of Acquisition, the unaudited pro forma consolidated total assets of the Enlarged Group would increase from approximately HK$2,028.0 million to approximately HK$2,726.7 million and the consolidated total liabilities of the Enlarged Group would increase from approximately HK$680.5 million to approximately HK$1,234.9 million. The net assets of the Enlarged Group would increase from HK$1,347.5 million to HK$1,491.8 million.

The unaudited supplementary financial information has been prepared for illustrative purpose only, based on the judgments and assumptions of the Directors, and, because of its hypothetical nature, it may not reflect the true financial position of the Enlarged Group as at the date of completion or any future date. Moreover, since the actual fair values of the assets, liabilities and contingent liabilities of Quarto Group as at the completion date would be different from their estimated fair values used in the preparation of the unaudited pro forma financial information, the actual financial effects of the Acquisition might be materially different from the financial position as shown in Appendix III to this circular.

Earnings

Based on the consolidated financial statements of Quarto Group as set out in Appendix II to this circular, it is expected that the earnings of the Enlarged Group will increase as a result of the Acquisition. After considering the factors set out in the section headed “Reasons for and benefits of the Acquisition” of the Letter from the Board, the Directors expect that the Acquisition could produce a positive impact on the earnings of the Group in the near future.

4. FINANCIAL AND TRADING PROSPECT OF THE ENLARGED GROUP

Upon completion, the Enlarged Group continues to be engaged in print manufacturing, print services management, and publishing.

In fiscal 2021, the three business segments of the Group, namely, print manufacturing, print services management and publishing, all performed very strongly. Revenue of the Group increased by approximately 26.5% to approximately HK$1,737.6 million for the year ended 31 December 2021 from that of approximately HK$1,373.5 million for the year ended 31 December 2020; and net profit of the Group increased by approximately 22.1% to approximately HK$142.0 million for the year ended 31 December 2021 from that of approximately HK$116.3 million for the year ended 31 December 2020.

FINANCIAL INFORMATION OF THE GROUP AND THE ENLARGED GROUP

APPENDIX I

We have long predicted that the cost advantage of PRC printers versus overseas printers will gradually decline due to various cost-based factors. On the PRC labour cost front, we expect wages to rise in the long term as the demographic dividend that drove PRC’s economic growth gradually disappears. Material costs for chemicals, paper and zinc plates will also trend upward as PRC continues its economic growth path and the cost of shipping from PRC will remain high as shipping capacity worldwide is still constrained.

The Acquisition is an important part of the Group’s diversification strategy to establish the publishing business as one of our three revenue engines. With Quarto Group’s return to financial health, we will look for ‘bolt-on’ acquisitions of publishers or imprints that could generate synergistic value by leveraging Quarto Group’s procurement, operations, and sales platform. This in turn will bring in additional potential revenue for the print manufacturing segment of the Enlarged Group.

The Acquisition will also allow us to strengthen the Enlarged Group’s supply chain capability as we gain visibility of the end-to-end supply chain of the book industry and tighter integration of planning, procurement, production and logistics functions across the publishing and print manufacturing segments. The strengthening of the supply chain capability will serve as a key differentiator for us versus our competitors, especially in the challenging COVID-driven environment.

Immediately before the Acquisition, 1010 Printing held approximately 44.7% of the issued share capital of Quarto. Immediately after the Acquisition, 1010 Printing holds approximately 49.2% of the issued share capital of Quarto. The Acquisition would result in the consolidation of the assets of Quarto Group in the accounts of the Group by reason of the Company having gained control over Quarto based on accounting treatment. The Acquisition enables the Group to further increase its shareholding in Quarto in order to maximise the economic benefits through the Group’s interest in Quarto. The Directors consider that the Acquisition is an important milestone for the Group’s future development and will benefit the operation of the Enlarged Group in the long run.

5. WORKING CAPITAL

The Directors, after due and careful enquiry, are of the opinion that, in the absence of unforeseeable circumstances, after taking into account the existing financial resources and the effect of the Acquisition, the Enlarged Group has sufficient working capital for its present requirements and to satisfy its requirements for at least the next 12 months from the date of publication of this circular.

6. MATERIAL ADVERSE CHANGE

The Directors confirm that, as at the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial or trading position of the Group since 31 December 2021, being the date up to which the latest published audited accounts of the Company were made up.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

FINANCIAL INFORMATION OF QUARTO GROUP FOR EACH OF THE THREE YEARS ENDED 31 DECEMBER 2019, 2020 AND 2021

The following is an extract of the audited consolidated financial statements of Quarto Group for the years ended 31 December 2019, 2020 and 2021, as extracted from the annual reports of Quarto Group. These financial statements were presented in thousands of US$ except where otherwise stated. The annual reports of Quarto Group is available free of charge, in printable format on Quarto’s website (www.quarto.com).

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021

Governance

Independent Auditor’s Report to the Members of The Quarto Group, Inc.

Opinion

OUR OPINION ON THE FINANCIAL STATEMENTS IS UNMODIFIED

We have audited the financial statements of The Quarto Group, Inc. (the ‘parent company’) and its subsidiaries (the ‘group’) for the year ended 31 December 2021, which comprise of the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheet, the Consolidated Statement of Changes in Equity, the Consolidated Cash Flow Statement, the Company Balance Sheet, the company statement of comprehensive income, the company statement of changes in equity and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in the preparation of the group financial statements is applicable law and UK-adopted international accounting standards. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards, including Financial Reporting Standard 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’ (United Kingdom Generally Accepted Accounting Practice).

In our opinion:

the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2021 and of the group and of the parent company’s profit for the year then ended;
the group financial statements have been properly prepared in accordance with UK-adopted international accounting standards;
the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 which would have applied were the parent company incorporated in the United Kingdom.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the ‘Auditor’s responsibilities for the audit of the financial statements’ section of our report. We are independent of the group and the parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Conclusions relating to going concern

We are responsible for concluding on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the group’s and the parent company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify the auditor’s opinion. Our conclusions are based on the audit evidence obtained up to the date of our report. However, future events or conditions may cause the group or the parent company to cease to continue as a going concern.

As part of our risk assessment, we evaluated the Group’s and the parent company’s cash position, assessed the Group’s and the parent company’s performance and headroom against bank covenants throughout the year, considered the Group’s and the parent company’s lack of reliance on government assistance throughout the current year, and concluded that the Group’s and the parent company’s ability to continue as a going concern was not a significant risk that required special audit consideration.

Our evaluation of the directors’ assessment of the Group’s and the parent company’s ability to continue to adopt the going concern basis of accounting included reviewing management’s base case cash flow forecasts covering the period to 31 March 2023, challenging the underlying assumptions and reviewing forecast covenant compliance throughout the going concern period. We obtained management’s reverse stress test prepared to consider the scenario that would cause a breach in covenant compliance and evaluated the impact and availability of mitigating actions available to management to restrict the impact on the Group’s and the parent company’s performance and covenant compliance. Our assessment also included a review of the accuracy of management’s past forecasting and an assessment of the adequacy of related disclosures within the annual report.

In our evaluation of the directors’ conclusions, we considered the inherent risks associated with the group’s and the parent company’s business model including effects arising from macro-economic uncertainties such as Brexit and Covid-19, we assessed and challenged the reasonableness of estimates made by the directors and the related disclosures and analysed how those risks might affect the group’s and the parent company’s financial resources or ability to continue operations over the going concern period.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

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THE QUARTO GROUP, INC. ANNUAL REPORT 2021
Governance
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Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the group’s and the parent company’s ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.

In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate.

The responsibilities of the directors with respect to going concern are described in the ‘Responsibilities of directors for the financial statements’ section of this report.

Our approach to the audit

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Overview of our audit approach
OVERALL MATERIALITY:
Materiality Key audit matters • • Group: Parent company: $693,600, which represents approximately 0.5% of the group’s revenue.$48,000, which represents 1% of the parent company’s total assets.
KEY AUDIT MATTERS WERE IDENTIFIED AS:
• completeness of the sales return provision; and
Scoping • valuation and accuracy of pre-publication intangible assets.
Our auditor’s report for the year ended 31 December 2020 included two key audit matters
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$48,000, which represents 1% of the parent company’s total assets.

Our auditor’s report for the year ended 31 December 2020 included two key audit matters that have not been reported as key audit matters in our current year’s report. These relate to the assessment of the carrying value of goodwill and the going concern assessment.

The exclusion of these matters from our current year’s report reflects our risk assessment, wherein the group’s continued improvement in profitability and performance over the past several years, combined with decreased uncertainty surrounding the impact of Covid-19 has informed a lower risk assessment relating to these matters. Therefore, these have not been reported as key audit matters for the year ended 31 December 2021.

We have performed an audit of the financial information of the components using component materiality (full-scope audit) for the parent company, of Quarto Publishing plc (‘Quarto UK’), and of Quarto Publishing Group USA Inc. (‘Quarto US’).

We have performed analytical procedures on the financial information of other companies within the group. This is consistent with the scope of the audit in the prior year.

Key audit matters

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KAM
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STRATEGIC REPORT
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GOVERNANCE
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FINANCIAL STATEMENTS
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FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Governance

INDEPENDENT AUDITOR’S REPORT (continued)

In the graph below, we have presented the key audit matters, significant risks and other risks relevant to the audit.

High	Pre-publication Intangibles –	Pre-publication Intangibles –
		valuation and accuracy
Other
Potential fnancial statement impact Inventory IFRS 16 Related party transactions Revenue Borrowings Deferred tax assets Trade Receivables Goodwill - Valuation External Pre-publication Intangibles – accuracy*		Sales Return - Completeness Management override Co-Edition revenue in Q4 - Occurrence *This relates to the capitalised external, third party costs and the
Going Concern Deferred Income		capitalised timesheet costs within pre-publication intangibles
Low
High Low Extent of management judgement
Key audit matter Signifcant risk Other risk
.
Key Audit Matter – Group		How our scope addressed the matter – Group
RISK 1: COMPLETENESS OF SALES RETURN		In responding to the key audit matter, our audit work included but was not
PROVISION		restricted to:
We identified the completeness of the sales returns		• Considering the appropriateness of the accounting policy for the
provision as one of the most significant assessed risks		provision for sales returns by checking whether it is in accordance with
of material misstatement due to error.		the financial reporting framework, including IAS 37 ‘Provisions, Contin-
The Group generates material revenues from published books. Certain trade customers have a right of return for these books and therefore the revenue is recog- nised net of a provision for these returns. At 31 December 2021, this provision totals $5,776,000. Management judgement is required when assessing the level of returns which are expected to occur subsequent to the year end for sales made during the year.		gent Liabilities and Contingent Assets’ and IFRS 15 ‘Revenue from Contracts with Customers’; • Selecting a sample of returns made during the year and agreeing to supporting documentation in order to confirm the accuracy of the data used to calculate the rates of returns used in management’s calculation of the provision; • Recalculating the provision to confirm that it is appropriate and in accordance with management’s policy; • Comparing actual returns in the period to the provision made in the prior period in order to evaluate the accuracy of management’s
The key assumption applied is in relation to historical		forecasting;
return experience, which is used to predict future		• Obtaining actual returns for the period after the balance sheet date and
returns and therefore the provision which is required	to	comparing these with the returns provision for the same period; and
be made.		• Inquiring of sales and operations staff as to their knowledge of any
		exceptional returns in the period or the potential for these in the returns
RELEVANT DISCLOSURES IN THE ANNUAL REPORT AND ACCOUNTS 2021		period.
• Financial statements: Note 1, General information		OUR RESULTS
and significant accounting policies and Note 20,		• Our audit work did not identify any material errors in the completeness
Trade and other payables		of the sales returns provision.
• Audit and Risk Committee Report: Page 25

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Governance

Key Audit Matter – Group	How our scope addressed the matter – Group
RISK 2: VALUATION AND ACCURACY OF PRE-	In responding to the key audit matter, our audit work included but was not
PUBLICATION INTANGIBLE ASSETS	restricted to:
We have identified valuation and accuracy of pre-publi-	• Considering the appropriateness of the amortisation policy by checking
cation intangible assets as one of the most significant assessed risks of material misstatement due to error. The Group holds capitalised pre-publication costs as intangible assets which have a net book value of $29,941,000 on its consolidated balance sheet. There is judgement involved in assessing the useful economic life of these assets, which informs manage-	whether it is in accordance with the financial reporting framework, including IAS 38 ‘Intangible Assets’; • Challenging management on the appropriateness of the assumption of a three-year useful economic life by reviewing historic sales patterns and assessing how well these support management’s estimate; • Obtaining management’s paper on their proposed amendments to the group’s amortisation policy and challenging management’s assump- tions;	STRATEGIC REPORT
ment’s amortisation policy. Therefore, there is a risk	• Selecting a sample of the underlying sales and publishing data which
that intangible assets are misstated due to an inappro-	underpins management’s analysis and agreeing these to support;
priate amortisation policy.	• Recalculating the amortisation charge to confirm it is appropriate, in
During the period management have amended the useful economic life of these assets from a three-year straight-line policy to a reducing balance method.	accordance with management’s policy and reflects the economic pattern of the underlying assets useful life; • Performing a benchmarking analysis against businesses of a similar size and industry to Quarto;
A significant portion of the capitalised costs relate to	• Recalculating management’s impairment analysis of titles held in
creative staff time and internal overheads, which	pre-publication intangibles, challenging management’s underlying
management have determined relate to the develop-	assumptions and agreeing a sample of the underlying data to support;
ment of book titles. There is management judgement involved in determin- ing the portion of overhead costs and employee time which is directly attributable to the development of books, as well as assessing the split between research and development activities, which would determine how much of this time should be capitalised.	• Assessing the adequacy of financial statement disclosures in relation to the management estimate associated with the useful economic life of pre-publication intangibles; • Considering the appropriateness of the capitalisation policy by checking whether it is in accordance with the financial reporting framework, including IAS 38 ‘Intangible Assets’; • Challenging judgements made by management in determining which costs are directly attributable to the development of book titles;	GOVERNANCE
RELEVANT DISCLOSURES IN THE ANNUAL	• Challenging management over the assumptions used to determine the
REPORT AND ACCOUNTS 2021	capitalisation percentages applied to overheads and corroborating these
• Financial statements: Note 1, General information and significant accounting policies and Note 14, Intangible assets – pre-publication costs;	assumptions to support where appropriate; • Selecting a sample of costs capitalised in the year and agreeing to supporting documentation to confirm they are directly attributable to the development of book titles; and
• Audit and Risk Committee Report: Page 25	• Making inquiries with members of the creative team to understand their
	role and the appropriateness of their time being capitalised to pre-publi-
	cation costs.
	OUR RESULTS Our audit work identified that the straight line amortisation of pre-publica- tion intangibles over a useful economic life of three years was no longer appropriate given the sales profile of the assets. Management subsequently revised their amortisation policy for the current and future years, to a 50% reducing balance method. Following the application of the revised amortisation policy, our audit	FINANCIAL STATEMENTS
	work did not identify any material errors in the accuracy or valuation of
	pre-publication intangibles.
We did not identify any key audit matters relating to the	audit of the financial statements of the parent company.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Governance

INDEPENDENT AUDITOR’S REPORT (continued)

OUR APPLICATION OF MATERIALITY

We apply the concept of materiality both in planning and performing the audit, and in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial statements and in forming the opinion in the auditor’s report.

Materiality was determined as follows:

Materiality measure	Group	Parent company
MATERIALITY FOR FINANCIAL	We define materiality as the magnitude of misstatement in the financial statements that,
STATEMENTS AS A WHOLE	individually or in the aggregate, could reasonably	be expected to influence the economic
	decisions of the users of these financial statements. We use materiality in determining the
	nature, timing and extent of our audit work.
Materiality threshold	$693,600, which is approximately 0.5% of group	$48,000, which is approximately 1% of the
	revenue.	parent company’s total assets.
Significant judgements made by	This benchmark is considered the most	This benchmark is considered the most
auditor in determining materiality	appropriate because revenue is a key driver and	appropriate because the parent company is
	a key performance indicator of the business,	a holding company and has no revenue.
	monitored by management and the directors.	Materiality for the current year is the same
	As part of this assessment, we considered the	as the level that we determined for the year
	use of earnings before tax as the benchmark	ended 31 December 2020.
	however as there have been significant fluctua-
	tions in the group’s earnings before tax in recent
	years this was not deemed to be appropriate.
	Given the current uncertainties in the mac-
	ro-economic environment a percentage of 0.5%
	of the revenue benchmark has been applied.
	We also referred to key metrics and perfor-
	mance indicators raised in the annual report to
	determine our revenue based materiality; this is
	therefore also a reflection of what the entity
	deem to be key benchmarks for users of the
	financial statements.
	Materiality for the current year is higher than the
	level that we determined for the year ended 31
	December 2020 to reflect the increase in the
	group’s revenue in the current year.
Significant revision of materiality	We calculated materiality during the planning	No reassessment of materiality was
threshold that was made as the	stage of the audit based on a straight-line	required.
audit progressed	extrapolation of revenue earned from January
	2021 to September 2021.
	During the course of our audit, we re-assessed
	initial materiality based on actual revenue for the
	year ended 31 December 2021 and adjusted our
	audit procedures accordingly. This was to
	ensure our audit work has been completed to
	an appropriate level based on the materiality
	benchmark selected.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Governance

Materiality measure		Group Parent company
PERFORMANCE MATERIALITY		We set performance materiality at an amount less than materiality for the financial statements as
USED TO DRIVE THE EXTENT		a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected
OF OUR TESTING		and undetected misstatements exceeds materiality for the financial statements as a whole.
Performance materiality threshold Significant judgements made by auditor in determining perfor- mance materiality		$486,000, which is 70% of financial statement materiality. $33,600, which is 70% of financial state- ment materiality. In determining performance materiality, we made the following significant judgements: • Our experience with auditing the financial statements of the Group in previous years – based on the number and quantum of In determining performance materiality, we made the following significant judgements: • Our experience with auditing the financial statements of the parent company in previous years – based on	STRATEGIC REPORT
		identified misstatements in the prior year audit the number and quantum of identified
		and management’s attitude to correcting misstatements in the prior year audit and
		misstatements identified; management’s attitude to correcting
		• Our assessment of the strength and effective- misstatements identified; and
		ness of the control environment; and • Our assessment of the strength and
		• The number of components within the Group effectiveness of the control environment.
		and the extent of audit procedures planned
		and performed at these components.
SPECIFIC MATERIALITY		We determine specific materiality for one or more particular classes of transactions, account
		balances or disclosures for which misstatements of lesser amounts than materiality for the
		financial statements as a whole could reasonably be expected to influence the economic
Specific materiality		decisions of users taken on the basis of the financial statements. We determined a lower level of specific materiality for the following areas: • Related party transactions; and • Directors’ remuneration We determined a lower level of specific materiality for the following areas: • Related party transactions; and • Directors’ remuneration	GOVERNANCE
COMMUNICATION OF		We determine a threshold for reporting unadjusted differences to the audit committee.
MISSTATEMENTS TO THE AUDIT
COMMITTEE
Threshold for communication		$34,680 and misstatements below that thresh- $2,400 and misstatements below that
		old that, in our view, warrant reporting on threshold that, in our view, warrant
		qualitative grounds. reporting on qualitative grounds.
The graph below illustrates how performance materiality interacts with our overall materiality and the tolerance for potential
uncorrected misstatements.
Overall materiality
Revenue $151,483k FSM $694k 0.46% Group	TFPUM $208k PM $486k 70%	TFPUM $14k PM $34k 70% Total Assets $4,759k FSM $48k 1% Parent Company FSM: Financial statements materiality, PM: Performance materiality, TFPUM: Tolerance for	FINANCIAL STATEMENTS
	30%	30% potential uncorrected misstatements
An overview of the scope of our audit
We performed a risk-based audit that requires an understanding of the group’s and the parent company’s business and in
til tt ltd t

We performed a risk-based audit that requires an understanding of the group’s and the parent company’s business and in particular matters related to:

UNDERSTANDING THE GROUP, ITS COMPONENTS, AND THEIR ENVIRONMENTS, INCLUDING GROUP-WIDE CONTROLS

The engagement team obtained an understanding of the group and its environment, including group-wide controls, and assessed the risks of material misstatement at the group level; and
The group comprises of two trading components alongside multiple dormant components. The groups financial system is independent at each component however input is provided into the group wide controls by group management.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021

Governance

INDEPENDENT AUDITOR’S REPORT (continued)

IDENTIFYING SIGNIFICANT COMPONENTS

The group audit team evaluated the various components to assess their significance and determined the planned audit response based on a measure of materiality. Significance was determined as a percentage of the group’s total assets, revenues and profit before taxation.

TYPE OF WORK TO BE PERFORMED ON FINANCIAL INFORMATION OF PARENT AND OTHER COMPONENTS

The parent entity has been subjected to a full scope audit, being an audit of the financial information of the component using component materiality, of its financial statements;
Based on our evaluation we considered that the only significant components of the group are Quarto Publishing plc and Quarto Publishing Group (USA) Inc. due to their significance to the group;
We have performed a full-scope audit of all significant components of the group as identified above;
Key audit matters were identified within the group as part of our risk assessment procedures. Disclosures as to how the key audit matters identified have been addressed can be found within the key audit matter section of our audit report;
The financial information of the other components in the group has been subjected to analytical procedures at a group level.

PERFORMANCE OF OUR AUDIT

The full scope audits performed represent 100% of the group’s continuing revenue for the year, 100% of the group’s total assets, and 99.1% of the group’s total liabilities;
As part of our procedures a review of the group’s IT systems and controls has been completed.

CHANGES IN APPROACH FROM PREVIOUS PERIOD

Our approach is consistent with the approach used in the previous year, due to travel restrictions imposed as a result of COVID-19, our audit work in relation to Quarto Publishing Group (USA) Inc. had to be completed virtually as opposed to an on-site visit.
We have been able to complete site visits through the audit engagement at the client site for Quarto Publishing plc as well as completing in person stock counts for Quarto Publishing Group (USA) Inc at the main distribution site in the US.

Other information

The directors are responsible for the other information. The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements, or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.

We have nothing to report in this regard.

Our opinions on other matters prescribed by the Companies Act 2006, were it to apply to the parent company, are unmodified

In our opinion, the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.

In our opinion, based on the work undertaken in the course of the audit:

the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.

Matter on which we are required to report under the Companies Act 2006, were it to apply to the parent company

In the light of the knowledge and understanding of the group and the parent company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors’ report.

Matters on which we are required to report by exception, were the Companies Act 2006 to apply to the parent company

We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion:
adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Governance

the parent company financial statements and the part of the directors’ remuneration report to be audited are not in agreement with the accounting records and returns; or
certain disclosures of directors’ remuneration specified by law are not made; or
we have not received all the information and explanations we require for our audit.

Corporate governance statement

The Listing Rules require us to review the directors’ statement in relation to going concern, longer-term viability and that part of the Corporate Governance Statement relating to the group’s and the parent company’s compliance with the provisions of the UK Corporate Governance Code specified for our review.

Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance Statement is materially consistent with the financial statements or our knowledge obtained during the audit:

the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements and the directors’ identification of any material uncertainties to the group’s and the parent company’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements;
the directors’ explanation in the annual report as to how they have assessed the prospects of the group and the parent company, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the group and the parent company will be able to continue in operation and meet their liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions;

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STRATEGIC REPORT
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the directors’ statement that they consider the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the group’s and the parent company’s performance, business model and strategy;
the directors’ confirmation in the annual report that they have carried out a robust assessment of the principal and emerging risks facing the group and the parent company, including the impact of Brexit and Covid-19, and the disclosures in the annual report that describe the principal risks, procedures to identify emerging risks and an explanation of how they are being managed or mitigated;
the section of the annual report that describes the review of the effectiveness of group’s and the parent company’s risk management and internal control systems, covering all material controls, including financial, operational and compliance controls; and
the section of the annual report describing the work of the audit committee, including significant issues that the audit committee considered relating to the financial statements and how these issues were addressed.

Responsibilities of directors for the financial statements

As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so.

Auditor’s responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.

EXPLANATION AS TO WHAT EXTENT THE AUDIT WAS CONSIDERED CAPABLE OF DETECTING IRREGULARITIES, INCLUDING FRAUD

Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. Owing to the inherent limitations of an audit, there is an unavoidable risk that material misstatements in the financial statements may not be detected, even though the audit is properly planned and performed in accordance with ISAs (UK).

The extent to which our procedures are capable of detecting irregularities, including fraud, is detailed below:

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Governance

INDEPENDENT AUDITOR’S REPORT (continued)

We obtained an understanding of the legal and regulatory frameworks applicable to the parent company and the group and the industry in which they operate. We determined that the following laws and regulations were most significant: UK-adopted international accounting standards, for the Group, Financial Reporting Standard 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’ for the parent company, Listing Rules, Companies Act 2006, Tax rules in the UK and US and the UK Corporate Governance Code.
We obtained an understanding of how the parent company and the group is complying with those legal and regulatory frameworks by making inquiries of management, at a group and component level, inquiring with those responsible for legal and compliance procedures and with the company secretary. We corroborated our inquiries through our review of board minutes and papers provided to the Audit Committee.
We evaluated the design and implementation of controls over the financial reporting systems and the effectiveness of the control environment as part of our risk assessment.
We assessed the susceptibility of the parent company’s and group’s financial statements to material misstatement, including how fraud might occur. Audit procedures performed included: – identifying and assessing the design effectiveness of controls management has in place to prevent and detect fraud; – understanding how those charged with governance considered and addressed the potential for override of controls or other inappropriate influence over the financial reporting process;
– challenging assumptions and judgments made by management in its significant accounting estimates; and – identifying and testing journal entries posted in the year which were deemed to be unusual.
• These audit procedures were designed to provide reasonable assurance that the financial statements were free from fraud or error. The risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error and detecting irregularities that result from fraud is inherently more difficult than detecting those that result from error, as fraud may involve collusion, deliberate concealment, forgery or intentional misrepresentations. Also, the further removed non-compliance with laws and regulations is from events and transactions reflected in the financial statements, the less likely we would become aware of it.
The engagement partner assessed whether the engagement team collectively had the appropriate competence and capabilities to identify and recognise non-compliance with laws and regulations through an assessment of the engagement team’s: – understanding of, and practical experience with, audit engagements of a similar nature and complexity, through appropriate training and participation; and
– knowledge of the industry in which the Group and parent company operate
• We note our key audit matter in relation to the completeness of the sales return provision relates to irregularities, including fraud. Refer to key audit matters for work completed and our results from the procedures performed.
We note that there is no specific industry legislation that significantly impacts The Quarto Group, inc. and the engagement team are deemed to hold appropriate competence and capabilities to identify non-compliance with laws and regulations.

Other matters which we are required to address

Following the recommendation of the audit committee, we were appointed by the Board on 20 November 2017 to audit the financial statements for the year ended 31 December 2017 and subsequent financial periods.

The period of total uninterrupted engagement including previous renewals and reappointments of the firm is 5 years, covering the periods ending 31 December 2017 to 31 December 2021.

The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the group or the parent company and we remain independent of the group and the parent company in conducting our audit.

Our audit opinion is consistent with the additional report to the audit committee.

Use of our report

This report is made solely to the company’s members, as a body, in accordance with the terms that have been agreed in our engagement letter dated 23 November 2021. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

David White

Senior Statutory Auditor

for and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants London

17 March 2022

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Financial Statements

Consolidated Income Statement

FOR THE YEAR ENDED 31 DECEMBER 2021

Notes 2021 $000	STRATEGIC REPORT GOVERNANCE 2020 $000 126,883 (89,298) 37,585 (18,264) (1,571) (7,132) 10,618 (890) (446) 9,282 (2,693) 6,589 (2,020) 4,569 4,569 4,569 11.7 11.6
Continuing operations Revenue 2 151,483 Cost of sales (103,897)
Gross profit 47,586 Administrative expenses (22,314) Impairment of financial assets 16 (874) Distribution costs (8,439)
Operating profit before amortization of acquired intangibles and exceptional items 4 15,959	10,618
Amortization of acquired intangibles (7)	(890)
Exceptional items 5 —	(446)
Operating profit 15,952 Finance costs 7 (1,796)
Profit before tax 14,156 Tax 8 (4,230)
Profit for the year 9,926
Attributable to: Owners of the parent 9,926
9,926
Earnings per share (cents) From continuing operations Basic 9 24.3 Diluted 9 24.3
The notes on pages 62 to 89 are an integral part of these consolidated financial statements.

The notes on pages 62 to 89 are an integral part of these consolidated financial statements.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Financial Statements

Consolidated Statement of Comprehensive Income

FOR THE YEAR ENDED 31 DECEMBER 2021

	2021	2020
	$000	$000
Profit for the year	9,926	4,569
Items that may be reclassified to profit or loss
Foreign exchange translation differences	(506)	1,087
Tax relating to items that may be reclassified to profit or loss	66	54
Total other comprehensive income	(440)	1,141
Total comprehensive income for the year	9,486	5,710
Total comprehensive income for the year attributable to:
Owners of the parent	9,486	5,710
	9,486	5,710

The notes on pages 62 to 89 are an integral part of these consolidated financial statements.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Financial Statements

Consolidated Balance Sheet

AS AT 31 DECEMBER 2021

			Restated1
		2021	2020
	Notes	$000	$000
Non-current assets
Property, plant and equipment Goodwill Intangible assets: Pre-publication costs Other intangible assets Intangible assets Deferred tax assets	12 10 14 11 18	5,181 19,286 29,941 51 49,278 2,436	6,818 19,381 40,913 159 60,453 1,360	STRATEGIC REPORT
Total non-current assets		56,895	68,631
Current assets
Inventories	15	20,393	15,465
Trade and other receivables	16	51,242	44,519
Cash and cash equivalents	17	28,432	22,079
Total current assets		100,067	82,063
Total assets		156,962	150,694
Current liabilities
Short term borrowings Trade and other payables Lease liabilities Tax payable Total current liabilities	17 20 19	(5,438) (53,789) (1,363) (7,467) (68,057)	(41,819) (50,064) (1,968) (4,355) (98,206)	GOVERNANCE
Non-current liabilities
Long term borrowings	17	(28,508)	—
Deferred tax liabilities	18	(3,130)	(4,079)
Tax payable		(386)	(386)
Lease liabilities	19	(3,672)	,(4,310)
Total non-current liabilities		(35,696)	(8,775)
Total liabilities		(103,753)	(106,981)
Net assets Equity Share capital Paid in surplus Retained earnings and other reserves Total equity	23 23 24	53,209 4,089 48,701 419 53,209	43,713 4,089 48,701 (9,077) 43,713	FINANCIAL STATEMENTS
1 Please refer to note 18.
The notes on pages 62 to 89 are an integral part of these consolidated financial statements.
The financial statements were approved by the Board of Directors and authorized for issue on 17 March		2022. They	were signed

The financial statements were approved by the Board of Directors and authorized for issue on 17 March 2022. They were signed on its behalf by:

17 March 2022

Chuk Kin Lau Director

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Financial Statements

Consolidated Statement of Changes in Equity

FOR THE YEAR ENDED 31 DECEMBER 2021

					Equity
					attributable
					to owners
	Share	Paid	Translation	Retained	of the
	capital	in surplus	Reserve	earnings	parent
	$000	$000	$000	$000	$000
Balance at 1 January 2020	2,045	33,764	(6,748)	(8,007)	21,054
Profit for the year	—	—	—	4,569	4,569
Other comprehensive income
Foreign exchange translation differences	—	—	1,087	—	1,087
Tax relating to items that may be reclassified to profit or loss	—	—	54	—	54
Total comprehensive income for the year	—	—	1,141	4,569	5,710
Transactions with owners
Share capital raised	2,044	16,307	—	—	18,351
Costs of raising share capital	—	(1,370)	—	—	(1,370)
Share based payments credit	—	—	—	(32)	(32)
Total transactions with owners for the year	2,044	14,937	—	(32)	16,949
Balance at 31 December 2020	4,089	48,701	(5,607)	(3,470)	43,713
Profit for the year	—	—	—	9,926	9,926
Other comprehensive income
Foreign exchange translation differences	—	—	(506)	—	(506)
Tax relating to items that may be reclassified to profit or loss	—	—	66	—	66
Total comprehensive income for the year	—	—	(440)	9,926	9,486
Transactions with owners
Share based payments credit	—	—	—	10	10
Total transactions with owners for the year	—	—	—	10	10
Balance at 31 December 2021	4,089	48,701	(6,047)	6,466	53,209
The notes on pages 62 to 89 are an integral part of these	consolidated	financial statements.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Financial Statements

Consolidated Cash Flow Statement

FOR THE YEAR ENDED 31 DECEMBER 2021

	2021	2020
	$000	$000
Profit for the year	9,926	4,569
Adjustments for:
Net finance costs	1,796	2,693
Depreciation of property, plant and equipment	1,741	2,160
Software amortization	101	231
Tax expense	4,230	2,020
Profit on disposal of right-of-use assets	—	(35)
Share based payments/(credits)	10	(32)
Amortization of acquired intangibles	7	890
Amortization and impairment of pre-publication costs	31,000	28,646
Operating cash flows before movements in working capital	48,811	41,142
(Increase)/decrease in inventories	(5,036)	4,023
(Increase)/decrease in receivables	(7,106)	2,721
Increase/(decrease) in payables	4,035	(9,205)
Cash generated by operations	40,704	38,681
Income taxes paid	(3,053)	(1,760)
Net cash from operating activities	37,651	36,921
Investing activities
Investment in pre-publication costs	(20,229)	(20,324)
Purchases of property, plant and equipment	(111)	(34)
Net cash used in investing activities	(20,340)	(20,358)
Financing activities
Interest payments	(1,866)	(1,297)
New share capital raised	—	18,351
Costs of raising new share capital	—	(1,370)
Lease payments	(1,426)	(1,995)
Drawdown of revolving credit facility and other loan	22,994	4,520
Repayment of term loan and revolving credit facility	(30,840)	(28,413)
Net cash used in financing activities	(11,138)	(10,204)
Net increase in cash and cash equivalents	6,173	6,359
Cash and cash equivalents at beginning of year	22,079	15,621
Foreign currencyexchange differences on cash and cash equivalents	180	99
Cash and cash equivalents at end ofyear	28,432	22,079
The notes on pages 62 to 89 are an integral part of these consolidated financial statements.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021

Financial Statements

Notes to the Financial Statements

1 General information and significant accounting policies

The Quarto Group, Inc. is a company incorporated in the State of Delaware, United States. The address of the registered office is given on page 97. The nature of the Group’s operations and its principal activities are set out in the Chief Executive Officer’s Statement on page 7. 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. The presentational currency of the Group is US dollars.

CHANGE IN ESTIMATE

The group undertook a review of the amortization period and method of the pre-publication costs in the development of the books title prior to publication. The review resulted in the change of method used to amortize the pre-publication costs in accordance with IAS 38 - Intangible Assets. The amortization rate has now changed prospectively from a 3 year straight line to a 50% reducing balance basis. The impact of this change is that the amortization charge of the group for the current year has been reduced by $1.26m.

During 2021, actual returns reduced by 31% year on year. As the directors believe this to be a short-term issue, the directors have extended the period which they monitor historical returns to ensure that the longer term trend is reflected in the provision. Accordingly, the period that sales and returns are reviewed was extended from 1 to 3 years. The estimated period that returns are made from the point of sale remains at 6 months, being the final six months of the financial year.

STATEMENT OF COMPLIANCE

The Group financial statements consolidate those of the Company and its subsidiaries (together referred to as the ‘Group’). The parent company financial statements present information about the Company as a separate entity and not about its Group.

The Group financial statements have been prepared and approved by the Directors in accordance with ‘UK Adopted’ International Financial Reporting Standards (‘IFRS’). The Company has elected to prepare its parent company financial statements in accordance with UK GAAP, including The Financial Reporting Standard applicable in the UK and Republic of Ireland (‘FRS 102’). These are presented on pages 90 to 95.

BASIS OF ACCOUNTING

The financial statements are prepared on the historical cost basis, except that derivative financial instruments are stated at fair value.

STANDARDS, AMENDMENTS AND INTERPRETATIONS TO EXISTING STANDARDS THAT ARE NOT YET EFFECTIVE AND HAVE NOT BEEN ADOPTED EARLY BY THE GROUP

A number of amendments to accounting standards and Interpretations, effective in the current financial year have been adopted but have not had a material impact on the Group financial statements.

The Group has not applied any other standards, Interpretations or amendments that have been issued but are not yet effective.

Management anticipates that all relevant pronouncements will be adopted for the first period beginning on or after the effective date of the pronouncement.

SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENTS

The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimate is revised if the revision affects only that year or in the year of the revision and future years if the revision affects both current and future years.

Key estimates at the balance sheet date are:

GOODWILL

Note 10:

Management makes estimates and assumptions in measuring the carrying amount of goodwill. In considering whether goodwill has been impaired, the recoverable amount of cash generating units has been determined based on value in use calculations. These calculations require management to estimate future cash flows, a long-term growth rate and an appropriate discount rate. The sensitivity of the carrying amount of goodwill to these variables are considered.

INTANGIBLE ASSETS

Note 14:

Management makes estimates and assumptions when assessing the estimated economic life attributed to such titles. The capitalisation of these assets and the related amortization and impairment charges are based on estimates about the value and economic life of such items. The Group undertook a review of the pre-publication cost amortization with the benefits generated from the book title revenues. We concluded that a 50% reducing balance method of amortization was now appropriate rather than the 3 year straight line basis.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Financial Statements

1 General information and significant accounting policies (continued)

The carrying amount of the intangible assets is reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell, and value in use based on an internal discounted cash flow valuation.

SALES RETURNS ALLOWANCE

Note 1, 2, 20:

On certain contracts, the customer has a right to return the products. The Group makes an allowance for this, based on a review of the historical return patterns associated with each customer, as well as current market trends. During 2021, actual returns reduced by 31% year on year which the directors believe was due to a large extent, by logistic and distribution issues that resulted in a significant backlog of returns and a change in customer habits. As this is believed to be a short-term issue, the directors have extended the period which they monitor historical returns to ensure that the longer-term trend is reflected in the provision. Accordingly, the period that sales and returns are reviewed to form an expectation of the sales return percentage was extended from 1 year to 3 years, with equal weighting given to each year. The estimated period that returns are made from the point of sale remains at 6 months, being the final six months of the financial year. The returns provision for the group, was $5.8m at 31 December 2021 which in accordance with the requirements of IFRS 15 - Revenue from Contracts with Customers, represents a weighted expectation of returns and the estimation of the variable income as a result of the sales returns has been constrained to the extent that it is highly probable that there will not be a significant reversal in the amount of cumulative revenue recognised. However, if the prior year methodology of 1 year had been used, the impact to the provision would have been a decrease of $1.1m.

Management deem that the sales returns provision could have a reasonable possible range from $3.4m to $6.1m as a result of the estimation uncertainty. The lower range reflects actual returns for 2022 to date increased by the expected backlog which has been extrapolated across the 6 month returns period.

This allowance is included within other payables. The Group also recognize an asset in relation to stock which is expected to be returned within inventory, based on average print margins and an additional allowance for unsaleable returns.

Key judgements at the balance sheet date are:

GOVERNMENT GRANTS

During 2020, the Group received a loan of $2,422,000 relating to government support given under the Coronavirus Aid, Relief and Economic Security Act of the USA. The loan is forgivable under certain prescribed conditions. As at the balance sheet date, the Group couldn’t adequately ascertain that the prescribed conditions had all been satisfied and, therefore, without such reasonable assurance, the loan has continued to be treated as a borrowing. Please see note 22 for more details.

GOING CONCERN BASIS

The Board assessed the Group’s ability to operate as a going concern for at least the next 12 months from the date of signing the financial statements.

The Directors have considered the underlying robustness of the Group’s business model, products and proposition and its recent trading performance, cash flows and key performance indicators. They have also reviewed the cash forecasts prepared in detail to 31 March 2023. This is to satisfy themselves of the going concern assumption used in preparing the financial statements. The base case model was built using a detailed sales forecast driven by the publishing program for 2022. Core margins have been reviewed, with the ongoing Issues of freight and shipping pushing margins down. Trade receivable days remaining consistent with 2021.

As part of this work, the model was sensitized initially by a 5% reduction in revenue to ensure headroom within the covenants. This is deemed as a severe but plausible scenario. Management performed a reverse stress test to assess the point in which the banking covenants were breached. This occurred at a reduction in revenue of 9% from the base case. It is considered unlikely that such a reduction of revenue would occur, given, the detailed nature of the sales forecast and even with the challenges of 2020, revenue dropped by only 7% year on year. Should we start to see a reduction in revenue, then mitigating action will be taken, such as reduction in investment in pre-publication costs, print volumes, staffing levels and other variable costs.

Based on the above indications, the Directors believe that it remains appropriate to continue to adopt the going concern in preparing the financial statements.

BASIS OF CONSOLIDATION

The Group financial statements include the results of the Company and all of its subsidiary undertakings. A subsidiary is an entity controlled, directly or indirectly, by the Group. Control is the power to govern the financial and operating policies of the entity so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

Intragroup balances and any unrealized gains and losses or income and expenses arising from intra-group transactions are eliminated in preparing the consolidated financial statements.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021

Financial Statements

NOTES TO THE FINANCIAL STATEMENTS (continued)

1 General information and significant accounting policies (continued)

The interest of non-controlling interests on an acquisition is initially measured at the minority’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognized.

BUSINESS COMBINATIONS, INTANGIBLE ASSETS AND GOODWILL

All business combinations are accounted for by applying the acquisition method. Goodwill represents the excess of the consideration transferred over the fair value of the net assets and any contingent liabilities acquired. Acquisition costs are expensed as incurred.

Goodwill arising on acquisitions is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is tested annually for impairment. Quarto identifies its cash-generating units based on its operating model and how data is collected and reviewed for management reporting and strategic planning purposes, in accordance with IAS36 - Impairment of Assets. Corporate overheads have been divided between cash-generating units and factored into the value in use calculation.

Other intangible assets, such as backlists, that are acquired by the Group are stated at cost less accumulated amortization and impairment losses.

Amortization of intangible assets is charged to profit or loss on a straight-line basis over the estimated useful lives of the intangible assets. The amortization period for non-contractual relationships is 2.5 years, for backlists is 5 years and for software is 4 years.

VOLUME REBATES

In the ordinary course of business, the Group receives volume rebates from its printers. This is accounted for in accordance with contractual terms and is credited to Inventory or cost of sales, as appropriate.

IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS INCLUDING GOODWILL

The carrying amount of the Group’s assets is reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell, and value in use based on an internal discounted cash flow valuation.

For goodwill, the recoverable amount is estimated at each balance sheet date. An impairment loss is recognized whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognized in profit or loss.

GOVERNMENT GRANTS

During 2020, the Group received financial support from Governments in UK and USA. The grants related to expense items. Any monies received or receivable are initially held as liabilities on the balance sheet. Grants are subsequently recognized in profit and loss when there is reasonable assurance that compliance has been satisfied. Additional Information is disclosed in note 6 and note 17.

SEGMENT REPORTING

The Group has two operating segments: US Publishing and UK Publishing. In identifying these operating segments, management follows the information provided to the chief operating decision maker of our business which relates to the two geographical locations. The two segments are managed separately and focus on different geographic markets. For management purposes, the Group uses the same measurement policies as those used in its financial statements.

REVENUE RECOGNITION

Revenue arises largely from the sale of physical products. To determine whether to recognize revenue, the Group considers the following criteria:

Identifying the contract with a customer
Identifying the performance obligations
Determining the transaction price
Allocating the transaction price to the performance obligations
Recognizing revenue as/when performance obligations are satisfied

Each contract is for an agreed price and revenue is recognized at a point in time when the Group satisfies performance obligations by transferring the products to its customers; this is determined with reference to delivery terms. Invoices for products transferred are due on the terms specified in the contract. Contracts can span over 1 year. Where invoices are issued prior to transfer of the product to the customer, and there are unconditional rights to consideration the amounts invoiced are recorded as contract liabilities on the balance sheet, under deferred Income. In most cases this contract liability will be recognized within 12 months. When the product has been transferred to the customer, the liabilities are released and treated as revenue accordingly.

Revenue from the sale of publishing rights is recognized at the point the customer is able to use and benefit from the right to use the license. This is when the Group has discharged its performance obligations under the contractual arrangements. The sale of publishing rights includes the right to future sales based royalties. Revenue generated from the sales based royalties is only recognized when the subsequent sale occurs. Quarto licences the intellectual property rights to the customer on a right to use basis. This allows the customer to use the intellectual property as detailed in the contract. Once the term of the contract has expired, the licence becomes cancelled.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Financial Statements

1 General information and significant accounting policies (continued)

On certain contracts, the customer has a right to return the products. The Group makes an allowance for this, based on a review of the historical return patterns associated with the customer, as well as current market trends. The estimated returns period is a key input of the returns allowance and is calculated by reference to historic returns data. The estimated returns period for the current and prior year is 6 months. The estimation of the variable income as a result of the sales returns is constrained to the extent that it is deemed highly probable that there will be no significant reversal in the amount of cumulative revenue recognized. This allowance is included within other payables. The Group also recognize an asset in relation to stock which is expected to be returned within inventory, based on average print margins and an additional allowance for unsaleable returns.

QUARTO DISTRIBUTION SERVICES

Quarto acts as an agent for our distributed customers facilitating sales through our distribution channels. Quarto recognizes the revenue from the sales in line with the above-mentioned revenue recognition policy.

FOREIGN CURRENCIES

Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the exchange rate ruling at that date with any exchange differences arising on retranslation being recognized in the income statement.

The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated into US Dollars at exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated into US Dollars at average exchange rates. Foreign exchange differences arising on retranslation are charged or credited to other comprehensive income and are recognized in the currency translation reserve in equity. On disposal of a foreign operation, the related cumulative translation differences recognized in equity are reclassified to profit or loss and are recognized as part of the gain or loss on disposal.

EXCEPTIONAL ITEMS

Exceptional items are those which the Group defines as significant items outside the scope of normal business that need to be disclosed by virtue of their size or incidence in order for the user to obtain a proper understanding of the financial information.

RETIREMENT BENEFIT COSTS

The Group’s pension costs relate to individual pension plans and are charged to profit or loss as they fall due.

TAXATION

Tax on the profit or loss for the year comprises both current and deferred tax. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustments to tax payable in respect of previous years. Tax provisions are based on Management’s interpretation of country specific tax law and recognized when it is considered probable that there will be a future outflow of funds to a tax authority. Provisions are made annually based on the specific information available at that time and therefore there is limited risk of change in the estimates in the short term. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. However, deferred tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or a liability unless the related transaction is a business combination or effects tax or accounting profit. Not all temporary differences give rise to deferred tax assets/liabilities. A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. Changes in deferred tax assets or liabilities are recognized as a component of tax expense in the income statement, except where they relate to items that are charged or credited directly to other comprehensive income or equity, in which case the related deferred tax is also charged or credited directly to other comprehensive income or equity, respectively.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost less accumulated depreciation and any provision for impairments in value.

Depreciation is provided on a straight-line basis to write off the cost, less the estimated residual value, of property, plant and equipment over their estimated useful lives, which are reviewed annually. Where parts of an item of plant and equipment have separate lives, they are accounted for and depreciated as separate items. Residual values are reassessed on an annual basis. Land is not depreciated.

Estimated useful lives are as follows:

Estimated useful lives are as follows:
Right-of-use assets	Over the period of the lease
Short leasehold property improvements	Over the period of the lease
Plant, equipment and motor vehicles	4 to 10 years
Fixtures and fittings	5 to 7 years

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Financial Statements

NOTES TO THE FINANCIAL STATEMENTS (continued)

1 General information and significant accounting policies (continued)

In the case of right-to-use assets, expected useful lives are determined by reference to comparable owned assets or the lease term, if shorter. Material residual value estimates and estimates of useful life are updates as required, but at least annually. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in income.

LEASED ASSETS

For any new contracts entered into on or after 1 January 2021, the Group considers whether a contract is, or contains, a lease. A lease is defined as a ‘contract, or part of a contract, that conveys the right to use an asset for a period of time in exchange for consideration’. To apply this definition the Group assesses whether the contract meets three key evaluations which are whether:

the contract contains an identified asset, which is either explicitly identified in the contract or implicitly specified by being identified at the time the asset is made available to the Group
the Group has the right to obtain substantially all of the economic benefits from use of the identified asset throughout the period of use, considering its rights within the defined scope of the contract
the Group has the right to direct the use of the identified asset throughout the period of use. The Group assess whether it has the right to direct ‘how and for what purpose’ the asset is used throughout the period of use.

At lease commencement date, the Group recognizes a right-of-use asset and a lease liability on the balance sheet. The right-ofuse asset is measured at cost, which is made up of the initial measurement of the lease liability, any direct costs incurred by the Group, an estimate of any costs to dismantle and remove the asset at the end of the lease, and any lease payments made in advance of the lease commencement date (net of any incentives received).

The Group depreciates the right-of-use assets on a straight-line basis from the lease commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The Group also assesses the right-of-use asset for impairment when such indicators exist.

At the commencement date, the Group measures the lease liability at the present value of the lease payments unpaid at that date, discounted using the interest rate implicit in the lease if that rate is readily available or the Group’s incremental borrowing rate. The Group’s incremental borrowing rate reflects the marginal interest rates available to the Group, in the countries in which the assets reside. Lease payments included in the measurement of the lease liability are made up of fixed payments, variable payments based on an index or rate, amounts expected to be payable under a residual value guarantee and payments arising from options reasonably certain to be exercised. Subsequent to initial measurement, the liability will be reduced for payments made and increased for interest. It is remeasured to reflect any reassessment or modification, or if there are any changes in in-substance fixed payments. When the lease liability is remeasured, the corresponding adjustment is reflected in the right-ofuse asset, or profit and loss if the right-of-use asset is already reduced to zero.

The Group has elected to account for short-term lease and leases of low-value assets using the practical expedients. Instead of recognizing a right-of-use asset and lease liability, the payments in relation to these are recognized as an expense in profit or loss on a straight-line basis over the lease term.

On the statement of financial position, right-of-use assets have been included in property, plant and equipment and lease liabilities are disclosed separately.

INTANGIBLE ASSETS - PRE-PUBLICATION COSTS

Pre-publication costs represent directly attributable costs and attributable overheads incurred in the development of book titles prior to their publication. Attributable overheads are allocated on a title by title basis. These costs are recognized as non-current intangible assets in accordance with IAS38 - Intangible Assets, where the book title will generate future economic benefits and costs can be measured reliably. Management has made judgements and assumptions when assessing the estimated economic life attributed to such titles. The capitalisation of these assets and the related amortization charges are based on judgements about the value and economic life of such items. The Group undertook a review of the pre-publication cost amortization with the benefits generated from the book title revenues. Specific imprints that had been impaired were excluded from the review. The review resulted in the change of method used to amortize the pre-publication costs in accordance with IAS 38 - Intangible Assets. The amortization rate has now changed prospectively from a 3 year straight line to a 50% reducing balance basis. The impact of this change is that the amortization charge of the group for the current year has been reduced by $1.26m. The investment in pre-publication costs has been disclosed as part of the investing activities in the cash flow statement.

Pre-publication costs include work-in-progress. Costs on such unpublished titles are regularly reviewed and if they fail to meet economic expectations, the costs are impaired.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Financial Statements

1 General information and significant accounting policies (continued)

INVENTORIES

Inventory is valued at the lower of cost and net realisable value, on a weighted average cost basis. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and selling expenses.

FINANCIAL INSTRUMENTS

Financial assets and financial liabilities are recognized on the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument.

FINANCIAL ASSETS

Financial assets are measured at amortized cost using the effective interest method.

Financial assets are assigned to the different categories on initial recognition, depending on the characteristics of the instrument and its purpose. A financial instrument’s category is relevant for the way it is measured and whether any resulting income and expenses is recognized in profit or loss or directly in equity. See note 21 for a summary of the Group’s financial assets by category.

Generally, the Group recognizes all financial assets using trade date accounting. An assessment of whether a financial asset is impaired is made at least at each reporting date. All income and expense relating to financial assets are recognized in the income statement line item ‘finance costs’ or ‘finance income’, respectively, with the exception of trade and other receivables which are recorded in revenue and administrative expenses.

After initial recognition, Financial Assets are measured at amortized cost using the effective interest method. Discounting is ignored, where the effect is immaterial. The Group’s cash and cash equivalents, trade and most other receivables, fall into this category of financial instrument. Assets in this category are measured, initially, at their transaction price with gains or losses recognized in profit or loss.

In considering impairment of financial assets, the group uses a wide range of information when assessing credit risk and measuring credit losses, including past events, current conditions, reasonable and supportable forecasts that affect the expected collectability of future cash flows of the instrument.

The Group adopts a simplified approach in accounting for trade and other receivables and records the loss allowance as lifetime expected credit losses. These are the expected shortfalls in contractual cash flows, considering the potential for default at any point during the life of the financial instrument. The Group uses its historical experience, external indicators and forward-looking information to calculate the expected credit losses using a provision matrix.

FINANCIAL LIABILITIES

The Group’s financial liabilities include borrowings, trade and other payables (including lease liabilities).

After initial recognition at fair value, all financial liabilities, with the exception of derivative financial instruments, are measured at amortized cost using the effective interest rate method. A summary of the Group’s financial liabilities by category is given in note 21.

FINANCIAL LIABILITIES AND EQUITY INSTRUMENTS

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of financial liabilities.

FINANCE COSTS

Finance costs comprise interest payable on borrowings calculated using the effective interest method together with the amortization of debt issuance costs.

CASH AND CASH EQUIVALENTS

For the purposes of the statement of cash flows, cash and cash equivalents comprise cash balances, call deposits and bank overdrafts that form an integral part of the Group’s cash management processes.

SHARE-BASED PAYMENTS

The Group issues equity settled share-based payments to certain employees. Equity settled share-based payments are measured at fair value at the date of grant. The fair value, determined at the grant date, of equity settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest.

The fair value of employee share option grants is calculated using a Monte Carlo model, taking into account the terms and conditions upon which the options were granted. The value of the charge is adjusted to reflect expected and actual levels of options vesting.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021

Financial Statements

NOTES TO THE FINANCIAL STATEMENTS (continued)

BORROWING COSTS

All borrowing costs are recognized in the income statement in the period in which they are incurred. Debt issuance costs comprising arrangement fees and legal costs are capitalized and amortized on a straight-line basis over the period of the borrowing facility or included within the amortized cost calculation as appropriate. The annual amortization charge is included within finance costs in the Consolidated Statement of Comprehensive Income.

No borrowing costs have been capitalized in the current or prior years in relation to any asset.

FINANCIAL RISK MANAGEMENT

The principal risk factors faced by the Group are disclosed in note 21.

2 External revenue

2 External revenue
	Products Publishing Rights Products Publishing Rights
	2021 $000 2021 $000 2020 $000 2020 $000
Sales	147,939 3,544 122,848 4,035

See accounting policies for detail of the revenue recognition concerning the above revenue streams.

During the year, sales to our primary distributor exceeded 10% of Group revenue (2020: one primary distributor). The value of these sales was $62.0m (2020: $58.8m).

3 Operating segments

The core publishing businesses comprises two divisions: US Publishing and UK Publishing. This is the basis on which operating results are reviewed and resources allocated by the Chief Executive Officer, who is deemed to be the chief operating decision maker.

maker.
	US Publishing	UK Publishing	Total Group
2021	$000	$000	$000
Continuing operations
External revenue	81,062	70,421	151,483
Operating profit before amortization of acquired intangibles and exceptional items	10,024	7,001	17,025
Amortization of acquired intangibles	(7)	—	(7)
Segment result	10,017	7,001	17,018
Unallocated corporate expenses			(1,066)
Corporate exceptional items			—
Operating profit			15,952
Finance costs			(1,796)
Profit before tax			14,156
Tax			(4,230)
Profit after tax			9,926
Capital expenditure	39	72	111
Disposals	(44)	—	(44)
Depreciation and software amortization	(1,399)	(443)	(1,842)
Depreciation on disposals	44	—	44
Investment in pre-publication costs	10,280	9,949	20,229
Amortization and impairment of pre-publication costs	(14,438)	(16,562)	(31,000)
Deferred Income released	1,811	10,617	12,428

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021

Financial Statements

3 Operating segments (continued)

			Total
	US Publishing	UK Publishing	Group
2020	$000	$000	$000
Continuing operations:
External revenue Operating profit before amortization of acquired intangibles and exceptional items Amortization of acquired intangibles Segment result Unallocated corporate expenses Corporate exceptional items	63,137 3,249 (851) 2,398	63,746 8,360 (39) 8,321	126,883 11,609 (890) 10,719 (991) (446)
Operating profit			9,282
Finance costs			(2,693)
Profit before tax			6,589
Tax			(2,020)
Profit after tax			4,569
Capital expenditure	7	27	34
Depreciation and software amortization	(1,333)	(1,058)	(2,391)
Investment in pre-publication costs	10,349	9,975	20,324
Amortization of pre-publication costs Deferred income released BALANCE SHEET	(15,702) 964	(12,944) 12,769	(28,646) 13,733

BALANCE SHEET
		Restated1
	2021	2020
	$000	$000
Quarto Publishing Group USA	54,313	69,330
Quarto Publishing Group UK	71,877	57,925
Unallocated (Deferred tax and cash)	30,772	25,439
Total assets	156,962	150,694
Quarto Publishing Group USA	28,472	26,930
Quarto Publishing Group UK	30,351	29,413
Unallocated (Deferred tax, corporation tax and debt) Total liabilities 1 Refer to note 18 for further details.	44,930 103,753	50,638 106,981

GEOGRAPHICAL AREAS

The Group operates in the following main geographic areas:

GEOGRAPHICAL AREAS The Group operates in the following main geographic areas:
	Revenue Non-current assets
	2021 $000 2020 $000 2021 $000 Restated1 2020 $000
United States of America United Kingdom Europe Rest of the world	93,399 76,061 31,333 36,858 20,241 18,250 23,127 30,413 21,204 17,446 — — 16,639 15,126 — —
	151,483 126,883 54,460 67,271

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021

Financial Statements

NOTES TO THE FINANCIAL STATEMENTS (continued)

3 Operating segments (continued)

1 The comparative value for non-current assets held within the United States of America operating segment has been restated. In the prior year financial statements, the non-current assets incorrectly included a balance of $3,604k in relation to deferred tax assets. The comparative numbers have been amended to reflect the revision.

The revenue in the above table has been allocated by country of destination, whilst the non-current assets have been allocated by location.

4 Operating profit

Whilst costs have been shown on the Income statement by function within the company, the following table shows costs grouped by nature:

grouped by nature:
2021	2020
$000	$000
Direct costs Purchase of goods and changes in inventories 61,414 Royalties and product development 11,483 Amortization of pre-publication costs (note 14) 19,808 Impairment of pre-publication costs (note 14) 11,192	50,078 10,574 23,304 5,342
103,897	89,298
Operating costs Staff 14,651 Depreciation of property, plant and equipment (note 12) 1,741 Software amortization (note 11) 101 Distribution Costs 8,439 Marketing Costs 4,461 Impairment of losses of financial assets 874 Other 1,361	12,068 2,160 231 7,131 3,075 1,450 852
31,628	26,967
AUDITOR’S REMUNERATION
Fees payable to the Company’s auditor for the audit of the Company’s annual accounts 142 Fees payable to the Company’s auditor and its associates for the audit of subsidiary companies 223	108 179
365	287
5 Exceptional items
2021	2020
$000	$000
Staff severance costs — Refinancing costs —	251 195
Total —	446

During the year, there were no exceptional Items (2020: $446,000), in accordance with the accounting policy disclosed in note 1. In 2020, costs comprised $251,000 in respect of redundancy costs following restructuring during the Covid-19 pandemic and a further $195,000 of refinancing costs in connection with amendments to the existing facility agreement. There was no charge, net of taxation for the year (2020: $349,000).

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Financial Statements

6 Staff costs


6 Staff costs
	2021	2020
	Number	Number
Average monthly number of employees (excluding Executive Directors)	304	302
Wages and salaries Share-based credits Social security costs Other pension costs	$000 23,107 (38) 2,214 918	$000 19,074 (32) 1,969 730	STRATEGIC REPORT
	26,201	21,741
Less monies received by UK Government under Coronavirus Job Retention Scheme	—	(387)
	26,201	21,354
Directors remuneration is disclosed in the Remuneration Committee Report on page 28.
Total emoluments for Directors was:
	2021	2020
	$000	$000
Short term employee benefits	900	878
Long term employee benefits Termination benefits Post-employment benefits	281 29 50 1,260	175 — 47 1,110	GOVERNANCE
The Directors’ remuneration disclosed above included the following amounts earned in respect of the highest paid director:
	2021	2020
	$000	$000
Short term employee benefits	620	504
Post-employment benefits	20	18
	640	522
The Group considers key management personnel as defined under IAS 24 - Related Party Disclosures. To be Directors of the
company, this includes Non-Executive Directors and those having authority and responsibility for planning, directing controlling the activities of Quarto. Total emoluments for Executive Directors and other key personnel were: 2021 $000 Short term employee benefits 1,366 Long term employee benefits 281		and Restated1 2020 $000 1,043 175	FINANCIAL STATEMENTS
Termination benefits	29	—
Post-employment benefits	88	67

	2021 $000 Restated1 2020 $000
Short term employee benefits Long term employee benefits Termination benefits Post-employment benefits	1,366 1,043 281 175 29 — 88 67
1,765 1,285

1 The key management personnel disclosure for the comparative year has been restated. The 2020 disclosure of key management personnel has been amended to include non-executive directors and those having authority and responsibility for planning, directing and controlling the activities of the group, as well as to include employer’s NI contribution with respect of key management personnel and the reclassification of long-term employee benefits which were previously disclosed within short-term employee benefits. The impact of these amendments is an increase in key management remuneration of $244k.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Financial Statements

NOTES TO THE FINANCIAL STATEMENTS (continued)

7 Finance costs

7 Finance costs
	2021	2020
	$000	$000
Interest expense on borrowings	1,399	1,724
Amortization of debt issuance costs and bank fees	85	543
Interest expense on lease liabilities arising from the adoption of IFRS 16	276	390
Other interest	36	36
	1,796	2,693

8 Taxation

8 Taxation
2021	2020
$000	$000
Corporation tax Current tax 6,209	3,156
Prior periods —	2
Total current tax 6,209	3,158
Deferred tax (note 18) Origination and reversal of temporary differences (1,979)	(1,138)
Total tax expense 4,230	2,020

Corporation tax on UK profits is calculated at 19%, based on the UK standard rate of corporation tax, (2020: 19%) of the estimated assessable profit for the year. An increase in the UK corporation rate from 19% to 25% is effective 1 April 2023. This will increase the company’s future current tax charge accordingly and would increase our net tax liability by $361k. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions. The table below explains the difference between the expected expense at the UK statutory rate of 19% and the Group’s total tax expense for the year.

expense at the UK statutory rate of 19% and the Group’s total tax expense for the year.
2021	2020
$000	$000
Profit before tax 14,156	6,589
Tax at the UK corporation tax rate of 19% (2020: 19%) 2,690	1,252
Effect of different tax rates of subsidiaries operating in other jurisdictions 1,058	161
Change in overseas tax rates during the year —	68
Adjustment to prior years —	2
Tax effect of items that are not deductible in determining taxable profit (16)	240
Other 498	297
Tax expense 4,230	2,020
Effective tax rate 29.9%	30.7%

9 Earnings per share

9 Earnings per share
	2021	2020
	$000	$000
From continuing operations
Profit for the year	9,926	4,569
Amortization of acquired intangibles (net of tax)	5	626
Exceptional items (net of tax)	—	349
Earnings for the purposes of adjusted earnings per share	9,931	5,544

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Financial Statements

9 Earnings per share (continued)

Number of shares	Number	Number
Weighted average number of ordinary shares	40,889,100	39,185,388
Average number of potentially dilutive share options	—	123,037
Diluted weighted average number of ordinary shares Earnings per share (cents) – continuing operations Basic Diluted Adjusted earnings per share (cents) Basic Diluted	40,889,100 24.3 24.3 24.3 24.3	39,308,425 11.7 11.6 14.1 14.1	STRATEGIC REPORT
10 Goodwill
	2021	2020
	$000	$000
Cost At 1 January	43,102	42,913
Exchange differences	(95)	189
At 31 December Accumulated impairment losses At 1 January Exchange differences At 31 December	43,007 (23,721) — (23,721)	43,102 (23,721) — (23,721)	GOVERNANCE
Carrying value At 31 December	19,286	19,381
IMPAIRMENT TESTS FOR CASH GENERATING UNITS CONTAINING GOODWILL

The following units have significant carrying amounts of goodwill:

IMPAIRMENT TESTS FOR CASH GENERATING UNITS CONTAINING GOODWILL The following units have significant carrying amounts of goodwill:
	2021	2020
	$000	$000
Quarto Publishing Group USA (QUS)	12,882	12,882
Quarto Publishing Group UK (QUK)	6,404 19,286	6,499 19,381

Quarto identifies its cash-generating units based on its operating model and how data is collected and reviewed for management reporting and strategic planning purposes, in accordance with IAS36 - Impairment of Assets. Corporate overheads have been divided between cash-generating units and factored into the value in use calculation.

The recoverable amount of each cash generating unit (‘CGU’) is determined using the value in use basis. In determining value in use, management prepares a detailed bottom up budget for the initial twelve-month period, with reviews conducted at each business unit. A further two years are forecast using relevant growth rates and other assumptions. Cash flows beyond the three-year period are extrapolated into perpetuity, by applying a 2% growth rate from the addressable market. The cashflows are then discounted using a country-specific discount rate. The growth rates used are consistent with the growth expectations for the sector in which the company operates and the discount rate has been calculated using pre-tax Weighted Average Cost of Capital analysis.

The key assumptions for calculating value in use are:

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021

Financial Statements

NOTES TO THE FINANCIAL STATEMENTS (continued)

10 Goodwill (continued)

	Terminal Growth Rates Discount Rates
	2021 2020 2021 2020
United States of America United Kingdom	2% 2% 11.13% 11.40% 2% 2% 10.86% 11.12%

Revenue growth rates: forecast sales growth rates are based on those applied to the Board approved budget for the year ending 31 December 2022 and three-year plan. They incorporate future expectations of growth driven by investment plans for each CGU.

Long-term growth rates: the three-year forecasts are extrapolated to perpetuity on the basis that the CGU’s are long-established business units. The long-term growth rates are blended rates formed from the territory-specific long-term growth rates.

Gross margins: gross margins are based on historic performance and expected changes to the sales mix in future periods.

The Group has undertaken various sensitivities of the QUK and QUS CGU’s. There were no reasonably possible changes in QUK that would lead to impairment. QUS, which has the largest goodwill and non-current assets, carries a greater risk that reasonably possible changes would result in impairment. Based on the above long-term growth rate and discount rate, QUS exceeded the carrying value of goodwill by $9m. The following sensitivities were applied to this CGU:

1.5% increase in discount rate, at which level there was no impairment. The recoverable amount exceeded the carrying value of goodwill by $1.8m. The discount rate would need to increase to 13.05% to record any impairment.
0.5% terminal growth rate, at which level there was no impairment. The recoverable amount exceeded the carrying value of goodwill by $1.8m. The terminal growth rate would need to be 0% before any impairment was recorded.
5% decline in first year revenues, at which level there was no impairment. The recoverable amount exceeded the carrying value of goodwill by $5.4m.
5% decline in first year revenues and an increased discount rate of 12.3% would cause impairment if there were no mitigation actions.

Should there be a headline change in revenues and margins, this could create an impairment.

11 Other intangible assets

11 Other intangible assets
	Backlists	Software	Total
	$000	$000	$000
Cost
At 1 January 2020	21,174	1,630	22,804
Exchange differences	79	—	79
At 1 January 2021	21,253	1,630	22,883
Exchange differences	(39)	—	(39)
At 31 December 2021	21,214	1,630	22,844
Amortization and impairment
At 1 January 2020	20,274	1,248	21,522
Exchange differences	81	—	81
Charge for the year	890	231	1,121
At 1 January 2021	21,245	1,479	22,724
Exchange differences	(39)	—	(39)
Charge for the year	7	101	108
At 31 December 2021	21,213	1,580	22,793
Carrying amount
At 31 December 2021	1	50	51
At 31 December 2020	8	151	159

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021

Financial Statements

12 Property, plant and equipment


12 Property, plant and equipment
			Plant,
	Short-term	Right-of-use	Equipment
	Leasehold	Leasehold	and Motor	Fixture and
	Improvements	Property	Vehicles	Fittings	Total
Cost At 1 January 2020 Exchange difference Additions Remeasurement Disposals	$000 1,010 21 — — —	$000 11,202 (22) 227 2 (2,313)	$000 1,197 25 34 — —	$000 1,086 2 — — —	$000 14,495 26 261 2 (2,313)	STRATEGIC REPORT
At 31 December 2020	1,031	9,096	1,256	1,088	12,471
Exchange difference	(11)	—	(13)	(1)	(25)
Additions	27	—	84	—	111
Disposals	—	—	(44)	—	(44)
At 31 December 2021	1,047	9,096	1,283	1,087	12,513
Depreciation
At 1 January 2020	362	1,545	782	923	3,612
Exchange differences	13	—	50	2	65
Charge for the year: right of use asset Charge for the year: other property, plant and equipment Disposals At 31 December 2020 Exchange differences	— 105 — 480 (7)	1,760 — (184) 3,121 —	— 217 — 1,049 (11)	— 78 — 1,003 —	1,760 400 (184) 5,653 (18)	GOVERNANCE
Charge for the year: right of use asset		1,432			1,432
Charge for the year: other property, plant and equipment	115	—	129	65	309
Disposals	—	—	(44)	—	(44)
At 31 December 2021	588	4,553	1,123	1,068	7,332
Net book value
At 31 December 2021	459	4,543	160	19	5,181
At 31 December 2020	551	5,975	207	85	6,818
All property, plant and equipment has been pledged as security for the Group’s bank borrowings (note 17). 13 Subsidiaries A list of the investments in subsidiaries, including the name, country of incorporation and proportion of ownership given in note 5 to the Company’s balance sheet. All of these subsidiaries are included in the consolidated results.					interest is	FINANCIAL STATEMENTS

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021

Financial Statements

NOTES TO THE FINANCIAL STATEMENTS (continued)

14 Intangible assets – pre-publication costs

Cost At 1 January Exchange difference Additions Transfers Amounts expensed Disposals	2021 $000 2021 $000 2021 $000 2020 $000 2020 $000 2020 $000
	Work in progress Published products Total Work in progress Published products Total
	11,442 86,496 97,938 12,929 118,271 131,200 (64) (1,037) (1,101) 147 2,056 2,203 20,229 — 20,229 20,324 — 20,324 (17,069) 17,069 — (18,508) 18,508 — (4,433) — (4,433) (3,450) — (3,450) — — — — (52,339) (52,339)
At 31 December	10,105 102,528 112,633 11,442 86,496 97,938
Amortization and impairment At 1 January Exchange difference Amortization charge Amounts expensed Disposals	— 57,025 57,025 — 82,503 82,503 — (900) (900) — 1,665 1,665 — 19,808 19,808 — 23,304 23,304 — 6,759 6,759 — 1,892 1,892 — — — — (52,339) (52,339)
At 31 December	— 82,692 82,692 — 57,025 57,025
Net book value	10,105 19,836 29,941 11,442 29,471 40,913

The assessment of the useful life of pre-publication costs and amortization involves a significant management estimate based on historical trends and future potential sales, in accordance with the accounting policy stated in note 1. The Group undertook a review of the pre-publication cost amortization with the benefits generated from the book title revenues. We concluded that a 50% reducing balance method of amortization was now appropriate rather than the 3 year straight line basis.

Pre-publication costs form part of the carrying value of the CGU for each segment and are considered for impairment of goodwill in note 10.

15 Inventories

15 Inventories
	2021	2020
	$000	$000
Finished goods	20,267	15,285
Raw materials	126	180
	20,393	15,465

All of the Group’s inventories have been reviewed for indicators of impairment. Certain inventories were found to be impaired and a provision of $1,967,000 (2020: $2,220,000) has been recorded accordingly.

All inventories have been pledged as security for the Group’s bank borrowings (Note 17).

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

Financial Statements

THE QUARTO GROUP, INC. ANNUAL REPORT 2021

16 Trade and other receivables

	2021	2020
	$000	$000
Trade receivables	45,086	38,361
Other receivables	and prepayments 6,156 51,242	6,158 44,519

The average credit period on sales of goods is 79 days (2020: 77 days).

The Group applies the IFRS 9 simplified model of recognising lifetime expected credit losses for all trade receivables as these items do not have a significant financing component. In measuring the expected credit losses, the trade receivables have been assessed on an individual basis, as much as possible, because credit risk characteristics vary by customer. The expected loss rates are based on the payment profile over the last 12 months, to reflect the current and future economic environment. Trade receivables are written off (ie, derecognized) when there is no reasonable expectation of recovery.

On the above basis, the expected credit loss for trade receivables as at 31 December 2021 and 31 December 2020 was determined as follows:

determined as follows:
		Overdue	Overdue	Overdue	Overdue
		Less Than	Less Than	Less Than	More Than
31 December 2021	Current	30 Days	60 Days	90 Days	90 Days	Total
Gross carrying amount $000	39,177	3,317	2,010	1,166	2,195	47,865
Expected credit loss rate	3.1%	3.1%	4.2%	13.2%	55.3%	5.8%
Lifetime expected credit loss $000	1,223	103	85	154	1,214	2,779
31 December 2020 Gross carrying amount $000	Current 33,877	Overdue Less Than 30 Days 2,039	Overdue Less Than 60 Days 1,506	Overdue Less Than 90 Days 1,096	Overdue More Than 90 Days 1,757	Total 40,275
Expected credit loss rate	1.0%	1.8%	3.8%	18.1%	72.5%	4.8%
Lifetime expected credit loss $000	347	37	58	199	1,273	1,914

Movement in provision for lifetime expected credit loss is as follows:

Movement in provision for lifetime expected credit loss is as follows:
2021	2020
$000	$000
Provision at beginning of year 1,914	1,168
Amounts de-recognized in the year (109)	(977)
Amounts recovered during the year 124	138
Exchange differences (24) Increase in allowance recognized in profit or loss 874 Provision at end of the year 2,779	14 1,571 1,914

The Directors consider that the carrying amount of trade and other receivables approximates to their fair value.

Note 21 includes disclosures relating to credit risk exposures and analysis relating to the allowance for expected credit losses.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Financial Statements

NOTES TO THE FINANCIAL STATEMENTS (continued)

17 Cash, borrowings and net debt

CASH

CASH
	2021	2020
	$000	$000
Cash and cash equivalents	28,432	22,079

The carrying amount of these assets approximates to their fair value. The effective interest rate on bank balances and short-term deposits was 0% (2020: 0%).

BORROWINGS

BORROWINGS
	2021	2020
	$000	$000
Bank and other loans	33,946	41,819
On demand or within one year	5,438	41,819
	33,946	41,819
Less: Amount due for settlement within 12 months (shown under current liabilities)	(5,438)	(41,819)
Amount due for settlement after 12 months	28,508	—

				Weighted
				average	Average
				interest rate	time over
		Fixed rate	Variable rate	for fixed rate	which interest
	Total	borrowings	borrowings	borrowings	rate is fixed
	$000	$000	$000	%	Months
US dollar borrowings	33,879	27,212	6,667	3.75	32
Other currency borrowings	67	—	67	—	—
As at 31 December 2021	33,946	27,212	6,734	3.75	32
US dollar borrowings	39,408	16,408	23,000	3.1	6.5
Other currency borrowings	2,411	—	2,411	—	—
As at 31 December 2020	41,819	16,408	25,411	3.1	6.5

OTHER LOANS

OTHER LOANS
	2021	2020
	$000	$000
Other loans (unsecured)	27,212	16,408
On demand or within one year	2,771	16,408
	27,212	16,408
Less: Amount due for settlement within 12 months (shown under current liabilities)	(2,771)	(16,408)
Amount due for settlement after 12 months	24,441	—

Other loans comprise:

(a) Loans of $13,000,000 (2020: $11,500,000) from related parties, as disclosed in note 28, are repayable 31 August 2024, together with the accrued interest.

(b) A loan for $10,000,000 from related parties, as disclosed in note 28 is repayable on 31 August 2024 and carries an interest rate of 4%.

(c) A loan of $2,422,000 (2020: $2,422.000) relates to government support given under the Coronavirus Aid, Relief and Economic Security Act of the USA. This attracts an interest rate of 1%. Without reasonable assurance of forgiveness, it has been treated as debt to be repaid within the next 12 months. See note 22.

(d) Accrued Interest of $1,790,000 (2020: $986,000) on the above loans.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Financial Statements

17 Cash, borrowings and net debt (continued)

				Weighted
				average	Average
			Variable	interest rate	time over
		Fixed rate	rate	for fixed rate	which interest
	Total	borrowings	borrowings	borrowings	rate is fixed
US dollar borrowings As at 31 December 2021 As at 31 December 2020	$000 27,212 16,408	$000 27,212 16,408	$000 — —	% 3.75 2.8	Months 32 6.5

BANK LOANS

BANK LOANS
	2021	2020
	$000	$000
Bank loans	6,734	25,411
On demand or within one year	2,667	25,411
	6,734	25,411
Less: Amount due for settlement within 12 months (shown under current liabilities)	(2,667)	(25,411)
Amount due for settlement after 12 months	4,067	—

At 31 December 2021, undrawn borrowing facilities totalled $9.7m (2020: $9.6m). The variable rate borrowings carry interest based on SOFR plus a margin, depending on the leverage ratio. The banking facilities expire on 16 July 2024. The Directors estimate the fair value of the Group’s borrowings to be equal to book value, by reference to market rates.

		Fixed rate	Variable rate	Weighted average interest rate for fixed rate	Average time over which interest
	Total	borrowings	borrowings	borrowings	rate is fixed
	$000	$000	$000	%	Months
US dollar borrowings	6,667	—	6,667	—	—
Other currency borrowings	67	—	67	—	—
As at 31 December 2021	6,734	—	6,734	—	—
US dollar borrowings	23,000	—	23,000	—	—
Other currency borrowings	2,411	—	2,411	—	—
As at 31 December 2020	25,411		25,411	—	—

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021

Financial Statements

NOTES TO THE FINANCIAL STATEMENTS (continued)

17 Cash, borrowings and net debt (continued)

CHANGES IN LIABILITIES ARISING FROM FINANCING ACTIVITIES

	1 January	Profit and		Non-cash	Foreign	31 December
	2021	Loss	Cashflows	items	exchange	2021
	$000	$000	$000	$000	$000	$000
Borrowings	(41,819)	—	7,846	(417)	444	(33,946)
IFRS 16 lease liabilities	(6,278)	—	1,426	(207)	24	(5,035)
Interest	—	(1,796)	1,866	(70)	—	—
Cash and cash equivalents	22,079	—	6,173	—	180	28,432
Net debt	(26,018)	(1,796)	17,311	(694)	648	(10,549)
	1 January	Profit and		Non-cash	Foreign	31 December
	2020	Loss	Cashflows	items	exchange	2020
	$000	$000	$000	$000	$000	$000
Borrowings	(66,077)	—	23,893	(92)	457	(41,819)
IFRS 16 lease liabilities	(9,866)	—	1,995	1,574	19	(6,278)
Interest	—	(2,693)	1,297	1,396	—	—
Cash and cash equivalents	15,621	—	6,359	—	99	22,079
Net debt	(60,322)	(2,693)	33,544	2,878	575	(26,018)

18 Deferred tax

18 Deferred tax
	2021	2020
	$000	$000
Deferred tax liabilities
Pre-publication costs and other temporary differences – UK	3,131	4,103
Pre-publication costs and other temporary differences – US	—	2,220
Deferred tax assets	3,131	6,323
Goodwill, intangible assets and other temporary differences – US	2,436	3,604
	2,436	3,604
Net deferred taxation liability	695	2,719

Quarto US have a deferred tax asset of $3,604k and a deferred tax liability of $2,220k. In the prior year statement of financial position these were incorrectly disclosed as gross balances, however, in accordance with IAS 12 - Income Taxes, the deferred tax asset and deferred tax liabilities have been offset as they relate to the same taxable entity. The comparative numbers within the statement of financial position have been amended to reflect the revision. A restated statement of financial position as at 1 January 2020 has not been presented, in accordance with IAS 1 - Presentation of Financial Statements, on the grounds that the misstatement does not impact on net assets and as it represents a grossing up on assets and liabilities is not considered to be qualitatively material.

The movement on the net provision for deferred taxation is as follows:

The movement on the net provision for deferred taxation is as follows:
	2021	2020
	$000	$000
Net provision at 1 January	2,719	3,808
Charge direct to equity	—	(54)
Exchange difference through other comprehensive income	(45)	103
Credit to profit and loss	(1,979)	(1,138)
Net provision at 31 December	695	2,719

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Financial Statements

19 Lease liabilities

19 Lease liabilities
	2021	2020
	$000	$000
Current	1,363	1,968
Non-current Total	3,672 5,035	4,310 6,278

The Group has leases for its offices and some IT equipment. With the exception of short-term leases and leases of low-value underlying assets, each lease is reflected on the balance sheet as right-of-use asset and a lease liability. Variable lease payments which do not depend on an index or a rate (such as lease payments based on a percentage of Group revenues) are excluded from the initial measurement of the lease liability and asset. The Group classifies its right-of-use assets in a consistent manner to its property, plant and equipment (note 12).

Each lease generally imposes a restriction that, unless there is a contractual right for the Group to sublet the asset to another party, the right-of-use asset can only be used by the Group. Leases are either non-cancellable or may only be cancelled by incurring a substantive termination fee. For leases over office buildings the Group must keep those properties in a good state of repair and return the properties in their original condition at the end of the lease. Further, the Group must insure items of property, plant and equipment and incur maintenance fees on such items in accordance with the lease contracts.

The table below describes the nature of the Group’s leasing activities by type of right-to-use asset recognized on the balance sheet:

						No of lease with
						variable
	No of right-of-		Average	No of lease	No of lease	payments	No of lease with
Right-of-use	use assets	Range of	remaining lease	with extension	with options to	linked to an	termination
asset Office building	leased 6	remaining term 4-9 years	term 6 years	options 1	purchase —	index 4	options 1

Properties with extension, or termination, options are assessed on a case-by-case basis in determining take-up of the options. The property lease in Seattle includes the option to extend this lease by 5 years. At this point in time, there is no intention by the company to exercise this extension. However, if we were to extend, the future cash flow would be $1.75m.

The lease liabilities are secured by the related underlying assets. Future minimum lease payments at 31 December 2021 were as follows:

The lease liabilities are follows:	secured by the related underlying assets. Future minimum lease payments at 31 December 2021 wer
31 December 2021	Minimum lease payments due US$000
	Within 1 year 1-2 years 2-3 years 3-4 years 4-5 years After 5 years Total

Lease payments	1,601 794 450 272 161 2,414 5,692
Finance charges	(223) (164) (122) (80) (42) (26) (657)
Net present values	1,378 630 328 192 119 2,388 5,035
31 December 2020
Lease payments	2,358 1,551 1,585 1,044 1,013 — 7,551
Finance charges	(390) (269) (219) (161) (234) — (1,273)
Net present values	1,968 1,282 1,366 883 779 — 6,278

The total cash outflow in relation to lease liabilities during the year was $1,426,000 (2020: $1,995,000). Please see note 17. The Group has elected not to recognize a lease liability for short term leases or for leases of low value assets. Payments made under such leases are expensed on a straight-line basis and amounted to $4,000 in the year (2020: $26,000).

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Financial Statements

NOTES TO THE FINANCIAL STATEMENTS (continued)

20 Trade and other payables

CURRENT LIABILITIES

20 Trade and other payables CURRENT LIABILITIES
	2021	2020
	$000	$000
Trade payables	29,450	28,529
Other payables	24,339	21,535
Total	53,789	50,064

Under IFRS 15, the reserve for sales returns is included in other payables; it amounts to $5,776,000 (2020: $6,481,000). The reserve is calculated based on a time lag between sales and returns and historical return patterns. Management monitors actual returns against the reserve on a regular basis. If the rate of sales return had been 1% higher during the year, the provision would have increased by $545,000 (2020: $512,000).

Included within other payables is $1,957,000 in respect of deferred Income (2020: $2,274,000), detailed below:

	2021	2020
	$000	$000
Opening liability	2,274	2,525
Deferred income invoiced	12,136	13,436
Revenue recognized	(12,428)	(13,733)
Exchange difference	(25)	46
Closing liability	1,957	2,274

We expect deferred Income to be recognized within the next 12 months.

21 Financial instruments

The Group is exposed to market risk through its use of financial instruments and specifically to currency risk, interest rate risk, credit risk, liquidity risk and certain other price risks, which result from both its operating and investing activities. The Group’s risk management is coordinated at its headquarters, in close co-operation with the Board of Directors, and focuses on actively securing the Group’s short to medium-term cash flows by minimising the exposure to financial markets.

The Group does not actively engage in the trading of financial assets for speculative purposes nor does it write options. The most significant financial risks to which the Group is exposed and a summary of financial assets and liabilities by category are described below.

FOREIGN CURRENCY SENSITIVITY

Exposures to currency exchange rates arise from the Group’s overseas sales and costs, which are primarily denominated in Sterling, and, to a much lesser extent in Euros. The Group has minimal exposure to other foreign currencies.

Foreign currency denominated financial assets and liabilities, translated into US Dollars at the closing rate, are as follows:

	2021 2020
	$000 Sterling $000 Other $000 Sterling $000 Other
Financial assets Financial liabilities	15,465 1,394 11,792 1,053 (1,362) (1,000) (755) (3,033)
Short-term exposure	14,103 394 11,037 (1,980)
Financial liabilities	— — — —
Long-term exposure	— — — —
At 31 December	14,103 394 11,037 (1,980)

The following table illustrates the sensitivity of the net result for the year and equity in regard to the Group’s financial assets and financial liabilities and the US Dollar – Sterling exchange rate.

It assumes a ± 5% change of the Sterling/US-Dollar exchange rate, in line with the movement over the last year.

The sensitivity analysis is based on the Group’s foreign currency financial instruments held at each balance sheet date.

If Sterling had strengthened against the US Dollar by 5% (2020: 5%) then this would have had the following impact:

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021

Financial Statements

21 Financial instruments (continued)

	2021	2020
	$000	$000
Profit/(loss) after tax for the year	46	(240)
Equity	46	(240)
If Sterling had weakened against the US Dollar by 5% (2020: 7.5%) then this would have had the following impact: 2021 $000 (Loss)/profit after tax for the year (46) Equity (46)		2020 $000 240 240

Exposures to foreign exchange rates vary during the year depending on the volume of overseas transactions. Nonetheless, the analysis above is considered to be representative of the Group’s exposure to currency risk.

INTEREST RATE SENSITIVITY

The Group’s policy is to minimize interest rate cash flow risk exposures, where possible and commercially appropriate, on long-term financing, through interest rate swaps. A part of longer-term borrowings are sometimes, therefore, at fixed rates.

At 31 December 2021, the Group is exposed to changes in market interest rates through its bank borrowings, which are subject to variable interest rates – see note 17 for further information.

The following table illustrates the sensitivity of the profit after tax for the year and equity to a reasonably possible change in interest rates of ± 0.25%, with effect from the beginning of the year. These changes are considered to be reasonably possible based on observation of current market conditions. The calculations are based on the Group’s financial instruments held at each balance sheet date. All other variables are held constant.

A 0.25% increase in interest rates would have the following impact:

A 0.25% increase in interest rates would have the following impact:
	2021 $000	2020 $000
Loss for the year	(13)	(48)
Equity	(13)	(48)
A 0.25% decrease in interest rates would have the following impact:
	2021	2020
	$000	$000
Profit for the year	13	48
Equity	13	48

CREDIT RISK ANALYSIS

The Group’s maximum exposure to credit risk is limited to the carrying amount of financial assets recognized at the balance sheet date, as summarized below:

sheet date, as summarized below:
Cash and cash equivalents Trade receivables	2021 $000 28,432 45,086	2020 $000 22,079 38,361
	73,518	60,440

The Group’s credit risk is primarily attributable to its trade receivables. There is minimal credit risk within other receivables. The amounts presented in the balance sheet are net of allowances for doubtful receivables, estimated by the Group’s management based on prior experience and their assessment of the current economic environment. The ongoing credit risk is managed through regular review of ageing analysis together with credit limits per customer.

The Group continuously monitors defaults of customers and other counterparties, identified either individually or by group, and incorporates this information into its credit risk controls. Where available at reasonable cost, external credit ratings and/or reports on customers and other counterparties are obtained and used. The Group’s policy is to deal only with creditworthy counterparties.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021

Financial Statements

NOTES TO THE FINANCIAL STATEMENTS (continued)

21 Financial instruments (continued)

The Group’s management considers that all the above financial assets that are not impaired for each of the reporting dates under review are of good credit quality, including those that are past due. Credit losses written off during the year which are subject to enforcement activity are minimal.

In respect of trade and other receivables, the Group is not exposed to any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. The credit risk for liquid funds and other short-term financial assets is limited, since the counterparties are reputable banks with high quality external credit ratings.

LIQUIDITY RISK ANALYSIS

The Group manages its liquidity needs by carefully monitoring scheduled debt servicing payments for long-term financial liabilities as well as cash-outflows due in day-to-day business. Liquidity needs are monitored in various time bands, on a day-today and week-to-week basis.

The Group maintains cash and marketable securities to meet its liquidity requirements. Funding for long-term liquidity needs is additionally secured by an adequate amount of committed credit facilities.

A new facility agreement was signed on 16 February 2021 with borrowing facilities of US$20m. This facility is subject to two principal covenants in 2021, being:

(a) Net banking Indebtedness shall not exceed 2.0 times EBITDA (as defined in the facility agreement)

(b) EBITDA shall exceed 4 times net finance charges (as defined in the facility agreement)

The Group’s liabilities have contractual maturities which are summarized below:

31 December 2021	Current Non-Current
	Within 6 months $000 6 to 12 months $000 1 to 5 years $000 Over 5 years $000
Bank and other loans Lease liabilities Trade payables Other short-term financial liabilities	348 2,422 28,508 — 800 800 4,092 — 29,450 — — — 24,339 — — —
	54,937 3,222 32,600 —

31 December 2020	Current Non-Current
	Within 6 months $000 6 to 12 months $000 1 to 5 years $000 Over 5 years $000
Bank and other loans Lease liabilities Trade payables Other short-term financial liabilities	3,132 40,965 — — 984 984 4,310 — 28,529 — — — 21,535 — — —
	54,180 41,949 4,310 —

SUMMARY OF FINANCIAL ASSETS AND LIABILITIES BY CATEGORY

The carrying amounts of the Group’s financial assets and liabilities as recognized at the balance sheet date of the reporting periods under review may also be categorized as follows. See note 1, significant accounting policies, covering financial assets and financial liabilities for explanations about how the category of instruments affects their subsequent measurement.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021

Financial Statements

21 Financial instruments (continued)

	Restated1
2021	2020
$000	$000
Current assets Financial assets at amortized cost: Trade receivables 45,086 Cash and cash equivalents 28,432 73,518 Current liabilities Financial liabilities measured at amortized cost: Borrowings 5,438 Trade payables 29,450 Other payables 21,475	38,361 22,079 60,440 41,819 28,529 19,146
56,363	89,494
Non-current liabilities Financial liabilities measured at amortized cost: Borrowings 28,508 28,508	— —

1 The comparative year has been restated to reflect disclosure errors identified within the prior year financial statements in relation to the financial liabilities. Within the prior year financial statements amounts for non-financial liabilities, including contractual liabilities and statutory obligations had been incorrectly disclosed. The comparative numbers have been amended to reflect the revision which has reduced current liabilities by $2,389k. The comparative year has also been restated with the removal of lease liabilities as these have been disclosed on the face of the Statement of financial position.

CAPITAL RISK MANAGEMENT

The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to shareholders through an optimal balance of debt and equity. The capital structure of the Group consists of debt, which includes the borrowings disclosed in note 17, cash and cash equivalents and equity attributable to equity holders of the parent, comprising share capital and reserves as disclosed in the consolidated statement of changes in equity.

The Board reviews the capital structure, including the level of indebtedness and interest cover, as required. The Board’s objective is to maintain the optimal level of indebtedness and manage interest cover to comply with the covenant requirements set out in note 17. As part of this review, the Board considers the cost of capital and the risks associated with each class of capital. The Group has complied with its covenant obligations during the year.

22 Post balance sheet events

C.K. Lau and 1010 Printing Limited were repaid $6m and $9m respectively in Q1 2022, including accrued interest. This repayment was made outside the agreement due to a favorable liquidity position at this point in time.

In February 2022, we received notification from Bank of America advising that $2.272m of the loan relating to government support given under the Coronavirus Aid, Relief and Economic Security Act of the USA of $2.422m was being forgiven. We are still in the process of finalising the repayment of the unforgiven portion, which will take place once agreement has been reached.

23 Share capital and paid in surplus

SHARE CAPITAL

23 Share capital and paid in surplus SHARE CAPITAL
	2021	2020
	$000	$000
Authorized
55,000,000 (2020: 55,000,000) shares of common stock of par value of US$0.10 each	5,500	5,500
Allotted, called up and fully paid:
40,889,100 (2020: 40,889,100) shares of common stock of par value of US$0.10 each	4,089	4,089

The Company has one class of common stock which carries no right to fixed income.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Financial Statements

NOTES TO THE FINANCIAL STATEMENTS (continued)

23 Share capital and paid in surplus (continued)

PAID IN SURPLUS

This reserve records the amount above par value received for common stock sold less transaction costs. The movement on this reserve was as follows:

reserve was as follows:
	2021	2020
	$000	$000
At 1 January	48,701	33,764
Issue of new common stock	—	14,937
At 31 December	48,701	48,701

24 Retained earnings and other reserves

TRANSLATION RESERVE

The translation reserve comprises all foreign exchange differences arising from the translation of the closing balance sheets of foreign operations of the Group and the results of foreign operations of the Group since 1 January 2004.

RETAINED EARNINGS

The retained earnings reserve comprises profit for the year attributable to owners of the Group and other items recognized directly through equity as presented on the consolidated statement of changes in equity.

25 Dividends

No dividends have been declared in the current or prior year.

26 Notes to the cash flow statement

Cash comprises cash on hand and demand deposits. Cash equivalents are short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to insignificant changes in value.

27 Share based payments

PERFORMANCE SHARE PLAN (‘PSP’)

The Company operates a PSP scheme that awards free shares.

2016 AWARD

The awards under this scheme were granted on 19 April 2016. The vesting period is 4 years from the date of grant. The award vests in the following proportion:

50% is conditional on the cumulative growth in Adjusted Diluted EPS being between 5% and 10% over the performance period, resulting in the awards vesting on a sliding scale of 20% to 100%; and
50% is conditional on Total Shareholder Return being between 7% and 15%, resulting in vesting on a sliding scale of 20% to 100%.

Participants are not entitled to receive dividends until awards have vested.

Details of the share options outstanding during the year are as follows:

Details of the share options outstanding during the year are as follows:
	2021	2020
	Number	Number
Outstanding at beginning of the year	—	143,784
Forfeited during the year	—	(33,673)
Lapsed during the year	—	(110,111)
Outstanding at the end of the year	—	—

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Financial Statements

27 Share based payments (continued)

The key inputs used to value the options are:

The key inputs used to value the options are:
	EPS Portion	TSR Portion
Share price at date of grant	£2.45	£2.45
Expected life (years)	4	4
Fair value per award Weighted average remaining contractual life (years) Dividend yield (%) Expected volatility of share price (%)	£2.10 2.3 3.88 n/a Dividend discount	£0.44 3.3 3.88 19.1 Monte- Carlo

2017 AWARD

The awards under this scheme were granted on 28 April 2017. The vesting period is 4 years from the date of grant. The award vests in the following proportion:

50% is conditional on the cumulative growth in Adjusted Diluted EPS being between 5% and 10% over the performance period, resulting in the awards vesting on a sliding scale of 20% to 100%; and
50% is conditional on Total Shareholder Return being between 7% and 15%, resulting in vesting on a sliding scale of 20% to 100%.

Participants are not entitled to receive dividends until awards have vested.

Details of the share options outstanding during the year are as follows.

Details of the share options outstanding during the year are as follows.
Outstanding at beginning of the year	2021 Number 65,223	2020 Number 84,995
Forfeited during the year	—	(19,772)
Lapsed during the year	(65,223)	—
Outstanding at the end of the year	—	65,223
The key inputs used to value the options are:
	EPS Portion	TSR Portion
Share price at date of grant	£2.64	£2.64
Expected life (years)	4	4
Fair value per award Weighted average remaining contractual life (years) Dividend yield (%) Expected volatility of share price (%) Model used	£2.20 3.3 £4.55 n/a Dividend discount	£0.48 3.3 £4.55 18.6 Monte- Carlo

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Financial Statements

NOTES TO THE FINANCIAL STATEMENTS (continued)

28 Related party transactions

The Group had the following related party transactions over the periods under review:

PRINTING PURCHASES:

PRINTING PURCHASES:
	2021	2020
Lion Rock Group Limited	$000	$000
Accounts payable at start of year	12,895	13,692
Purchases	23,830	14,720
Rebate received	—	(1,464)
Payments	(20,123)	(14,053)
Accounts payable at end of year	16,602	12,895

LOANS AND ACCRUED INTEREST:

LOANS AND ACCRUED INTEREST:
	At 31	At 31
	December	December
	2021	2020
	$000	$000
Loans	23,000	11,500
Accrued interest on loans at end ofyear	1,789	874

The loans are from 1010 Printing Limited $17m (2020: $7m) and C.K. Lau $6m ($6m). The loans are unsecured, are repayable, on 31 August 2024, and carry interest at 3.5% and 4.0%. Interest is paid annually on one loan with the remaining accrued interest to be paid at the end of the term.

Lion Rock Group Limited and 1010 Printing Limited are companies over which C.K. Lau exercises control.

The rebate received in 2020 was accounted for in accordance with the accounting policy disclosed in note 1. The rebate scheme was not renewed in 2021.

REVENUES AND TRADE RECEIVABLES:

REVENUES AND TRADE RECEIVABLES:
	At 31	At 31
	December	December
	2021	2020
	$000	$000
Revenues	631	137
Outstanding receivables balance at end of year	126	63

The Group recorded revenues of $623,000 (2020: $129,000) with Giunti Editore S.p.A, a company over which Andrea Giunti Lombardo, a non-executive director, exercises control. The transactions were in the normal course of business on arms-length terms. The amount outstanding at 31 December 2021 was $126,000 (2020: $58,000).

The Group recorded revenues of $8,000, up to 30 June 2021, (2020: $8,000) with Pavilion Books Limited, a company over which Polly Powell, the CEO for Pavilion Books, exercises control. The transactions were in the normal course of business on arms-length terms.

DISTRIBUTION SERVICES:

DISTRIBUTION SERVICES:
	At 31	At 31
	December	December
	2021	2020
Pavilion Books Limited	$000	$000
Net sales less distribution fees	1,357	—

From January to June 2021, Quarto provided distribution services to Pavilion Books Group Limited, which was owned by Polly Powell, who resigned on 1 July 2021.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Financial Statements

29 Reconciliation of figures included in other parts of the financial statements


29 Reconciliation of figures included in other parts of the financial statements
2021	2020
$000	$000
Adjusted operating profit
Operating profit 15,952 Add back: Amortization of acquired intangibles 7 Other exceptional items (note 5) — Adjusted operating profit 15,959 EBITDA Operating profit before amortization of acquired intangibles and exceptional items 15,959	9,282 890 446 10,618 10,618	STRATEGIC REPORT
Less: Net finance costs (1,796)	(2,693)
Impact of IFRS 16 (18)	(270)
Adjusted profit before tax 14,145	7,655
Net finance costs 1,796	2,693
Depreciation of property, plant and equipment and software (excluding right-of-use assets) 410	631
Share based payments/(credits) 10	(32)
One off non-cash costs —	1,892
EBITDA for banking purposes 16,361	12,839
Impact of IFRS 16 18 Depreciation of right-of-use assets 1,432 Less: one off non-cash costs — EBITDA 17,811 Adjusted profit before tax before amortization of acquired intangibles and exceptional items	270 1,760 (1,892) 12,977	GOVERNANCE
Adjusted operating profit before amortization of acquired intangibles and exceptional items 15,959	10,618
Less: net finance costs (1,796)	(2,693)
Adjusted profit before tax before amortization of acquired intangibles and exceptional items 14,163	7,925
Free cashflow
Net cash from operating activities 37,651	36,921
Investment in pre-publication costs (20,229)	(20,324)
Purchases of property, plant and equipment excluding IFRS 16 assets (111)	(34)
Free cashflow 17,311 Net debt Short-term borrowings 5,438 Long-term borrowings 28,508 Cash and cash equivalents (28,432) Net debt 5,514	16,563 41,819 — (22,079) 19,740	FINANCIAL STATEMENTS

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Financial Statements

Company Balance Sheet

AS AT 31 DECEMBER 2021

	2021	2020
	Notes $000	$000
Fixed assets
Investments	4 1,244	1,234
Current assets	1,244	1,234
Other receivables falling due within one year	6 3,515	3,370
Current liabilities	3,515	3,370
Creditors falling due within one year	7 (431)	(52)
Creditors falling due after more than one year	(431)	(52)
Tax payable	—	(430)
Net assets	4,328	4,122
Equity
Called up share capital	8 4,089	4,089
Paid in surplus	48,701	48,701
Retained earnings	(48,462)	(48,668)
Total equity	4,328	4,122

The company reported a profit for the financial year ended 31 December 2021 of $195,000 (2020 $2,214,000). The notes on pages 92 to 95 are an integral part of these consolidated financial statements. The financial statements were approved by the Board of Directors and authorized for issue on 17 March 2022. They were signed on its behalf by

Chuk Kin Lau Director 17 March 2022

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Financial Statements

Company Statement of Comprehensive Income

FOR THE YEAR ENDED 31 DECEMBER 2021

			2021	2020
		Notes	$000	$000
Other operating income
Dividends received			—	1980
Administrative expenses Foreign exchange (loss)/gain Profit before tax Tax Profit for the year		3	196 (52) 144 52 196	— 224 2,204 10 2,214	STRATEGIC REPORT
The notes on pages 92 to 95 are an integral part of these consolidated financial statements.
Company Statement		of
	Changes in Equity
	FOR THE YEAR ENDED 31 DECEMBER 2021 Share capital	Paid in surplus	Retained earnings	Equity attributable to owners	GOVERNANCE
	$000	$000	$000	$000
Balance at 1 January 2020	2,045	33,764	(50,850)	(15,041)
Profit for the year	—	—	2,214	2,214
Transactions with owners
Share capital raised	2,044	16,307	—	18,351
Costs of raising share capital	—	(1,370)	—	(1,370)
Share based charges	—	—	(32)	(32)
Balance at 1 January 2021	4,089	48,701	(48,668)	4,122
Profit for the year Transactions with owners Share capital raised Costs of raising share capital Share based payments/charges Balance at 31 December 2021	— — — 4,089	— — — 48,701	196 — — 10 (48,462)	196 — — 10 4,328	FINANCIAL STATEMENTS
The notes on pages 92 to 95 are an integral part of these consolidated financial statements.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Financial Statements

Notes to the Company Accounts

AT 31 DECEMBER 2021

1 Basis of preparation

The separate financial statements of the Company are presented and have been prepared in accordance with Financial Reporting Standard 102 (FRS 102) issued by the Financial Reporting Council. These financial statements present information for the Company, not about the Group.

The financial statements have been prepared in accordance with applicable accounting standards and under the historical cost accounting rules modified to include certain items as fair value and in accordance with FRS 102. The financial statements have been prepared using the going concern basis, as discussed in the Group going concern disclosure.

The Company has adopted the following disclosure exemptions:

the requirement to present a statement of cash flow and related notes; and
financial instrument disclosures, including,
categories of financial instruments;
items of income, expenses, gains or losses relating to financial instruments; and
exposure to, and management of, financial risks.

There were no significant judgements or estimates in preparing the financial statements of the Company.

2 Accounting policies

The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the financial statements. The functional currency of the company is Pounds Sterling, with the parent company accounts presented in US Dollars.

INVESTMENTS

Investments in subsidiaries are stated at cost less, where appropriate, provisions for impairment.

OTHER RECEIVABLES

Amounts owed by subsidiary undertakings are initially recognized at fair value, and subsequently measured at amortized cost using the effective interest method.

CREDITORS

Amounts owed to subsidiary undertakings are initially recognized at fair value, and subsequently measured at amortized cost using the effective interest method.

SHARE-BASED PAYMENTS

The Company operates a number of equity-settled, share based compensation plans that are awarded to employees of the Company’s subsidiary undertakings. The fair value of the employee services received under such schemes is recognized as an expense in the subsidiary undertakings financial statements, which benefit from the employee services. The Company has recognized the fair value of the share-based payments as an increase to equity with a corresponding adjustment to investments. Equity settled share-based payments are measured at fair value at the date of grant. The fair value, determined at the grant date, of equity settled share–based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest. The fair value of employee share option grants is calculated using a Monte Carlo model, taking into account the terms and conditions upon which the options were granted. The value of the charge is adjusted to reflect expected and actual levels of options vesting. Further detail is set out in note 27 to the group consolidated Financial Statements.

CASH AND CASH EQUIVALENTS

There were no cash transactions during the year and accordingly no cash flow statement has been presented.

FOREIGN CURRENCIES

FINANCIAL GUARANTEE CONTRACTS

Where the Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within its group, the Company considers these to be insurance arrangements, and accounts for them as such. In this respect, the Company treats the guarantee contract as a contingent liability until such time as it becomes probable that the Company will be required to make a payment under the guarantee.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Financial Statements

NOTES TO THE COMPANY ACCOUNTS (continued)

3 Tax

3 Tax
	2021	2020
	$000	$000
Current tax credit	(52)	(10)

Corporation tax is calculated at 21%, based on the US standard rate of corporate tax (2020: 21%) of the estimated assessable profit for the year. The table below explains the difference between the expected expense at the US statutory rate of 21% and the Company’s total tax expense for the year.

the Company’s total tax expense for the year.
Profit before tax Tax at the US corporation tax rate of 21% (2020: 21%)	2021 $000 144 30	2020 $000 2,204 463
Tax effect of items that are not (taxable)/deductible in determining taxable profit	(30)	(463)
Other	—	(10)
Tax Credit	—	(10)

4 Investments

4 Investments
	2021	2020
	$000	$000
At 1 January	1,234	1,266
Movement during the year At 31 December	10 1,244	(32) 1,234

5 Subsidiaries

A) TRADING COMPANIES

Name	Incorporation Issued and fully paid up share capital % held Segment Place Date Registered address key
Quarto Publishing Group USA Inc. Delaware, USA 28 June 2004 B 380 shares of US$0.01 each 100 US Publishing
Quarto Publishing plc United Kingdom 1 April 1976 A 100,000 shares of £1 each 100* UK Publishing
Quarto, Inc. Delaware, USA 16 October 1986 B 86 shares of no par value 100* US Publishing

*Directly held by The Quarto Group, Inc.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Financial Statements

NOTES TO THE COMPANY ACCOUNTS (continued)

5 Subsidiaries (continued)

B) DORMANT COMPANIES

B) DORMANT COMPANIES
Name	Incorporation Registered address key Issued share capital % held Place Date
AP Screen Printers Limited	United Kingdom 30 September 1980 A 1000 shares of £1 each 100
Apple Press Limited	United Kingdom 5 June 1984 A 100 shares of £1 each 100
Aurum Press Limited	United Kingdom 31 May1977 A 382,502 shares of £1 each 100
Books & Gifts Direct Limited	New Zealand 27 September 1996 C 400,000 shares of NZ$1 each 100*
Cartographica Press Limited	United Kingdom 27 July1981 A 1000 shares of £1 each 100
Design Eye Holdings Limited	United Kingdom 22 June 1992 A 200 shares of £1 each 100
Design Eye Limited	United Kingdom 18 March 1988 A 100 shares of £1 each 100
Design Eye PublishingLimited	United Kingdom 17 June 1992 A 2 shares of £1 each 100
EYE Quarto Inc	Delaware, USA 19 December 2002 B 1000 shares of nopar value 100
Fine Wine Editions Limited	United Kingdom 23 June 1949 A 9020 shares of £1 each 100
Frances Lincoln Limited	United Kingdom 15 December 1980 A 565,000 shares of 10peach 100
Frances Lincoln Publishers Limited	United Kingdom 11 March 1987 A 100 shares of £1 each 100
Global Book PublishingPtyLimited	United Kingdom 7 July1986 A 1000 shares of £1 each 100
Global Book PublishingPtyLimited1	Australia 4 November 1999 1,000 shares of A$1 each 100
The Great American Trading CompanyLimited	United Kingdom 24 February 1982 A 100 shares of £1 each 100
IQON Editions Limited	United Kingdom 5 December 1972 A 300 shares of £1 each 100
iqu-digital.com Limited	United Kingdom 30 November 1978 A 100 shares of £1 each 100
The IvyPress Limited	United Kingdom 9 July1996 A 1042 shares of 10peach 100
Quarto (JS) LLP	United Kingdom 6 November 1998 A 100 units 100
JR Books Limited	United Kingdom 9 September 1986 A 43 004 shares of £1 each 100
Lewes Holdings Limited	United Kingdom 21 July2005 A 20,840 shares of £0.01 each 100
Marshall Editions Limited	United Kingdom 7 February2002 A 1 shares of £1 each 100
Marshall PublishingLimited	United Kingdom 7 February2002 A 1 shares of £1 each 100
QEB PublishingInc	Delaware, USA 27 April 2004 B 1500 shares of nopar value 100
QED PublishingLimited	United Kingdom 12 November 1974 A 400 shares of £1 each 100
QU:ID PublishingLimited	United Kingdom 30 September 1980 A 100 shares of £1 each 100
Quarto Australia PtyLimited2	Australia 14 September 1981 D 110 shares of $A1 each 100
Quantum Books Limited	United Kingdom 7 February1983 A 100 shares of £1 each 100
Quarto Children’s Books Limited	United Kingdom 6 January1976 A 2 shares of £1 each 100
Quarto China CompanyLimited	HongKong 16 March 2021 E 1 share of HKD1 each 100
Quarto GroupHK Ltd3	HongKong 26 January2015 100 shares of HKD1 each 100
Quarto Magazines Limited	United Kingdom 20 May1986 A 1000 shares of £1 each 100
Quarto MarketingInc	Delaware, USA 26 April 1995 B 3000 shares of nopar value 100
Quarto Media Inc	Delaware, USA 10 December 2010 B 1000 shares of $1 each 100
Quarto Multi Media Limited	United Kingdom 14 December 1984 A 1000 shares of £1 each 100
Quill PublishingLimited	United Kingdom 14 May1979 A 1000 shares of £1 each 100
Quintessence Editions Limited	United Kingdom 7 February2002 A 1 shares of £1 each 100
Quintet PublishingLimited	United Kingdom 14 May1979 A 100 shares of £1 each 100
RotoVision S.A.2	Switzerland 18 July1977 F 1,500 shares of SFr500 each 100
Small World Creations Limited	United Kingdom 20 September 1997 A 1,536 share of £1 each 100

*Directly held by The Quarto Group, Inc.

1 Deregistered on 24 February 2021.
2 In the process of deregistration.
3 Deregistered on 5 March 2021.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2021 Financial Statements

NOTES TO THE COMPANY ACCOUNTS (continued)

5 Subsidiaries (continued)

C) LIST OF REGISTERED OFFICES

A The Old Brewery, 6 Blundell Street, London, N7 9BH, United Kingdom

B 100 Cummings Center, Suite 265D, Beverly, MA 01915-6115, USA
(Quarto Publishing Group USA Inc., 251 Little Falls Drive, Wilmington, DE 19808, Delaware, USA; Quarto Inc.,
1209 Orange Street, Wilmington, Delaware 19801, USA)
C c/o Brownes CA Limited, Unit K, 215 Rosedale Road, Albany, Auckland, 0632, New Zealand
D c/o ZM Partners, Suite 10 Ground Floor, 123 Clarence Street, Sydney, NSW 2000, Australia
E Level 11 East Wing, NEO, 123 Hoi Bun Road, Kwun Tong, Hong Kong
F Passage Perdonet 1, 1005 Lausanne, Switzerland

6 Other receivables falling due within one year

6 Other receivables falling due within one year
	2021	2020
	$000	$000
Amounts owed by subsidiary undertakings	3,515	3,370
	3,515	3,370

7 Creditors falling due within one year

7 Creditors falling due within one year
	2021	2020
	$000	$000
Amounts owed to subsidiary undertakings Tax payable	— (431) (431)	— 52 52

8 Called up share capital

Details of called up share capital are set out in note 23 of the consolidated Financial Statements.

9 Contingent liabilities

The Quarto Group, Inc. has issued guarantees in respect of bank loans of subsidiaries of $6.7m, (2020: $25,411,000). Refer to note 17 of the group consolidated Financial Statements.

10 Related parties

The Company made no repayments to its wholly owned subsidiary, Quarto Publishing plc, during the year (2020: $19,184,000 borrowed in the year). The balance on the loan at 31 December 2021 was $3.5m (due to the company) (2020: $3.4m owed by the company). These balances are non-interest bearing and repayable on demand.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2020

Governance

Independent Auditor’s Report to the Members of The Quarto Group, Inc.

Opinion

OUR OPINION ON THE FINANCIAL STATEMENTS IS UNMODIFIED

We have audited the financial statements of The Quarto Group, Inc. (the ‘parent company’) and its subsidiaries (the ‘group’) for the year ended 31 December 2020 which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated cash flow statement, the company balance sheet, the company statement of comprehensive income, the company statement of changes in equity and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in the preparation of the group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards, including Financial Reporting Standard 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’ (United Kingdom Generally Accepted Accounting Practice).

In our opinion:

the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2020 and of the group’s profit and the parent company’s profit for the year then ended;
the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;
the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 which would have applied were the parent company incorporated in the United Kingdom; and, as regards the group financial statements, Article 4 of the IAS Regulation.

Basis for opinion

Conclusions relating to going concern

A description of our evaluation of management’s assessment of the ability to continue to adopt the going concern basis of accounting, and the key observations arising with respect to that evaluation is included in the Key Audit Matters section of our report.

In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate.

In relation to the group’s and the parent company’s reporting on how they have applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation to the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

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THE QUARTO GROUP, INC. ANNUAL REPORT 2020
Governance
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The responsibilities of the directors with respect to going concern are described in the ‘Responsibilities of directors for the financial statements’ section of this report.

Our approach to the audit

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OVERVIEW OF OUR AUDIT APPROACH

Overall materiality: £632,000, which represents approximately 0.5% of the group’s revenue.
Materiality Key audit matters • Key audit matters were identified as assessing the completeness of the sales return provision, assessment of the carrying value of goodwill, assessment of the accuracy of pre-publication intangible assets and the going concern assessment. This is consistent with the key audit matters identified in the prior year.
Scoping • We have performed a full scope audit of the financial statements of the parent
company and of the financial information of Quarto Publishing plc (‘Quarto UK’) and Quarto Publishing Group USA Inc. (‘Quarto US’). We have performed analytical procedures on the financial information of other companies within the group.

KEY AUDIT MATTERS

In the graph below, we have presented the key audit matters, significant risks and other risks relevant to the audit.

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High
Goodwill
Intangibles - accuracy
Sales Return
Revenue – Co-Edition Going Concern
Intangibles - other
Management override
Related party
transactions
Trade Receivables
Trade Payables
IFRS 16 CARES Act Loan
Revenue -other
Exceptionals Inventory
Low
Low Extent of management judgement High
Key audit matter Significant risk Other risk
Potential financial statement impact
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STRATEGIC REPORT
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GOVERNANCE
FINANCIAL STATEMENTS
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FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Governance

INDEPENDENT AUDITOR’S REPORT (continued)

Key Audit Matter – Group	How our scope addressed the matter – Group
COMPLETENESS OF THE SALES RETURNS	Our audit work included, but was not restricted to:
PROVISION	• Considering the appropriateness of the accounting policy for the
We have identified the completeness of the sales	provision for sales returns by checking whether it is in accordance with
returns provision as one of the most significant	the financial reporting framework, including IAS 37 ‘Provisions, Contin-
assessed risks of material misstatement due to error	gent Liabilities and Contingent Assets’ and IFRS 15 ‘Revenue from
The Group generates material revenues from published	Contracts with Customers’.
books. Certain trade customers have a right of return	• Testing a sample of returns made during the year to supporting
for these books and therefore the revenue is recog-	documentation in order to confirm the accuracy of the data used to
nised net of a provision for these returns. At 31	calculate the rates of returns used in management’s calculation of the
December 2020, this provision totals $6,481,000.	provision;
Management judgement is required when assessing the level of returns which are expected to occur subsequent to the year end for sales made during the	• Recalculating the provision to confirm that it is appropriate and in accordance with management’s policy;
year.	• Comparing actual returns in the period to the provision made in the
The key assumption applied is in relation to historical return experience, which is used in order to predict	prior period in order to evaluate the accuracy of management’s forecasting;
future returns and therefore the provision which is	• Obtaining actual returns for the period after the balance sheet date and
required to be made.	comparing these with the returns provision for the same period; and
We therefore identified the completeness of the sales	• Inquiring of sales and operations staff as to their knowledge of any
returns provision as a significant risk, which was one of	exceptional returns in the period or the potential for these in the returns
the most significant assessed risks of material misstate-	period.
ment.

OUR RESULTS

RELEVANT DISCLOSURES IN THE ANNUAL REPORT AND ACCOUNTS 2020

Our audit work did not identify any material errors in the completeness of the sales returns provision.
Financial statements: Note 1, General information and significant accounting policies and Note 21, Trade and other payables;
Audit and risk committee report: Page 26

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

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THE QUARTO GROUP, INC. ANNUAL REPORT 2020
Governance
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Key Audit Matter – Group How our scope addressed the matter – Group ASSESSMENT OF THE CARRYING VALUE OF Our audit work included, but was not restricted to: GOODWILL • Considering the appropriateness of the accounting policy by checking
• We identified the assessment of the carrying value of whether it is in accordance with the financial reporting framework, goodwill in relation to Quarto US as one of the most including IAS 36 ‘Impairment of Assets’; significant assessed risks of material misstatement due to error. • Consideration of the appropriateness of the CGU definition applied by management, based on discussions with management and inspection
• The Group holds $19,381,000 of goodwill on its of internal reporting documents; balance sheet, including $12,882,000 relating to • Obtaining management’s impairment review model, testing its mathe-
Quarto US as disclosed in Note 11 to the group financial statements. matical accuracy and key assumptions within the model;
Assessing the appropriateness of the asset and liability amounts
• In accordance with International Accounting included in the carrying value of each of the cash generating units
Standard 36 ‘Impairment of Assets’ (‘IAS 36’), goodwill which were assessed by management as part of the impairment review;
is subject to an annual impairment test. • Challenge of management on the allocation of overheads within the
• We consider that the carrying value of the goodwill CGUs;
for this cash generating unit (CGU) is a key risk due to the sensitivity of the impairment calculations to a • Assessing the discount rate applied, including an assessment by our reasonably possible change in the key assumptions, valuation specialists and benchmarking the rate against that used by including the discount rate, cash flow forecasts and competitors; growth rates. • Performing sensitivity analysis around the value in use calculation
• We therefore identified the assessment of the performed by management; carrying value of goodwill as a significant risk, which • Considering the post year end performance for January and February of
was one of the most significant assessed risks of material misstatement. the group against budget and comparing historical budgets to actual performance in order to assess the accuracy of budgets prepared by
RELEVANT DISCLOSURES IN THE ANNUAL management; and REPORT AND ACCOUNTS 2020 • Financial statements: Note 1, General information • Assessing the adequacy of financial statement disclosures in relation to the impairment reviews and sensitivity analysis.
and significant accounting policies and Note 11, Goodwill; KEY OBSERVATIONS
Audit and risk committee report: Page 26 • Our audit expert calculated that the discount rate used for the impairment reviews should be in the range 12.0% to 14.3%, whereas management’s rate was outside of this range at 11.4%. Using the auditor experts discount rates did not on its own lead to an impairment, but we note that the impact of a change in discount rate has a significant affect on the discounted cash forecasts, as is indicated in management’s sensitivities as disclosed in note 11

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

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THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Governance

INDEPENDENT AUDITOR’S REPORT (continued)

Key Audit Matter – Group How our scope addressed the matter – Group ASSESSMENT OF THE ACCURACY OF PREOur audit work included, but was not restricted to: PUBLICATION INTANGIBLE ASSETS • Considering the appropriateness of the accounting policy by checking We identified the assessment of the accuracy of whether it is in accordance with the financial reporting framework, pre-publication intangible assets as one of the most including IAS 38 ‘Intangible Assets’; significant assessed risks of material misstatement. • Testing a sample of costs capitalised in the year to supporting docuThe Group’s holds capitalised pre-publication costs as mentation in order to confirm they are directly attributable to the intangible assets which have a net book value of development of book titles; $41,013,000 on its consolidated balance sheet. This • Holding inquiries with members of the creative team to understand their represents costs which are capitalised by the Group in role and the appropriateness of their time being capitalised to pre-publirelation to the development of book titles, including cation costs; directly attributable overhead costs. There is management judgement involved in determining which costs • Challenging judgements made by management in determining which are directly attributable to the development of books costs are directly attributable to the development of book titles; and and should therefore be capitalised. • Testing the transfers made from assets under construction to pre-publiWe therefore identified the assessment of the accuracy cation costs. of pre-publication intangible assets as a significant risk, which was one of the most significant assessed risks of OUR RESULTS material misstatement. • Our audit work did not identify any material errors in the accuracy of pre-publication intangible assets. RELEVANT DISCLOSURES IN THE ANNUAL REPORT AND ACCOUNTS 2020 • Financial statements: Note 1, General information and significant accounting policies and Note 15, Intangible assets – pre-publication costs; • Audit and risk committee report: Page 26 Page 26 GOING CONCERN Our audit work included, but was not restricted to: We identified going concern as one of the most • Obtaining management’s forecasts covering the period to 31 March significant assessed risks of material misstatement. 2022 and assessing their integrity and suitability as a basis for manageCovid-19 is one of the most significant economic ment to assess going concern; events currently faced worldwide and at the date of this • Corroborating the existence and key terms of the group’s loan facilities and report its effects are subject to unprecedented levels of covenant compliance for the period covered by management’s forecasts; uncertainty. This event could adversely impact the future trading performance of the group and the • Corroborating the opening net cash position within the model to company. Whilst the Group has seen a decline in sales supporting evidence as at 31 December 2020; to some bookstores it has also seen an increase in • Analysing and challenging management’s historical forecasting accuracy; sales by its online customers. • Considering the severity and plausibility, in light of our knowledge of the As such we identified going concern as a significant business, of management’s sensitivity analysis for downside scenarios; risk, which was one of the most significant assessed risks of material misstatement. • Testing the accuracy of management’s reverse stress test scenario;

Audit and risk committee report: Page 26 Page 26
RELEVANT DISCLOSURES IN THE ANNUAL REPORT AND ACCOUNTS 2020 • Financial statements: Note 1, General information and significant accounting policies;
• Audit and risk committee report: Page 25
Evaluating and corroborating key assumptions to underlying supporting information and fact patterns as appropriate whilst considering any contra indicators; and,
Assessing the adequacy of the going concern disclosures included within the financial statements based on our knowledge of the forecasts.
OUR RESULTS
Strategic report: Financial Review, Page 13
Our audit work did not identify any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the group’s and the parent’s ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.

We did not identify any key audit matters relating to the audit of the financial statements of the parent company.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Governance

OUR APPLICATION OF MATERIALITY

OUR APPLICATION OF MATERIAL	ITY
We apply the concept of materiality both in planning and performing the audit, and in evaluating the effect of identified
misstatements on the audit and of uncorrected misstatements, if any, on the financial statements and in forming the opinion in
the auditor’s report.
Materiality was determined as follows: Materiality measure Group Parent company MATERIALITY FOR FINANCIAL STATEMENTS AS A WHOLE We define materiality as the magnitude of misstatement in the financial statements that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of these financial statements. We use materiality in determining the nature, timing and extent of our audit work.			STRATEGIC REPORT
Materiality threshold	$632,000 which is 0.5% of revenue.	$48,300 which is 1% of the parent compa-
		ny’s total assets.
Significant judgements made by	This benchmark is considered the most	This benchmark is considered the most
auditor in determining the materi-	appropriate because revenue is a key driver of	appropriate because the parent company is
ality	the business and is monitored by management	a holding company and has no revenue.
	and the directors. As part of this assessment, we considered the use of earnings before tax as the benchmark however as there have been significant fluctuations in the group’s earnings before tax in recent years this was not deemed to be appropriate. Given the current uncertain- ties in the macro-economic environment a percentage of 0.5% of the revenue benchmark has been applied. We also referred to key metrics and highlights raised in the annual report to pinpoint our revenue based materiality,	Materiality for the current year is higher than the level that we determined for the year ended 31 December 2019 to reflect the increase in net assets of the parent company as a result of the equity issue.	GOVERNANCE
	this is based on expectations of what the entity
	deems to be key benchmarks for users of the
	financial statements
	Materiality for the current year is lower than the
	level that we determined for the year ended 31
	December 2019 to reflect the decrease in the
	group’s revenue in the current year.
Significant revision of materiality	We calculated materiality during the planning	No reassessment of materiality was
threshold that was made as the	stage of the audit based on a pro-rata of	required.
audit progressed	revenue from January 2020 to August 2020. During the course of our audit, we re-assessed initial materiality based on actual revenue for the year ended 31 December 2020 and adjusted our audit procedures accordingly. This was to ensure our audit work has been completed to an appropriate level based on the materiality benchmark selected.		FINANCIAL STATEMENTS

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Governance

INDEPENDENT AUDITOR’S REPORT (continued)

Materiality measure	Group Parent company
PERFORMANCE MATERIALITY	We set performance materiality at an amount less than materiality for the financial statements
USED TO DRIVE THE EXTENT	as a whole to reduce to an appropriately low level the probability that the aggregate of
OF OUR TESTING	uncorrected and undetected misstatements exceeds materiality for the financial statements as
	a whole.
Performance materiality threshold	$442,400 which is 70% of financial statement $33,810 which is 70% of financial statement
	materiality. materiality.
Significant judgements made by	In determining materiality, we made the significant judgement to increase performance
auditor in determining the perfor-	materiality from 65% to 70%, this is based on only a small number of adjustments being noted
mance materiality	in the prior year and changes being implemented by management in relation to the processes
	surrounding areas in which adjustments have previously been identified.
SPECIFIC MATERIALITY	We determine specific materiality for one or more particular classes of transactions, account
	balances or disclosures for which misstatements of lesser amounts than materiality for the
	financial statements as a whole could reasonably be expected to influence the economic
	decisions of users taken on the basis of the financial statements.
Specific materiality threshold	We determined a lower level of specific We determined a lower level of specific
	materiality for certain areas including directors' materiality for certain areas including
	remuneration and related party transactions. directors' remuneration and related party
	transactions.
COMMUNICATION OF	We determine a threshold for reporting unadjusted differences to the audit committee
MISSTATEMENTS TO THE AUDIT
COMMITTEE
Threshold for communication	$31,600 and misstatements below that thresh- $1,400 and misstatements below that
	old that, in our view, warrant reporting on threshold that, in our view, warrant
	qualitative grounds. reporting on qualitative grounds.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

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THE QUARTO GROUP, INC. ANNUAL REPORT 2020
Governance
The graph below illustrates how performance materiality interacts with our overall materiality and the tolerance for potential
uncorrected misstatements.
Overall materiality – Group Overall materiality – Parent company
Revenue Total Assets
$126,383k $4,604k
PM PM
FSM $442k FSM $34k
$632k 70% $48k 70%
0.5% 1%
TFPUM TFPUM
$190k $14k
FSM: Financial statements materiality, PM: Performance materiality, TFPUM: Tolerance for potential uncorrected misstatements
STRATEGIC REPORT
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An overview of the scope of our audit

We performed a risk-based audit that requires an understanding of the group’s and the parent company’s business and in particular matters related to:

UNDERSTANDING THE GROUP, ITS COMPONENTS, AND THEIR ENVIRONMENT, INCLUDING GROUP-WIDE CONTROLS

The engagement team obtained an understanding of the group and its environment, including group-wide controls, and assessed the risks of material misstatement at the group level;
The group comprises of two trading components alongside a number of dormant components. The groups financial system is independent at each component however input is provided into the group wide controls by group management.

IDENTIFYING SIGNIFICANT COMPONENTS

Evaluation by the group audit team identified components to assess the significance of that component and to determine the planned audit response based on a measure of materiality. Significance was determined as a percentage of the group’s total assets, revenues and profit before taxation

WORK TO BE PERFORMED ON FINANCIAL INFORMATION OF PARENT AND OTHER COMPONENTS

The parent entity has been subjected to a full scope audit, being an audit of the financial information of the component using component materiality, of its financial statements;
Based on our evaluation we considered that the only significant components of the group are Quarto Publishing plc and Quarto Publishing Group (USA) Inc. due to their significance to the group;
Key audit matters were identified within the group as part of our risk assessment procedures. Disclosures as to how the key audit matters identified have been addressed can be found within the key audit matter section of our audit report;
The financial information of the other components in the group has been subjected to analytical.

PERFORMANCE OF OUR AUDIT

The full scope audits performed represent 100% of the group’s continuing revenue for the year, 100% of the group’s total assets, and 98.8% of the group’s total liabilities;
As part of our procedures a review of the groups IT systems and controls has been completed.

CHANGES IN APPROACH FROM PREVIOUS PERIOD

Our approach is consistent with the approach used in the previous period with the exception being that due to travel restrictions imposed as a result of COVID-19, our audit work in relation to Quarto Publishing Plc and Quarto Publishing Group (USA) Inc. had to be completed virtually as opposed to site visits, this includes the virtual attendance of stock counts.

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GOVERNANCE
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FINANCIAL STATEMENTS
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FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Governance

INDEPENDENT AUDITOR’S REPORT (continued)

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Other information

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.

We have nothing to report in this regard.

OUR OPINIONS ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006, WERE IT TO APPLY TO THE PARENT COMPANY, ARE UNMODIFIED

In our opinion, the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.

In our opinion, based on the work undertaken in the course of the audit:

the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.

MATTER ON WHICH WE ARE REQUIRED TO REPORT UNDER THE COMPANIES ACT 2006, WERE IT TO APPLY TO THE

PARENT COMPANY

MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION, WERE THE COMPANIES ACT 2006 TO APPLY TO THE PARENT COMPANY

We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion:

adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or
the parent company financial statements and the part of the directors’ remuneration report to be audited are not in agreement with the accounting records and returns; or
certain disclosures of directors’ remuneration specified by law are not made; or
we have not received all the information and explanations we require for our audit

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Governance

Corporate governance statement

the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements and the directors’ identification of any material uncertainties to the group’s and the parent company’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements - refer to page [25];
the directors’ explanation in the annual report as to how they have assessed the prospects of the group and the parent company, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the group and the parent company will be able to continue in operation and meet their liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions - refer to page 25;
the directors’ statement that they consider the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the group’s and the parent company’s performance, business model and strategy - refer to page 42;
the directors’ confirmation in the annual report that they have carried out a robust assessment of the principal and emerging risks facing the group and the parent company (including the impact of Brexit and Covid-19) and the disclosures in the annual report that describe the principal risks, procedures to identify emerging risks and an explanation of how they are being managed or mitigated including the impact of Brexit and Covid-19 - refer to page 19;
the section of the annual report that describes the review of the effectiveness of group’s and the parent company’s risk management and internal control systems, covering all material controls, including financial, operational and compliance controls - refer to page 19; and
the section of the annual report describing the work of the audit committee, including significant issues that the audit committee considered relating to the financial statements and how these issues were addressed - refer to pages 25 to 39.

RESPONSIBILITIES OF DIRECTORS FOR THE FINANCIAL STATEMENTS

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STRATEGIC REPORT
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GOVERNANCE
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AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

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THE QUARTO GROUP, INC. ANNUAL REPORT 2020
Governance
INDEPENDENT AUDITOR’S REPORT (continued)
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EXPLANATION AS TO WHAT EXTENT THE AUDIT WAS CONSIDERED CAPABLE OF DETECTING IRREGULARITIES, INCLUDING FRAUD

The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below:

We obtained an understanding of the legal and regulatory frameworks applicable to the parent company and the group and the industry in which they operate. We determined that the following laws and regulations were most significant: IFRSs as adopted by the European Union, Listing Rules, Companies Act 2006 and the UK Corporate Governance Code.
We obtained an understanding of how the parent company and the group is complying with those legal and regulatory frameworks by making inquiries of management, those responsible for legal and compliance procedures and the company secretary. We corroborated our inquiries through our review of board minutes and papers provided to the Audit Committee.
We assessed the susceptibility of the parent company’s and group’s financial statements to material misstatement, including how fraud might occur. Audit procedures performed included:
identifying and assessing the design effectiveness of controls management has in place to prevent and detect fraud;
understanding how those charged with governance considered and addressed the potential for override of controls or other inappropriate influence over the financial reporting process;
challenging assumptions and judgments made by management in its significant accounting estimates; and
identifying and testing journal entries posted in the year which were deemed to be unusual.
We note our key audit matter in relation to the completeness of the sales return provision relates to irregularities, including fraud. Refer to key audit matters for work completed and our results from the procedures performed.
No matters of non-compliance with laws and regulations and fraud were identified by the engagement team or communicated to the engagement team.
We note that there is no specific industry legislation that significantly impacts The Quarto Group, inc. and the engagement team are deemed to hold appropriate competence and capabilities to identify non-compliance with laws and regulations

OTHER MATTERS WHICH WE ARE REQUIRED TO ADDRESS

Following the recommendation of the audit committee, we were appointed by the audit committee on 20 November 2017 to audit the financial statements for the year ending 31 December 2017 and subsequent financial periods.

The period of total uninterrupted engagement including previous renewals and reappointments of the firm is 4 years, covering the periods ending 31 December 2017 to 31 December 2020.

Our audit opinion is consistent with the additional report to the audit committee.

USE OF OUR REPORT

This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

David White

Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants London

21 March 2021

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Financial Statements

Consolidated Income Statement

FOR THE YEAR ENDED 31 DECEMBER 2020

	2020	2019
	Notes $’000	$’000
Continuing operations
Revenue	2 126,883	135,807
Cost of sales Gross profit Administrative expenses Impairment of financial assets Distribution costs Operating profit before amortisation of acquired intangibles	(89,298) 37,585 (18,264) 17 (1,571) (7,132) 4 10,618	(97,782) 38,025 (19,641) (853) (7,527) 10,004	STRATEGIC REPORT
and exceptional items
Amortisation of acquired intangibles	(890)	(811)
Exceptional items	5 (446)	(419)
Operating profit	9,282	8,774
Finance income	7 —	9
Finance costs	8 (2,693)	(4,939)
Profit before tax	6,589	3,844
Tax Profit for the year Attributable to: Owners of the parent	9 (2,020) 4,569 4,569 4,569	(962) 2,882 2,882 2,882	GOVERNANCE
Earnings per share (cents)
From continuing operations
Basic	10 11.7	14.1
Diluted	10 11.6	14.0

The notes on pages 62 to 88 are an integral part of these consolidated financial statements.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Financial Statements

Consolidated Statement of Comprehensive Income

FOR THE YEAR ENDED 31 DECEMBER 2020

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	2020	2019
	$’000	$’000
Profit for the year	4,569	2,882
Items that may be reclassified to profit or loss
Foreign exchange translation differences	1,087	403
Cash flow hedge; (losses) arising during the year	—	(105)
Tax relating to items that may be reclassified to profit or loss	54	(162)
Total other comprehensive income	1,141	136
Total comprehensive income for the year	5,710	3,018
Total comprehensive income for the year attributable to:
Owners of the parent	5,710	3,018
	5,710	3,018

The notes on pages 62 to 88 are an integral part of these consolidated financial statements.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Financial Statements

Consolidated Balance Sheet

AS AT 31 DECEMBER 2020

		2020	2019
	Notes	$000	$000
Non-current assets
Goodwill Other intangible assets Property, plant and equipment Intangible assets: Pre-publication costs Deferred tax assets Total non-current assets	11 12 13 15 19	19,381 159 6,818 40,913 3,604 70,875	19,192 1,282 10,883 48,697 3,331 83,385	STRATEGIC REPORT
Current assets
Inventories	16	15,465	19,378
Trade and other receivables	17	44,519	46,397
Cash and cash equivalents	18	22,079	15,621
Total current assets		82,063	81,396
Total assets		152,938	164,781
Current liabilities
Short term borrowings	18	(41,819)	(66,077)
Trade and other payables Lease liabilities Tax payable Total current liabilities Non-current liabilities	21 20	(50,064) (1,968) (4,355) (98,206)	(57,381) (1,937) (2,831) (128,226)	GOVERNANCE
Deferred tax liabilities	19	(6,323)	(7,139)
Tax payable		(386)	(433)
Lease liabilities	20	(4,310)	(7,929)
Total non-current liabilities		(11,019)	(15,501)
Total liabilities		(109,225)	(143,727)
Net assets		43,713	21,054
Equity Share capital Paid in surplus Retained earnings and other reserves Total equity The notes on pages 62 to 88 are an integral part of these consolidated financial statements.	24 24 25	4,089 48,701 (9,077) 43,713	2,045 33,764 (14,755) 21,054	FINANCIAL STATEMENTS
The financial statements were approved by the Board of Directors and authorised for issue on 21 March		2021. They were
signed on its behalf by:

Polly Powell

Director

21 March 2021

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Financial Statements

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Consolidated Statement of Changes in Equity

FOR THE YEAR ENDED 31 DECEMBER 2020

						Equity
						attributable to
						owners
	Share		Hedging	Translation	Retained	of the
	capital	Paid in surplus	reserve	Reserve	earnings	parent
	$000	$000	$000	$000	$000	$000
Balance at 1 January 2019	2,045	33,764	105	(6,989)	(10,937)	17,988
Profit for the year	—	—	—	—	2,882	2,882
Other comprehensive income
Foreign exchange translation differences	—	—	—	403	—	403
Cash flow hedge: losses arising during the	—	—	(105)	—	—	(105)
year
Tax relating to items that may be	—	—	—	(162)	—	(162)
reclassified to profit or loss
Total comprehensive income	—	—	(105)	241	2,882	3,018
for the year
Share based payments charge	—	—	—	—	48	48
Balance at 31 December 2019	2,045	33,764	—	(6,748)	(8,007)	21,054
Profit for the year	—	—	—	—	4,569	4,569
Other comprehensive income
Foreign exchange translation differences	—	—	—	1,087	—	1,087
Tax relating to items that may be	—	—	—	54	—	54
reclassified to profit or loss
Total comprehensive income	—	—	—	1,141	4,569	5,710
for the year
Share capital raised	2,044	16,307	—	—	—	18,351
Costs of raising share capital	—	(1,370)	—	—	—	(1,370)
Share based payments credit	—	—	—	—	(32)	(32)
Balance at 31 December 2020	4,089	48,701	—	(5,607)	(3,470)	43,713

The notes on pages 62 to 88 are an integral part of these consolidated financial statements.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Financial Statements

Consolidated Cash Flow Statement

FOR THE YEAR ENDED 31 DECEMBER 2020

2020	2019
$000	$000
Profit for the year 4,569	2,882
Adjustments for: Net finance costs 2,693	4,930
Depreciation of property, plant and equipment 2,160	2,127
Software amortisation 231	276
Tax expense 2,020	962
Profit on disposal of right-of-use assets (35)	—
Share based (credits)/payments (32)	48
Amortisation of acquired intangibles 890	811
Amortisation and impairment of pre-publication costs 28,646	28,694
Operating cash flows before movements in working capital 41,142	40,730
Decrease in inventories 4,023	3,157
Decrease in receivables 2,721	8,961
(Decrease) in payables (9,205)	(8,896)
Cash generated by operations 38,681	43,952
Income taxes paid (1,760)	(2,650)
Net cash from operating activities 36,921	41,302
Investing activities Interest received —	9
Investment in pre-publication costs (20,324)	(23,786)
Purchases of property, plant and equipment (34)	(138)
Acquisition of businesses —	(1,250)
Net cash used in investing activities (20,358)	(25,165)
Financing activities Interest payments (1,297)	(3,709)
New share capital raised 18,351	—
Costs of raising new share capital (1,370)	—
Lease payments (1,995)	(1,882)
Drawdown of revolving credit facility and other loan 4,520	1,963
Repayment of term loan and revolving credit facility (28,413)	(12,417)
Net cash used in financingactivities (10,204)	(16,045)
Net increase in cash and cash equivalents 6,359	92
Cash and cash equivalents at beginning of year 15,621	15,384
Foreign currencyexchange differences on cash and cash equivalents 99	145
Cash and cash equivalents at end ofyear 22,079	15,621

The notes on pages 62 to 88 are an integral part of these consolidated financial statements.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Financial Statements

Notes to the Financial Statements

1 General information and significant accounting policies

The Quarto Group, Inc. is a company incorporated in the State of Delaware, United States. The address of the registered office is given on page 94. The nature of the Group’s operations and its principal activities are set out in the Chief Executive Officer’s Statement on page 7.

The accounting policies adopted, are consistent with those of the annual financial statements for the year ended 31 December 2019, as described in those financial statements.

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. The presentational currency of the Group is US dollars.

STATEMENT OF COMPLIANCE

The Group financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the EU (‘IFRS’). The Company has elected to prepare its parent company financial statements in accordance with UK GAAP, including The Financial Reporting Standard applicable in the UK and Republic of Ireland (‘FRS 102’). These are presented on pages 87 to 92.

BASIS OF ACCOUNTING

The financial statements are prepared on the historical cost basis, except that derivative financial instruments are stated at fair value.

STANDARDS, AMENDMENTS AND INTERPRETATIONS TO EXISTING STANDARDS THAT ARE NOT YET EFFECTIVE AND HAVE NOT BEEN ADOPTED EARLY BY THE GROUP

A number of amendments to accounting standards and Interpretations, effective in the current financial year have been adopted but have not had a material impact on the Group financial statements.

The Group has not applied any other standards, Interpretations or amendments that have been issued but are not yet effective.

Management anticipates that all relevant pronouncements will be adopted for the first period beginning on or after the effective date of the pronouncement.

SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENTS

The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the year in which the estimate is revised if the revision affects only that year or in the year of the revision and future years if the revision affects both current and future years.

Key estimates at the balance sheet date are:

Note 1, 21

The revenue recognition policy details our judgement in respect of sales returns and the method of estimating the related sales returns allowance

Note 11: Key assumptions in making the assessment of carrying value of goodwill

Note 15: Recoverability of pre-publication costs and the assessment of their useful life

Key judgements at the balance sheet date are:

The appropriateness of the going concern basis: when preparing the financial statements, management is required to make an assessment of the entity’s ability to continue as a going concern and prepare the financial statements on this basis unless it either Intends to liquidate the entity or to cease trading or has no realistic alternative but to do so. As set out in the going concern basis in the following paragraph, after reviewing the most recent projections, the sensitivity analysis and the mitigating actions available, the Directors have formed the judgement that it is appropriate to prepare the financial statements on the going concern basis.
Government grants: during the year, the Group received a loan of $2,422,000 relating to government support given under the Coronavirus Aid, Relief and Economic Security Act of the USA. The loan is forgivable under certain prescribed conditions. As at the balance sheet date, the Group cannot adequately ascertain that the prescribed conditions have all been satisfied and, therefore, without such reasonable assurance, the loan has been treated as a borrowing.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Financial Statements

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1 General information and significant accounting policies (continued)

GOING CONCERN BASIS

The Board assessed the Group’s ability to operate as a going concern for the next 12 months from the date of signing the financial statements.

The Directors have considered the underlying robustness of the Group’s business model, products and proposition and its recent trading performance, cash flows and key performance indicators. They have also reviewed the cash forecasts prepared in detail to 31 March 2022. This is to satisfy themselves of the going concern assumption used in preparing the financial statements. The base case model was built using a detailed sales forecast driven by the publishing program for 2021. Core margins have remained unchanged with trade receivable days remaining consistent with 2020.

As part of this work, the model was sensitised initially by a 5% reduction in revenue to ensure headroom within the covenants. This is deemed as a severe but plausible scenario. The model was then flexed to a tolerance of 13%, at which point the banking covenants were breached at the end of December 2021. It is considered remote that such a reduction of revenue would occur, given, the detailed nature of the sales forecast and even with the challenges of 2020, revenue dropped by only 7% year on year. Should we start to see a reduction in revenue, then mitigating action will be taken, such as reduction in investment in prepublication costs, print volumes, staffing levels and other variable costs.

Based on the above indications, the Directors believe that it remains appropriate to continue to adopt the going concern in preparing the financial statements.

BASIS OF CONSOLIDATION

Intragroup balances and any unrealised gains and losses or income and expenses arising from intra-group transactions are eliminated in preparing the consolidated financial statements.

BUSINESS COMBINATIONS, INTANGIBLE ASSETS AND GOODWILL

Goodwill arising on acquisitions is stated at cost less any accumulated impairment losses. Goodwill is allocated to cashgenerating units and is tested annually for impairment.

Other intangible assets, such as backlists, that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses.

Amortisation of intangible assets is charged to profit or loss on a straight-line basis over the estimated useful lives of the intangible assets. The amortisation period for non-contractual relationships is 2.5 years, for backlists is 5 years and for software is 4 years.

VOLUME REBATES

IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS INCLUDING GOODWILL

For goodwill, the recoverable amount is estimated at each balance sheet date. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in profit or loss.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Financial Statements

NOTES TO THE FINANCIAL STATEMENTS (continued)

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1 General information and significant accounting policies (continued)

GOVERNMENT GRANTS

During the year, the Group received financial support from Governments in UK and USA. The grants related to expense items. Any monies received or receivable are initially held as liabilities on the balance sheet. Grants are subsequently recognised in profit and loss when there is reasonable assurance that compliance has been satisfied. Additional Information is disclosed in Note 6 and Note 18.

SEGMENT REPORTING

The Group has two operating segments: US Publishing and UK Publishing. In identifying these operating segments, management follows the geographic locations of our business. The two segments are managed separately and focus on different geographic markets. For management purposes, the Group uses the same measurement policies as those used in its financial statements.

REVENUE RECOGNITION

Revenue arises largely from the sale of physical products. To determine whether to recognise revenue, the Group considers the following criteria:

Identifying the contract with a customer
Identifying the performance obligations
Determining the transaction price
Allocating the transaction price to the performance obligations
Recognising revenue as/when performance obligations are satisfied

Each contract is for an agreed price and revenue is recognised at a point in time when the Group satisfies performance obligations by transferring the products to its customers; this is determined with reference to delivery terms. Invoices for products transferred are due on the terms specified in the contract. Where invoices are issued prior to transfer of the product to the customer, and there is unconditional rights to consideration the amounts invoiced are recorded as liabilities on the balance sheet, under deferred Income. When the product has been transferred to the customer, the liabilities are released and treated as revenue accordingly.

Revenue from the sale of publishing rights is recognised when the Group has discharged its performance obligations under the contractual arrangements.

On certain contracts, the customer has a right to return the products. The Group makes an allowance for this, based on a review of the historical return patterns associated with the customer, as well as current market trends. The estimated returns period is a key input of the returns allowance and is calculated by reference to historic returns data. The estimated returns period for the current and prior year is 6 months. The estimation of the variable income as a result of the sales returns is constrained to the extent that it is deemed highly probable that there will be no significant reversal in the amount of cumulative revenue recognised. This allowance is included within other payables. The Group also recognise an asset in relation to stock which is expected to be returned within inventory, based on average print margins and an additional allowance for unsaleable returns.

FOREIGN CURRENCIES

The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated into US Dollars at exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated into US Dollars at average exchange rates. Foreign exchange differences arising on retranslation are charged or credited to other comprehensive income and are recognised in the currency translation reserve in equity. On disposal of a foreign operation, the related cumulative translation differences recognised in equity are reclassified to profit or loss and are recognised as part of the gain or loss on disposal.

EXCEPTIONAL ITEMS

RETIREMENT BENEFIT COSTS

The Group’s pension costs relate to individual pension plans and are charged to profit or loss as they fall due.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Financial Statements

1 General information and significant accounting policies (continued)

TAXATION

Tax on the profit or loss for the year comprises both current and deferred tax. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustments to tax payable in respect of previous years. Tax provisions are based on Management’s interpretation of country specific tax law and recognised when it is considered probable that there will be a future outflow of funds to a tax authority. Provisions are made annually based on the specific information available at that time and therefore there is limited risk of change in the estimates in the short term. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. However, deferred tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or a liability unless the related transaction is a business combination or effects tax or accounting profit. Not all temporary differences give rise to deferred tax assets/liabilities. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Changes in deferred tax assets or liabilities are recognised as a component of tax expense in the income statement, except where they relate to items that are charged or credited directly to other comprehensive income or equity, in which case the related deferred tax is also charged or credited directly to other comprehensive income or equity, respectively.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost less accumulated depreciation and any provision for impairments in value.

Estimated useful lives are as follows: Right-of-use assets Short leasehold property improvements Plant, equipment and motor vehicles Fixtures and fittings	Over the period of the lease Over the period of the lease 4 to 10 years 5 to 7 years

Assets held under right-of-use leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease.

The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in income.

LEASED ASSETS

For any new contracts entered into on or after 1 January 2020, the Group considers whether a contract is, or contains, a lease. A lease is defined as a ‘contract, or part of a contract, that conveys the right to use an asset for a period of time in exchange for consideration’. To apply this definition the Group assesses whether the contract meets three key evaluations which are whether:

the contract contains an identified asset, which is either explicitly identified in the contract or implicitly specified by being identified at the time the asset is made available to the Group
the Group has the right to obtain substantially all of the economic benefits from use of the identified asset throughout the period of use, considering its rights within the defined scope of the contract
the Group has the right to direct the use of the identified asset throughout the period of use. The Group assess whether it has the right to direct ‘how and for what purpose’ the asset is used throughout the period of use.

At lease commencement date, the Group recognises a right-of-use asset and a lease liability on the balance sheet. The right-ofuse asset is measured at cost, which is made up of the initial measurement of the lease liability, any direct costs incurred by the Group, an estimate of any costs to dismantle and remove the asset at the end of the lease, and any lease payments made in advance of the lease commencement date (net of any incentives received).

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2020

Financial Statements

NOTES TO THE FINANCIAL STATEMENTS (continued)

1 General information and significant accounting policies (continued)

The Group has elected to account for short-term lease and leases of low-value assets using the practical expedients. Instead of recognising a right-of-use asset and lease liability, the payments in relation to these are recognised as an expense in profit or loss on a straight-line basis over the lease term.

On the statement of financial position, right-of-use assets have been included in property, plant and equipment and lease liabilities are disclosed separately.

INTANGIBLE ASSETS - PRE-PUBLICATION COSTS

Pre-publication costs include work-in-progress. Costs on such unpublished titles are regularly reviewed and if they fail to meet economic expectations, the costs are impaired.

INVENTORIES

FINANCIAL INSTRUMENTS

Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument.

FINANCIAL ASSETS

Financial assets are measured at amortised cost using the effective interest method.

Financial assets are assigned to the different categories on initial recognition, depending on the characteristics of the instrument and its purpose. A financial instrument’s category is relevant for the way it is measured and whether any resulting income and expenses is recognised in profit or loss or directly in equity. See Note 22 for a summary of the Group’s financial assets by category.

Generally, the Group recognises all financial assets using trade date accounting. An assessment of whether a financial asset is impaired is made at least at each reporting date. All income and expense relating to financial assets are recognised in the income statement line item ‘finance costs’ or ‘finance income’, respectively, with the exception of trade and other receivables which are recorded in revenue and administrative expenses.

After initial recognition, Financial Assets are measured at amortised cost using the effective interest method. Discounting is ignored, where the effect is immaterial. The Group’s cash and cash equivalents, trade and most other receivables, fall into this category of financial instrument. Assets in this category are measured, initially, at their transaction price with gains or losses recognized in profit or loss.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Financial Statements

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1 General information and significant accounting policies (continued)

FINANCIAL LIABILITIES

The Group’s financial liabilities include borrowings, trade and other payables (including finance lease liabilities).

After initial recognition at fair value, all financial liabilities, with the exception of derivative financial instruments, are measured at amortised cost using the effective interest rate method. A summary of the Group’s financial liabilities by category is given in Note 22.

FINANCIAL LIABILITIES AND EQUITY INSTRUMENTS

FINANCE COSTS

Finance costs comprise interest payable on borrowings calculated using the effective interest method together with the amortisation of debt issuance costs.

FINANCE INCOME

Finance income comprises interest receivable, which is recognised in profit or loss as it accrues using the effective interest method.

CASH AND CASH EQUIVALENTS

SHARE-BASED PAYMENTS

BORROWING COSTS

All borrowing costs are recognised in the income statement in the period in which they are incurred. Debt issuance costs comprising arrangement fees and legal costs are capitalised and amortised on a straight-line basis over the period of the borrowing facility or included within the amortised cost calculation as appropriate. The annual amortisation charge is included within finance costs in the Consolidated Statement of Comprehensive Income.

No borrowing costs have been capitalized in the current or prior years in relation to any asset.

FINANCIAL RISK MANAGEMENT

The principal risk factors faced by the Group are disclosed in Note 22.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Financial Statements

NOTES TO THE FINANCIAL STATEMENTS (continued)

2 External Revenue

2 External Revenue
	2020	2019
	$’000	$’000
Sales of products	122,848	131,857
Sales of publishing rights	4,035	3,950
Total revenue	126,883	135,807

See accounting policies for detail of the revenue recognition concerning the above revenue streams.

During the year, sales to our primary distributor exceeded 10% of Group revenue (2019: one primary distributor). The value of these sales was $58.8m (2019: $59.6m).

3 Operating segments

maker.
	US Publishing	UK Publishing	Total Group
2020	$000	$000	$000
Continuing operations
External revenue	63,137	63,746	126,883
Operating profit before amortisation of acquired intangibles and exceptional items	3,249	8,360	11,609
Amortisation of acquired intangibles	(851)	(39)	(890)
Segment result	2,398	8,321	10,719
Unallocated corporate expenses			(991)
Corporate exceptional items			(446)
Operating profit			9,282
Finance costs			(2,693)
Profit before tax			6,589
Tax			(2,020)
Profit after tax			4,569
Capital expenditure	7	27	34
Depreciation and software amortization	1,333	1,058	2,391
Investment in pre-publication costs	10,349	9,975	20,324
Amortisation and impairment of pre-publication costs	15,702	12,944	28,646
Deferred Income released	12,769	964	13,733

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Financial Statements

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3 Operating segments (continued)

2019 US Publishing $000	2019 US Publishing $000	STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS UK Publishing $000 Total Group $000 64,319 135,807 6,540 11,051 (241) (811) 6,299 10,240 (1,047) (419) 8,774 9 (4,939) 3,844 (962) 2,882 121 138 1,109 2,403 12,856 23,786 14,405 28,694 1,899 20,119 2020 $’000 2019 $’000 69,330 81,154 57,925 64,675 25,683 18,952 152,938 164,781 26,930 29,613 29,413 37,634 52,882 76,480 109,225 143,727 Non-current assets 2020 $’000 2019 $’000 40,456 47,887
Continuing Operations: External revenue 71,488
Operating profit before amortisation of acquired intangibles and exceptional items 4,511 Amortisation of acquired intangibles (570)
Segment result Unallocated corporate expenses Corporate exceptional items	3,941
Operating profit Finance income Finance costs
Profit before tax Tax
Profit after tax
Capital expenditure Depreciation and software amortisation Investment in pre-publication costs Amortisation of pre-publication costs Deferred Income released	17 1,294 10,930 14,289 18,220
BALANCE SHEET
Quarto Publishing Group USA Quarto Publishing Group UK Unallocated (Deferred tax and cash)
Total assets
Quarto Publishing Group USA Quarto Publishing Group UK Unallocated (Deferred tax, corporation tax and debt)
Total liabilities
GEOGRAPHICAL AREAS The Group operates in the following main geographic areas:
	Revenue	Non-current assets
	2020 $’000 2019 $’000	2020 $’000 2019 $’000
United States of America	76,061 80,131	40,456 47,887
United Kingdom Europe Rest of the World	18,250 19,193 30,419 35,498 17,446 21,392 — — 15,126 15,091 — —
	126,883 135,807 70,875 83,385

GEOGRAPHICAL AREAS The Group operates in the following main geographic areas:
	Revenue		Non-current assets
	2020	2019	2020 2019
	$’000	$’000	$’000 $’000
United States of America	76,061	80,131	40,456 47,887
United Kingdom	18,250	19,193	30,419 35,498
Europe	17,446	21,392	— —
Rest of the World	15,126	15,091	— —
	126,883	135,807	70,875 83,385

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Financial Statements

NOTES TO THE FINANCIAL STATEMENTS (continued)

4 Operating profit

Operating profit has been arrived at after charging/(crediting):

4 Operating profit Operating profit has been arrived at after charging/(crediting):
2020	2019
$’000	$’000
Depreciation of property, plant and equipment 2,160 Profit on disposal of right-to-use assets 35 Depreciation of software 231 Net foreign currency exchange differences 240 Amortisation of acquired intangibles 890 Amortisation of pre-publication costs (Note 15) 23,304 Impairment of pre-publication costs (Note 15) 5,342 Staff costs (Note 6) 21,741 Impairment losses of financial assets 1,571 Cost of inventory recognised as an expense 30,120 Exceptional items (Note 5) 446	2,127 — 276 (181) 811 25,359 3,335 24,985 853 32,647 419
AUDITOR’S REMUNERATION
Fees payable to the Company’s auditor for the audit of the Company’s annual accounts 108 Fees payable to the Company’s auditor and its associates for the audit of subsidiary companies 179 Fees payable to the Company’s auditor for other assurance services relating to Open Offer —	90 165 172
287	427

5 Exceptional items

5 Exceptional items
	2020	2019
	$000	$000
Staff severance costs	251	—
Refinancing costs	195	387
Aborted corporate transaction costs	—	32
Total	446	419

During the year, the Group determined that costs amounting to $446,000 (2019: $419,000) should be classified as exceptional items, in accordance with the accounting policy disclosed in Note 1. The costs comprised $251,000 in respect of redundancy costs following restructuring during the Covid-19 pandemic and a further $195,000 of refinancing costs in connection with amendments to the existing facility agreement. In 2019, the Group incurred $387,000 of refinancing costs in connection with the renewal of the facility agreement, signed 16 January 2020 and $32,000 of costs incurred on aborted corporate transaction costs. The charge, net of taxation, amounted to $349,000 (2019: $339,000).

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Financial Statements

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6 Staff costs

6 Staff costs
	2020 Number 2019 Number
Average monthly number of employees (excluding Executive Directors)	302 334
Wages and salaries Share-based (credits)/payments Social security costs Other pension costs	$000 $’000
	19,074 21,854 (32) 48 1,969 2,229 730 854
Less monies received by UK Government under Coronavirus Job Retention Scheme	21,741 24,985 (387) —
	21,354 24,985

Directors’ remuneration is disclosed in the Remuneration Committee Report on page 28.

The remuneration of the Executive Directors (2019: Executive Directors), who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures.

	2020	2019
Short term employee benefits	994	788*
Post-employment benefits	47	18
1,041 806 The Directors’ remuneration disclosed above Included the following amounts earned in respect of the highest paid director: 2020 2019 Short term employee benefits 504 379
Post-employment benefits	18	18
	522	397

Includes $58,000 discretionary bonus payments paid in 2019 but relating to performance in 2018.

7 Finance income

7 Finance income
	2020	2019
	$’000	$’000
Interest income	—	9
8 Finance costs Interest expense on borrowings Amortisation of debt issuance costs and bank fees Interest expense on lease liabilities arising from the adoption of IFRS 16 Other interest	2020 $’000 1,724 543 390 36	2019 $’000 3,360 936 454 189
	2,693	4,939

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Financial Statements

NOTES TO THE FINANCIAL STATEMENTS (continued)

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9 Taxation

9 Taxation
2020	2019
$’000	$’000
Corporation tax Current tax 3,156	1,557
Prior periods 2	(123)
Total current tax 3,158	1,434
Deferred tax (Note 19) Origination and reversal of temporary differences (1,138)	(472)
Total tax expense 2,020	962

Corporation tax on UK profits is calculated at 19%, based on the UK standard rate of corporation tax, (2019: 19%) of the estimated assessable profit for the year. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions. The table below explains the difference between the expected expense at the UK statutory rate of 19% and the Group’s total tax expense for the year.

expense for the year.
2020	2019
$’000	$’000
Profit before tax 6,589	3,844
Tax at the UK corporation tax rate of 19% (2019: 19%) 1,252	730
Effect of different tax rates of subsidiaries operating in other jurisdictions 161	(79)
Change in overseas tax rates during the year 68	-
Adjustment to prior years 2	97
Tax effect of items that are not deductible in determining taxable profit 240	174
Other 297	40
Tax expense 2,020	962
Effective tax rate 30.7%	25.0%

10 Earnings per share

10 Earnings per share
	2020	2019
	$’000	$’000
	Group	Group
From continuing operations
Profit for the year	4,569	2,882
Amortisation of acquired intangibles (net of tax)	626	654
Exceptional items (net of tax)	349	339
Earnings for the purposes of adjusted earnings per share	5,544	3,875
Number of shares	Number	Number
Weighted average number of ordinary shares Average number of potentially dilutive share options	39,185,388 123,037	20,444,550 171,597
Diluted weighted average number of ordinary shares	39,308,425	20,616,147
Earnings per share (cents) – continuing operations Basic Diluted Adjusted earnings per share (cents) Basic Diluted	11.7 11.6 14.1 14.1	14.1 14.0 19.0 18.8

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Financial Statements

11 Goodwill

11 Goodwill
	2020	2019
	$000	$000
Cost
At 1 January Exchange differences At 31 December Accumulated impairment losses At 1 January Exchange differences	42,913 189 43,102 (23,721) —	42,675 238 42,913 (23,721) —
At 31 December	(23,721)	(23,721)
Carrying value
At 31 December	19,381	19,192

IMPAIRMENT TESTS FOR CASH GENERATING UNITS CONTAINING GOODWILL

The following units have significant carrying amounts of goodwill:

IMPAIRMENT TESTS FOR CASH GENERATING UNITS CONTAINING GOODWILL The following units have significant carrying amounts of goodwill:
	2020	2019
	$000	$000
Quarto Publishing Group USA (QUS)	12,882	12,882
Quarto Publishing Group UK (QUK)	6,499 19,381	6,310 19,192

The key assumptions for calculating value in use are:

	Terminal Growth Rates Discount Rates
	2020 2019 2020 2019
United States of America United Kingdom	2% 2% 11.40% 10.81% 2% 2% 11.12% 10.54%

Revenue growth rates: forecast sales growth rates are based on those applied to the Board approved budget for the year ending 31 December 2021 and three-year plan. They incorporate future expectations of growth driven by investment plans for each CGU.

Gross margins: gross margins are based on historic performance and expected changes to the sales mix in future periods.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2020

Financial Statements

NOTES TO THE FINANCIAL STATEMENTS (continued)

11 Goodwill (continued)

The Group has not identified any reasonable possible changes to key assumptions that would cause the carrying value of goodwill of the QUK CGU to exceed its recoverable amount. QUS has by far the largest goodwill and non-current assets and carries a greater risk of impairment. Based on the above long-term growth rate and discount rate, QUS exceeded the carrying value of goodwill by $17.8m. The following sensitivities were applied to this CGU:

2% increase in discount rate, at which level there was no impairment. The recoverable amount exceeded the carrying value of goodwill by $7.1m. The discount rate would need to increase to 15.3% to record any Impairment.
Nil terminal growth rate, at which level there was no impairment. The recoverable amount exceeded the carrying value of goodwill by $8.9m. The terminal growth rate would need to show an annual 2% decline before any impairment was recorded.
5% decline in first year revenues, at which level there was no impairment. The recoverable amount exceeded the carrying value of goodwill by $13.1m.
5% decline in first year revenues and an increased discount rate of 13.1% would cause impairment if there were no mitigation actions.

Should there be a headline change in revenues and margins, this could create an impairment.

12 Other intangible assets

12 Other intangible assets
	Backlists	Software	Total
	$000	$000	$000
Cost
At 1 January 2019	21,204	1,630	22,834
Exchange differences	(30)	—	(30)
At 1 January 2020	21,174	1,630	22,804
Exchange differences	79	—	79
At 31 December 2020	21,253	1,630	22,883
Amortisation and impairment
At 1 January 2019	19,494	972	20,466
Exchange differences	(31)	—	(31)
Charge for the year	811	276	1,087
At 1 January 2020	20,274	1,248	21,522
Exchange differences	81	—	81
Charge for the year	890	231	1,121
At 31 December 2020	21,245	1,479	22,724
Carrying amount
At 31 December 2020	8	151	159
At 31 December 2019	900	382	1,282

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

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THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Financial Statements

13 Property, plant and equipment


13 Property, plant and equipment
			Plant,
	Short-term	Right-of-use	Equipment &
	Leasehold	Leasehold	Motor	Fixture &
	Improvements	Property	Vehicles		Fittings	Total
Cost At 1 January 2019 Adjustment on transition to IFRS 16 Exchange difference Additions Remeasurement	$000 1,242 — 26 — —	$000 — 10,538 156 — 508	$000 943 71 27 138 18		$000 1,085 — 1 — —	$000 3,270 10,609 210 138 526	STRATEGIC REPORT
Disposals	(258)	—	—		—	(258)
At 31 December 2019	1,010	11,202	1,197		1,086	14,495
Exchange difference	21	(22)	25		2	26
Additions	—	227	34		—	261
Remeasurement	—	2	—		—	2
Disposals	—	(2,313)	—		—	(2,313)
At 31 December 2020	1,031	9,096	1,256		1,088	12,471
Depreciation
At 1 January 2019 Exchange differences Charge for the year: right of use asset Charge for the year: other property, plant and equipment Disposals	508 8 — 104 (258)	— — 1,545 — —	391 17 64 310 —		819 — — 104 —	1,718 25 1,609 518 (258)	GOVERNANCE
At 31 December 2019	362	1,545	782		923	3,612
Exchange differences	13	—	50		2	65
Charge for the year: right of use asset	—	1,760	—		—	1,760
Charge for the year: other property, plant and equipment	105	—	217		78	400
Disposals	—	(184)	—		—	(184)
At 31 December 2020	480	3,121	1,049		1,003	5,653
Net book value
At 31 December 2020 551 5,975 207 85 6,818 At 31 December 2019 648 9,657 415 163 10,883 All property, plant and equipment has been pledged as security for the Group’s bank borrowings (note 18). Included in the net carrying amount of property, plant and equipment are right-of-use assets of $5,975,000 (2019: $9,683,000) of which $5,975,000 (2019: $9,657,000) is attributable to leasehold property improvements and $nil (2019: $26,000) to plant, equipment and motor vehicles. Depreciation charges on these assets are disclosed separately in the above table.							FINANCIAL STATEMENTS
14 Subsidiaries
A list of the investments in subsidiaries, including the name, country of incorporation and proportion of ownership interest is
given in Note 5 to the Company’s balance sheet. All of these subsidiaries		are included in the consolidated results.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Financial Statements

NOTES TO THE FINANCIAL STATEMENTS (continued)

15 Intangible assets – pre-publication costs

	2020 $000 2020 $000 2020 $000 2019 $000 2019 $000 2019 $000
	Work in progress Published products Total Work in progress Published products Total
Cost At 1 January Exchange difference Additions Transfers Impairment charge Disposals	12,929 118,271 131,200 13,544 124,096 137,640 147 2,056 2,203 213 1,827 2,040 20,324 — 20,324 23,786 — 23,786 (18,508) 18,508 — (21,279) 21,279 — (3,450) — (3,450) (3,335) — (3,335) — (52,339) (52,339) — (28,931) (28,931)
At 31 December	11,442 86,496 97,938 12,929 118,271 131,200
Amortisation At 1 January Exchange difference Amortisation charge Impairment charge Disposals	— 82,503 82,503 — 84,934 84,934 — 1,665 1,665 — 1,141 1,141 — 23,304 23,304 — 25,359 25,359 — 1,892 1,892 — — — — (52,339) (52,339) — (28,931) (28,931)
At 31 December	— 57,025 57,025 — 82,503 82,503
Net book value	11,442 29,471 40,913 12,929 35,768 48,697

The assessment of the useful life of pre-publication costs and amortisation involves a significant management estimate based on historical trends and future potential sales, in accordance with the accounting policy stated in Note 1. In the current year, certain imprints operating under the US Publishing segment reported material falls in revenues and gross margins, which led to a downward revision of the useful lives of these imprints. The additional charge of $1,892,000 (2019: $nil) is disclosed above.

Pre-publication costs form part of the carrying value of the CGU for each segment and are considered for impairment of goodwill in note 11.

16 Inventories

16 Inventories
	2020	2019
	$000	$000
Finished goods	15,285	19,270
Raw materials	180	108
	15,465	19,378

All of the Group’s inventories have been reviewed for indicators of impairment. Certain inventories were found to be impaired and a provision of $2,220,000 (2019: $2,318,000) has been recorded accordingly.

All inventories have been pledged as security for the Group’s bank borrowings (note 18).

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

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THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Financial Statements

17 Trade and other receivables

	2020	2019
	$000	$000
Trade receivables	38,361	38,753
Other receivables	and prepayments 6,158 44,519	7,644 46,397

The average credit period on sales of goods is 77 days (2019: 73 days).

The Group applies the IFRS 9 simplified model of recognising lifetime expected credit losses for all trade receivables as these Items do not have a significant financing component. In measuring the expected credit losses, the trade receivables have been assessed on an Individual basis, as much as possible, because credit risk characteristics vary by customer. The expected loss rates are based on the payment profile over the last 12 months, to reflect the Impact of Covid-19 on our customers. Trade receivables are written off (ie, derecognised) when there is no reasonable expectation of recovery.

On the above basis, the expected credit loss for trade receivables as at 31 December 2020 and 31 December 2019 was determined as follows:

determined as follows:
		Overdue	Overdue	Overdue	Overdue
		Less Than	Less Than	Less Than	More Than
31 December 2020	Current	30 Days	60 Days	90 Days	90 Days	Total
Gross carrying amount $000	33,877	2,039	1,506	1,096	1,757	40,275
Expected credit loss rate	1.0%	1.8%	3.8%	18.1%	72.5%	4.8%
Lifetime expected credit loss $000	347	37	58	199	1,273	1,914
31 December 2019 Gross carrying amount $000	Current 35,616	Overdue Less Than 30 Days 1,770	Overdue Less Than 60 Days 950	Overdue Less Than 90 Days 292	Overdue More Than 90 Days 1,293	Total 39,921
Expected credit loss rate	0.1%	1.1%	2.1%	72.2%	68.2%	2.9%
Lifetime expected credit loss $000	35	20	20	211	882	1,168

Movement in provision for lifetime expected credit loss is as follows:

Movement in provision for lifetime expected credit loss is as follows:
2020	2019
$000	$000
Provision at beginning of year 1,168	826
Amounts de-recognised in the year (977)	(677)
Amounts recovered during the year 138	148
Exchange differences 14 Increase in allowance recognised in profit or loss 1,571 Provision at end of the year 1,914	18 853 1,168

The Directors consider that the carrying amount of trade and other receivables approximates to their fair value. Note 22 includes disclosures relating to credit risk exposures and analysis relating to the allowance for expected credit losses.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Financial Statements

NOTES TO THE FINANCIAL STATEMENTS (continued)

18 Cash, borrowings and net debt

CASH

CASH
	2020	2019
	$000	$000
Bank balances	22,079	15,621
Cash and cash equivalents	22,079	15,621

The carrying amount of these assets approximates to their fair value. The effective interest rate on bank balances and short-term deposits was 0% (2019: 0%).

BORROWINGS

BORROWINGS
				2020	2019
				$000	$000
Bank and other loans				41,819	66,077
On demand or within one year				41,819	66,077
				41,819	66,077
Less: Amount due for settlement within 12 months (shown under current		liabilities)		(41,819)	(66,077)
Amount due for settlement after 12 months				—	—
				Weighted
				average	Average
				interest rate	time over
		Fixed rate	Variable rate	for fixed rate	which interest
	Total	borrowings	borrowings	borrowings	rate is fixed
	$’000	$’000	$’000	%	Months
US dollar borrowings	39,408	16,408	23,000	3.1	6.5
Other currency borrowings	2,411	—	2,411	—	—
As at 31 December 2020	41,819	16,408	25,411	3.1	6.5
US dollar borrowings	45,000	13,000	32,000	3.5	19.0
Other currency borrowings	21,077	—	21,077	—	—
As at 31 December 2019	66,077	13,000	53,077	3.5	19.0

OTHER LOANS

OTHER LOANS
	2020	2019
	$000	$000
Other loans (unsecured)	16,408	13,000
On demand or within one year	16,408	13,000
	16,408	13,000
Less: Amount due for settlement within 12 months (shown under current liabilities)	(16,408)	(13,000)
Amount due for settlement after 12 months	—	—

Other loans comprise:

(a) Loans of $11,500,000 (2019: $11,500,000) from related parties, as disclosed in note 29, which were repayable, together with the accrued interest on 31 July 2021 and carry an interest rate of 3.5%. After the year end, the repayment date of these loans has been extended to 31 August 2024.

(b) A loan for $1,500,000 (2019: $1,500,000) which was repayable together with accrued interest on 31 July 2021 and carries an interest rate of 3.5%. After the year end, the repayment date has been extended to 31 August 2024.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

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THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Financial Statements

18 Cash, borrowings and net debt (continued)

(c) A loan of $2,422,000 (2019: $nil) relates to government support given under the Coronavirus Aid, Relief and Economic Security Act of the USA. This attracts an interest rate of 1%. Without reasonable assurance of forgiveness, it has been treated as debt to be repaid within the next 12 months.

(d) Accrued Interest of $986,000 (2019: $nil) on the above loans.

US As	dollar borrowings at 31 December 2020	Total $’000 16,408	Fixed rate borrowings $’000 16,408	Variable rate borrowings $’000 —	Weighted average interest rate for fixed rate borrowings % 2.8	Average time over which interest rate is fixed Months 6.5
As	at 31 December 2019	13,000	13,000	—	3.5	19.0

BANK LOANS

BANK LOANS
	2020	2019
	$000	$000
Bank loans	25,411	53,077
On demand or within one year	25,411	53,077
Less: Amount due for settlement within 12 months (shown under current liabilities) Amount due for settlement after 12 months	25,411 (25,411) —	53,077 (53,077) —

				Weighted
				average	Average
				interest rate	time over
		Fixed rate	Variable rate	for fixed rate	which interest
	Total	borrowings	borrowings	borrowings	rate is fixed
	$’000	$’000	$’000	%	Months
US dollar borrowings	23,000	—	23,000	—	—
Other currency borrowings	2,411	—	2,411	—	—
As at 31 December 2020	25,411		25,411	—	—
US dollar borrowings	32,000	—	32,000	—	—
Other currency borrowings As at 31 December 2019	21,077 53,077	— —	21,077 53,077	— —	— —

At 31 December 2020, undrawn borrowing facilities totalled $9.6m (2019: $11.0m). The variable rate borrowings carry interest based on LIBOR plus a margin, depending on the leverage ratio. The Directors estimate the fair value of the Group’s borrowings to be equal to book value, by reference to market rates.

At 31 December 2020, the Group had a US$35m (2019: US$64.0m) multi-currency syndicated bank facility which was due to expire on 31 July 2021. A new facility agreement was signed on 16 February 2021 with borrowing facilities of US$20m. Banking EBITDA used for bank covenant purposes was $12,839,000 (Note 30) in 2020 (2019: $10,376,000).

The facilities, which were in place at the year end, were subject to three principal covenants which vary over the course of the financial year. During the year, as part of the Group’s Covid-19 course of action, the banking covenants were waived for the year ended 31 December 2020. As part of the new facility agreement referred to above, a new set of banking covenants were agreed for the duration of the new facility.

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Financial Statements

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NOTES TO THE FINANCIAL STATEMENTS (continued)

18 Cash, borrowings and net debt (continued)

NET DEBT

NET DEBT
	1 January		Non-cash	Foreign	31 December
	2020	Cashflows	items	exchange	2020
	$’000	$’000	$’000	$’000	$’000
Borrowings	(66,077)	23,893	(92)	457	(41,819)
IFRS 16 lease liabilities	(9,866)	1,995	1,574	19	(6,278)
Cash and cash equivalents	15,621	6,359	—	99	22,079
Net debt	(60,322)	32,247	1,482	575	(26,018)
	1 January		Non-cash	Foreign	31 December
	2019	Cashflows	items	exchange	2019
	$’000	$’000	$’000	$’000	$’000
Borrowings	(75,752)	10,454	(188)	(591)	(66,077)
IFRS 16 lease liabilities1	(10,609)	1,882	(979)	(160)	(9,866)
Cash and cash equivalents	15,384	92	—	145	15,621
Net debt	(70,977)	12,428	(1,167)	(606)	(60,322)

1 The effective date of IFRS 16 Leases was 1 January 2019.

19 Deferred tax

19 Deferred tax
2020	2019
$000	$000
Deferred tax liabilities Excess of capital allowances over depreciation – UK —	1
Pre-publication costs and other temporary differences – UK 4,103	4,519
4,103	4,520
Pre-publication costs and other temporary differences - US 2,220	2,619
6,323	7,139
Deferred tax assets Goodwill, intangible assets and other temporary differences – US 3,604	3,331
3,604	3,331
Net deferred taxation liability 2,719	3,808

The movement on the net provision for deferred taxation is as follows:

The movement on the net provision for deferred taxation is as follows:
	2020	2019
	$000	$000
Net provision at 1 January	3,808	3,947
(Charge)/credit direct to equity	(54)	162
Exchange difference through other comprehensive income	103	171
Credit to profit and loss	(1,138)	(472)
Net provision at 31 December	2,719	3,808
20 Lease liabilities
	2020	2019
	$000	$000
Current	1,968	1,937
Non-current	4,310	7,929
Total	6,278	9,866

100

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APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2020

Financial Statements

20 Lease liabilities (continued)

The table below describes the nature of the Group’s leasing activities by type of right-to-use asset recognised on the balance sheet:

						No of lease with
						variable
	No of right-of-		Average	No of lease	No of lease	payments	No of lease with
Right-of-use	use assets	Range of	remaining lease	with extension	with options to	linked to an	termination
asset	leased	remaining term	term	options	purchase	index	options
Office	6	4-9 years	6 years	5	—	4	1
building

Properties with extension, or termination, options are assessed on a case-by-case basis In determining take-up of the options.

The lease liabilities are secured by the related underlying assets. Future minimum lease payments at 31 December 2020 were as follows:

The lease liabilities are follows:	secured by the related underlying assets. Future minimum lease payments at 31 December 2020 we
31 December 2020	Minimum lease payments due US$000
	Within 1 year 1-2 years 2-3 years 3-4 years 4-5 years After 5 years Total

Lease payments	2,358 1,551 1,585 1,044 1,013 — 7,551
Finance charges	(390) (269) (219) (161) (234) — (1,273)
Net present values	1,968 1,282 1,366 883 779 — 6,278
31 December 2019
Lease payments	2,253 2,085 1,886 1,504 1,343 2,291 11,362
Finance charges	(390) (329) (267) (204) (149) (157) (1,496)
Net present values	1,863 1,756 1,619 1,300 1,194 2,134 9,866

The total cash outflow in relation to lease liabilities during the year was $1,995,000 (2019: $1,882,000).

The Group has elected not to recognise a lease liability for short term leases or for leases of low value assets. Payments made under such leases are expensed on a straight-line basis and amounted to $26,000 in the year (2019: $26,000).

21 Trade and other payables

CURRENT LIABILITIES

21 Trade and other payables CURRENT LIABILITIES
Trade payables	2020 $000 28,529	2019 $000 36,218
Other payables	21,535	21,163
Total	50,064	57,381

Under IFRS 15, the reserve for sales returns in included in other payables; it amounts to $6,481,000 (2019: $6,749,000). The reserve is calculated based on a time lag between sales and returns and historical return patterns. Management monitors actual returns against the reserve on a regular basis. If the rate of sales return had been 1% higher during the year, the provision would have increased by $512,000 (2019: $488,000).

Included within other payables is $2,274,000 in respect of deferred Income (2019: $2,525,000), detailed below:

101

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THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Financial Statements

NOTES TO THE FINANCIAL STATEMENTS (continued)

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21 Trade and other payables (continued)

	2020	2019
	$000	$000
Opening liability	2,525	1,654
Deferred Income Invoiced	13,436	20,902
Revenue Recognised	(13,733)	(20,119)
Exchange difference	46	88
Closing liability	2,274	2,525

22 Financial instruments

FOREIGN CURRENCY SENSITIVITY

Foreign currency denominated financial assets and liabilities, translated into US Dollars at the closing rate, are as follows:

	2020 2019
	$000 Sterling $000 Other $000 Sterling $000 Other
Financial assets: Financial liabilities	11,792 1,053 10,321 2,121 (755) (3,033) (19,030) (4,344)
Short-term exposure	11,037 (1,980) (8,709) (2,223)
Financial liabilities: Long-term exposure	— — — —
At 31 December	11,037 (1,980) (8,709) (2,223)

It assumes a +/– 5% change of the Sterling/US-Dollar exchange rate, in line with the movement over the last year.

The sensitivity analysis is based on the Group’s foreign currency financial instruments held at each balance sheet date.

If Sterling had strengthened against the US Dollar by 5% (2019: 7.5%) then this would have had the following impact:

	2020	2019
	$000	$000
Profit/(loss) after tax for the year	(240)	(120)
Equity	(240)	(120)
If Sterling had weakened against the US Dollar by 5% (2019: 7.5%) then this would have had the following impact:
	2020	2019
	$000	$000
Profit/(loss) after tax for the year	240	120
Equity	240	120

102

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APPENDIX II

Financial Statements

THE QUARTO GROUP, INC. ANNUAL REPORT 2020

22 Financial instruments(continued)

INTEREST RATE SENSITIVITY

The Group’s policy is to minimise interest rate cash flow risk exposures, where possible and commercially appropriate, on long-term financing, through interest rate swaps. A part of longer-term borrowings are sometimes, therefore, at fixed rates.

At 31 December 2020, the Group is exposed to changes in market interest rates through its bank borrowings, which are subject to variable interest rates – see Note 18 for further information.

The following table illustrates the sensitivity of the profit after tax for the year and equity to a reasonably possible change in interest rates of +/–0.25%, with effect from the beginning of the year. These changes are considered to be reasonably possible based on observation of current market conditions. The calculations are based on the Group’s financial instruments held at each balance sheet date. All other variables are held constant.

A 0.25% increase in interest rates would have the following impact:

A 0.25% increase in interest rates would have the following impact:
	2020	2019
	$000	$000
Profit for the year	(48)	(100)
Equity	(48)	(100)

A 0.25% decrease in interest rates would have the following impact:

A 0.25% decrease in interest rates would have the following impact:
	2020	2019
	$’000	$’000
Profit for the year Equity	48 48	100 100

CREDIT RISK ANALYSIS

The Group’s maximum exposure to credit risk is limited to the carrying amount of financial assets recognised at the balance sheet date, as summarised below:

sheet date, as summarised below:
	2020	2019
	$’000	$’000
Cash and cash equivalents	22,079	15,621
Trade receivables	38,361	38,753
	60,440	54,374

LIQUIDITY RISK ANALYSIS

103

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

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THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Financial Statements

NOTES TO THE FINANCIAL STATEMENTS (continued)

22 Financial instruments (continued)

As disclosed in Note 18, at 31 December 2020, the Group had a US$35m (2019: US$64.0m) multi-currency syndicated bank facility which was due to expire on 31 July 2021. The covenants linked to this facility were waived for the year ended 31 December 2020 only, as part of the Group’s Covid-19 course of action. A new facility agreement was signed on 16 February 2021 with borrowing facilities of US$20m. This facility is subject to two principal covenants in 2021, being:

(a) Net banking Indebtedness shall not exceed 2.0 times EBITDA (as defined in the facility agreement)

(b) EBITDA shall exceed 4 times net finance charges (as defined in the facility agreement)

The Group’s liabilities have contractual maturities which are summarised below:

31 December 2020	Current Non-Current
	Within 6 months $’000 6 to 12 months $’000 1 to 5 years $’000 Over 5 years $’000
Bank and other loans Lease liabilities Trade payables Other short-term financial liabilities	3,132 40,965 — — 984 984 4,310 — 28,529 — — — 21,535 — — —
	54,180 41,949 4,310 —
31 December 2019	Current Non-Current
	Within 6 months $’000 6 to 12 months $’000 1 to 5 years $’000 Over 5 years $’000
Bank and other loans Lease liabilities Trade payables Other short-term financial liabilities	1,365 66,671 — — 932 931 5,870 2,133 31,218 5,000 — — 21,163 — — —
	54,678 72,602 5,870 2,133

SUMMARY OF FINANCIAL ASSETS AND LIABILITIES BY CATEGORY

The carrying amounts of the Group’s financial assets and liabilities as recognised at the balance sheet date of the reporting periods under review may also be categorised as follows. See note 1, significant accounting policies, covering financial assets and financial liabilities for explanations about how the category of instruments affects their subsequent measurement.

2020	2019
$000	$000
Current assets Financial assets at amortised cost: • Trade receivables 38,361 • Cash and cash equivalents 22,079	38,753 15,621
60,440	54,374
Current liabilities Financial liabilities measured at amortised cost: • Borrowings 41,819 • Lease liabilities 1,968 • Trade payables 28,529 • Other payables 21,535	66,077 1,937 36,218 21,163
93,851	125,395

104

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APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2020

Financial Statements

22 Financial instruments (continued)

Non-current liabilities
Financial liabilities measured at amortised cost:
• Lease liabilities	4,310	7,929
	4,310	7,929

CAPITAL RISK MANAGEMENT

The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to shareholders through an optimal balance of debt and equity. The capital structure of the Group consists of debt, which includes the borrowings disclosed in note 18, cash and cash equivalents and equity attributable to equity holders of the parent, comprising share capital and reserves as disclosed in the consolidated statement of changes in equity.

The Board reviews the capital structure, including the level of indebtedness and interest cover, as required. The Board’s objective is to maintain the optimal level of indebtedness and manage interest cover to comply with the covenant requirements set out in note 18. As part of this review, the Board considers the cost of capital and the risks associated with each class of capital. The Group has complied with its covenant obligations during the year.

23 Post balance sheet events

On 16 February 2021, the Group concluded Its refinancing, signing an extension to its existing bank facilities to 16 July 2024. The multi-currency facility comprises a $10m term loan, a $8m revolving credit facility and a $2m overdraft facility. On the same date, Lion Rock Group Limited, a related party (Note 29) agreed to provide the Group a $10m loan note at 4% interest, repayable on 31 July 2024.

24 Share capital and paid In surplus

SHARE CAPITAL

24 Share capital and paid In surplus SHARE CAPITAL
Authorised	2020 $000	2019 $000
55 million shares (2019: 28 million shares) of common stock of par value of US$0.10 each	5,500	2,800
Allotted, called up and fully paid:
40,889,100 (2019: 20,444,550) shares of common stock of par value of US$0.10 each	4,089	2,045

The Company has one class of common stock which carries no right to fixed income.

PAID IN SURPLUS

This reserve records the amount above par value received for common stock sold less transaction costs. The movement on this reserve was as follows:

reserve was as follows:
	2020	2019
At 1 January Issue of new common stock At 31 December	$000 33,764 14,937 48,701	$000 33,764 — 33,764

On 16 January 2020, the Group announced an Open Offer of 20,444,550 new common stock at 68 pence per share, raising net proceeds of $16,981,000. Of this amount, $2,044,450 Is attributed to share capital and the balance, $14,936,550 to the paid in surplus reserve.

25 Retained earnings and other reserves

HEDGING RESERVE

The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions.

TRANSLATION RESERVE

105

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THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Financial Statements

NOTES TO THE FINANCIAL STATEMENTS (continued)

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25 Retained earnings and other reserves (continued)

RETAINED EARNINGS

The retained earnings reserve comprises profit for the year attributable to owners of the Group and other Items recognised directly through equity as presented on the consolidated statement of changes in equity.

26 Dividends

No dividends have been declared in the current or prior year.

27 Notes to the cash flow statement

28 Share based payments

PERFORMANCE SHARE PLAN (‘PSP’)

The Company operates a PSP scheme that awards free shares.

2016 AWARD

The awards under this scheme were granted on 19 April 2016. The vesting period is 4 years from the date of grant. The award vests in the following proportion:

50% is conditional on the cumulative growth in Adjusted Diluted EPS being between 5% and 10% over the performance period, resulting in the awards vesting on a sliding scale of 20% to 100%; and
50% is conditional on Total Shareholder Return being between 7% and 15%, resulting in vesting on a sliding scale of 20% to 100%.

Participants are not entitled to receive dividends until awards have vested.

Details of the share options outstanding during the year are as follows:

Details of the share options outstanding during the year are as follows:
	2020	2019
	Number	Number
Outstanding at beginning of the year	143,784	152,192
Forfeited during the year	(33,673)	(8,408)
Lapsed during the year	(110,111)	—
Outstanding at the end of the year	—	143,784
The key inputs used to value the options are:
	EPS Portion	TSR Portion
Share price at date of grant	£2.45	£2.45
Expected life (years)	4	4
Fair value per award	£2.10	£0.44
Weighted average remaining contractual life (years)	2.3	3.3
Dividend yield (%)	3.88	3.88
Expected volatility of share price (%)	n/a	19.1
	Dividend	Monte-
	discount	Carlo

2017 AWARD

The awards under this scheme were granted on 28 April 2017. The vesting period is 4 years from the date of grant. The award vests in the following proportion:

50% is conditional on the cumulative growth in Adjusted Diluted EPS being between 5% and 10% over the performance period, resulting in the awards vesting on a sliding scale of 20% to 100%; and
50% is conditional on Total Shareholder Return being between 7% and 15%, resulting in vesting on a sliding scale of 20% to 100%.

Participants are not entitled to receive dividends until awards have vested.

106

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THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Financial Statements

28 Share based payments (continued)

Details of the share options outstanding during the year are as follows.

Details of the share options outstanding during the year are as follows.
	2020	2019
	Number	Number
Outstanding at beginning of the year	84,995	104,463
Forfeited during the year Outstanding at the end of the year The key inputs used to value the options are: Share price at date of grant	(19,772) 65,223 EPS Portion £2.64	(19,468) 84,995 TSR Portion £2.64
Expected life (years)	4	4
Fair value per award	£2.20	£0.48
Weighted average remaining contractual life (years)	3.3	3.3
Dividend yield (%)	4.55	4.55
Expected volatility of share price (%)	n/a	18.6
Model used	Dividend	Monte-
	discount	Carlo

29 Related party transactions

The Group had the following related party transactions over the periods under review:

PRINTING PURCHASES:

PRINTING PURCHASES:
Lion Rock Group Limited Accounts payable at start of year	2020 $’000 13,692	2019 $’000 6,083
Purchases	14,720	11,562
Rebate received	(1,464)	—
Payments	(14,053)	(3,953)
Accounts payable at end of year	12,895	13,692

LOANS AND ACCRUED INTEREST:

LOANS AND ACCRUED INTEREST:
	At 31	At 31
	December	December
	2020	2019
Loans Accrued interest on loans at end of year	$000 11,500 874	$000 11,500 470

The loans are from 1010 Printing Limited ($7.0m) and C K Lau ($4.5m). The loans are unsecured, are repayable, together with the accrued interest, on 31 July 2021, and carry interest at 3.5%. After the year end, the repayment date was extended to 31 July 2024.

Lion Rock Group Limited and 1010 Printing Limited are companies over which C K Lau exercises control.

The rebate received in 2020 has been accounted for in accordance with the accounting policy disclosed in Note1. The rebate scheme, at this stage, will not be renewed in 2021.

REVENUES AND TRADE RECEIVABLES:

REVENUES AND TRADE RECEIVABLES:
	At 31	At 31
	December	December
	2020	2019
	$000	$000
Revenues	137	—
Outstanding receivables balance at end of year	63	—

107

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THE QUARTO GROUP, INC. ANNUAL REPORT 2020

Financial Statements

NOTES TO THE FINANCIAL STATEMENTS (continued)

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29 Related party transactions (continued)

The Group recorded revenues of $129,000 with Giunti Editore S.p.A, a company over which Andrea Giunti Lombardo, a nonexecutive director appointed on 10 February 2020, exercises control. The transactions were in the normal course of business on arms-length terms. The amount outstanding at 31 December 2020 was $58,000.

The Group recorded revenues of $8,000 with Pavilion Books Limited, a company over which Polly Powell, CEO (appointed 10 February 2020) exercises control. The transactions were in the normal course of business on arms-length terms. The amount outstanding at 31 December 2020 was $5,000.

30 Reconciliation of figures included in other parts of the financial statements

30 Reconciliation of figures included in other parts of the financial statements
	2020	2019
	$000	$000
Adjusted operating profit
Operating profit	9,282	8,774
Add back: Amortisation of acquired intangibles	890	811
Other exceptional items (Note[5])	446	419
Adjusted operating profit	10,618	10,004
EBITDA
Operating profit before amortisation of acquired intangibles and exceptional items	10,618	10,004
Less: Net finance costs	(2,693)	(4,930)
Impact of IFRS 16	(270)	(271)
Adjusted profit before tax	7,655	4,803
Net finance costs	2,693	4,930
Depreciation of property, plant and equipment and software (excluding right-of-use assets)	631	794
Share based (credits)/payments	(32)	48
One off non-cash costs	1,892	—
EBITDA for banking purposes	12,839	10,575
Impact of IFRS 16	270	271
Depreciation of right-of-use assets	1,760	1,609
Less: one off non-cash costs	(1,892)	—
EBITDA	12,977	12,455
Adjusted profit before tax before amortisation of acquired intangibles and exceptional items
Adjusted operating profit before amortisation of acquired intangibles and exceptional items	10,618	10,004
Less: net finance costs	(2,693)	(4,930)
Adjusted profit before tax before amortisation of acquired intangibles and exceptional items	7,925	5,074
Free cashflow
Net cash from operating activities	36,921	41,302
Investment in pre-publication costs	(20,324)	(23,786)
Purchases of property, plant and equipment excluding IFRS 16 assets	(34)	(138)
Free cashflow	16,563	17,378
Net debt
Short-term borrowings	41,819	66,077
Cash and cash equivalents	(22,079)	(15,621)
Net debt	19,740	50,456

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THE QUARTO GROUP, INC. ANNUAL REPORT 2020 Financial Statements

Company Balance Sheet

AS AT 31 DECEMBER 2020

		2020	2019
	Notes	$000	$000
Fixed assets
Investments	4	1,234	1,266
Current assets Other receivables falling due within one year Current liabilities Creditors: Amounts falling due within one year	6 7	1,234 3,370 3,370 (52)	1,266 — — (15,866)	STRATEGIC REPORT
Creditors: Amounts falling due after more than one year		(52)	(15,866)
Tax payable		(430)	(441)
Net assets/(liabilities)		4,122	(15,041)
Equity
Called up share capital	8	4,089	2,045
Paid in surplus Retained earnings Total equity The notes on pages 91 to 94 are an integral part of these consolidated financial statements		48,701 (48,668) 4,122	33,764 (50,850) (15,041)	GOVERNANCE
The financial statements were approved by the Board of Directors and authorised for issue	on 21 March	2021.
They were signed on its behalf by

Polly Powell

Director

21 March 2021

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Company Statement of Comprehensive Income

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FOR THE YEAR ENDED 31 DECEMBER 2020

		2020	2019
	Notes	$’000	$’000
Other operating income
Dividends received		1,980	—
Administrative expenses
Foreign exchange gain/(loss)		224	(587)
Profit/(loss) before tax		2,204	(587)
Tax	3	10	—
Profit/(loss) for the year		2,214	(587)

The notes on pages 91 to 94 are an integral part of these consolidated financial statements

Company Statement of Changes in Equity

FOR THE YEAR ENDED 31 DECEMBER 2020

				Equity
	Share		Retained	attributable to
	capital	Paid in	earnings	owners
	$’000	surplus $’000	$’000	$’000
Balance at 1 January 2019	2,045	33,764	(50,311)	(14,502)
Loss for the year	—	—	(587)	(587)
Transactions with owners
Share based payments/charges	—	—	48	48
Balance at 1 January 2020	2,045	33,764	(50,850)	(15,041)
Profit for the year	—	—	2,214	2,214
Transactions with owners
Share capital raised	2,044	16,307	—	18,351
Costs of raising share capital	—	(1,370)	—	(1,370)
Share based payments/charges	—	—	(32)	(32)
Balance at 31 December 2020	4,089	48,701	(48,668)	4,122

The notes on pages 91 to 94 are an integral part of these consolidated financial statements

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Notes to the Company Accounts

AT 31 DECEMBER 2020

1 Basis of preparation

The Company has adopted the following disclosure exemptions:

the requirement to present a statement of cash flow and related notes; and
financial instrument disclosures, including,
categories of financial instruments;
items of income, expenses, gains or losses relating to financial instruments; and
exposure to, and management of, financial risks.

There were no significant judgements or estimates in preparing the financial statements of the Company.

2 Accounting policies

INVESTMENTS

Investments in subsidiaries are stated at cost less, where appropriate, provisions for impairment.

OTHER RECEIVABLES

Amounts owed by subsidiary undertakings are initially recognised at fair value, and subsequently measured at amortised cost using the effective interest method.

CREDITORS

Amounts owed to subsidiary undertakings are initially recognised at fair value, and subsequently measured at amortised cost using the effective interest method.

SHARE-BASED PAYMENTS

The Company operates a number of equity-settled, share based compensation plans that are awarded to employees of the Company’s subsidiary undertakings. The fair value of the employee services received under such schemes is recognised as an expense in the subsidiary undertakings financial statements, which benefit from the employee services. The Company has recognized the fair value of the share-based payments as an increase to equity with a corresponding adjustment to investments. Equity settled share-based payments are measured at fair value at the date of grant. The fair value, determined at the grant date, of equity settled share–based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest. The fair value of employee share option grants is calculated using a Monte Carlo model, taking into account the terms and conditions upon which the options were granted. The value of the charge is adjusted to reflect expected and actual levels of options vesting. Further detail is set out in note [28] to the group consolidated Financial Statements.

CASH AND CASH EQUIVALENTS

There were no cash transactions during the year and accordingly no cash flow statement has been presented.

FOREIGN CURRENCIES

FINANCIAL GUARANTEE CONTRACTS

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NOTES TO THE COMPANY ACCOUNTS (continued)

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3 Tax

3 Tax
	2020	2019
	$000	$000
Current tax (Credit)	(10)	—

Corporation tax is calculated at 21%, based on the US standard rate of corporate tax (2019: 21%) of the estimated assessable profit for the year. The table below explains the difference between the expected expense at the US statutory rate of 21% and the Company’s total tax expense for the year.

the Company’s total tax expense for the year.
	2020	2019
	$’000	$’000
Profit/(loss) before tax	2,204	(587)
Tax at the US corporation tax rate of 21% (2019: 21%)	463	(123)
Tax effect of items that are not (taxable)/deductible in determining taxable profit	(463)	123
Other	(10)	—
Tax (Credit)	(10)	—

4 Investments

4 Investments
	2020	2019
	$000	$000
At 1 January	1,266	1,209
Movement during the year	(32)	57
At 31 December	1,234	1,266

5 Subsidiaries

A) TRADING COMPANIES

Name	Incorporation Issued and fully paid up share capital % held Segment Place Date Registered address key
Quarto Publishing Group USA Inc. Delaware, USA 28 June 2004 B 380 shares of US$0.01 each 100 US Publishing
Quarto Publishing plc United Kingdom 1 April 1976 A 100,000 shares of £1 each 100* UK Publishing
Quarto, Inc. Delaware, USA 16 October 1986 B 86 shares of no par value 100* US Publishing

*Directly held by The Quarto Group, Inc.

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5 Subsidiaries (continued)

B) DORMANT COMPANIES


B) DORMANT COMPANIES Name	STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Incorporation Registered address key Issued share capital % held Place Date United Kingdom 30 September 1980 A 1000 shares of £1 each 100 United Kingdom 5 June 1984 A 100 shares of £1 each 100 United Kingdom 31 May 1977 A 382,502 shares of £1 each 100 New Zealand 27 September 1996 C 400,000 shares of NZ$1 each 100* United Kingdom 27 July 1981 A 1000 shares of £1 each 100 United Kingdom 22 June 1992 A 200 shares of £1 each 100 United Kingdom 18 March 1988 A 100 shares of £1 each 100 United Kingdom 17 June 1992 A 2 shares of £1 each 100 Delaware, USA 19 December 2002 B 1000 shares of no par value 100 United Kingdom 23 June 1949 A 9020 shares of £1 each 100 United Kingdom 15 December 1980 A 565,000 shares of 10p each 100 United Kingdom 11 March 1987 A 100 shares of £1 each 100 United Kingdom 7 July 1986 A 1000 shares of £1 each 100 Australia 4 November 1999 D 1,000 shares of A$1 each 100 United Kingdom 24 February 1982 A 100 shares of £1 each 100 United Kingdom 5 December 1972 A 300 shares of £1 each 100 United Kingdom 30 November 1978 A 100 shares of £1 each 100 United Kingdom 9 July 1996 A 1042 shares of 10p each 100 United Kingdom 6 November 1998 A 100 units 100 United Kingdom 9 September 1986 A 43 004 shares of £1 each 100 United Kingdom 21 July 2005 A 20,840 shares of £0.01 each 100 United Kingdom 7 February 2002 A 1 shares of £1 each 100 United Kingdom 7 February 2002 A 1 shares of £1 each 100 Delaware, USA 27 April 2004 B 1500 shares of no par value 100 United Kingdom 12 November 1974 A 400 shares of £1 each 100 United Kingdom 30 September 1980 A 100 shares of £1 each 100 Australia 14 September 1981 D 110 shares of $A1 each 100 United Kingdom 7 February 1983 A 100 shares of £1 each 100 United Kingdom 6 January 1976 A 2 shares of £1 each 100 Hong Kong 26 January 2015 E 100 shares of HKD1 each 100 United Kingdom 20 May 1986 A 1000 shares of £1 each 100 Delaware, USA 26 April 1995 B 3000 shares of no par value 100 Delaware, USA 10 December 2010 B 1000 shares of $1 each 100 United Kingdom 14 December 1984 A 1000 shares of £1 each 100 United Kingdom 14 May 1979 A 1000 shares of £1 each 100 United Kingdom 7 February 2002 A 1 shares of £1 each 100 United Kingdom 14 May 1979 A 100 shares of £1 each 100 Switzerland 18 July 1977 F 1,500 shares of SFr500 each 100 United Kingdom 20 September 1997 A 1,536 share of £1 each 100
AP Screen Printers Limited
Apple Press Limited
Aurum Press Limited
Books & Gifts Direct Limited
Cartographica Press Limited
Design Eye Holdings Limited
Design Eye Limited
Design Eye Publishing Limited
EYE Quarto Inc
Fine Wine Editions Limited
Frances Lincoln Limited
Frances Lincoln Publishers Limited
Global Book Publishing Pty Limited
Global Book Publishing Pty Limited
Great American Trading Company Limited (THE)
IQON Editions Limited
iqu-digital.com Limited
Ivy Press (The)
Jacqui Small LLP
JR Books Limited
Lewes Holdings Limited
Marshall Editions Limited
Marshall Publishing Limited
QEB Publishing Inc
QED Publishing Limited
QU:ID Publishing Limited
Quarto Australia Pty Limited
Quantum Books Limited
Quarto Children’s Books Limited
Quarto Group HK Ltd
Quarto Magazines Limited
Quarto Marketing Inc
Quarto Media Inc
Quarto Multi Media Limited
Quill Publishing Limited
Quintessence Editions Limited
Quintet Publishing Limited
RotoVision S.A.
Small World Creations Limited

*Directly held by The Quarto Group, Inc.

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NOTES TO THE COMPANY ACCOUNTS (continued)

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5 Subsidiaries (continued)

D) LIST OF REGISTERED OFFICES

A The Old Brewery, 6 Blundell Street, London, N7 9BH, United Kingdom
B 100 Cummings Center, Suite 265D, Beverly, MA 01915-6115, USA
(Quarto Publishing Group USA Inc., 251 Little Falls Drive, Wilmington, DE 19808, Delaware, USA; Quarto Inc., 1209 Orange Street, Wilmington, Delaware 19801, USA)
C c/o Brownes CA Limited, Unit K, 215 Rosedale Road, Albany, Auckland, 0632, New Zealand
D c/o ZM Partners, Suite 10 Ground Floor, 123 Clarence Street, Sydney, NSW 2000, Australia
E Room 2306, Technology Plaza, 651 King’s Road, North Point, Hong Kong
F Passage Perdonet 1, 1005 Lausanne, Switzerland

6 Other receivables falling due within one year

6 Other receivables falling due within one year
	2020	2019
	$000	$000
Amounts owed by subsidiary undertakings	3,370	—
	3,370	—

7 Creditors: Amounts falling due within one year

7 Creditors: Amounts falling due within one year
	2020	2019
	$000	$000
Amounts owed to subsidiary undertakings	—	15,814
Tax payable	52	52
	52	15,866

8 Called up share capital

Details of called up share capital are set out in note 24 of the consolidated Financial Statements.

9 Contingent liabilities

The Quarto Group, Inc. has issued guarantees in respect of bank loans of subsidiaries of $25,411,000 (2019: $53,077,000). Refer to note 18 of the group consolidated Financial Statements.

10 Related parties

The Company repaid an amount of $19,184,000 to its wholly owned subsidiary, Quarto Publishing plc, during the year (2019: $0.6m borrowed in the year). The balance on the loan at 31 December 2020 was $3.4m (due to the company) (2019:

$15.8m owed by the company). These balances are non-interest bearing and repayable on demand.

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Governance

Independent Auditor’s Report to the Members of The Quarto Group, Inc.

Opinion

OUR OPINION ON THE FINANCIAL STATEMENTS IS UNMODIFIED

We have audited the financial statements of The Quarto Group, Inc. (the ‘parent company’) and its subsidiaries (the ‘group’) for the year ended 31 December 2019, which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated cash flow statement, the company balance sheet, the company statement of comprehensive income, the company statement of changes in equity and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in the preparation of the group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards, including Financial Reporting Standard 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’ (United Kingdom Generally Accepted Accounting Practice).

In our opinion:

the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2019 and of the group’s profit and the parent company’s loss for the year then ended;
the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;
the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 which would have applied were the parent company incorporated in the United Kingdom; and, as regards the group financial statements, Article 4 of the IAS Regulation.

BASIS FOR OPINION

THE IMPACT OF UNCERTAINTIES ARISING FROM THE UK EXITING THE EUROPEAN UNION ON OUR AUDIT

Our audit of the financial statements requires us to obtain an understanding of all relevant uncertainties, including those arising as a consequence of the effects of Brexit. All audits assess and challenge the reasonableness of estimates made by the directors and the related disclosures and the appropriateness of the going concern basis of preparation of the financial statements. All of these depend on assessments of the future economic environment and the group’s and parent company’s future prospects and performance.

Brexit is one of the most significant economic events for the UK, and at the date of this report its effects are subject to unprecedented levels of uncertainty, with the full range of possible outcomes and their impacts unknown. We applied a standardised firm-wide approach in response to these uncertainties when assessing the group’s and parent company’s future prospects and performance. However, no audit should be expected to predict the unknowable factors or all possible future implications for a group and parent company associated with a course of action such as Brexit.

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Governance

MATERIAL UNCERTAINTY RELATED TO GOING CONCERN

We draw attention to note 1 of the financial statements, which indicates that the directors have prepared a downside scenario analysis which models the potential impact of the recent Covid-19 outbreak on the group’s trading and cash flow forecasts and financial covenants. As stated in note 1, the downside scenario analysis indicates that a material uncertainty exists that may cast significant doubt on the group’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.

Audit work performed

In evaluating whether a material uncertainty exists, our procedures evaluated management’s assessment of the impact of Covid-19 on the group’s working capital and covenant conditions by undertaking, inter alia, the following work:

We have reviewed the forecasts and the assumptions used by management and have considered whether these are consistent with our understanding of the business derived from other detailed work undertaken;
We assessed the quality of management’s forecasting by comparing projections to actual post year-end results;
We agreed the underlying cash flow projections to management-approved forecasts, assessed how these forecasts are compiled, and considered the adequacy of management’s scenario planning by applying appropriate sensitivities to the underlying assumptions;
Considered the effect of the assumptions regarding the lost revenue, availability of workforce and the resulting effect on working capital during the estimated period of Covid-19 impact;
Reviewed the terms of the covenant agreement and assessed under what circumstances that there was a risk that a covenant may be breached as a result of the Covid-19 adjustments to the projections; and
Assessed the impact of the mitigating factors available to management in respect of the ability to restrict cash impact, including the level of available credit facilities.

OVERVIEW OF OUR AUDIT APPROACH

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Overall materiality: $700,000, which represents approximately 0.5% of the group’s revenue;
Key audit matters were identified as assessing the completeness of the sales return provision, assessment of the carrying value of goodwill in relation to Quarto US and assessment of the valuation of pre-publication intangible assets; and
We have performed a full scope audit of the financial statements of the parent company and of the financial information of Quarto Publishing plc (‘Quarto UK’) and Quarto Publishing Group USA Inc. (‘Quarto US’). We have performed analytical procedures on the financial information of other companies within the group.

KEY AUDIT MATTERS

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those that had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, which Include the matter described in the ‘Material uncertainty related to going concern’ section, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In addition to the matter described In the Material Uncertainty Related to Going Concern section, we have determined the matters described below to be the key audit matters to be communicated In our report.

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----- Start of picture text -----

STRATEGIC REPORT
GOVERNANCE
FINANCIAL STATEMENTS
----- End of picture text -----

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INDEPENDENT AUDITOR’S REPORT (continued)

Key Audit Matter – Group	How the matter was addressed in the audit – Group
COMPLETENESS OF THE SALES RETURNS	Our audit work included, but was not restricted to:
PROVISION	• Considering the appropriateness of the accounting policy for the
The Group generates material revenues from published	provision for sales returns by checking whether it is in accordance with
books. Certain customers have a right of return for	the financial reporting framework, including IAS 37 ‘Provisions, Contin-
these books and therefore the revenue is recognised	gent Liabilities and Contingent Assets’ and IFRS 15 ‘Revenue from
net of a provision for these returns. At 31 December	Contracts with Customers’.
2019, this provision totals $6,349,000. Management judgement is required when assessing the level of returns which are expected to occur subsequent to the year end for sales made during the year.	• Testing a sample of returns made during the year to supporting documentation in order to confirm the accuracy of the data used to calculate the rates of returns used in management’s calculation of the provision;
The key assumption applied is in relation to historical return experience, which is used in order to predict future returns and therefore the provision which is	• Recalculating the provision to confirm that it is appropriate and in accordance with management’s policy;
required to be made.	• Comparing actual returns in the period to the provision made in the
We therefore identified the completeness of the sales returns provision as a significant risk, which was one of	prior period in order to evaluate the accuracy of management’s forecasting; and
the most significant assessed risks of material misstate-	• Inquiring of sales and operations staff as to their knowledge of any
ment.	exceptional returns in the period or the potential for these in the returns
	period.
	The group’s accounting policy on the sales returns provision is shown in
	note 1 to the group financial statements and related disclosures are
	included in notes 1 and 21. The Audit Committee identified revenue
	recognition and sales returns as a significant issue in its report on page 24,
	where the Audit Committee also described the action that it has taken to
	address this issue.

KEY OBSERVATIONS

Based on our audit work, we concur with management’s view that the provision made for sales returns is in accordance with the financial reporting framework, including IAS 37 and IFRS 15. Our audit work did not identify any material errors in the completeness of the sales returns provision recognised at 31 December 2019.

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Key Audit Matter – Group How the matter was addressed in the audit – Group ASSESSMENT OF THE CARRYING VALUE OF Our audit work included, but was not restricted to: GOODWILL IN RELATION TO QUARTO US • Considering the appropriateness of the accounting policy by checking
The Group holds $19,192,000 of goodwill on its whether it is in accordance with the financial reporting framework, balance sheet, including a balance of $12,882,000 including IAS 36 ‘Impairment of Assets’. relating to Quarto US as disclosed in Note 11 to the • Obtaining management’s impairment review model and testing its
group financial statements. mathematical accuracy;
In accordance with International Accounting Standard • Assessing the appropriateness of the asset and liability amounts
36 ‘Impairment of Assets’ (‘IAS 36’), goodwill is subject included in the carrying value of each of the cash generating units
to an annual impairment test. which were assessed by management as part of the impairment review;
We consider that the carrying value of the goodwill for • Assessing the discount rate applied, including an assessment by our
this cash generating unit (CGU) is a key risk due to the valuation specialists and benchmarking the rate against that used by
sensitivity of the impairment calculations to a reasonacompetitors;
bly possible change in the key assumptions, including the discount rate, cash flow forecasts and growth rates. • Performing sensitivity analysis around the value in use calculation performed by management; and
We therefore identified the assessment of the carrying value of goodwill in relation to Quarto US as a signifi• Considering the post year end performance of the group against budget cant risk, which was one of the most significant and comparing historical budgets to actual performance in order to assessed risks of material misstatement. assess the accuracy of budgets prepared by management.

We consider that the carrying value of the goodwill for this cash generating unit (CGU) is a key risk due to the sensitivity of the impairment calculations to a reasonably possible change in the key assumptions, including the discount rate, cash flow forecasts and growth rates. We therefore identified the assessment of the carrying value of goodwill in relation to Quarto US as a significant risk, which was one of the most significant assessed risks of material misstatement.

The group’s accounting policy on goodwill is shown in note 1 to the group financial statements and related disclosures are included in note 11. The Audit Committee identified assessment of the carrying value of goodwill as a significant issue in its report on page 24, where the Audit Committee also described the action that it has taken to address this issue.

KEY OBSERVATIONS

Our audit work did not identify any material errors in the carrying value of goodwill in relation to Quarto US and we concur with management’s view that no impairment charge is necessary. The impairment calculation remains sensitive to changes in key assumptions and these continue to be disclosed in the accounts.

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INDEPENDENT AUDITOR’S REPORT (continued)

Key Audit Matter – Group How the matter was addressed in the audit – Group ASSESSMENT OF THE VALUATION OF PREOur audit work included, but was not restricted to: PUBLICATION INTANGIBLE ASSETS • Considering the appropriateness of the accounting policy by checking The Group’s holds capitalised pre-publication costs whether it is in accordance with the financial reporting framework, with a net book value of $52,213,000 as intangible including IAS 38 ‘Intangible Assets’. assets on its consolidated balance sheet. This repre• Testing a sample of costs capitalised in the year to supporting docusents costs which are capitalised by the Group in mentation in order to confirm they are directly attributable to the relation to the development of book titles, including development of book titles; directly attributable overhead costs. There is management judgement involved in determining which costs • Challenging judgements made by management in determining which are directly attributable to the development of books costs are directly attributable to the development of book titles; and should therefore be capitalised. • Assessing the recoverability of pre-publication costs allocated to each These costs are amortised over a three-year period on CGU as part of the impairment test performed under IAS 36 to ensure a straight-line basis to reflect the expected useful that pre-publication costs are recoverable based on management’s economic life of these intangible assets. There is value in use calculation for each CGU; and

These costs are amortised over a three-year period on a straight-line basis to reflect the expected useful economic life of these intangible assets. There is management judgement in relation to the length of life of these intangible assets and whether the balance is recoverable.

• Analysing historic sales patterns to ensure that they support the estimate made by management of a three-year useful economic life. The group’s accounting policy on pre-publication costs is shown in note 1 to the group financial statements and related disclosures are included in note 15. The Audit Committee identified recoverability of pre-publication costs as a significant issue in its report on page 24, where the Audit Committee also described the action that it has taken to address this issue.

We therefore identified the assessment of the valuation of pre-publication intangible assets as a significant risk, which was one of the most significant assessed risks of material misstatement.

KEY OBSERVATIONS Our audit work for the current year identified that certain overhead costs have been capitalised in pre-publication intangible assets in the current and prior year which do not meet the recognition criteria set out in IAS 38. Accordingly, as set out in note 1, management have made a prior period adjustment to restate the prior period financial statements and have made an adjustment in the current year to correct this misstatement. Following the adjustments noted above, based on our audit work, we concur with management’s view that pre-publication assets are carried at an appropriate valuation and are amortised over an appropriate useful economic life.

We did not identify any key audit matters relating to the audit of the financial statements of the parent company.

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THE QUARTO GROUP, INC. ANNUAL REPORT 2019 Governance

OUR APPLICATION OF MATERIALITY

OUR APPLICATION OF MATERIAL	ITY
We define materiality as the magnitude of misstatement in the financial statements		that makes it probable that the economic
decisions of a reasonably knowledgeable person would be changed or influenced.		We use materiality in determining the nature,
timing and extent of our audit work	and in evaluating the results of that work.
Materiality was determined as follows: Materiality measure Group Financial statements as a whole $700,000, which is approximately 0.5% of the group’s revenue. This benchmark is considered the most appropriate because revenue is a key driver of the business and is monitored by management and the directors. We do not		Parent company $8,000, which is 0.6% of the parent company’s total assets. This benchmark is considered the most appropriate because the parent company is a holding company and has no revenue.	STRATEGIC REPORT
	consider it appropriate to use earnings before tax as the benchmark as there have been significant fluctuations in the group’s earnings before tax in recent years.	Materiality for the current year is at the same level that we determined for the year ended 31 December 2018 to reflect that there has been no significant change in the
	Materiality for the current year is lower than the	parent company’s total assets.
	level that we determined for the year ended 31
	December 2018 to reflect the decrease in the
	group’s revenue in the current year.
Performance materiality used to	65% of financial statement materiality.	65% of financial statement materiality.
drive the extent of our testing
Specific materiality Communication of misstatements to the audit committee	We determined a lower level of specific materiality for certain areas including directors’ remuneration and related party transactions. $35,000 and misstatements below that thresh- old that, in our view, warrant reporting on	We determined a lower level of specific materiality for certain areas including directors’ remuneration and related party transactions. $400 and misstatements below that threshold that, in our view, warrant	GOVERNANCE
	qualitative grounds.	reporting on qualitative grounds.
			FINANCIAL STATEMENTS

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THE QUARTO GROUP, INC. ANNUAL REPORT 2019 Governance

INDEPENDENT AUDITOR’S REPORT (continued)

AN OVERVIEW OF THE SCOPE OF OUR AUDIT

Our audit approach was a risk-based approach founded on a thorough understanding of the group’s business, its environment and risk profile and in particular included:

Evaluation by the group audit team of identified components to assess the significance of that component and to determine the planned audit response based on a measure of materiality. Significance was determined as a percentage of the group’s total assets, revenues and profit before taxation;
Based on this evaluation we considered that the only significant components are Quarto UK and Quarto US due to their financial significance to the group;
We performed a full scope audit of the financial statements of the parent company;
For Quarto US, we performed a full scope audit of its financial information using component materiality, being 65% of group materiality.
For Quarto UK, we performed a full scope audit of its financial information using materiality that we determined for the statutory audit, which was lower than we would have applied had we performed audit procedures only for group purposes.
The full scope audits performed represent 100% of the group’s continuing revenue for the year, 100% of the group’s total assets, and 99.8% of the group’s total liabilities.
The financial information of the other components in the group has been subjected to analytical procedures.

EXPLANATION AS TO WHAT EXTENT THE AUDIT WAS CONSIDERED CAPABLE OF DETECTING IRREGULARITIES, INCLUDING FRAUD

The objectives of our audit are to identify and assess the risks of material misstatement of the financial statements due to fraud or error; to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud or error; and to respond appropriately to those risks. Owing to the inherent limitations of an audit, there is an unavoidable risk that material misstatements in the financial statements may not be detected, even though the audit is properly planned and performed in accordance with ISAs (UK).

In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with laws and regulations, our procedures included the following:

We obtained an understanding of the legal and regulatory frameworks applicable to the parent company and the group and the industry in which they operate. We determined that the following laws and regulations were most significant: IFRSs as adopted by the European Union, Listing Rules, and the UK Corporate Governance Code.
We obtained an understanding of how the parent company and the group is complying with those legal and regulatory frameworks by making inquiries of management, those responsible for legal and compliance procedures and the company secretary. We corroborated our inquiries through our review of board minutes and papers provided to the Audit Committee.
We assessed the susceptibility of the parent company’s and group’s financial statements to material misstatement, including how fraud might occur. Audit procedures performed included:
identifying and assessing the design effectiveness of controls management has in place to prevent and detect fraud;
understanding how those charged with governance considered and addressed the potential for override of controls or other inappropriate influence over the financial reporting process;
challenging assumptions and judgments made by management in its significant accounting estimates; and
identifying and testing journal entries posted in the year which were deemed to be unusual.
We did not identify any key audit matters relating to irregularities, including fraud.

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THE QUARTO GROUP, INC. ANNUAL REPORT 2019 Governance

OTHER INFORMATION

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact.

We have nothing to report in this regard.

In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions:

Fair, balanced and understandable – the statement given on page 43 by the directors that they consider the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the group’s performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or
Audit committee reporting – the section set out on pages 23 to 25 describing the work of the audit committee does not appropriately address matters communicated by us to the audit committee; or
Directors’ statement of compliance with the UK Corporate Governance Code set out on pages 40 and 41 – the parts of the directors’ statement required under the Listing Rules relating to the company’s compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code.

OUR OPINIONS ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006, WERE IT TO APPLY TO THE PARENT COMPANY, ARE UNMODIFIED

In our opinion, the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.

In our opinion, based on the work undertaken in the course of the audit:

the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.

MATTER ON WHICH WE ARE REQUIRED TO REPORT UNDER THE COMPANIES ACT 2006, WERE IT TO APPLY TO THE PARENT COMPANY

MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION, WERE THE COMPANIES ACT 2006 TO APPLY TO THE PARENT COMPANY

We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion:

adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or
the parent company financial statements and the part of the directors’ remuneration report to be audited are not in agreement with the accounting records and returns; or
certain disclosures of directors’ remuneration specified by law are not made; or

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STRATEGIC REPORT
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GOVERNANCE
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FINANCIAL STATEMENTS
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we have not received all the information and explanations we require for our audit.

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THE QUARTO GROUP, INC. ANNUAL REPORT 2019 Governance

INDEPENDENT AUDITOR’S REPORT (continued)

RESPONSIBILITIES OF DIRECTORS FOR THE FINANCIAL STATEMENTS

As explained more fully in the statement of directors’ responsibilities set out on page 43, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS

OTHER MATTERS WHICH WE ARE REQUIRED TO ADDRESS

Following the recommendation of the audit committee, we were appointed by the audit committee on 20 November 2017 to audit the financial statements for the year ended 31 December 2017 and subsequent financial periods.

The period of total uninterrupted engagement is 3 years, covering the years ended 31 December 2017 to 31 December 2019.

Our audit opinion is consistent with the additional report to the audit committee.

USE OF OUR REPORT

This report is made solely to the company’s members, as a body, in accordance with the terms that have been agreed in our engagement letter dated 9 January 2019. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

David White

Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants London 22 April 2020

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THE QUARTO GROUP, INC. ANNUAL REPORT 2019 Financial Statements

Consolidated Income Statement

FOR THE YEAR ENDED 31 DECEMBER 2019

			Restated
			(Note 1)
		2019	2018
	Notes	$’000	$’000
Continuing operations
Revenue Cost of sales Gross profit Administrative expenses Impairment of financial assets	2 17	135,807 (97,782) 38,025 (19,641) (853)	149,292 (105,113) 44,179 (25,710) (245)	STRATEGIC REPORT
Distribution costs		(7,527)	(7,919)
Operating profit before amortisation of acquired intangibles	4	10,004	10,305
and exceptional items
Amortisation of acquired intangibles		(811)	(850)
Exceptional items	5	(419)	(5,152)
Operating profit		8,774	4,303
Finance income	7	9	21
Finance costs	8	(4,939)	(4,381)
Profit/(loss) before tax		3,844	(57)
Tax Profit/(loss) for the year Attributable to: Owners of the parent	9	(962) 2,882 2,882	(495) (552) (552)	GOVERNANCE
		2,882	(552)
Earnings/(loss) per share (cents)
From continuing operations
Basic	10	14.1	(2.7)
Diluted	10	14.0	(2.7)
Adjusted basic	10	19.0	23.2
Adjusted diluted	10	18.8	23.0
				FINANCIAL STATEMENTS

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THE QUARTO GROUP, INC. ANNUAL REPORT 2019 Financial Statements

Consolidated Statement of Comprehensive Income

FOR THE YEAR ENDED 31 DECEMBER 2019

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Restated
(Note 1)
2019 2018
$’000 $’000
Profit/(loss) for the year 2,882 (552)
Items that may be reclassified to profit or loss
Foreign exchange translation differences 403 (1,950)
Cash flow hedge; (losses) arising during the year (105) (60)
Tax relating to items that may be reclassified to profit or loss (162) (246)
Total other comprehensive income/(expense) 136 (2,256)
Total comprehensive income/(expense) for the year 3,018 (2,808)
Total comprehensive income/(expense) for the year attributable to:
Owners of the parent 3,018 (2,808)
3,018 (2,808)
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THE QUARTO GROUP, INC. ANNUAL REPORT 2019 Financial Statements

Consolidated Balance Sheet

AS AT 31 DECEMBER 2019

			Restated	Restated
			(Note 1)	(Note 1)
		2019	2018	2017
	Notes	$000	$000	$000
Non-current assets Goodwill Other intangible assets Property, plant and equipment Intangible assets: Pre-publication costs Deferred tax assets	11 12 13 15 19	19,192 1,282 10,883 48,697 3,331	18,954 2,368 1,552 52,706 3,901	19,286 3,516 2,129 56,243 3,901	STRATEGIC REPORT
Total non-current assets		83,385	79,481	85,075
Current assets
Inventories	16	19,378	22,324	22,637
Trade and other receivables	17	46,397	54,476	53,460
Derivative financial instruments		—	105	205
Cash and cash equivalents	18	15,621	15,384	17,946
Total current assets		81,396	92,289	94,248
Total assets		164,781	171,770	179,323
Current liabilities Short term borrowings Trade and other payables Lease liabilities	18 21 20	(66,077) (57,381) (1,937)	(5,000) (64,917) —	(5,000) (60,796) —	GOVERNANCE
Tax payable		(2,831)	(4,167)	(5,243)
Total current liabilities		(128,226)	(74,084)	(71,039)
Non-current liabilities
Medium and long-term borrowings	18	—	(70,752)	(76,907)
Deferred tax liabilities	19	(7,139)	(7,848)	(7,615)
Tax payable		(433)	(544)	(1,116)
Lease liabilities	20	(7,929)	—	—
Other payables	21	—	(554)	(1,673)
Total non-current liabilities Total liabilities Net assets Equity Share capital Paid in surplus	25	(15,501) (143,727) 21,054 2,045 33,764	(79,698) (153,782) 17,988 2,045 33,764	(87,311) (158,350) 20,973 2,045 33,764	FINANCIAL STATEMENTS
Retained earnings and other reserves		(14,755)	(17,821)	(14,836)
Total equity		21,054	17,988	20,973

The financial statements were approved by the Board of Directors and authorised for issue on 22 April 2020. They were signed on its behalf by:

C K Lau, Director

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THE QUARTO GROUP, INC. ANNUAL REPORT 2019 Financial Statements

Consolidated Statement of Changes in Equity

FOR THE YEAR ENDED 31 DECEMBER 2019

						Equity
						attributable to
						owners
	Share		Hedging	Translation	Retained	of the
	capital	Paid in surplus	reserve	Reserve	earnings	parent
	$000	$000	$000	$000	$000	$000
Balance at 1 January 2018 as	2,045	33,764	165	(4,793)	(7,078)	24,103
previously stated
Prior year adjustment (Note 1)	—	—	—	—	(3,130)	(3,130)
Balance at 1 January 2018	2,045	33,764	165	(4,793)	(10,208)	20,973
Loss for the year	—	—	—	—	(552)	(552)
Other comprehensive income
Foreign exchange translation differences	—	—	—	(1,950)	—	(1,950)
Cash flow hedge: losses arising during the	—	—	(60)	—	—	(60)
year
Tax relating to items that may be	—	—	—	(246)	—	(246)
reclassified to profit or loss
Total comprehensive income	—	—	(60)	(2,196)	(552)	(2,808)
for the year
Share based payments credit	—	—	—	—	(177)	(177)
Balance at 31 December 2018	2,045	33,764	105	(6,989)	(10,937)	17,988
Profit for the year	—	—	—	—	2,882	2,882
Other comprehensive income
Foreign exchange translation differences	—	—	—	403	—	403
Cash flow hedge: losses arising during the	—	—	(105)	—	—	(105)
year
Tax relating to items that may be	—	—	—	(162)	—	(162)
reclassified to profit or loss
Total comprehensive income	—	—	(105)	241	2,882	3,018
for the year
Share based payments charge	—	—	—	—	48	48
Balance at 31 December 2019	2,045	33,764	—	(6,748)	(8,007)	21,054

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THE QUARTO GROUP, INC. ANNUAL REPORT 2019 Financial Statements

Consolidated Cash Flow Statement

FOR THE YEAR ENDED 31 DECEMBER 2019

		Restated
		(Note 1)
	2019	2018
	$000	$000
Profit/(loss) for the year Adjustments for: Net finance costs Depreciation of property, plant and equipment Software amortisation Tax expense	2,882 4,930 2,127 276 962	(552) 4,360 693 298 495	STRATEGIC REPORT
Impairment of pre-publication costs	—	501
Share based payments	48	(177)
Amortisation and amounts written off acquired intangibles	811	910
Amortisation of pre-publication costs	28,694	29,267
Operating cash flows before movements in working capital	40,730	35,795
Decrease in inventories	3,157	21
Decrease/(increase) in receivables	8,961	(2,280)
(Decrease)/increase in payables	(8,896)	4,639
Cash generated by operations Income taxes paid Net cash from operating activities Investing activities	43,952 (2,650) 41,302	38,175 (1,962) 36,213	GOVERNANCE
Interest received	9	21
Investment in pre-publication costs	(23,786)	(27,585)
Purchases of property, plant and equipment	(138)	(169)
Purchase of software	—	(77)
Acquisition of businesses	(1,250)	(1,887)
Net cash used in investing activities	(25,165)	(29,697)
Financing activities
Interest payments	(3,709)	(2,980)
Lease payments Drawdown of revolving credit facility Repayment of term loan and revolving credit facility Net cash used in financing activities Net increase/ (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Foreign currencyexchange differences on cash and cash equivalents	(1,882) 1,963 (12,417) (16,045) 92 15,384 145	— 18,457 (24,238) (8,761) (2,245) 17,946 (317)	FINANCIAL STATEMENTS
Cash and cash equivalents at end ofyear	15,621	15,384

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THE QUARTO GROUP, INC. ANNUAL REPORT 2019 Financial Statements

Notes to the Financial Statements

1 General information and significant accounting policies

The accounting policies adopted, are consistent with those of the annual financial statements for the year ended 31 December 2018, as described in those financial statements. Two new accounting standards, IFRS 16 - Leases and IFRIC 23 - Uncertainty over Income Tax Treatments, have been adopted during the period. There was no impact of IFRIC 23 on the financial statements whilst the impact of IFRS 16 has been disclosed below.

RESTATEMENT OF PRIOR YEAR RESULTS

The following tables show the restated prior year comparative figures for the financial year ended 31 December 2018. This restatement reflects a reinterpretation of the directly attributable costs and overheads that should be capitalised under IAS 38, as pre-publication costs; in the past, an element of overheads relating to indirect costs were capitalised which represents an error. The Directors accept responsibility for the error in their interpretation of IAS38 and the treatment of indirect overhead costs. This interpretation first introduced in 2005 has not been challenged or commented on, by any of the Company’s auditors in the intervening years. Past Company’s auditors include Grant Thornton (2017 - 2019), Deloitte (2014 - 2016), Grant Thornton (2007 - 2013) and RSM (2006). There was no overall impact on the results of the Group for the year ended 31 December 2018. The impact on the financial statements is set out below:

				As reported	Adjustment	Restated
				2018	2018	2018
				$000	$000	$000
Income statement
Cost of sales				(107,195)	2,082	(105,113)
Administration expenses				(23,628)	(2,082)	(25,710)
Cash flow statement
Amortisation and amounts written off pre-publication costs				31,426	(2,159)	29,267
Investment in pre-publication costs				(29,744)	2,159	(27,585)
	As reported	Adjustment	Restated	As reported	Adjustment	Restated
	2018	2018	2018	2017	2017	2017
	$000	$000	$000	$000	$000	$000
Balance sheet
Intangible assets: pre-publication costs	56,741	(4,035)	52,706	60,278	(4,035)	56,243
Deferred tax liabilities	(8,753)	905	(7,848)	(8,520)	905	(7,615)
Net assets	21,118	(3,130)	17,988	24,103	(3,130)	20,973
Total equity	21,118	(3,130)	17,988	24,103	(3,130)	20,973

STATEMENT OF COMPLIANCE

BASIS OF ACCOUNTING

The financial statements are prepared on the historical cost basis, except that derivative financial instruments are stated at fair value.

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THE QUARTO GROUP, INC. ANNUAL REPORT 2019 Financial Statements

1 General information and significant accounting policies (continued)

NEW ACCOUNTING STANDARDS

The Group has adopted the new accounting standard IFRS 16 ‘Leases’ during the year. The adoption of this new Standard has resulted in the Group recognising a right-of-use asset and related lease liability in connection with all former operating leases except for those identified as low-value or having a remaining lease term of less than 12 months from the date of initial application.

The new Standard has been applied using the modified retrospective approach, with the cumulative effect of adopting IRFS 16 being recognised in equity as an adjustment to the opening balance of retained earnings for the current period. Prior periods have not been restated.

For contracts in place at the date of initial application, the Group has elected to apply the definition of a lease from IAS 17 and IFRIC 4 and has not applied IFRS 16 to arrangements that were previously not identified as lease under IAS 17 or IFRIC 4.

The Group has elected not to include initial direct costs in the measurement of the right-to-use asset for operating leases in existence at the date of initial application of IFRS 16, being 1 January 2019. At this date, the Group has also elected to measure the right-of-use assets at an amount equal to the lease liability adjusted for any prepaid or accrued lease payments that existed at the date of transition.

Instead of performing an impairment review on the right-to-use assets at the date of initial application, the Group has relied on its historic assessment as to whether leases were onerous immediately before the date of initial application of IFRS 16.

On transition, for leases previously accounted for as operating leases with a remaining lease term of less than 12 months and for leases of low-value assets the Group has applied the optional exemptions to not recognise right-of-use assets but to account for the lease expense on a straight-line basis over the remaining lease term.

On transition to IFRS 16 the weighted average incremental borrowing rate applied to lease liabilities recognised under IFRS 16 was 4.29%.

The following is a reconciliation of total operating lease commitments at 31 December 2018, as disclosed in the financial statements to 31 December 2018, to the lease liabilities recognised at 1 January 2019:

statements to 31 December 2018, to the lease liabilities recognised at 1 January 2019:
Total operating lease commitments disclosed at 31 December 2018 Recognized exemptions at 1 January 2019:	$’000 12,008
Leases with remaining lease term of less than 12 months	(266)
Other liabilities now recognised within lease liabilities	837
	12,579
Discounted using incremental borrowing rate	(1,970)
Total lease liabilities recognised under IFRS 16 at 1 January 2019	10,609
Of which are:
Current lease liabilities	1,885
Non-current lease liabilities The adoption of IFRS 16 has impacted the following items: Impact on Balance Sheet	8,724

Impact on Balance Sheet
Right-of-use assets Property, plant and equipment	1 January 2019 $’000 10,609	31 December 2019 $’000 9,683
Lease liabilities
Trade and other payables: within one year	(1,885)	(1,937)
Trade and other payables: over one year	(8,724)	(7,929)
	(10,609)	(9,866)

The adoption of IFRS 16 on 1 January 2019 had a nil impact on the net assets of the Group due to applying the modified retrospective approach where assets equal liabilities. At 31 December 2019, lease liabilities of $9,866,000 are $183,000 higher than right-of-use assets due to the depreciation charge in the period being in excess of lease repayments, net of interest charges.

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THE QUARTO GROUP, INC. ANNUAL REPORT 2019 Financial Statements

NOTES TO THE FINANCIAL STATEMENTS (continued)

1 General information and significant accounting policies (continued)

A reconciliation of the value of right-to-use assets and lease liabilities from 1 January 2019 to 31 December 2019 is presented below:

	Right-of-use	Lease
	assets	liabilities
	$’000	$’000
Right-of-use assets and lease liabilities at 1 January 2019	10,609	(10,609)
Depreciation	(1,609)	—
Lease payments	—	1,882
Lease interest	—	(454)
Remeasurement	526	(526)
Exchange differences	157	(159)
Right-of-use assets and lease liabilities at 31 December 2019	9,683	(9,866)

Impact on Income Statement

	2019
	$’000
Reduction in occupancy expenses	1,882
(Increase) in depreciation of property, plant and equipment	(1,609)
(Increase) in exchange differences	(2)
(Increase) in interest expense	(454)
Net (decrease) in profit before tax	(183)

STANDARDS, AMENDMENTS AND INTERPRETATIONS TO EXISTING STANDARDS THAT ARE NOT YET EFFECTIVE AND HAVE NOT BEEN ADOPTED EARLY BY THE GROUP

Standards and amendments that are not yet effective and have not been adopted early by the Group include:

IFRS 17 Insurance Contracts
Definition of a business (Amendments to IFRS 3)
Definition of Material (Amendments to IAS 1 and IAS 8)
Conceptual Framework for Financial Reporting

At the date of authorisation of these financial statements, several new, but not yet effective, Standards and amendments to existing Standards, and Interpretations have been published by the IASB. None of these Standards or amendments to existing Standards have been adopted early by the Group.

Management anticipates that all relevant pronouncements will be adopted for the first period beginning on or after the effective date of the pronouncement. New Standards, amendments and Interpretations not adopted in the current year have not been disclosed as they are not expected to have a material impact on the Group’s financial statements.

SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENTS

The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the year in which the estimate is revised if the revision affects only that year or in the year of the revision and future years if the revision affects both current and future years.

Key estimates at the balance sheet date are:

Note 1, 21 The revenue recognition policy details our judgement in respect of sales returns and the method of estimating the related sales returns allowance

Note 11: Key assumptions in making the assessment of carrying value of goodwill

Note 15: Recoverability of pre-publication costs and the assessment of their useful life

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THE QUARTO GROUP, INC. ANNUAL REPORT 2019 Financial Statements

1 General information and significant accounting policies (continued)

Key judgements at the balance sheet date are:

The appropriateness of the going concern basis: when preparing the financial statements, management Is required to make an assessment of the entity’s ability to continue as a going concern and prepare the financial statements on this basis unless It either Intends to liquidate the entity or to cease trading or has no realistic alternative but to do so. As set out In going concern, there are a number of events or conditions that Indicate a material uncertainty exists In relation to going concern. After reviewing the most recent projections and the sensitivity analysis and having carefully considered the material uncertainty, and the mitigating actions available, the directors have formed the judgement that It Is appropriate to prepare the financial statements on the going concern basis.

At 31 December 2019 there was no explicit evidence of human to human transmission of Covid-19. The subsequent spread of Covid-19 does not provide further evidence of conditions that existed at the year-end and is, therefore, considered to be a non-adjusting post balance sheet event in accordance with IAS 10. Accordingly, the development of Covid-19 has not been reflected in the directors’ assessment of the measurement of assets and liabilities such as impairment of tangible and intangible assets, expected credit losses, the net realisable value of inventory and the recoverability of deferred tax assets.

GOING CONCERN BASIS

The Board initially assessed the Group’s ability to operate as a going concern for the next 12 months from the date of signing the financial statements, based on a financial model which was prepared as part of the process of considering and approving the 2020 budget.

The Directors considered the underlying robustness of the Group’s business model, products and proposition and its recent trading performance, cash flows and key performance indicators. They have also reviewed the cash forecasts prepared for the three years ending 31 December 2022, together with certain assumptions for revenue and costs, to satisfy themselves of the appropriateness of the going concern basis used in preparing the financial statements.

Regarding financing, the Group has raised equity of $18.5m (£13.9m), approximately $16.5m net of expenses, since the end of the year, and renewed its facilities on the remaining debt which now expire on 31 July 2021, which is outside of the going concern period. Notwithstanding, given this recent renewal, the directors believe that the debt providers will continue to support the Group thereafter.

The Directors also took account of the principal risks and uncertainties facing the business referred to above, a sensitivity analysis on the key revenue growth assumption and the effectiveness of available mitigating actions.

The uncertainty as to the future impact on the Group of the recent Covid-19 outbreak has subsequently been considered as part of the Group’s adoption of the going concern basis. In the downside scenario analysis performed, the Directors have considered the impact of the Covid-19 outbreak on the Group’s trading and cash flow forecasts. In preparing this analysis, the directors assumed that the lockdown effects of the Covid-19 virus will peak around the end of June and trading will normalise over the subsequent few months, albeit attaining substantially lower levels of revenue than budgeted, for at least the rest of the current financial year. This scenario will lead to a material reduction in the Group’s revenues and results for 2020.

A range of mitigating actions within the control of management were assumed, including reductions in the investment in pre-publication costs, print volumes, staffing levels and other variable costs. The Directors have also considered the financial support commitment made by the UK Government and they believe the Group is eligible for some elements of this financial support. This has been factored in to the forecasts. The Directors have also assumed, having had productive discussions with its lenders, that certain bank fees due to be paid in August 2020, can be deferred to the end of the current facility.

In this scenario, whilst the Group would remain within its banking facilities, some of the financial covenants would, within the current financial year, be breached, unless a waiver agreement is reached with the majority of lenders. Further adverse changes arising from Covid-19 would increase the challenge of complying with financial covenants and remaining within the banking facilities. The Directors, as stated above, are in discussions with its lenders which, albeit at early stages, are considered as being productive. The financial covenants, which are tested every calendar quarter, and generally vary by each quarter, are referred to in Note 18.

Based on the above indications, after taking into account the impact of Covid-19 on the Group’s future trading, the Directors believe that it remains appropriate to continue to adopt the going concern in preparing the financial statements. However, the downside scenario detailed above, Including successfully taking mitigating actions, would indicate the existence of a material uncertainty which may cast doubt on the Group’s ability to continue as a going concern.

BASIS OF CONSOLIDATION

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NOTES TO THE FINANCIAL STATEMENTS (continued)

1 General information and significant accounting policies (continued)

Intragroup balances and any unrealised gains and losses or income and expenses arising from intra-group transactions are eliminated in preparing the consolidated financial statements.

BUSINESS COMBINATIONS, INTANGIBLE ASSETS AND GOODWILL

Goodwill arising on acquisitions is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is tested annually for impairment.

Other intangible assets, such as backlists, that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses.

Amortisation of intangible assets is charged to profit or loss on a straight-line basis over the estimated useful lives of intangible assets. The amortisation period for non-contractual relationships is 2.5 years, for backlists is 5 years and software is 4 years.

PROFIT OR LOSS FROM DISCONTINUED OPERATIONS

A discontinued operation is a component of the Group that has been disposed of. Profit or loss from discontinued operations comprises the post-tax profit or loss of discontinued operations.

IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS INCLUDING GOODWILL

REVENUE RECOGNITION

Revenue arises largely from the sale of physical products. Each contract is for an agreed prices and revenue is recognised at a point in time when the Group satisfies performance obligations by transferring the products to its customers; this is determined with reference to delivery terms. Invoices for products transferred are due on the terms specified in the contract.

Revenue from the sale of publishing rights is recognised when the Group has discharged its performance obligations under the contractual arrangements.

FOREIGN CURRENCIES

The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated into US Dollars at exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated into US Dollars at average exchange rates. Foreign exchange differences arising on retranslation are charged or credited to other comprehensive income and are recognised in the currency translation reserve in equity. On disposal of a foreign operation, the related cumulative translation differences recognised in equity are reclassified to profit or loss and are recognised as part of the gain or loss on disposal.

EXCEPTIONAL ITEMS

RETIREMENT BENEFIT COSTS

The Group’s pension costs relate to individual pension plans and are charged to profit or loss as they fall due.

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1 General information and significant accounting policies (continued)

TAXATION

Tax on the profit or loss for the year comprises both current and deferred tax. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustments to tax payable in respect of previous years. Tax provisions are based on Management’s interpretation of country specific tax law and recognised when it is considered probable that there will be a future outflow of funds to a tax authority. Provisions are made annually based on the specific information available at that time and therefore there is limited risk of change in the estimates in the short term. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. However, deferred tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or a liability unless the related transaction is a business combination or effects tax or accounting profit. Not all temporary differences give rise to deferred tax assets/liabilities. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Changes in deferred tax assets or liabilities are recognised as a component of tax expense in the income statement, except where they relate to items that are charged or credited directly to other comprehensive income or equity, in which case the related deferred tax is also charged or credited directly to other comprehensive income or equity, respectively.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at deemed cost less accumulated depreciation and any provision for impairments in value.

The Group recognises in the carrying amount of property, plant and equipment the subsequent costs of replacing part of such items when there are future economic benefits. All other costs are recognised in profit or loss as an expense as they are incurred.

Estimated useful lives are as follows:

Right-of-use assets Over the period of the lease Short leasehold property improvements Over the period of the lease Plant, equipment and motor vehicles 4 to 10 years Fixtures and fittings 5 to 7 years

Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease.

The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in income.

LEASED ASSETS

As described on page 60, the Group has applied IFRS 16 using the modified retrospective approach and therefore comparative information has not been restated. This means comparative information is still reported under IAS 17 and IFRIC 4.

For any new contracts entered into on or after 1 January 2019, the Group considers whether a contract is, or contains, a lease. A lease is defined as a ‘contract, or part of a contract, that conveys the right to use an asset for a period of time in exchange for consideration’. To apply this definition the Group assesses whether the contract meets three key evaluations which are whether:

the contract contains an identified asset, which is either explicitly identified in the contract or implicitly specified by being identified at the time the asset is made available to the Group
the Group has the right to obtain substantially all of the economic benefits from use of the identified asset throughout the period of use, considering its rights within the defined scope of the contract
the Group has the right to direct the use of the identified asset throughout the period of use. The Group assess whether it has the right to direct ‘how and for what purpose’ the asset is used throughout the period of use.

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NOTES TO THE FINANCIAL STATEMENTS (continued)

1 General information and significant accounting policies (continued)

At the commencement date, the Group measures the lease liability at the present value of the lease payments unpaid at that date, discounted using the interest rate implicit in the lease if that rate is readily available or the Group’s incremental borrowing rate. Lease payments included in the measurement of the lease liability are made up of fixed payments, variable payments based on an index or rate, amounts expected to be payable under a residual value guarantee and payments arising from options reasonably certain to be exercised. Subsequent to initial measurement, the liability will be reduced for payments made and increased for interest. It is remeasured to reflect any reassessment or modification, or if there are any changes in in-substance fixed payments. When the lease liability is remeasured, the corresponding adjustment is reflected in the right-of-use asset, or profit and loss if the right-of-use asset is already reduced to zero.

On the statement of financial position, right-of-use assets have been included in property, plant and equipment and lease liabilities have been included in trade and other payables.

INTANGIBLE ASSETS - PRE-PUBLICATION COSTS

INVENTORIES

Inventory is valued at the lower of cost and net realisable value, on a first in, first out basis. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and selling expenses.

FINANCIAL INSTRUMENTS

Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument.

FINANCIAL ASSETS

Financial assets other than those designated and effective as hedging instruments are divided into the following categories:

amortised costs
fair value through profit or loss
fair value through other comprehensive income

Financial assets are assigned to the different categories on initial recognition, depending on the characteristics of the instrument and its purpose. A financial instrument’s category is relevant for the way it is measured and whether any resulting income and expenses is recognised in profit or loss or directly in equity. See Note 22 for a summary of the Group’s financial assets by category.

After initial recognition, Financial Assets are measured at amortised cost using the effective interest method. Discounting is ignored, where the effect is immaterial. The Group’s cash and cash equivalents, trade and most other receivables, fall into this category of financial instrument. Assets in this category are measured, initially, at fair value with gains or losses recognized in profit or loss.

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1 General information and significant accounting policies (continued)

Derivative financial instruments are initially recognised at fair value, and subsequently classified as financial assets at fair value through profit and loss. Any gain or loss arising from derivative financial instruments is based on changes in fair value, which is determined by direct reference to active market transactions or using a valuation technique where no active market exists.

FINANCIAL LIABILITIES

The Group’s financial liabilities include borrowings, trade and other payables (including finance lease liabilities).

All of the Group’s derivative financial instruments that are not designated as hedging instruments in accordance with the strict conditions explained under the heading ‘Derivative financial instruments and hedge accounting’, are accounted for at fair value through profit or loss by definition.

FINANCIAL LIABILITIES AND EQUITY INSTRUMENTS

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STRATEGIC REPORT
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FINANCE COSTS

Finance costs comprise interest payable on borrowings calculated using the effective interest method together with the amortisation of debt issuance costs.

FINANCE INCOME

Finance income comprises interest receivable, which is recognised in profit or loss as it accrues using the effective interest method.

CASH AND CASH EQUIVALENTS

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING

The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. The Group uses interest rate swap contracts to hedge interest rate exposures. The Group does not use derivative financial instruments for speculative purposes.

The use of financial derivatives is governed by the Group’s policies approved by the Board of Directors, which provide written principles on the use of financial derivatives.

Derivative financial instruments are accounted for at fair value through profit and loss, except for derivatives designated as hedging instruments in cash flow hedge relationships, which require a specific accounting treatment. To qualify for hedge accounting, the hedging relationship must meet all of the following requirements:

there is an economic relationship between the hedged item and the hedging instrument
the effect of credit risk does not dominate the value changes that result from that economic relationship
the hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the entity actually hedges and the quantity of the hedging instrument that the entity actually use to hedge that quantity of hedged item.

All derivative financial instruments used for hedge accounting are recognized initially at fair value and reported subsequently at fair value in the statement of financial position.

To the extent that the hedge is effective, changes in the fair value of derivatives designated as hedging instruments in cash flow hedges are recognized in other comprehensive income and included within cash flow hedge reserve in equity. Any ineffectiveness in the hedge relationship is recognized immediately in profit or loss.

At the time the hedged item affects profit or loss, any gain or loss previously recognized in other comprehensive income is reclassified from equity to profit or loss and presented as a reclassification adjustment within other comprehensive income. However, if a non-financial asset or liability is recognized as a result of the hedged transaction, the gains and losses previously recognized in other comprehensive income are included in the initial measurement of the hedged item.

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NOTES TO THE FINANCIAL STATEMENTS (continued)

1 General information and significant accounting policies (continued)

If a forecast transaction is no longer expected to occur, any related gain or loss recognized in other comprehensive income is transferred immediately to profit or loss. If the hedging relationship ceases to meet the effectiveness conditions, hedge accounting is discontinued and the related gain or loss is held in the equity reserve until the forecast transaction occurs.

The interest rate swaps are level 2 financial instruments and they are valued using techniques based significantly on observable market data such as yield curves as at the balance sheet date.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. At that time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in other comprehensive income until the forecast transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in other comprehensive income is transferred to net profit or loss for the period.

SHARE-BASED PAYMENTS

BORROWING COSTS

No borrowing costs have been capitalized in the current or prior years in relation to qualifying assets. Qualifying assets are considered to be those assets that take in excess of one year to be ready for use.

FINANCIAL RISK MANAGEMENT

The principal risk factors faced by the Group are disclosed in Note 21.

2 Revenue

2 Revenue
	2019	2018
	$’000	$’000
Sales of products	131,857	144,880
Sales of publishing rights	3,950	4,412
Total revenue	135,807	149,292

See accounting policies for detail of the revenue recognition concerning the above revenue streams.

During the year, sales to one customer exceeded 10% of Group revenue (2018: one customer). The value of these sales was $29,404,000 (2018: $26,664,000).

3 Operating segments

The core publishing businesses comprises two divisions: US Publishing and UK Publishing. This is the basis on which operating results are reviewed and resources allocated by the Chief Executive Officer. The Group reorganised the number of its divisions from three to two at the start of the current year. The previous year’s figures have been restated accordingly.

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3 Operating segments (continued)

	US Publishing	UK Publishing	Total Group
2019	$000	$000	$000
Continuing operations
Revenue	71,488	64,319	135,807
Operating profit before amortisation of acquired intangibles and exceptional items Amortisation of acquired intangibles Segment result Unallocated corporate expenses Corporate exceptional items Operating profit	4,511 (570) 3,941	6,540 (241) 6,299	11,051 (811) 10,240 (1,047) (419) 8,774	STRATEGIC REPORT
Finance income			9
Finance costs			(4,939)
Profit before tax			3,844
Tax			(962)
Profit after tax			2,882
Capital expenditure	17	121	138
Depreciation and software amortization	1,294	1,109	2,403
Investment in pre-publication costs	10,930	12,856	23,786
Amortisation of pre-publication costs 2018 (restated)	14,289 US Publishing $000	14,405 UK Publishing $000	28,694 Total Group $000	GOVERNANCE
Continuing Operations:
Revenue	78,108	71,184	149,292
Operating profit before amortisation of acquired intangibles and exceptional items	5,027	7,708	12,735
Amortisation of acquired intangibles	(596)	(254)	(850)
Segment result	4,431	7,454	11,885
Exceptional pre-publication asset impairment and write-off (note 5)	(1,164)	—	(1,164)
Exceptional items other (note 5)	(811)	(402)	(1,213)
	2,456	7,052	9,508
Unallocated corporate expenses Corporate exceptional items Operating profit Finance income Finance costs Loss before tax Tax			(2,430) (2,775) 4,303 21 (4,381) (57) (495)	FINANCIAL STATEMENTS
Loss after tax			(552)
Capital expenditure	135	111	246
Depreciation and software amortisation	575	416	991
Investment in pre-publication costs	12,974	14,611	27,585
Amortisation of pre-publication costs	13,968	15,299	29,267

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NOTES TO THE FINANCIAL STATEMENTS (continued)

3 Operating segments (continued)

BALANCE SHEET

	Restated
	(Note 1)
2019	2018
$’000	$’000
Continuing operations: Quarto Publishing Group USA 81,154	81,960
Quarto Publishing Group UK 64,675	70,525
Unallocated (Deferred tax and cash) 18,952	19,285
Total assets 164,781	171,770
Continuing operations: Quarto Publishing Group USA 29,613	30,518
Quarto Publishing Group UK 37,634	34,953
Unallocated (Deferred tax, corporation tax and debt) 76,480	88,311
Total liabilities 143,727	153,782

GEOGRAPHICAL AREAS

The Group operates in the following main geographic areas:

GEOGRAPHICAL AREAS The Group operates in the following main geographic areas:
	Revenue Non-current assets
	2019 $’000 2018 $’000 2019 $’000 Restated (Note 1) 2018 $’000
United States of America United Kingdom Europe Rest of the World	80,131 86,092 47,887 47,453 19,193 20,384 35,498 32,028 21,392 25,314 — — 15,091 17,502 — —
	135,807 149,292 83,385 79,481

4 Operating profit

Operating profit has been arrived at after charging/(crediting):

	Restated
	(Note 1)
2019	2018
$’000	$’000
Depreciation of property, plant and equipment 2,127	693
Depreciation of software 276	298
Net foreign currency exchange differences (181)	(129)
Amortisation of acquired intangibles 811	850
Amortisation of pre-publication costs 28,694	29,267
Staff costs (Note 6) 24,985	29,789
Doubtful debt allowance 853	245
Cost of inventory recognised as an expense 32,647	36,080
Exceptional items (Note 5) 419	5,152

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4 Operating profit (continued)

AUDITOR’S REMUNERATION

Fees payable to the Company’s auditor for the audit of the Company’s annual accounts 90 93 Fees payable to the Company’s auditor and its associates for the audit of subsidiary companies 165 151 Fees payable to the Company’s auditor for other assurance services relating to Open Offer 172 — 427 244

5 Exceptional items

5 Exceptional items
2019 $000 Reorganisation costs • Impairment of pre-publication intangible assets (note 15) —	2018 $000 501
• Impairment of backlists (note 12) —	60
• Write-off of pre-publication costs —	603
• Staff severance costs —	1,039
• Other reorganisation costs —	672
• Board changes —	831
Refinancing costs 387	1,446
Aborted corporate transaction costs 32	—
Total 419	5,152

In 2019, the Group incurred $387,000 of refinancing costs in connection with the renewal of the facility agreement, signed on 16 January 2020 and $32,000 of costs incurred on aborted corporate transaction costs. This year’s charges, net of taxation, amount to $339,000.

During 2018, the Group incurred the following exceptional costs: (a) staff severance and reorganisation costs relating to a cost-out programme that was implemented in order to right-size the Group and to provide a path to sustainable debt reduction (of the costs incurred, $634,000 would ordinarily have been included within cost of sales and $1,077,000 would ordinarily have been included within administrative costs), (b) costs relating to board changes, following the Annual Meeting, which would ordinarily have been included within administrative costs, (c) refinancing costs, which would ordinarily have been included within administrative costs and (d) impairment and write-off of pre-publication costs as a consequence of the cost-out programme, which would ordinarily have been included within cost of sales.

6 Staff costs

6 Staff costs
	2019 Number 2018 Number
Average monthly number of employees (excluding Executive Directors)	334 374
Wages and salaries Share-based payments Social security costs Other pension costs	$’000 $’000
	21,854 26,343 48 (177) 2,229 2,617 854 1,006
	24,985 29,789

Directors’ remuneration is disclosed in the Remuneration Committee Report on page 34.

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NOTES TO THE FINANCIAL STATEMENTS (continued)

6 Staff costs (continued)

The remuneration of the Executive Directors (2018: Executive Directors), who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures.

	2019	2018
Short term employee benefits	788*	1,442
Post-employment benefits	18	18
	806	1,460
* Includes $58,000 discretionary bonus payments paid in 2019 but relating to performance in 2018.
7 Finance income
	2019	2018
	$’000	$’000
Interest income	9	21
8 Finance costs
	2019	2018
	$’000	$’000
Interest expense on borrowings	3,360	3,710
Amortisation of debt issuance costs and bank fees	936	301
Interest expense on lease liabilities arising from the adoption of IFRS 16	454	—
Other interest	189	370
	4,939	4,381
9 Taxation
	2019	2018
	$’000	$’000
Corporation tax
Current tax	1,557	73
Prior periods	(123)	176
Total current tax	1,434	249
Deferred tax (Note 19)
Origination and reversal of temporary differences	(472)	246
Total tax expense	962	495

Corporation tax on UK profits is calculated at 19%, based on the UK standard rate of corporation tax, (2018: 19%) of the estimated assessable profit for the year. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions. The table below explains the difference between the expected expense at the UK statutory rate of 19% and the Group’s total tax expense for the year.

expense for the year.
2019	2018
$’000	$’000
Profit/(loss) before tax 3,844	(57)
Tax at the UK corporation tax rate of 19% (2018: 19%) 730	(11)
Effect of different tax rates of subsidiaries operating in other jurisdictions (79)	(101)
Adjustment to prior years 97	(85)
Tax effect of items that are not deductible in determining taxable profit 174	606
Other 40	86
Tax expense 962	495
Effective tax rate 25.0%	(868.4)%

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10 Earnings per share


10 Earnings per share
		2019	2018
		$’000	$’000
		Group	Group
From continuing operations
Profit/(loss) for the year Amortisation of acquired intangibles (net of tax) Exceptional items (net of tax) Earnings for the purposes of adjusted earnings per share		2,882 654 339 3,875	(552) 701 4,603 4,752	STRATEGIC REPORT
Number of shares		Number	Number
Weighted average number of ordinary shares		20,444,550	20,444,550
Average number of potentially dilutive share options		171,597	256,655
Diluted weighted average number of ordinary shares		20,616,147	20,701,205
Earnings/(loss) per share (cents) – continuing operations
Basic		14.1	(2.7)
Diluted		14.0	(2.7)
Adjusted earnings per share (cents)
Basic Diluted 11 Goodwill		19.0 18.8	23.2 23.0	GOVERNANCE
	2019	2018	2017
	$000	$000	$000
Cost At 1 January	42,675	43,007	42,425
Exchange differences	238	(332)	582
At 31 December	42,913	42,675	43,007
Accumulated impairment losses At 1 January	(23,721)	(23,721)	(6,281)
Exchange differences Impairment At 31 December Carrying value At 31 December IMPAIRMENT TESTS FOR CASH GENERATING UNITS CONTAINING GOODWILL The following units have significant carrying amounts of goodwill:	— — (23,721) 19,192	— — (23,721) 18,954	(26) (17,414) (23,721) 19,286	FINANCIAL STATEMENTS
	2019	2018	2017
	$000	$000	$000
Quarto Publishing Group USA (QUS)	12,882	12,882	12,882
Quarto Publishing Group UK (QUK)	6,310	6,072	6,404
	19,192	18,954	19,286

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NOTES TO THE FINANCIAL STATEMENTS (continued)

11 Goodwill (continued)

	Terminal Growth Rates Discount Rates
	2019 2018 2017 2019 2018 2017
United States of America United Kingdom	2% 2% 2% 10.81% 10.90% 11.72% 2% 2% 2% 10.54% 10.38% 11.16%

If a reasonably possible change occurred in either forecast revenues, terminal growth rate or discount rate there would be no impairment. The sensitivities applied were 2.5% reduction in revenues and a 1% increase in discount rate.

12 Other intangible assets

12 Other intangible assets
	Backlists	Software	Total
	$000	$000	$000
Cost
At 1 January 2018	21,342	1,579	22,921
Exchange differences	(138)	—	(138)
Additions	—	77	77
Disposals	—	(26)	(26)
At 1 January 2019	21,204	1,630	22,834
Exchange differences	(30)	—	(30)
At 31 December 2019	21,174	1,630	22,804
Amortisation and impairment
At 1 January 2018	18,705	700	19,405
Exchange differences	(121)	—	(121)
Charge for the year	850	298	1,148
Amount written off for the year	60	—	60
Disposals	—	(26)	(26)
At 1 January 2019	19,494	972	20,466
Exchange differences	(31)	—	(31)
Charge for the year	811	276	1,087
At 31 December 2019	20,274	1,248	21,522
Carrying amount
At 31 December 2019	900	382	1,282
At 31 December 2018	1,710	658	2,368
At 31 December 2017	2,637	879	3,516

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13 Property, plant and equipment


13 Property, plant and equipment
			Plant,
	Short-term	Right-of-use	Equipment &
	Leasehold	Leasehold	Motor	Fixture &
	Improvements	Property	Vehicles	Fittings	Total
Cost At 1 January 2018 Exchange difference Additions Disposals At 1 January 2019	$000 1,308 (57) — (9) 1,242	$000 — — — — —	$000 1,116 (58) 167 (282) 943	$000 1,117 (23) 2 (11) 1,085	$000 3,541 (138) 169 (302) 3,270	STRATEGIC REPORT
Adjustment on transition to IFRS 16	—	10,538	71	—	10,609
Exchange difference	26	156	27	1	210
Additions	—	—	138	—	138
Remeasurement	—	508	18	—	526
Disposals	(258)	—	—	—	(258)
At 31 December 2019	1,010	11,202	1,197	1,086	14,495
Depreciation
At 1 January 2018	434	—	295	683	1,412
Exchange differences Charge for the year Disposals At 1 January 2019 Exchange differences	(30) 113 (9) 508 8	— — — — —	(35) 413 (282) 391 17	(20) 167 (11) 819 —	(85) 693 (302) 1,718 25	GOVERNANCE
Charge for the year: right of use asset	—	1,545	64	—	1,609
Charge for the year: other property, plant and equipment	104	—	310	104	518
Disposals	(258)	—	—	—	(258)
At 31 December 2019	362	1,545	782	923	3,612
Net book value
At 31 December 2019	648	9,657	415	163	10,883
At 31 December 2018	734	—	552	266	1,552
At 31 December 2017	874	—	821	434	2,129	FI

All property, plant and equipment has been pledged as security for the Group’s bank borrowings (note 18).

Included in the net carrying amount of property, plant and equipment are right-of-use assets of $9,683,000 of which $9,657,000 is attributable to leasehold property improvements and $26,000 to plant, equipment and motor vehicles. Depreciation charge on these assets are disclosed separately in the above table.

14 Subsidiaries

A list of the investments in subsidiaries, including the name, country of incorporation and proportion of ownership interest is given in Note 5 to the Company’s balance sheet. All of these subsidiaries are included in the consolidated results.

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NOTES TO THE FINANCIAL STATEMENTS (continued)

15 Intangible assets – pre-publication costs

15 Intangible assets – pre-publication costs
Restated	Restated
(Note 1)	(Note 1)
2019 2018	2017
$000 $000	$000
Cost At 1 January 137,640 188,531	179,021
Exchange differences 2,040 (3,354)	4,609
Additions 23,786 27,585	33,360
Reclassification to other balance sheet line — —	(2,113)
Disposals (28,931) (75,122)	(26,346)
At 31 December 134,535 137,640	188,531
Amortisation At 1 January 84,934 132,288	120,658
Exchange differences 1,141 (2,000)	1,822
Charge for the year 28,694 29,267	31,286
Impairment charge — 501	4,868
Disposals (28,931) (75,122)	(26,346)
At 31 December 85,838 84,934	132,288
Net Book Value
At 31 December 48,697 52,706	56,243

The assessment of the useful life of pre-publication costs and amortisation involves a significant amount of judgement based on historical trends and management estimates of future potential sales, in accordance with the accounting policy stated in Note 1. The impairment charge and the amount written-off for the year, for 2018 is included in exceptional items and further information is included in Note 5. Pre-publication costs form part of the carrying value of the CGU for each segment and are considered for impairment of goodwill in note 11.

16 Inventories

16 Inventories
	2019	2018	2017
	$000	$000	$000
Finished goods	19,270	22,098	22,309
Raw materials	108	226	328
	19,378	22,324	22,637

All of the Group’s inventories have been reviewed for indicators of impairment. Certain inventories were found to be impaired and a provision of $2,318,000 (2018: $2,079,000) has been recorded accordingly.

All inventories have been pledged as security for the Group’s bank borrowings (note 18).

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17 Trade and other receivables

17 Trade and other receivables
	2019	2018	2017
	$000	$000	$000
Trade receivables	38,753	45,430	43,127
Other receivables and prepayments	7,644 46,397	9,046 54,476	10,333 53,460

The average credit period on sales of goods is 73 days (2018: 71 days).

The Group’s trade and other receivables have been reviewed for indicators of impairment. Certain trade receivables, including certain trade receivables not yet due, were not considered to be recoverable and a provision of $1,168,000 (2018: $826,000) has been recorded accordingly. The trade receivables considered irrecoverable relate to customers which are experiencing trading difficulties. In addition, some of the recoverable trade receivables are past due as at the reporting date. The extent of financial assets past due but not impaired is as follows:

assets past due but not impaired is as follows:
	2019	2018	2017
	$000	$000	$000
Less than one month	1,750	1,022	2,475
More than one month but less than two months	930	687	860
More than two months but less than three months	81	182	699
More than three months but less than six months	242	171	245
More than six months	167	49	341
	3,170	2,111	4,620

The Group has not provided against these receivables as there has not been a significant change in credit quality and the Group believes they are still recoverable. No collateral is held over these balances.

Movement in allowance for doubtful debts:

Movement in allowance for doubtful debts:
	2019	2018	2017
	$000	$000	$000
Balance at beginning of year	826	801	670
Amounts written off in the year	(677)	(215)	(476)
Amounts recovered during the year	148	12	17
Exchange differences	18	(17)	25
Increase in allowance recognised in profit or loss	853	245	565
Balance at end of the year	1,168	826	801

The Directors consider that the carrying amount of trade and other receivables approximates to their fair value.

Note 22 includes disclosures relating to credit risk exposures and analysis relating to the allowance for expected credit losses.

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NOTES TO THE FINANCIAL STATEMENTS (continued)

18 Cash, borrowings and net debt

CASH

CASH
	2019	2018	2017
	$000	$000	$000
Bank balances	15,621	11,134	17,946
Short term deposits	—	4,250	—
Cash and cash equivalents	15,621	15,384	17,946

The carrying amount of these assets approximates to their fair value. The effective interest rate on bank balances and short-term deposits was 0% (2018: 0.4%).

BORROWINGS

BORROWINGS
			2019	2018	2017
			$000	$000	$000
Bank and other loans			66,077	75,752	81,907
On demand or within one year			66,077	5,000	5,000
In the second year			—	70,752	76,907
			66,077	75,752	81,907
Less: Amount due for settlement within 12 months (shown under current		liabilities)	(66,077)	(5,000)	(5,000)
Amount due for settlement after 12 months			—	70,572	76,907
				Weighted
				average	Average
				interest rate	time over
		Fixed rate	Variable rate	for fixed rate	which interest
	Total	borrowings	borrowings	borrowings	rate is fixed
	$’000	$’000	$’000	%	Months
US dollar borrowings	45,000	13,000	32,000	3.5	19.0
Other currency borrowings	21,077	—	21,077	—	—
As at 31 December 2019	66,077	13,000	53,077	3.5	19.0
US dollar borrowings	55,450	23,000	32,450	4.0	14.6
Other currency borrowings	20,302	—	20,302	—	—
As at 31 December 2018	75,752	23,000	52,752	4.0	14.6
US dollar borrowings	55,500	20,000	35,500	3.8	13.5
Other currency borrowings	26,407	—	26,407	—	—
As at 31 December 2017	81,907	20,000	61,907	3.8	13.5

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18 Cash, borrowings and net debt (continued)

OTHER LOANS

OTHER LOANS
	2019	2018	2017
	$000	$000	$000
Other loans	13,000	13,000	—
On demand or within one year In the second year Less: Amount due for settlement within 12 months (shown under current liabilities) Amount due for settlement after 12 months	13,000 — 13,000 (13,000) —	— 13,000 13,000 — 13,000	— — — — —

Other loans, of which $11,500,000 (2018: $13,000,000) are with related parties, as disclosed in note 30, are unsecured, are repayable, together with the accrued interest on 31 August 2020 and carry an interest rate of 3.5%. A loan for $1,500,000 (2018: $1,500,000) is from Recruit & Company Limited which was a related party at 31 December 2018 but is no longer classified as such C K Lau no longer exercises control.

Post the year end date the facilities detailed above were extended to 31 July 2021.

				Weighted
				average	Average
			Variable	interest rate	time over
		Fixed rate	rate	for fixed rate	which interest
	Total	borrowings	borrowings	borrowings	rate is fixed
	$’000	$’000	$’000	%	Months
US dollar borrowings As at 31 December 2019 As at 31 December 2018 As at 31 December 2017	13,000 13,000 13,000 —	13,000 13,000 13,000 —	— — — —	3.5 3.5 3.5 —	19.0 19.0 20.0 —

BANK LOANS

BANK LOANS
	2019	2018	2017
	$000	$000	$000
Bank loans	53,077	62,752	81,907
On demand or within one year	53,077	5,000	5,000
In the second year	—	57,752	76,907
	53,077	62,752	81,907
Less: Amount due for settlement within 12 months (shown under current liabilities) Amount due for settlement after 12 months	(53,077) —	(5,000) 57,752	(5,000) 76,907

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NOTES TO THE FINANCIAL STATEMENTS (continued)

18 Cash, borrowings and net debt (continued)

				Weighted
				average	Average
				interest rate	time over
		Fixed rate	Variable rate	for fixed rate	which interest
	Total	borrowings	borrowings	borrowings	rate is fixed
	$’000	$’000	$’000	%	Months
US dollar borrowings	32,000	—	32,000	—	—
Other currency borrowings	21,077	—	21,077	—	—
As at 31 December 2019	53,077	—	53,077	—	—
US dollar borrowings	42,450	10,000	32,450	5.8	7.5
Other currency borrowings	20,302	—	20,302	—	—
As at 31 December 2018	62,752	10.000	52,752	5.8	7.5
US dollar borrowings	55,500	20,000	35,500	3.8	13.5
Other currency borrowings	26,407	—	26,407	—	—
As at 31 December 2017	81,907	20,000	61,907	3.8

At 31 December 2019, undrawn borrowing facilities totalled $11.0m (2018: $9.4m). The variable rate borrowings carry interest based on LIBOR plus a margin, depending on the leverage ratio. The Directors estimate the fair value of the Group’s borrowings to be equal to book value, by reference to market rates.

At 31 December 2019 the Group had a US$64.0m (2018: US$72.5m) multi-currency syndicated bank facility which was due to expire on 31 August 2020. A new facility agreement was signed on 16 January 2020 with borrowing facilities of US$35m, subsequent to the net proceeds of the Open Offer being received by the banks prior to 20 February 2020. Banking EBITDA used for bank covenant purposes was $10,376,000 in 2019 (2018: $11,707,000).

These facilities are subject to three principal covenants which vary over the course of the financial year. At December 31, 2019, the covenants were:

(a) Total consolidated net banking indebtedness shall not exceed 4.07 times EBITDA (as defined in the committed facility agreement). At December 31, 2019 net indebtedness was 3.54 times EBITDA.
(b) EBITDA shall exceed 2.79 times net finance charges (as defined in the committed facility agreement). For the year ended December 31, 2019, net finance charges were 3.47 times covered under this covenant.
(c) Cash flow (as defined in the committed facility agreement) shall exceed 1.1 times Debt Service. For the year ended December 31, 2019, Debt Service was 3.10 times covered under this covenant.

NET DEBT

	1 January		Non-cash	Foreign	31 December
	2019	Cashflows	items	exchange	2019
	$’000	$’000	$’000	$’000	$’000
Borrowings	(75,752)	10,454	(188)	(591)	(66,077)
Cash and cash equivalents	15,384	92	—	145	15,621
Net debt	(60,368)	10,546	(188)	(446)	(50,456)
	1 January		Non-cash	Foreign	31 December
	2018	Cashflows	items	exchange	2018
	$’000	$’000	$’000	$’000	$’000
Borrowings	(81,907)	5,781	(301)	675	(75,752)
Cash and cash equivalents	17,946	(2,245)	—	(317)	15,384
Net debt	(63,961)	3,536	(301)	358	(60,368)

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18 Cash, borrowings and net debt (continued)

	1 January		Non-cash	Foreign	31 December
	2017	Cashflows	items	exchange	2017
	$’000	$’000	$’000	$’000	$’000
Borrowings	(80,748)	1,761	(384)	(2,536)	(81,907)
Cash and cash equivalents Net debt	18,824 (61,924)	(1,310) 451	— (384)	432 (2,104)	17,946 (63,961)

19 Deferred tax

19 Deferred tax
		Restated (Note 1)	Restated (Note 1)
	2019	2018	2017
	$000	$000	$000
Deferred tax liabilities
Excess of capital allowances over depreciation – UK	1	8	32
Pre-publication costs and other temporary differences – UK	4,519	4,688	5,060
	4,520	4,696	5,092
Pre-publication costs and other temporary differences - US	2,619	3,152	2,523
Other overseas temporary differences	—	—	—
Deferred tax assets Tax losses and other timing differences – UK Goodwill, intangible assets and other temporary differences – US	7,139 — 3,331 3,331	7,848 99 3,802 3,901	7,615 509 3,392 3,901
Net deferred taxation liability	3,808	3,947	3,714

The movement on the net provision for deferred taxation is as follows:

The movement on the net provision for deferred taxation is as follows:
	Restated
	(Note 1)
2019	2018
$000	$000
Net provision at 1 January as previously stated 3,947	4,619
Prior year adjustment (note 1) —	(905)
3,947 Credit direct to equity 162 Exchange difference through other comprehensive income 171 (Credit)/charge to profit and loss (472) Net provision at 31 December 3,808	3,714 246 (259) 246 3,947

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NOTES TO THE FINANCIAL STATEMENTS (continued)

20 Lease liabilities

20 Lease liabilities
	2019	2018	2017
	$000	$000	$000
Current	1,937	—	—
Non-current	7,929	—	—
Total	9,866	—	—

The table below describes the nature of the Group’s leasing activities by type of right-to-use asset recognised on the balance sheet:

sheet:
						No of lease with
						variable
	No of right-of-		Average	No of lease	No of lease	payments	No of lease with
Right-of-use	use assets	Range of	remaining lease	with extension	with options to	linked to an	termination
asset	leased	remaining term	term	options	purchase	index	options
Office	7	2-9 years	6 years	5	—	4	1
building
IT	2	1 year	1 year	—	—	—	—
equipment

The lease liabilities are secured by the related underlying assets. Future minimum lease payments at 31 December 2019 were as follows:

The lease liabilities are follows:	secured by the related underlying assets. Future minimum lease payments at 31 December 2019 were as
31 December 2019	Minimum lease payments due US$000
	Within 1 year 1-2 years 2-3 years 3-4 years 4-5 years After 5 years Total

Lease payments	2,253 2,085 1,886 1,504 1,343 2,291 11,362
Finance charges	(390) (329) (267) (204) (149) (157) (1,496)
Net present values	1,863 1,756 1,619 1,300 1,194 2,134 9,866
31 December 2018
Lease payments	2,263 2,102 1,938 1,746 1,683 2,847 12,579
Finance charges	(454) (395) (334) (271) (208) (308) (1,970)
Net present values	1,809 1,707 1,604 1,475 1,475 2,539 10,609

The Group has elected not to recognise a lease liability for short term lease or for leases of low value assets. Payments made under such leases are expenses on a straight-line basis and amounted to $26,000 in the year.

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21 Trade and other payables

CURRENT LIABILITIES

CURRENT LIABILITIES
	2019	2018	2017
	$000	$000	$000
Trade payables Other payables Total	36,218 21,163 57,381	45,850 19,067 64,917	46,514 14,282 60,796

Under IFRS 15, the reserve for sales returns in included in other payables, amounting to $6,749,000 (2018: $5,391,000). The reserve is calculated based on a time lag between sales and returns and historical return patterns. Management monitor actual returns against the reserve on a regular basis.

Other payables include the discounted deferred and contingent consideration liabilities of $nil in respect of prior year acquisitions (2018: $1.2m). $1.2m was paid in the year (2018: $1.9m).

NON-CURRENT LIABILITIES

At 31 December 2019, Other Payables comprise $nil in respect of the discounted deferred and contingent liabilities of prior year acquisitions (2018: $0.6m).

The Directors consider that the carrying amount of trade payables approximates to their fair value.

22 Financial instruments

FOREIGN CURRENCY SENSITIVITY

Exposures to currency exchange rates arise from the Group’s overseas sales and costs, which are primarily denominated in Sterling.

Foreign currency denominated financial assets and liabilities, translated into US Dollars at the closing rate, are as follows:

	2019 2018
	$000 Sterling $000 Other $000 Sterling $000 Other
Financial assets: Financial liabilities	10,321 2,121 8,232 1,948 (19,030) (4,344) (1,603) (1,045)
Short-term exposure	(8,709) (2,223) 6,629 903
Financial liabilities: Long-term exposure	— — (16,841) (3,459)
At 31 December	(8,709) (2,223) (10,212) (2,556)

It assumes a +/– 7.5% change of the Sterling/US-Dollar exchange rate.

The sensitivity analysis is based on the Group’s foreign currency financial instruments held at each balance sheet date.

If Sterling had strengthened against the US Dollar by 7.5% (2018: 7.5%) then this would have had the following impact:

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NOTES TO THE FINANCIAL STATEMENTS (continued)

22 Financial instruments (continued)

	2019	2018
	$000	$000
Profit/(loss) after tax for the year	244	92
Equity	4,228	3,914
If Sterling had weakened against the US Dollar by 7.5% (2018: 7.5%) then this would have had the following impact:
	2019	2018
	$000	$000
Profit/(loss) after tax for the year	(244)	(92)
Equity	(4,228)	(3,914)

INTEREST RATE SENSITIVITY

At 31 December 2019, the Group is exposed to changes in market interest rates through its bank borrowings, which are subject to variable interest rates – see Note 18 for further information.

A 0.25% increase in interest rates would have the following impact:

A 0.25% increase in interest rates would have the following impact:
	2019	2018
	$000	$000
Profit/(loss) for the year	(100)	(118)
Equity	(100)	(118)
A 0.25% decrease in interest rates would have the following impact:
	2019	2018
	$’000	$’000
Profit/(loss) for the year	100	118
Equity	100	118

CREDIT RISK ANALYSIS

The Group’s maximum exposure to credit risk is limited to the carrying amount of financial assets recognised at the balance sheet date, as summarised below:

sheet date, as summarised below:
	2019	2018
	$’000	$’000
Cash and cash equivalents	15,621	15,384
Trade receivables	38,753	45,430
Derivative financial instruments	—	105
	54,374	60,919

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22 Financial instruments (continued)

The Group’s credit risk is primarily attributable to its trade receivables. The amounts presented in the balance sheet are net of allowances for doubtful receivables, estimated by the Group’s management based on prior experience and their assessment of the current economic environment. The ongoing credit risk is managed through regular review of ageing analysis together with credit limits per customer.

LIQUIDITY RISK ANALYSIS

The Group’s liabilities have contractual maturities which are summarised below:

31 December 2019	Current Non-Current
	Within 6 months $’000 6 to 12 months $’000 1 to 5 years $’000 Over 5 years $’000
Bank and other loans Trade payables Other short-term financial liabilities	1,365 66,671 — —
	31,218 5,000 — —
	21,163 — — —
	53,746 71,671 — —

31 December 2018	Current Non-Current
	Within 6 months $’000 6 to 12 months $’000 1 to 5 years $’000 Over 5 years $’000
Bank and other loans Trade payables Other short-term financial liabilities Other long-term payables	7,130 2,165 74,686 —
	45,850 — — —
	17,836 1,250 — —
	— — 569 —
	70,816 3,415 75,255 —

SUMMARY OF FINANCIAL ASSETS AND LIABILITIES BY CATEGORY

The carrying amounts of the Group’s financial assets and liabilities as recognised at the balance sheet date of the reporting periods under review may also be categorised as follows. See note 1, significant accounting policies, covering financial assets, financial liabilities and derivative financial instruments and hedge accounting for explanations about how the category of instruments affects their subsequent measurement.

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NOTES TO THE FINANCIAL STATEMENTS (continued)

22 Financial instruments (continued)

	2019	2018
	$000	$000
Current assets
Derivative financial instruments designated as hedging instruments:
• Interest rate swap	—	105
Financial assets at amortised cost:
• Trade receivables	38,753	45,430
• Cash and cash equivalents	15,621	15,384
	54,374	60,919
Non-current liabilities
Financial liabilities measured at amortised cost:
Borrowings	—	70,752
Other payables	—	554
	—	71,306
Current liabilities
Financial liabilities measured at amortised cost:
• Borrowings	66,077	5,000
• Trade payables	36,218	45,850
• Other payables	21,163	19,067
	123,458	69,917

CAPITAL RISK MANAGEMENT

The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to shareholders through an optimal balance of debt and equity. The capital structure of the Group consists of debt, which includes the borrowings disclosed in note 18, cash and cash equivalents and equity attributable to equity holders of the parent, comprising share capital and reserves as disclosed in the consolidated statement of changes in equity.

The Board reviews the capital structure, including the level of indebtedness and interest cover, as required. The Board’s objective is to maintain the optimal level of indebtedness and manage interest cover to comply with the covenant requirements set out in note 18. As part of this review, the Board considers the cost of capital and the risks associated with each class of capital. The Group has complied with its covenant obligations during the year.

23 Other financial assets/liabilities

In the reporting periods under review, other financial assets/liabilities comprise derivative financial instruments as follows:

	2019	2018
	$000	$000
Current financial assets
Derivative financial instruments – interest rate swaps	—	105
Total	—	105

The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. The Group uses interest rate swap contracts to hedge the interest rate exposures. The Group does not use derivative financial instruments for speculative purposes. All interest rate swaps have been designated as hedging instruments in cash flow hedges in accordance with IAS 39.

The Group’s interest rate swaps have been designated to match the corresponding loan terms to maximise the effectiveness of the hedging instrument. There was no ineffectiveness during the year and all movements were recorded in other comprehensive income, with amounts reclassified to finance costs within profit or loss. Exchange rate swaps are not treated as hedging instruments for hedge accounting purposes.

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23 Other financial assets/liabilities (continued)

The following table details the principal amounts and the remaining terms of interest rate swap contracts outstanding at the reporting date:

reporting date:
	Interest rate Principal amounts Committed interest payments
	2019 % 2018 % 2019 $000 2018 $000 2019 $000 2018 $000
Within one year Within one to two years	— 5.8 — 10,000 — (370) — — — — — —
Derivative	— 10,000 — (370)

24 Post balance sheet events

On 16 January 2020, the Group announced an Open Offer of 20,444,550 new Common Shares at 68 pence per share. On the same day, the Group concluded its refinancing, signing an extension to its existing bank facilities to 31 July 2021. The multicurrency facility comprises a $25m term loan, a $8m revolving credit facility and a $2m overdraft facility. The effective date of the new facility was dependent on the raising of the funds from the Open Offer which was successfully completed on 4 February 2020.

The outbreak of Covid-19 is considered to be a non-adjusting post balance sheet event. At this stage of the outbreak, It Is not possible to make an estimate of the financial effect that Covid-19 will have on the Group.

25 Share capital

25 Share capital
	2019	2018	2017
Authorised 28 million shares of common stock of par value of US$0.10 each Allotted, called up and fully paid:	$000 2,800	$000 2,800	$000 2,800
20,444,550 (2018: 20,444,550) shares of common stock of par value of US$0.10 each	2,045	2,045	2,045

The Company has one class of common stock which carries no right to fixed income.

26 Retained earnings and other reserves

HEDGING RESERVE

The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions.

TRANSLATION RESERVE

27 Dividends

No dividends have been declared in the current or prior year.

28 Notes to the cash flow statement

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NOTES TO THE FINANCIAL STATEMENTS (continued)

29 Share based payments

PERFORMANCE SHARE PLAN (‘PSP’)

The Company operates a PSP scheme that awards free shares.

2015 AWARD

The awards under this scheme were granted on 24 September 2015. The vesting period is 4 years from the date of grant. The award vests in the following proportion:

50% is conditional on the cumulative growth in Adjusted Diluted EPS being between 5% and 10% over the performance period, resulting in the awards vesting on a sliding scale of 20% to 100%; and
50% is conditional on Total Shareholder Return being between 7% and 15%, resulting in vesting on a sliding scale of 20% to 100%.

Participants are not entitled to receive dividends until awards have vested.

Details of the share options outstanding during the year are as follows:

Details of the share options outstanding during the year are as follows:
	2019	2018
	Number	Number
Outstanding at beginning of the year	—	167,464
Forfeited during the year	—	(167,464)
Outstanding at the end of the year	—	—
The key inputs used to value the options are:
	EPS Portion	TSR Portion
Share price at date of grant	£2.09	£2.09
Expected life (years)	4	4
Fair value per award	£1.78	£1.07
Weighted average remaining contractual life (years)	2.7	3.7
Dividend yield (%)	3.97	3.97
Expected volatility of share price (%)	n/a	19
Model used	Dividend	Monte-
	discount	Carlo

2016 AWARD

The awards under this scheme were granted on 19 April 2016. The vesting period is 4 years from the date of grant. The award vests in the following proportion:

50% is conditional on the cumulative growth in Adjusted Diluted EPS being between 5% and 10% over the performance period, resulting in the awards vesting on a sliding scale of 20% to 100%; and
50% is conditional on Total Shareholder Return being between 7% and 15%, resulting in vesting on a sliding scale of 20% to 100%.

Participants are not entitled to receive dividends until awards have vested.

Details of the share options outstanding during the year are as follows:

	2019	2018
	Number	Number
Outstanding at beginning of the year	152,192	287,136
Forfeited during the year	(8,408)	(134,944)
Outstanding at the end of the year	143,784	152,192

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29 Share based payments (continued)

The key inputs used to value the options are:


The key inputs used to value the options are:
	EPS Portion	TSR Portion
Share price at date of grant	£2.45	£2.45
Expected life (years)	4	4
Fair value per award Weighted average remaining contractual life (years) Dividend yield (%) Expected volatility of share price (%)	£2.10 2.3 3.88 n/a Dividend discount	£0.44 3.3 3.88 19.1 Monte- Carlo	STRATEGIC REPORT
2017 AWARD
The awards under this scheme were granted on 28 April 2017. The vesting period is 4 years from the date of grant. The award
vests in the following proportion:
• 50% is conditional on the cumulative growth in Adjusted Diluted EPS being between 5% and 10% over the performance
period, resulting in the awards vesting on a sliding scale of 20% to 100%; and
• 50% is conditional on Total Shareholder Return being between 7% and 15%, resulting in vesting on a sliding scale of
20% to 100%.
Participants are not entitled to receive dividends until awards have vested. Details of the share options outstanding during the year are as follows. Outstanding at beginning of the year	2019 Number 104,463	2018 Number 178,131	GOVERNANCE
Forfeited during the year	(19,468)	(73,668)
Outstanding at the end of the year	84,995	104,463
The key inputs used to value the options are:
	EPS Portion	TSR Portion
Share price at date of grant	£2.64	£2.64
Expected life (years)	4	4
Fair value per award Weighted average remaining contractual life (years) Dividend yield (%) Expected volatility of share price (%) Model used	£2.20 3.3 4.55 n/a Dividend discount	£0.48 3.3 4.55 18.6% Monte- Carlo	FINANCIAL STATEMENTS

158

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2019 Financial Statements

NOTES TO THE FINANCIAL STATEMENTS (continued)

30 Related party transactions

The Group had the following related party transactions over the periods under review:

PRINTING PURCHASES:

PRINTING PURCHASES:
	2019	2018
Lion Rock Group Limited	$’000	$’000
Accounts payable at start of year (2018: 17 May 2018)	6,083	4,806
Purchases	11,562	1,872
Payments	(3,953)	(595)
Accounts payable at end of year	13,692	6,083

LOANS AND ACCRUED INTEREST:

	At 31	At 31
	December	December
	2019	2018
	$000	$000
Loans (advanced on 1st and 2nd November 2018)	11,500	13,000
Accrued interest on loans at end of year	470	76

The loans are from 1010 Printing Limited ($7.0m) and C K Lau ($4.5m). The loans are unsecured, are repayable, together with the accrued interest, on 31 July 2021, and carry interest at 3.5%. In the prior year, a further loan of $1.5m from Recruit & Company was designated as a related party loan but this ceased to be a related party during 2019.

Lion Rock Group Limited and 1010 Printing Limited are companies over which C K Lau exercises control.

159

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2019 Financial Statements

31 Reconciliation of figures included in other parts of the financial statements


31 Reconciliation of figures included in other parts of the financial statements
		Restated
		(Note 1)
	2019	2018
	$000	$000
Adjusted operating profit Operating profit (continuing operations) Add back: Amortisation of acquired intangibles Other exceptional items (Note 5) Adjusted operating profit EBITDA	8,774 811 419 10,004	4,303 850 5,152 10,305	STRATEGIC REPORT
Operating profit before amortisation of acquired intangibles and exceptional items	10,004	10,305
Less: Net finance costs	(4,930)	(4,360)
Impact of IFRS 16	(271)	—
Adjusted profit before tax (before amortisation of acquired intangibles and exceptional items)	4,803	5,945
Net finance costs	4,930	4,360
Depreciation of property, plant and equipment and software (excluding right-of-use assets)	794	991
Share based payments	48	(177)
EBITDA on consistent measure Impact of IFRS 16 Depreciation of right-of-use assets EBITDA Adjusted profit before tax before amortisation of acquired intangibles and exceptional items	10,575 271 1,609 12,455	11,119 — — 11,119	GOVERNANCE
Adjusted operating profit before amortisation of acquired intangibles and exceptional items	10,004	10,305
Less: net finance costs	(4,930)	(4,360)
Adjusted profit tax before amortisation of acquired intangibles and exceptional items	5,074	5,945
Free cashflow
Net cash from operating activities	41,302	36,213
Investment in pre-publication costs	(23,786)	(27,585)
Purchases of property, plant and equipment	(138)	(169)
Purchases of software Free cashflow Net debt Short-term borrowings Medium-and long-term borrowings Cash and cash equivalents Net debt	— 17,378 66,077 — (15,621) 50,456	(77) 8,382 5,000 70,752 (15,384) 60,368	FINANCIAL STATEMENTS

160

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2019 Financial Statements

Company Balance Sheet

AS AT 31 DECEMBER 2019

		2019	2018
	Notes	$000	$000
Fixed assets
Investments	4	1,266	1,209
Current liabilities		1,266	1,209
Creditors: Amounts falling due within one year	6	(15,866)	(15,167)
		(15,866)	(15,167)
Creditors: Amounts falling due after more than one year		(441)	(544)
Net liabilities		(15,041)	(14,502)
Equity
Called up share capital	7	2,045	2,045
Paid in surplus		33,764	33,764
Retained earnings		(50,850)	(50,311)
Total equity		(15,041)	(14,502)

The financial statements were approved by the Board of Directors and authorised for issue on 22 April 2020. They were signed on its behalf by

C K Lau

Director 22 April 2020

161

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APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2019 Financial Statements

Company Statement of Comprehensive Income

FOR THE YEAR ENDED 31 DECEMBER 2019

			2019	2018
		Notes	$’000	$’000
Administrative expenses			—	—
Foreign exchange (loss)/gain			(587)	822
(Loss)/profit before tax Tax (Loss)/profit for the year		3	(587) — (587)	822 472 1,294	STRATEGIC REPORT
	Company Statement of
	Changes in Equity
	FOR THE YEAR ENDED 31 DECEMBER 2019
				Equity
	Share		Retained	attributable to
	capital	Paid in	earnings	owners
	$’000	surplus $’000	$’000	$’000
Balance at 1 January 2018 Profit for the year Transactions with owners Share based payments charges	2,045 — —	33,764 — —	(51,428) 1,294 (177)	(15,619) 1,294 (177)	GOVERNANCE
Balance at 1 January 2019	2,045	33,764	(50,311)	(14,502)
Loss for the year	—	—	(587)	(587)
Transactions with owners
Share based payments/charges	—	—	48	48
Balance at 31 December 2019	2,045	33,764	(50,850)	(15,041)

162

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2019 Financial Statements

Notes to the Company Accounts

AT 31 DECEMBER 2019

1 Basis of preparation

The Company has adopted the following disclosure exemptions:

the requirement to present a statement of cash flow and related notes; and
financial instrument disclosures, including,
categories of financial instruments;
items of income, expenses, gains or losses relating to financial instruments; and
exposure to, and management of, financial risks.

There were no significant judgements or estimates in preparing the financial statements of the Company.

2 Accounting policies

INVESTMENTS

Investments in subsidiaries are stated at cost less, where appropriate, provisions for impairment.

CREDITORS

Amounts owed to subsidiary undertakings are initially recognised at fair value, and subsequently measured at amortised cost using the effective interest method.

SHARE-BASED PAYMENTS

The Company operates a number of equity-settled, share based compensation plans that are awarded to employees of the Company’s subsidiary undertakings. The fair value of the employee services received under such schemes is recognised as an expense in the subsidiary undertakings financial statements, which benefit from the employee services. The Company has recognized the fair value of the share-based payments as an increase to equity with a corresponding adjustment to investments. Equity settled share-based payments are measured at fair value at the date of grant. The fair value, determined at the grant date, of equity settled share–based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest. The fair value of employee share option grants is calculated using a Monte Carlo model, taking into account the terms and conditions upon which the options were granted. The value of the charge is adjusted to reflect expected and actual levels of options vesting. Further detail is set out in note 28 to the group consolidated Financial Statements.

CASH AND CASH EQUIVALENTS

There were no cash transactions during the year and accordingly no cash flow statement has been presented.

FOREIGN CURRENCIES

FINANCIAL GUARANTEE CONTRACTS

163

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APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2019 Financial Statements

3 Tax

3 Tax
	2019	2018
	$000	$000
Current tax (Credit)/charge	—	(472)

Corporation tax is calculated at 21%, based on the US standard rate of corporate tax (2018: 21%) of the estimated assessable profit for the year. The table below explains the difference between the expected expense at the US statutory rate of 21% and the Company’s total tax expense for the year.

the Company’s total tax expense for the year.
Profit/(loss) before tax	2019 $’000 (587)	2018 $’000 822
Tax at the US corporation tax rate of 21% (2018: 21%)	(123)	173
Adjustment to prior years	—	(472)
Tax effect of items that are not deductible in determining taxable profit	123	(173)
Tax (Credit)/charge	—	(472)

4 Investments

4 Investments
	2019	2018
	$000	$000
At 1 January	1,209	1,436
Capital contribution (note 2) At 31 December	57 1,266	(227) 1,209

5 Subsidiaries

A) TRADING COMPANIES

Name	Incorporation Issued and fully paid up share capital % held Segment Place Date Registered address key
Quarto Australia Pty Limited	Australia 14 September 1981 D 110 shares of $A1 each 100 UK Publishing
Books & Gifts Direct Limited	New Zealand 27 September 1996 C 400,000 shares of NZ$1 each 100* UK Publishing
Quarto Group HK Ltd	Hong Kong 26 January 2015 E 100 shares of HKD1 each 100 UK/US Publishing
Quarto Publishing Group USA Inc. Delaware, USA 28 June 2004 B 380 shares of US$0.01 each 100 US Publishing
Quarto Publishing plc United Kingdom 1 April 1976 A 100,000 shares of £1 each 100* UK Publishing
Quarto, Inc. Delaware, USA 16 October 1986 B 86 shares of no par value 100* US Publishing
RotoVision S.A. Switzerland 18 July 1977 F 1,500 shares of SFr500 each 100* UK Publishing

*Directly held by The Quarto Group, Inc.

164

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APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2019 Financial Statements

NOTES TO THE COMPANY ACCOUNTS (continued)

5 Subsidiaries (continued)

B) DORMANT COMPANIES

B) DORMANT COMPANIES
Name	Incorporation Registered address key Issued share capital % held Place Date
AP Screen Printers Limited	United Kingdom 30 September 1980 A 1000 shares of £1 each 100
Apple Press Limited	United Kingdom 5 June 1984 A 100 shares of £1 each 100
Aurum Press Limited	United Kingdom 31 May 1977 A 382,502 shares of £1 each 100
Cartographica Press Limited	United Kingdom 27 July 1981 A 1000 shares of £1 each 100
Design Eye Holdings Limited	United Kingdom 22 June 1992 A 200 shares of £1 each 100
Design Eye Limited	United Kingdom 18 March 1988 A 100 shares of £1 each 100
Design Eye Publishing Limited	United Kingdom 17 June 1992 A 2 shares of £1 each 100
EYE Quarto Inc	Delaware, USA 19 December 2002 B 1000 shares of no par value 100
Fine Wine Editions Limited	United Kingdom 23 June 1949 A 9020 shares of £1 each 100
Frances Lincoln Limited	United Kingdom 15 December 1980 A 565,000 shares of 10p each 100
Frances Lincoln Publishers Limited	United Kingdom 11 March 1987 A 100 shares of £1 each 100
Global Book Publishing Pty Limited	United Kingdom 7 July 1986 A 1000 shares of £1 each 100
Global Book Publishing Pty Limited	Australia 4 November 1999 D 1,000 shares of A$1 each 100
Great American Trading Company Limited (THE)	United Kingdom 24 February 1982 A 100 shares of £1 each 100
IQON Editions Limited	United Kingdom 5 December 1972 A 300 shares of £1 each 100
iqu-digital.com Limited	United Kingdom 30 November 1978 A 100 shares of £1 each 100
Ivy Press (The)	United Kingdom 9 July 1996 A 1042 shares of 10p each 100
Jacqui Small LLP	United Kingdom 6 November 1998 A 100 units 100
JR Books Limited	United Kingdom 9 September 1986 A 43 004 shares of £1 each 100
Lewes Holdings Limited	United Kingdom 21 July 2005 A 20,840 shares of £0.01 each 100
Marshall Editions Limited	United Kingdom 7 February 2002 A 1 shares of £1 each 100
Marshall Publishing Limited	United Kingdom 7 February 2002 A 1 shares of £1 each 100
QEB Publishing Inc	Delaware, USA 27 April 2004 B 1500 shares of no par value 100
QED Publishing Limited	United Kingdom 12 November 1974 A 400 shares of £1 each 100
QU:ID Publishing Limited	United Kingdom 30 September 1980 A 100 shares of £1 each 100
Quantum Books Limited	United Kingdom 7 February 1983 A 100 shares of £1 each 100
Quarto Children’s Books Limited	United Kingdom 6 January 1976 A 2 shares of £1 each 100
Quarto Magazines Limited	United Kingdom 20 May 1986 A 1000 shares of £1 each 100
Quarto Marketing Inc	Delaware, USA 26 April 1995 B 3000 shares of no par value 100
Quarto Media Inc	Delaware, USA 10 December 2010 B 1000 shares of $1 each 100

165

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

THE QUARTO GROUP, INC. ANNUAL REPORT 2019 Financial Statements

5 Subsidiaries (continued)

Name	Incorporation Registered address key Issued share capital % held Place Date
Quarto Multi-Media Limited	United Kingdom 14 December 1984 A 1000 shares of £1 each 100
Quill Publishing Limited	United Kingdom 14 May 1979 A 1000 shares of £1 each 100
Quintessence Editions Limited	United Kingdom 7 February 2002 A 1 shares of £1 each 100
Quintet Publishing Limited	United Kingdom 14 May 1979 A 100 shares of £1 each 100
Small World Creations Limited	United Kingdom 20 September 1997 A 1,536 share of £1 each 100

D) LIST OF REGISTERED OFFICES

A The Old Brewery, 6 Blundell Street, London, N7 9BH, United Kingdom

B 100 Cummings Center, Suite 265D, Beverly, MA 01915, USA
C 135b Morrin Road, Saint Johns, Auckland, 1072, New Zealand
D c/o ZM Partners, Suite 10 Ground Floor, 123 Clarence Street, Sydney, NSW 2000, Australia
E Room 2306, Technology Plaza, 651 King’s Road, North Point, Hong Kong
F Passage Perdonet 1, 1005 Lausanne, Switzerland

6 Creditors: Amounts falling due within one year

	2019	2018
	$000	$000
Amounts owed to subsidiary undertakings Tax payable	15,814 52 15,866	15,167 — 15,167

7 Called up share capital

Details of called up share capital are set out in note 25 of the consolidated Financial Statements.

8 Contingent liabilities

The Quarto Group, Inc. has issued guarantees in respect of bank loans of subsidiaries of $53,077,000 (2018: $62,752,000). Refer to note 18 of the group consolidated Financial Statements.

9 Related parties

The Company borrowed an amount of $647,000 from its wholly owned subsidiary, Quarto Publishing plc, during the year (2018: $0.1m borrowed in the year). The balance on the loan at 31 December 2019 was $15.8m (2018: $15.2m). These balances are non-interest bearing and repayable on demand.

166

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

SUPPLEMENTAL FINANCIAL INFORMATION OF QUARTO GROUP

The following is the supplemental financial information of Quarto Group, which was not included in Quarto Group’s audited financial statements showing the financial information for the three years ended 31 December 2021.

Ageing analysis of gross carrying amounts of trade receivables by invoice date

0-30 days 31-60 days 61-90 days 91-120 days 121-150 days Over 150 days Total gross carrying amounts of trade receivables	For the year ended 31 December 2019 2020 2021 US$’000 US$’000 US$’000 14,909 13,347 14,919 9,125 12,221 14,402 5,129 5,695 10,777 4,154 4,527 4,088 2,888 2,654 1,178 3,716 1,831 2,501 39,921 40,275 47,865	For the year ended 31 December 2019 2020 2021 US$’000 US$’000 US$’000 14,909 13,347 14,919 9,125 12,221 14,402 5,129 5,695 10,777 4,154 4,527 4,088 2,888 2,654 1,178 3,716 1,831 2,501 39,921 40,275 47,865
		47,865

Ageing analysis of trade payables by invoice date

0-30 days 31-60 days 61-90 days 91-120 days Over 120 days Total trade payables	As at 31 December 2019 2020 2021 US$’000 US$’000 US$’000 7,316 6,810 10,714 3,426 3,043 3,928 2,865 2,242 1,829 3,167 3,267 4,197 19,444 13,167 8,782 36,218 28,529 29,450	As at 31 December 2019 2020 2021 US$’000 US$’000 US$’000 7,316 6,810 10,714 3,426 3,043 3,928 2,865 2,242 1,829 3,167 3,267 4,197 19,444 13,167 8,782 36,218 28,529 29,450
		29,450

167

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

Directors’ emoluments

Year ended 31 December 2019

Executive Directors Lau Chuk Kin Michael Mousley (re-designated to non-executive director on 1 May 2019) Ken Fund Non-executive Directors Andy Cumming Mei Lan Lam Jane Moriarty Michael Mousley (re-designated from executive director on 1 May 2019) Year ended 31 December 2020 Executive Directors Lau Chuk Kin Polly Powell (appointed on 10 February 2020) Ken Fund Non-executive Directors Andy Cumming Mei Lan Lam Jane Moriarty Michael Mousley (resigned on 10 February 2020) Andrea Giunti Lombardo (appointed on 10 February 2020)	Fee US$’000 – – – 92 – 64 65 221 Fee US$’000 – – – 93 – 64 7 40 204	Salaries and allowances US$’000 – 183 379 – – – – 562 Salaries and allowances US$’000 – 286 504 – – – – – 790	Pension US$’000 – – 18 – – – – 18 Pension US$’000 – 29 18 – – – – – 47	Total US$’000 – 183 397 92 – 64 65
				801

				Total US$’000 – 315 522 93 – 64 7 40
				1,041

168

FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

Year ended 31 December 2021

Executive directors Lau Chuk Kin Polly Powell (resigned on 1 July 2021) Ken Fund (re-designated to non-executive director on 1 December 2021 Non-executive Directors Andy Cumming Mei Lan Lam Jane Moriarty Ken Fund (re-designated from executive director on 1 December 2021) Andrea Giunti Lombardo	Fee Salaries and allowances US$’000 US$’000 – – – 285 – 617 99 – – – 69 – 3 – 49 – 220 902	Pension Payment for loss of office US$’000 US$’000 – – 30 – 20 29 – – – – – – – – – – 50 29	Total US$’000 – 315 666 99 – 69 3 49
			1,201

Five highest paid individuals

The five individuals whose emoluments were the highest in Quarto Group for the years ended 31 December 2019, 2020 and 2021 included one, two and two directors whose emolument are reflected in the analysis presented above. Emoluments payable to the remaining four, three and three individuals during the years are as follows:

Salaries, allowances and other benefits Pension and national insurance	2019 US$’000 822 58 880	2020 US$’000 593 53 646	2021 US$’000 675 101
			776

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FINANCIAL INFORMATION OF QUARTO GROUP

APPENDIX II

Their emoluments fell within the following bands presented in Hong Kong dollars (HK$) is as follows:

Emolument bands HK$1,000,001 – HK$1,500,000 HK$1,500,001 – HK$2,000,000 HK$2,000,001 – HK$2,500,000 HK$2,500,001 – HK$3,000,000	Number of individuals 2019 2020 2021 1 – – 3 3 1 – – 2 – – – 4 3 3	Number of individuals 2019 2020 2021 1 – – 3 3 1 – – 2 – – – 4 3 3
		3

Save as disclosed above, during each of the three years ended 31 December 2019, 2020 and 2021, no emoluments were paid by the Quarto to any of the five highest paid individuals as an inducement to join or upon joining Quarto or as compensation for loss of office.

Bank and other borrowings

Bank and other borrowings as at 31 December 2019, 2020 and 2021 were due for repayment as follows:

Bank loans

On demand or within one year In the second year In the third to fifth year	As at 31 December 2019 2020 2021 *US$’000* *US$’000* *US$’000* 53,077 25,411 2,667 – – 2,667 – – 1,400 53,077 25,411 6,734	As at 31 December 2019 2020 2021 *US$’000* *US$’000* *US$’000* 53,077 25,411 2,667 – – 2,667 – – 1,400 53,077 25,411 6,734
		6,734

Other loans

On demand or within one year In the second year In the third to fifth year	As at 31 December 2019 2020 2021 *US$’000* *US$’000* *US$’000* 13,000 16,408 2,771 – – – – – 24,441 13,000 16,408 27,212	As at 31 December 2019 2020 2021 *US$’000* *US$’000* *US$’000* 13,000 16,408 2,771 – – – – – 24,441 13,000 16,408 27,212
		27,212

170

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

A. INTRODUCTION

The following unaudited pro forma financial information has been prepared by the Directors in accordance with Rule 4.29 of the Listing Rules and on the basis of the notes set out below for the purpose of illustrating the effect of the completion of the Acquisition on the financial information of the Group as if the transaction had been completed on 31 December 2021.

The unaudited pro forma financial information of the Enlarged Group is prepared, in accordance with the accounting policies of the Group under Hong Kong Financial Reporting Standards, based on the audited consolidated statement of financial position of the Group as at 31 December 2021 extracted from the published audited annual report of the Group for the year ended 31 December 2021 which have been published on the website of the Stock Exchange and the website of the Company, as if the Acquisition had been completed on 31 December 2021.

The unaudited pro forma financial information is based on the aforesaid historical data after giving effect to the pro forma adjustments described in the accompanying notes. A narrative description of the pro forma adjustments of the completion of the Acquisition that are (i) directly attributable to the Acquisition on 1 April 2022 and not relating to future events or decisions; and (ii) factually supportable, is summarised in the accompanying notes.

The accompanying unaudited pro forma financial information has been prepared by the Directors for illustrative purpose only and is based on certain assumptions, estimates, uncertainties and other currently available information. Accordingly, and because of its nature, the unaudited pro forma financial information may not give a true picture of the financial position of the Enlarged Group following the completion of the Acquisition as at 31 December 2021 or at any other dates. Further, the unaudited pro forma financial information of the Enlarged Group does not purport to predict the Enlarged Group’s future financial position.

Unaudited supplementary financial information of the Enlarged Group has been prepared by the Directors as set out in section C on pages 177-184 to illustrate the effect of (i) the First Open Market Acquisitions, (ii) the Second Open Market Acquisitions, and (iii) the Acquisition, as if these transactions had taken place on 31 December 2021. The unaudited supplementary financial information of the Enlarged Group has been prepared based on the audited consolidated statement of financial position of the Group as at 31 December 2021 extracted from the published audited annual report of the Group for the year ended 31 December 2021 which have been published on the website of the Stock Exchange and the website of the Company, the consolidated balance sheet of the Quarto Group as at 31 December 2021 as extracted from the financial information of the Quarto Group set out in Appendix II to this circular, as if these transactions had been completed on 31 December 2021.

The unaudited supplementary financial information of the Enlarged Group is based on the aforesaid historical data after giving effect to the adjustments described in the accompanying notes. Narrative descriptions of the adjustments of (i) the First Open Market Acquisitions, (ii) the Second Open Market Acquisitions, and (iii) the Acquisition are set out in the accompanying notes.

As the First Open Market Acquisitions, the Second Open Market Acquisitions and Acquisition are separate transactions and not inter-conditional, they could be completed on stand-alone basis. It is therefore presented in another scenario in section C on pages 177-184.

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APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

B. UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

ASSETS Non-current assets Property, plant and equipment Deposits for acquisition of property, plant and equipment Right of use assets Intangible assets-goodwill Interest in an associate Loans to an associate Lease receivables Deferred tax assets Current assets Inventories Trade and other receivables and deposits Lease receivables Financial asset at fair value through profit or loss Tax recoverable Pledged deposits Cash and cash equivalents Total assets	The Group as at 31 December 2021 (Audited) HK$’000 214,359 3,399 71,518 177,925 189,134 129,490 1,698 23,200 810,723 240,605 539,200 1,142 37 4,217 156 431,920 1,217,277 2,028,000	Pro forma adjustments (Unaudited) HK$’000 (Notes 1, 2) 23,175 (23,175)	Pro forma Enlarged Group as at 31 December 2021 (Unaudited) HK$’000 214,359 3,399 71,518 177,925 212,309 129,490 1,698 23,200 833,898 240,605 539,200 1,142 37 4,217 156 408,745 1,194,102 2,028,000

172

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Current liabilities Trade and other payables Bank and other borrowings Lease liabilities Provisions Provision for taxation Net current assets Total assets less current liabilities Non-current liabilities Provisions Lease liabilities Deferred tax liabilities Net assets	The Group as at 31 December 2021 (Audited) HK$’000 288,934 261,967 29,908 25,508 15,909 622,226 595,051 1,405,774 1,504 43,821 12,910 58,235 1,347,539	Pro forma adjustments (Unaudited) HK$’000 (Notes 1, 2)	Pro forma Enlarged Group as at 31 December 2021 (Unaudited) HK$’000 288,934 261,967 29,908 25,508 15,909 622,226 571,876 1,405,774 1,504 43,821 12,910 58,235 1,347,539

173

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

NOTES TO UNAUDITED PRO FORMA ADJUSTMENTS

Notes:

(1) On 1 April 2022, the Company acquired 1,875,000 Quarto Shares, representing approximately 4.6% of the issued share capital of Quarto, from Mr. Zen Wei Peu at a consideration of £2,250,000 (equivalent to approximately HK$23,175,000).
(2) The pro forma adjustment represents the additional interests acquired by the Group while continuing to apply the equity accounting in accordance with Hong Kong Accounting Standard 28 (“HKAS 28”) Investments in Associates, at a cash consideration of £2,250,000 (equivalent to approximately HK$23,175,000) paid by the Group to acquire approximately 4.6% of the issued share capital of the Quarto Group. In the opinion of the Directors, the Company continued to have significant influence in Quarto Group with approximately 45.83% of the issued share capital of Quarto, as if the Acquisition had been completed on 31 December 2021.
(3) No adjustment have been made to the unaudited pro forma financial information of the Enlarged Group as at 31 December 2021 to reflect any trading results or other transactions of the Enlarged Group entered into subsequent to 31 December 2021. In particular, the unaudited pro forma financial information of the Enlarged Group as at 31 December 2021 as shown on pages 172 to 173 have not been adjusted to illustrate the effect of (i) the First Open Market Acquisitions, (ii) the Second Open Market Acquisitions and (iii) shares of Quarto acquired after the Acquisition between 1 April 2022 and the Latest Practicable Date (both dates inclusive) (“Shares acquired after the Acquisition”). The effect of Shares acquired after the Acquisition to the unaudited pro forma financial information has been illustrated below. The combining effect of the First Open Market Acquisitions, Second Open Market Acquisitions and the Acquisition has been illustrated in section C to the unaudited pro forma financial information as set out on pages 177-182. The combining effect of the First Open Market Acquisitions, Second Open Market Acquisitions, the Acquisitions and Shares acquired after the Acquisition has been illustrated in note 7 of the unaudited supplementary financial information as set out on pages 182-184.

Had the effect of shares of Quarto acquired after the Acquisition between 1 April 2022 and the Latest Practicable Date (both dates inclusive) been taken into account, the unaudited pro forma financial information of the Enlarged Group as at 31 December 2021 would have been further adjusted as follows:

174

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

The Group as at 31 December 2021 (Audited) HK$’000 ASSETS Non-current assets Property, plant and equipment 214,359 Deposits for acquisition of property, plant and equipment 3,399 Right-of-use assets 71,518 Intangible assets – goodwill 177,925 Interest in an associate 189,134 Loans to an associate 129,490 Lease receivables 1,698 Deferred tax assets 23,200 810,723 Current assets Inventories 240,605 Trade and other receivables and deposits 539,200 Lease receivables 1,142 Financial asset at fair value through profit or loss 37 Tax recoverable 4,217 Pledged deposits 156 Cash and cash equivalents 431,920 1,217,277 Total assets 2,028,000 Current liabilities Trade and other payables 288,934 Bank borrowings 261,967 Lease liabilities 29,908 Provisions 25,508 Provision for taxation 15,909 622,226 Net current assets 595,051 Total assets less current liabilities 1,405,774 Non-current liabilities Provisions 1,504 Lease liabilities 43,821 Deferred tax liabilities 12,910 58,235 Net assets 1,347,539	Pro forma Adjustments Pro forma Enlarged Group as at 31 December 2021 (Unaudited) (Unaudited) (Unaudited) HK$’000 HK$’000 HK$’000 (Notes 1, 2) (Note 3(a)) 214,359 3,399 71,518 177,925 23,175 5,587 217,896 129,490 1,698 23,200 839,485 240,605 539,200 1,142 37 4,217 156 (23,175) (5,587) 403,158 1,188,515 2,028,000 288,934 261,967 29,908 25,508 15,909 622,226 566,289 1,405,774 1,504 43,821 12,910 58,235 1,347,539	Pro forma Adjustments Pro forma Enlarged Group as at 31 December 2021 (Unaudited) (Unaudited) (Unaudited) HK$’000 HK$’000 HK$’000 (Notes 1, 2) (Note 3(a)) 214,359 3,399 71,518 177,925 23,175 5,587 217,896 129,490 1,698 23,200 839,485 240,605 539,200 1,142 37 4,217 156 (23,175) (5,587) 403,158 1,188,515 2,028,000 288,934 261,967 29,908 25,508 15,909 622,226 566,289 1,405,774 1,504 43,821 12,910 58,235 1,347,539
		839,485

		240,605 539,200 1,142 37 4,217 156 403,158
		1,188,515 2,028,000

		288,934 261,967 29,908 25,508 15,909
		622,226 566,289

		1,405,774

		1,504 43,821 12,910
		58,235 1,347,539

175

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

NOTES TO UNAUDITED PRO FORMA ADJUSTMENTS (CONTINUED)

Notes:

(3) (a) The adjustment represents the additional interests acquired by the Group while continuing to apply the equity accounting in accordance with HKAS 28, at a cash consideration of £527,000 (equivalent to approximately HK$5,587,000) paid by the Group to acquire approximately 0.79% of the issued share capital of the Quarto Group after the Acquisition between 1 April 2022 and the Latest Practicable Date (both dates inclusive). In the opinion of the Directors, the Company continued to have significant influence in Quarto Group with approximately 46.62% of the issued share capital of Quarto, as if the Acquisition and Shares acquired after the Acquisition had been completed on 31 December 2021.

176

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

C. UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION OF THE ENLARGED GROUP

ASSETS Non-current assets Property, plant and equipment Deposits for acquisition of property, plant and equipment Right of use assets Intangible assets – goodwill Pre-publication cost Other intangible assets Interest in an associate Loans to an associate Lease receivables Deferred tax assets Current assets Inventories Trade and other receivables and deposits Lease receivables Financial asset at fair value through profit or loss Tax recoverable Pledged deposits Cash and cash equivalents Total assets	The Group as at 31 December 2021 (Audited) HK$’000 214,359 3,399 71,518 177,925 – – 189,134 129,490 1,698 23,200 810,723 240,605 539,200 1,142 37 4,217 156 431,920 1,217,277 2,028,000		Adjustments The Quarto Group as at 31 December 2021 (Audited) (Unaudited) HK$’000 HK$’000 HK$’000 HK$’000 (Note 5) (Note 6(i)) (Note 6(ii)) (Note 6(iii)) 4,976 – 35,436 150,431 (47,342) 233,540 8,634 398 4,025 – (189,134) – (129,490) – 19,001 443,782 159,065 399,688 (128,997) – – – – 221,770 (42,455) (870) 780,523 1,224,305	Enlarged Group as at 31 December 2021 (Unaudited) HK$’000 219,335 3,399 106,954 281,014 242,174 4,423 – – 1,698 42,201
		The Quarto Group as at 31 December 2021 (Audited) US$'000 (Note 5) 638 – 4,543 19,286 29,941 51 – – – 2,436 56,895 20,393 51,242 – – – – 28,432 100,067 156,962
				901,198

				399,670 809,891 1,142 37 4,217 156 610,365
				1,825,478 2,726,676

177

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Current liabilities Trade and other payables Bank and other borrowings Lease liabilities Provisions Provision for taxation Net current assets Total assets less current liabilities Non-current liabilities Long term borrowings Provisions Tax payable Lease liabilities Deferred tax liabilities Net assets	The Group as at 31 December 2021 (Audited) HK$’000 288,934 261,967 29,908 25,508 15,909 622,226 595,051 1,405,774 – 1,504 – 43,821 12,910 58,235 1,347,539		Adjustments The Quarto Group as at 31 December 2021 (Audited) (Unaudited) HK$’000 HK$’000 HK$’000 HK$’000 (Note 5) (Note 6(i)) (Note 6(ii)) (Note 6(iii)) 419,554 (128,997) 42,416 10,631 – 58,243 530,844 249,679 693,461 222,362 (129,490) – 3,011 28,642 24,414 3,649 278,429 415,032	Pro forma Enlarged Group as at 31 December 2021 (Unaudited) HK$’000 579,491 304,383 40,539 25,508 74,152
		The Quarto Group as at 31 December 2021 (Audited) US$'000 (Note 5) 53,789 5,438 1,363 – 7,467 68,057 32,010 88,905 28,508 – 386 3,672 3,130 35,696 53,209
				1,024,073 801,405

				1,702,603 92,872 1,504 3,011 72,463 40,973
				210,823 1,491,780

178

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

NOTES TO THE UNAUDITED SUPPLEMENTARY ADJUSTMENTS

Notes:

(4) Subsequent to 31 December 2021, during the period up to 26 January 2022, the Company further increased its shareholdings in the Quarto with total additional consideration of HK$19,280,000 and increased its shareholding in Quarto from 41.23% to 44.64% through the open market purchases of the shares of Quarto (the “ First Open Market Acquisitions ” and the “ Second Open Market Acquisitions ”).

On 1 April 2022, the Company acquired 1,875,000 Quarto Shares (the “ Acquisition ”), representing approximately 4.6% of the issued share capital of Quarto, from Mr. Zen Wei Peu at a consideration of £2,250,000 (equivalent to approximately HK$23,175,000). After the Acquisition, the Company holds approximately 49.24% of the issued share capital of Quarto.

Upon the completion of the First Open Market Acquisitions, the Second Open Market Acquisitions and the Acquisition, the Company holds 49.24% equity interest on the Quarto Group and the Quarto Group is considered by the Directors as a subsidiary of the Company as the Quarto Group is controlled by the Group after the completion of the Acquisition of 4.6% of the issued share capital of Quarto. The consolidated balance sheet of the Quarto Group will be consolidated into those of the Group from the date on which control is transferred to the Group, which is assumed to be 31 December 2021, for the purpose of preparation of the unaudited supplementary financial information.

(5) The figures are extracted from the financial information of the Quarto Group as set out in Appendix II to this circular and translated into HK$ at the exchange rate of US$1 to HK$7.8 prevailing at the close of business on 31 December 2021. No representation is made that US$ amounts have been, could have been or could be converted to HK$, or vice versa, at the applied rate or at any other rates or at all.
(6) The adjustments are to reflect the effect of the completion of First Open Market Acquisitions, the Second Open Market Acquisitions and the Acquisition of Quarto Shares on the unaudited supplementary financial information of the Enlarged Group as if the First Open Market Acquisitions, the Second Open Market Acquisitions and the Acquisition had been completed on 31 December 2021.
(i) This adjustment represents the accounting for the Acquisition using the acquisition method in accordance with Hong Kong Financial Reporting Standard 3 (Revised) Business Combinations issued by the Hong Kong Institute of Certified Public Accountants. For the purpose of preparation of the unaudited supplementary Financial Information of the Enlarged Group, the Group has carried out an illustrative purchase price allocation and the fair values of the identifiable assets and liabilities of the Quarto Group as at 31 December 2021 were estimated by the Directors.

179

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

NOTES TO THE UNAUDITED SUPPLEMENTARY ADJUSTMENTS (CONTINUED)

Notes:

(6) (i) The adjustment on goodwill arising from the Acquisition is calculated as follows:

Cash consideration_(Note (a)) Add: Fair value of previously held equity interest(Note (b)) Less: Fair value of identifiable net assets of the Quarto Group to be acquired Identifiable net assets (excluding goodwill recognised at Quarto Group)(Note 5) Fair value adjustments on: – Pre-publication cost(Note (d)) – Backlog order(Note (d)) Deferred tax liabilities in respect of fair value adjustments (_Note (e)) Add: Non-controlling interest’s proportionate share of the Quarto’s identifiable net assets_(Note (f)) (HK$273,611,000 x 50.76%) Goodwill arising from the Acquisition(Note (g)) Less: Goodwill recognised at Quarto Group Adjustment on goodwill _Notes:	HK$’000 (264,601) (8,634) (4,025)	HK$’000 42,455 195,360 237,815 (277,260) 3,649 (273,611) 138,885 103,089 (150,431) (47,342)

(a) This represents cash consideration of £2,250,000 (equivalent to approximately HK$23,175,000) paid by the Group to acquire approximately 4.6% of the issued share capital of the Quarto Group and the cash consideration of £1,768,842 (equivalent to approximately HK$19,280,000) paid by the Group to acquire additional shares in the Quarto Group through the open market as if the transactions had been completed on 31 December 2021.
(b) This represents the 41.23% shares held by the Group before the First Open Market Acquisitions, the Second Open Market Acquisitions and the Acquisition of the Quarto Shares amounting to £18,967,015 based on the market price of 16,859,569 Quarto Shares of £1.125 per Quarto Share as quoted on London Stock Exchange as at 31 December 2021 and translated into HK$195,360,000 at the exchange rate of £1 to HK$10.3 prevailing at the close of business on 31 December 2021. No representation is made that £ amounts have been, could have been or could be converted to HK$, or vice versa, at the applied rate or at any other rates or at all.

180

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

NOTES TO THE UNAUDITED SUPPLEMENTARY ADJUSTMENTS (CONTINUED)

Notes:

(6) (i) (c) The Group remeasures its previously held equity interest as at 31 December 2021 and recognises the related gain in profit and loss:

Fair value of previously held equity interest_(Note (b)) Less: Carrying amount of previous equity interest(Note 6(i))_ Gain on disposal of an associate	HK$’000 195,360 189,134
	6,226

(d) The fair value of pre-publication costs were determined with reference to the valuation performed by an independent professional valuer, which valued the useful life of pre-publication costs by analyzing the revenue from historical trend and working out the percentage to apply on the future potential sales and operating costs. Then using the present value of excess earning method to value the fair value of the pre-publication costs of US$31,048,000. For the backlog order, the valuer valued the useful life of backlog order only for one year as most of the books will be dispatch in 2022. The valuer based on the order book details to work out the revenue generated from backlog order and using the present value of excess earning method to value the fair value of the backlog order of US$516,000. On 31 December 2021, the exchange rate of US$1 to HK$7.8, the pre-publication costs and backlog order are amounting to HK$242,174,000 and HK$4,025,000 respectively. As at 31 December 2021, adjustment amounting to HK$8,634,000 and HK$4,025,000 are provided.

For the purpose of preparing the unaudited supplementary financial information, the Directors expect that, other than the pre-publication costs and backlog order, the carrying amounts of identifiable assets and liabilities of the Quarto Group as at 31 December 2021 approximate their respective fair values at that date.

(e) The deferred tax liabilities relating to the fair value adjustment of the pre-publication costs and backlog order amounting to HK$3,649,000, which is calculated based on the US and UK income tax rate of 28% and 30% respectively.
(f) The non-controlling interests of the Quarto Group is measured at their proportionate share in the recognised fair values of the Quarto Group’s identifiable net assets as at 31 December 2021.
(g) The Directors have assessed whether there is any impairment on the goodwill arising from the Acquisition as at 31 December 2021, on a pro forma basis, in accordance with HKAS 36 “Impairment of Assets” and concluded that there is no impairment to be made in respect of the goodwill of the Enlarged Group as at 31 December 2021 on the basis set out in the Group’s audited consolidated financial statements for the year ended 31 December 2021. The recoverable amount of the cash generating unit (“ CGU ”) comprising these goodwill are determined based on value in use calculation. That calculation uses cash flow projections based on a 3-year financial budgets approved by management of the Quarto Group. Key assumptions of the value in use calculations relate to the estimation of cash inflows or outflows which include budgeted gross margins and operating expenses. Such estimation is based on the unit’s past performance and the management’s expectations for the market development.

On the date of the completion of the transaction, the actual fair values of the identifiable assets and the liabilities to be acquired will have to be reassessed and accordingly, their fair values at the dates of the transactions may be materially different from those for the preparation of the unaudited supplementary financial information. As a result, the amount of goodwill arising from the transactions may be different from that estimation based on the basis, as stated above, used in the preparation of the unaudited supplementary financial information. Accordingly, the actual goodwill arising from the Acquisition at the date of completion of the Acquisition may be different from that presented above.

181

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

NOTES TO THE UNAUDITED SUPPLEMENTARY ADJUSTMENTS (CONTINUED)

Notes:

(6) (ii) This represents the estimated transaction cost amounting to HK$870,000 for the transactions.
(iii) This represents intercompany elimination of loans to the Quarto Group amounting to HK$129,490,000 and trade receivables amounting to HK$128,997,000.
(7) No adjustment have been made to the unaudited supplementary financial information of the Enlarged Group as at 31 December 2021 to reflect any trading results or other transactions of the Enlarged Group entered into subsequent to 31 December 2021. In particular, the unaudited supplementary financial information of the Enlarged Group as at 31 December 2021 as shown on pages 177 to 178 have not been adjusted to illustrate the effect of shares of Quarto acquired after the Acquisition between 1 April 2022 and the Latest Practicable Date (both dates inclusive).

Had the effect of shares of Quarto acquired after the Acquisition between 1 April 2022 and the Latest Practicable Date (both dates inclusive) been taken into account, the unaudited supplementary financial information of the Enlarged Group as at 31 December 2021 would have been further adjusted as follows:

182

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

ASSETS Non-current assets Property, plant and equipment Deposits for acquisition of property, plant and equipment Right-of-use assets Intangible assets – goodwill Pre-publication costs Other intangible assets Interest in an associate Loans to an associate Lease receivables Deferred tax assets Current assets Inventories Trade and other receivables and deposits Lease receivables Financial asset at fair value through profit or loss Tax recoverable Pledged deposits Cash and cash equivalents Total assets	The Group as at 31 December 2021 (Audited) HK$’000 214,359 3,399 71,518 177,925 – – 189,134 129,490 1,698 23,200 810,723 240,605 539,200 1,142 37 4,217 156 431,920 1,217,277 2,028,000	Adjustments The Quarto Group as at 31 December 2021 The Quarto Group as at 31 December 2021 Enlarged Group as at 31 December 2021 (Audited) (Audited) (Unaudited) (Unaudited) US$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Note 5) (Note 5) (Note 6(i)) (Note 6(ii)) (Note 6(iii)) (Note 7(a)) 638 4,976 219,335 – – 3,399 4,543 35,436 106,954 19,286 150,431 (47,342) 281,014 29,941 233,540 8,634 242,174 51 398 4,025 4,423 – – (189,134) – – – (129,490) – – – 1,698 2,436 19,001 42,201 56,895 443,782 901,198 20,393 159,065 399,670 51,242 399,688 (128,997) 809,891 – – 1,142 – – 37 – – 4,217 – – 156 28,432 221,770 (42,455) (870) (5,587) 604,778 100,067 780,523 1,819,891 156,962 1,224,305 2,721,089	Adjustments The Quarto Group as at 31 December 2021 The Quarto Group as at 31 December 2021 Enlarged Group as at 31 December 2021 (Audited) (Audited) (Unaudited) (Unaudited) US$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Note 5) (Note 5) (Note 6(i)) (Note 6(ii)) (Note 6(iii)) (Note 7(a)) 638 4,976 219,335 – – 3,399 4,543 35,436 106,954 19,286 150,431 (47,342) 281,014 29,941 233,540 8,634 242,174 51 398 4,025 4,423 – – (189,134) – – – (129,490) – – – 1,698 2,436 19,001 42,201 56,895 443,782 901,198 20,393 159,065 399,670 51,242 399,688 (128,997) 809,891 – – 1,142 – – 37 – – 4,217 – – 156 28,432 221,770 (42,455) (870) (5,587) 604,778 100,067 780,523 1,819,891 156,962 1,224,305 2,721,089
			901,198

			399,670 809,891 1,142 37 4,217 156 604,778
			1,819,891 2,721,089

183

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The
Group
as at 31
December
2021
(Audited)
HK$’000
Current liabilities
Trade and other payables
288,934
Bank and other
borrowings
261,967
Lease liabilities
29,908
Provisions
25,508
Provision for taxation
15,909
622,226
Net current assets
595,051
Total assets less current
liabilities
1,405,774
Non-current liabilities
Long term borrowings
–
Provisions
1,504
Tax payable
–
Lease liabilities
43,821
Deferred tax liabilities
12,910
58,235
Net assets
1,347,539

Adjustments
The
Quarto
Group
as at 31
December
2021
The
Quarto
Group
as at 31
December
2021
Enlarged
Group
as at 31
December
2021
(Audited)
(Audited)
(Unaudited)
(Unaudited)
US$’000
HK$’000
HK$’000
HK$’000
HK$’000
HK$’000
HK$’000
(Note 5)
(Note 5)
(Note 6(i)) (Note 6(ii)) (Note 6(iii)) (Note 7(a))
53,789
419,554
(128,997)
579,491
5,438
42,416
304,383
1,363
10,631
40,539
–
–
25,508
7,467
58,243
74,152
68,057
530,844
1,024,073
32,010
249,679
795,818
88,905
693,461
1,697,016
28,508
222,362
(129,490)
92,872
–
–
1,504
386
3,011
3,011
3,672
28,642
72,463
3,130
24,414
3,649
40,973
35,696
278,429
210,823
53,209
415,032
1,486,193

Notes:

(7) (a) The adjustment represents the additional interests of Quarto acquired by the Group from the non-controlling shareholders, at a cash consideration of £527,000 (equivalent to approximately HK$5,587,000) paid by the Group to acquire approximately 0.79% of the issued share capital of the Quarto Group after the Acquisition between 1 April 2022 and the Latest Practicable Date (both dates inclusive).

184

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

香港干諾道中一百一十一號永安中心二十五樓

INDEPENDENT REPORTING ACCOUNTANTS’ ASSURANCE REPORT ON THE COMPILATION OF UNAUDITED PRO FORMA FINANCIAL INFORMATION

To the directors of Lion Rock Group Limited

We have completed our assurance engagement to report on the compilation of unaudited pro forma financial information of Lion Rock Group Limited (the “ Company ”) and its subsidiaries (collectively referred to as the “ Group ”) by the directors of the Company for illustrative purposes only. The unaudited pro forma financial information consists of the unaudited pro forma statement of assets and liabilities as at 31 December 2021 and related notes as set out on pages 171 to 184 of the circular dated 25 May 2022 (the “ Circular ”) issued by the Company in connection with the acquisition of 4.6% of the issued share capital of The Quarto Group, Inc. (“ Quarto ”). The Group and the Quarto Group are collectively referred to as the “ Enlarged Group ”. The applicable criteria on the basis of which the directors of the Company have compiled the unaudited pro forma financial information are described on 171 to 184 of Appendix III of the Circular.

The unaudited pro forma financial information has been compiled by the directors of the Company to illustrate the impact of the Acquisition of the Quarto Group on the Group’s financial position as at 31 December 2021 as if the Acquisition of the Quarto Group had taken place on 31 December 2021. As part of this process, information about the Group’s assets and liabilities has been extracted by the directors from the Group’s consolidated financial statements for the year ended 31 December 2021, on which an auditor’s report has been published.

Directors’ Responsibility for the Unaudited Pro Forma Financial Information

The directors are responsible for compiling the unaudited pro forma financial information in accordance with paragraph 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “ Listing Rules ”) and with reference to Accounting Guideline 7 “Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars” (“ AG 7 ”) issued by the Hong Kong Institute of Certified Public Accountants (“ HKICPA ”).

Our Independence and Quality Control

We have complied with the independence and other ethical requirements of the “ Code of Ethics for Professional Accountants ” issued by the HKICPA, which is founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behavior.

185

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Our firm applies Hong Kong Standard on Quality Control 1 “Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements” issued by the HKICPA and accordingly maintains a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements.

Reporting Accountants’ Responsibilities

Our responsibility is to express an opinion, as required by paragraph 4.29(7) of the Listing Rules, on the unaudited pro forma financial information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the unaudited pro forma financial information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

We conducted our engagement in accordance with Hong Kong Standard on Assurance Engagements 3420 “Assurance Engagements to Report on the Compilation of Pro Forma Financial Information Included in a Prospectus” issued by the HKICPA. This standard requires that the reporting accountants plan and perform procedures to obtain reasonable assurance about whether the directors have compiled the unaudited pro forma financial information in accordance with paragraph 4.29 of the Listing Rules and with reference to AG 7 issued by the HKICPA.

For purposes of this engagement, we are not responsible for updating or reissuing any reports or opinions on any historical financial information used in compiling the unaudited pro forma financial information, nor have we, in the course of this engagement, performed an audit or review of the financial information used in compiling the unaudited pro forma financial information.

The purpose of unaudited pro forma financial information included in an investment circular is solely to illustrate the impact of a significant event or transaction on unadjusted financial information of the Group as if the event had occurred or the transaction had been undertaken at an earlier date selected for purposes of the illustration. Accordingly, we do not provide any assurance that the actual outcome of the event or transaction at 31 December 2021 would have been as presented.

A reasonable assurance engagement to report on whether the unaudited pro forma financial information has been properly compiled on the basis of the applicable criteria involves performing procedures to assess whether the applicable criteria used by the directors in the compilation of the unaudited pro forma financial information provide a reasonable basis for presenting the significant effects directly attributable to the event or transaction, and to obtain sufficient appropriate evidence about whether:

the related unaudited pro forma adjustments give appropriate effect to those criteria; and
the unaudited pro forma financial information reflects the proper application of those adjustments to the unadjusted financial information.

186

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The procedures selected depend on the reporting accountants’ judgment, having regard to the reporting accountants’ understanding of the nature of the Enlarged Group, the event or transaction in respect of which the unaudited pro forma financial information has been compiled, and other relevant engagement circumstances.

The engagement also involves evaluating the overall presentation of the unaudited pro forma financial information.

We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Opinion

In our opinion:

(a) the unaudited pro forma financial information has been properly compiled by the directors of the Company on the basis stated;
(b) such basis is consistent with the accounting policies of the Group; and
(c) the adjustments are appropriate for the purposes of the unaudited pro forma financial information as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.

BDO Limited

Certified Public Accountants

Au Yiu Kwan Practising Certificate Number P05018

25 May 2022

187

MANAGEMENT DISCUSSION AND ANALYSIS OF QUARTO GROUP

APPENDIX IV

MANAGEMENT DISCUSSION AND ANALYSIS OF QUARTO GROUP

The following is the management discussion and analysis of Quarto Group for the years ended 31 December 2019, 2020 and 2021.

The following management discussion and analysis should be read in conjunction with the consolidated financial information of Quarto Group as set out in Appendix II to this circular.

BUSINESS REVIEW

REVENUE

Revenue arises largely from the sale of physical products. Quarto Group has two operating segments: US publishing and UK publishing. In identifying these operating segments, management follows the information provided to the chief operating decision maker of the business which relates to the two geographical locations.

Revenue of Quarto Group increased by approximately 19.4% to approximately US$151.5 million for the year ended 31 December 2021 from that of approximately US$126.9 million for the year ended 31 December 2020, which was mainly due to the well performance of US publishing segment that having a strong bounce back following the disruption due to Covid-19, with segment revenue increasing by approximately 28.5% from approximately US$63.1 million for the year ended 31 December 2020 to US$81.1 million for the year ended 31 December 2021, which was mainly driven by strong sales in some best-selling titles.

Revenue of Quarto Group decreased by approximately 6.6% to approximately US$126.9 million for the year ended 31 December 2020 from that of approximately US$135.8 million for the year ended 31 December 2019, which was mainly due to the US publishing segment having a reduction in the number of new titles published following a review of the publishing program due to Covid-19 and the continuing pandemic, with segment revenue falling by approximately 11.7% from approximately US$71.5 million for the year ended 31 December 2019 to approximately US$63.1 million for the year ended 31 December 2020.

COST OF SALES AND GROSS PROFIT

Cost of sales of Quarto Group consists primarily of direct costs incurred to purchase of goods and changes in inventories and amortization and impairment of pre-publication costs.

Gross profit of the Quarto Group is calculated by subtracting the cost of sales sold from revenue. Gross profit margin is calculated as gross profit divided by revenue.

188

APPENDIX IV

MANAGEMENT DISCUSSION AND ANALYSIS OF QUARTO GROUP

Gross profit of Quarto Group increased by approximately 26.6% to approximately US$47.6 million for the year ended 31 December 2021 from that of approximately US$37.6 million for the year ended 31 December 2020, which was mainly driven by the increase in revenue. The gross profit margin slightly increased to approximately 31.4% for the year ended 31 December 2021 from that of approximately 29.6% for the year ended 31 December 2020. The revenue increase was driven by a buoyant book market in the US as consumers rediscovered the love for books during the COVID-19 lockdowns. The successful digital transformation of print procurement also helped to achieve cost savings.

Gross profit of Quarto Group slightly decreased by approximately 1.1% to approximately US$37.6 million for the year ended 31 December 2020 from that of approximately US$38.0 million for the year ended 31 December 2019. The gross profit margin slightly increased to approximately 29.6% for the year ended 31 December 2020 from that of approximately 28.0% for the year ended 31 December 2019. This was due to the management’s strategy to publish less but profitable titles.

DISTRIBUTION COSTS

Distribution costs of Quarto Group consists primarily of costs relating to order fulfilment, warehousing, billing, returns processing, handling of loss or damage claims and freight.

Distribution costs of Quarto Group increased by approximately 18.3% to approximately US$8.4 million for the year ended 31 December 2021 from that of approximately US$7.1 million for the year ended 31 December 2020, roughly in line with increased sales.

Distribution costs of Quarto Group slightly decreased by approximately 5.3% to approximately US$7.1 million for the year ended 31 December 2020 from that of approximately US$7.5 million for the year ended 31 December 2019, roughly in line with sales decline.

ADMINISTRATIVE EXPENSES

Administrative expenses for Quarto Group consists primarily of salaries and benefits for its administrative and management staff, information technology expenses, office expenses and rental, travel expenses for its staff, as well as expenses related to third-party professionals such as consultants, auditors, lawyers and tax advisors, along with other office-related and miscellaneous expenses.

Administrative expenses of Quarto Group increased by approximately 21.9% to approximately US$22.3 million for the year ended 31 December 2021 from that of approximately US$18.3 million for the year ended 31 December 2020, which was mainly due to the increase in staff costs, related to the support for the strong business growth.

Administrative expenses of Quarto slightly decreased by approximately 6.6% to approximately US$18.3 million for the year ended 31 December 2020 from that of approximately US$19.6 million for the year ended 31 December 2019, which was mainly due to the decrease in headcount.

189

MANAGEMENT DISCUSSION AND ANALYSIS OF QUARTO GROUP

APPENDIX IV

FINANCE COSTS

Finance costs of Quarto Group comprise interest payable on borrowings calculated using the effective interest method together with the amortization of debt issuance costs.

Finance costs of the Quarto Group decreased by approximately 33.3% from approximately US$2.7 million for the year ended 31 December 2020 to approximately US$1.8 million for the year ended 31 December 2021, the reduction was attributable to reduction in bank debt due to strong cash generation.

Finance costs of the Quarto Group decreased by approximately 44.9% to approximately US$2.7 for the year ended 31 December 2020 from that of approximately US$4.9 million for the year ended 31 December 2019, the reduction was attributable to reduction in bank debt due to strong cash generation and the equity raise.

PROFIT FOR THE PERIODS

For the financial years ended 31 December 2019, 2020 and 2021, Quarto Group’s net profit was approximately US$2.9 million, approximately US$4.6 million and approximately US$9.9 million, respectively. During the relevant periods, the net profit of Quarto Group has been on the uptrend, mainly driven by improved trading and reduced finance costs.

LIQUIDITY POSITION, FINANCIAL RESOURCES AND CAPITAL STRUCTURE

Total Assets and Total Liabilities

As at 31 December 2019, 31 December 2020 and 31 December 2021, the total assets of Quarto Group were amounted to approximately US$164.8 million, US$150.7 million and US$157.0 million, respectively.

As at 31 December 2019, 31 December 2020 and 31 December 2021, the total liabilities of Quarto Group were amounted to approximately US$143.7 million, US$107.0 million and US$103.8 million, respectively.

Current Assets and Current Liabilities

The current assets of Quarto Group consist primarily of inventories, trade and other receivables and cash and cash equivalents. The current liabilities of Quarto Group consist of short term borrowings, trade and other payables, lease liabilities and tax payable.

As at 31 December 2019, the current assets and current liabilities of Quarto Group were approximately US$81.4 million and approximately US$128.2 million, respectively. As at 31 December 2019, the net current liabilities of Quarto Group was approximately US$46.8 million.

190

MANAGEMENT DISCUSSION AND ANALYSIS OF QUARTO GROUP

APPENDIX IV

As at 31 December 2020, the current assets and current liabilities of Quarto Group were approximately US$82.1 million and approximately US$98.2 million, respectively. As at 31 December 2020, the net current liabilities of Quarto Group was approximately US$16.1 million.

As at 31 December 2021, the current assets and current liabilities of Quarto Group were approximately US$100.1 million and approximately US$68.1 million, respectively. As at 31 December 2021, the net current assets of Quarto Group was approximately US$32.0 million.

Bank and other Borrowings

Bank and other borrowings of the Quarto Group as at 31 December 2019, 2020 and 2021 amounted to approximately US$66,077,000, US$41,819,000 and US$33,946,000, respectively, comprising bank loan of US$53,077,000, US$25,411,000 and US$6,734,000, respectively and other loans of US$13,000,000, US$16,408,000 and US$27,212,000, respectively.

At 31 December 2019, the Quarto Group had a US$64.0 million multi-currency syndicated bank facility which was due to expire on 31 August 2020. Following the loan repayment from the net proceeds of the open offer in February 2020, a new facility agreement was signed in January 2020 with borrowing facilities decreased to US$35.0 million. In February 2021, new facility agreement was signed with borrowing facilities of US$20.0 million.

Other loans of the Quarto Group increased from 2019 to 2020 were mainly due to the increase in government support loan given under the Conronavirus Aid, Relief and Economic Security Act (“ CARES Act ”) of the USA of US$2.4 million and accrued interest. Other loans of the Quarto Group further increased in 2021 after the US$10 million new loan obtained from 1010 Printing. As at 31 December 2021, other loans included loan from 1010 Printing of US$17.0 million, loan from Mr. Lau of US$6.0 million, loan from CARES Act of US$2.4 million and accrued interest. The loans from 1010 Printing and Mr. Lau were unsecured, carried interest at 3.5% to 4.0% and repayable in August 2024.

Bank and other borrowings of the Quarto Group as at 31 December 2019 and 2020 were due on demand or repayment within one year. For the bank and other borrowings as at 31 December 2021, US$5,438,000 were due on demand or within one year, US$2,667,000 were due in the second year and US$25,841,000 were due were in the third to fifth year.

CHARGE OF ASSETS

As at 31 December 2019, 2020 and 2021, Quarto obtained banking facilities of US$64.0 million, US$35.0 million and US$20.0 million respectively. The banking facilities were secured by the joint guarantee and the charge of assets over Quarto and certain of its subsidiaries.

191

MANAGEMENT DISCUSSION AND ANALYSIS OF QUARTO GROUP

APPENDIX IV

CONTINGENT LIABILITIES

As at 31 December 2019, 2020 and 2021, Quarto Group did not have any significant contingent liabilities.

EMPLOYMENT AND REMUNERATION POLICIES

For the years ended 31 December 2019, 2020 and 2021, Quarto Group had a total of 334, 302 and 304 average monthly number of employees (excluding executive directors), respectively. For the years ended 31 December 2019, 2020 and 2021, the staff costs were approximately US$25.0 million, US$21.7 million and US$26.2 million, respectively.

Quarto Group has a remuneration policy in line with market practice and provides employees remuneration and benefits based on the needs of its subsidiaries and the positions, the duties and responsibilities of the employees.

FOREIGN EXCHANGE EXPOSURE

The Quarto Group’s businesses operate in a number of currencies giving rise to a risk of exchange loss from fluctuating exchange rates. Exposures to currency exchange rates arise from the Quarto Group’s overseas sales and costs, which are primarily denominated in Sterling, and, to a much lesser extent in Euros. Quarto Group has minimal exposure to other foreign currencies. Quarto Group has a natural hedge that mitigates against currency movements impacting its earnings in that one of Quarto Group’s largest costs, which is print costs, are paid in US$. As at the Latest Practicable Date, Quarto Group did not have any foreign currency hedging policies. The management of Quarto Group will continue to access its foreign exchange risk exposure and consider adopting prudent measures as appropriate.

SIGNIFICANT INVESTMENTS

For the years ended 31 December 2019, 31 December 2020 and 31 December 2021, Quarto does not have any material investments.

MATERIAL ACQUISITIONS AND DISPOSALS

For the years ended 31 December 2019, 31 December 2020 and 31 December 2021, Quarto Group has not completed any material acquisition or disposal of subsidiaries, jointly controlled entities and associated companies.

Quarto Group did not have any plans to acquire material investments or capital assets after the Acquisition in the financial year 2022.

TREASURY POLICY AND HEDGING ARRANGEMENT

For the years ended 31 December 2019, 31 December 2020 and 31 December 2021, Quarto Group did not have any treasury policy or hedging arrangement.

192

APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF QUARTO GROUP

CAPITAL COMMITMENTS

As at 31 December 2019, 31 December 2020 and 31 December 2021, Quarto Group did not have any capital commitments.

GEARING RATIO

As at 31 December 2019, 2020 and 2021, the gearing ratios of Quarto Group were 87.2%, 71.0% and 66.1% respectively. The gearing ratio is defined as total liabilities divided by total assets.

PROSPECTS

Quarto Group is in a good financial position and has a strong list of new titles for publication in 2022. The sizeable backlist continues to perform well and Quarto Group is confident in its sales teams ability to navigate the changing market. By combining the competitiveness of the Quarto Group and the Group, Quarto is confident that it can create greater value for its customers. Quarto considers that the Acquisition is an important milestone for the its future development and will benefit the operation of the Enlarged Group in the long run.

193

GENERAL INFORMATION

APPENDIX V

1. RESPONSIBILITY STATEMENT

This circular, for which the Directors collectively and individually accept full responsibility, includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. The Directors, having made all reasonable enquiries, confirm that to the best of their knowledge and belief the information contained in this circular is accurate and complete in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this circular misleading.

2. DISCLOSURE OF INTEREST BY DIRECTORS

As at the Latest Practicable Date, the Directors and the chief executive of the Company and their respective associates had the following interests or short positions in the Shares, underlying Shares and debentures of the Company and its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (“ SFO ”)) which have been notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO, including interests and short positions which the Directors and the chief executive of the Company are taken and deemed to have under such provisions of the SFO, or which are required to be and are entered in the register required to be kept under Section 352 of the SFO or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers as set out in Appendix 10 to the Listing Rules (the “ Model Code ”):

Long Positions in the Shares

					Percentage
					to the issued
					share capital
	Personal	Family	Corporate	Total	of the
Name of Directors	Interests	Interests	Interests	Interests	Company
	(Shares)	(Shares)	(Shares)	(Shares)	(%)
Mr. Lau Chuk Kin_(Note 1)_	78,701,906	Nil	266,432,717	345,134,623	44.82
Ms. Lam Mei Lan	16,568,688	Nil	Nil	16,568,688	2.15
Mr. Guo Junsheng_(Note 2)_	Nil	Nil	249,804	249,804	0.03

Long Position in the shares of Left Field Printing Group Limited (“Left Field”), an associated corporation of the Company

					Percentage
					to the issued
	Personal	Family	Corporate	Total	share capital
Name of Directors	Interests	Interests	Interests	Interests	of Left Field
	(Shares)	(Shares)	(Shares)	(Shares)	(%)
Mr. Lau Chuk Kin_(Note 3)_	9,803,278	Nil	313,048,997	322,852,275	64.74
Ms. Lam Mei Lan	1,035,543	Nil	Nil	1,035,543	0.21

194

GENERAL INFORMATION

APPENDIX V

Long Position in the underlying Shares under the share award scheme of the Company

		Number of	Shares
			Average
		Number of	fair value
	Date of	awarded	per share
Name of Director	award	shares	(HK$)	Vesting period
Mr. Lau Chuk Kin	16 November 2020	200,000	0.68	36 months
Ms. Lam Mei Lan	16 November 2020	1,280,000 and	0.68	36 months and
		2,560,000	0.68	60 months
Mr. Chu Chun Wan	16 November 2020	200,000	0.68	36 months
Mr. Li Hoi David	16 November 2020	200,000	0.68	36 months
Mr. Guo Junsheng	16 November 2020	200,000	0.68	36 months
Mr. Yeung Ka Sing	16 November 2020	200,000	0.68	36 months
Prof. Lee Hau Leung	16 November 2020	200,000	0.68	36 months
Dr. Ng Lai Man Carmen	16 November 2020	200,000	0.68	36 months

Notes:

(1) Of 266,432,717 shares, 258,135,326 shares and 8,297,391 shares are beneficially owned by City Apex and ER2 respectively. As at the Latest Practicable Date, ER2 was the ultimate holding company of City Apex. Mr. Lau owned 69.76% of the issued share capital of ER2 and accordingly, Mr. Lau is deemed to be interested in the said shares pursuant to Part XV of the SFO.
(2) The shares are beneficially owned by Dragon Might Global Limited (“ Dragon Might ”). As at the Latest Practicable Date, Dragon Might is 100% directly owned by Mr. Guo Junsheng and therefore Mr. Guo is deemed to be interested in the said shares.
(3) Of 313,048,997 shares, 16,133,457 shares, 518,586 shares and 296,396,954 shares are beneficially owned by City Apex, ER2 and Bookbuilders BVI Ltd respectively. As at the Latest Practicable Date, Bookbuilders BVI Ltd is an indirect wholly-owned subsidiary of the Company. As stated under note 1 above, Mr. Lau is deemed to be interested in 44.82% issued share capital of the Company. Accordingly, Mr. Lau is deemed to be interested in the said shares.

Save as disclosed above, as at the Latest Practicable Date, none of the Directors or the chief executive of the Company, or any of their spouses, or children under eighteen years of age, had or was deemed to have any interests or short position in the Shares, underlying Shares or debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which have been notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which the Directors and the chief executive of the Company are taken or deemed to have under such provisions of the SFO), or which were required and had been entered in the register maintained by the Company pursuant to section 352 of the SFO or which had been notified to the Company and the Stock Exchange pursuant to the Model Code.

195

GENERAL INFORMATION

APPENDIX V

As at the Latest Practicable Date, each of the independent non-executive Directors has entered into a service contract with the Company for a term of two years ending on 31 December 2022. The service contract is subject to termination by either party giving not less than three months’ prior written notice to the other. Apart from the service contracts abovementioned, no Directors had any existing or proposed service contracts with the Company or any of its subsidiaries which is not determinable within one year without payment of compensation other than statutory compensation.

As at the Latest Practicable Date, none of the Directors had direct or indirect material interest in any assets which have been, since 31 December 2021 (being the date to which the latest published audited financial statements of the Company were made up), acquired or disposed of by or leased to or by or proposed to be acquired or disposed of by or leased to or by any member of the Enlarged Group.

There is no contract or arrangement subsisting at the date of this circular in which any of the Directors is materially interested and which is significant in relation to the business of the Enlarged Group.

3. DISCLOSURE OF INTEREST BY SUBSTANTIAL SHAREHOLDERS AND OTHER PERSONS

As at the Latest Practicable Date, the following persons, other than a Director or chief executive of the Company, had interests or short positions in the shares or underlying shares of the Company which would fall to be disclosed to the Company under Divisions 2 and 3 of Part XV of the SFO, or were directly or indirectly interested in 10% or more of the issued voting shares of any other member of the Enlarged Group or held any options in respect of such securities:

Nature of interest

		Nature of	interest
				Percentage to
				the issued
		Interest in		share capital
	Beneficial	controlled	Total	of the
Name of shareholder	Owner	corporation	Interests	Company
	(Shares)	(Shares)	(Shares)	(%)
ER2_(Note 1)_	8,297,391	258,135,326	266,432,717	34.60
City Apex_(Note 1)_	258,135,326	Nil	258,135,326	33.52
Mr. Chang Mun Kee_(Note 2)_	10,067,583	54,112,030	64,179,613	8.34
Mr. Webb David Michael_(Note 3)_	27,931,168	41,413,808	69,344,976	9.00
JcbNext Berhad_(Note 2)_	54,112,030	Nil	54,112,030	7.03
Preferable Situation Assets
Limited_(Note 3)_	41,413,808	Nil	41,413,808	5.38

196

GENERAL INFORMATION

APPENDIX V

Notes:

(1) 258,135,326 shares are beneficially owned by City Apex. ER2 was the ultimate holding company of City Apex. Accordingly, ER2 is deemed to be interested in the said shares pursuant to Part XV of the SFO.
(2) According to the record kept by the Company, as at the Latest Practicable Date, Mr. Chang Mun Kee is interested in 45.49% of the shares in JcbNext Berhad. Therefore, Mr. Chang is deemed to be interested in the said shares held by JcbNext Berhad.
(3) According to the record kept by the Company, as at the Latest Practicable Date, Preferable Situation Assets Limited is 100% directly owned by Mr. Webb David Michael and therefore Mr. Webb is deemed to be interested in the said shares held by Preferable Situation Assets Limited.

Save as disclosed above, as at the Latest Practicable Date, the Company had not been notified of any other person (other than a Director or chief executive of the Company) who had an interest or short position in the shares and underlying shares of the Company which would fall to be disclosed to the Company under Divisions 2 and 3 of Part XV of the SFO, or were directly or indirectly interested in 10% or more of the issued voting shares of any other member of the Enlarged Group or held any options in respect of such securities.

4. MATERIAL CONTRACTS

The Enlarged Group has entered into the following contracts (not being contracts entered into in the ordinary course of business) within the two years preceding the date of this circular which is or may be material:

(a) the stock transfer form dated 11 October 2021 and entered into between 1010 Printing and Mr. Lau in relation to the acquisition of 1,679,743 Quarto Shares by 1010 Printing at a consideration of £1,511,769;
(b) the stock transfer form dated 1 April 2022 and entered into between 1010 Printing and Mr. Zen Wai Peu in relation to the Acquisition of 1,875,000 Quarto Shares by 1010 Printing at a consideration of £2,250,000;
(c) the deed of assignment, novation and amendment dated 1 April 2022 and entered into among (1) OPUS Group Limited, an indirectly non-wholly owned subsidiary of the Company, (2) Scottish Pacific Business Finance Pty Ltd, (3) Scottish Pacific (BFS) Pty Ltd, (4) Ovato Limited and (5) subsidiaries of Ovato Limited in relation to the acquisition of the outstanding amount of A$4.86 million owed by Ovato Limited to Scottish Pacific Business Finance Pty Ltd, and the provision of additional loan of A$5.14 million by OPUS Group Limited to Ovato Limited; and
(d) the priority deed dated 1 April 2022 and entered into among (1) OPUS Group Limited, (2) HC Management Pty Ltd, and (3) Ovato Limited and its subsidiaries in relation to OPUS Group having the first priority security interest and HC Management Pty Ltd having the second priority interest for the outstanding loan due from Ovato Limited to OPUS Group Limited.

197

GENERAL INFORMATION

APPENDIX V

5. LITIGATION AND CLAIMS

At as the Latest Practicable Date, the Enlarged Group was not engaged in any litigation or arbitration of material importance and no litigation or claim of material importance was known to the Directors to be pending or threatened by or against the Enlarged Group.

6. DIRECTORS’ INTERESTS IN COMPETING BUSINESS

As at the Latest Practicable Date, to the best knowledge, information and belief of the Directors after having made all reasonable enquiries, none of the Directors or their respective close associates had any interests in businesses, which compete or may compete with the Group.

7. GENERAL

The English text of this circular shall prevail over the Chinese text in case of inconsistency.

The company secretary of the Company is Ms. Tan Lai Ming. Ms. Tan is a fellow member of the Hong Kong Institute of Certified Public Accountants and the Association of Chartered Certified Accountants.

The registered office of the Company is at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda and the head office and principal place of business in Hong Kong is at Level 11 East Wing, NEO, 123 Hoi Bun Road, Kwun Tong, Kowloon, Hong Kong.

The branch share registrar and transfer office in Hong Kong of the Company is Computershare Hong Kong Investor Services Limited at Shops 1712-16, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong.

8. EXPERT AND CONSENT

The following are the qualifications of the expert whose name, opinion and/or report are contained in this circular:

Name Qualifications

BDO Limited Certified Public Accountants

The expert named above has given and confirmed that it has not withdrawn its written consent to the issue of this circular with the inclusion herein of its letter, report, advice, opinion and/or references to its name, in the form and context in which they respectively appear.

198

GENERAL INFORMATION

APPENDIX V

As at the Latest Practicable Date, the above expert (i) had no shareholding in any member of the Group and did not have any right, whether legally enforceable or not, to subscribe for or to nominate persons to subscribe for securities in any member of the Group; (ii) had no direct or indirect interest in any assets which had been, since 31 December 2021 (being the date to which the latest published audited consolidated financial statements of the Group were made up), acquired, disposed of by, or leased to any member of the Enlarged Group, or proposed to be acquired or disposed of by or leased to any member of the Enlarged Group; and (iii) had given and had not withdrawn its consent to the issue of this circular with the inclusion of its letter, opinions and/or reports and the reference to its name included herein in the form and context in which they respectively appear.

9. DOCUMENTS ON DISPLAY

Copies of the following documents will be published on both the website of the Stock Exchange (http://www.hkexnews.hk) and the website of the Company (https://www.lionrockgrouphk.com/) for a period of 14 days from the date of this circular:

(a) the report on unaudited pro forma financial information of the Enlarged Group prepared by BDO Limited, the text of which is set out in Appendix III of this circular;
(b) the written consent as referred to in the paragraph headed “EXPERT AND CONSENT” in this Appendix;
(c) the annual reports of Quarto for the three years ended 31 December 2021, the extract of which is set out in Appendix II to this circular; and
(d) this circular.

199

AI assistant

Lion Rock Group Limited — Proxy Solicitation & Information Statement 2022

49710_rns_2022-05-24_c6d4dae8-87e7-4f36-8aa6-ea6c912925d5.pdf

LION ROCK GROUP LIMITED 獅子山集團有限公司 *

MAJOR TRANSACTION

ACQUISITION OF QUARTO SHARES

CONTENTS

DEFINITIONS

DEFINITIONS

LION ROCK GROUP LIMITED 獅子山集團有限公司 *

MAJOR TRANSACTION ACQUISITION OF QUARTO SHARES

INTRODUCTION

THE ACQUISITION

BASIS OF DETERMINATION OF THE CONSIDERATION

PREVIOUS ACQUISITIONS

LETTER FROM THE BOARD

SHARES ACQUIRED IN THE ACQUISITION

SHARES ACQUIRED AFTER THE ACQUISITION

INFORMATION OF QUARTO

REASONS FOR AND BENEFITS OF THE ACQUISITION

LETTER FROM THE BOARD

IMPLICATIONS OF THE ACQUISITION UNDER THE LISTING RULES

WAIVER FROM STRICT COMPLIANCE WITH RULE 14.67(6)(A)(I) OF THE LISTING RULES

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Alternative Disclosure

LETTER FROM THE BOARD

ADDITIONAL INFORMATION

1. FINANCIAL INFORMATION OF THE GROUP

2. INDEBTEDNESS

3. FINANCIAL IMPACT OF THE ACQUISITION

Assets and Liabilities

Earnings

4. FINANCIAL AND TRADING PROSPECT OF THE ENLARGED GROUP

5. WORKING CAPITAL

6. MATERIAL ADVERSE CHANGE

FINANCIAL INFORMATION OF QUARTO GROUP FOR EACH OF THE THREE YEARS ENDED 31 DECEMBER 2019, 2020 AND 2021

THE QUARTO GROUP, INC. ANNUAL REPORT 2021

Independent Auditor’s Report to the Members of The Quarto Group, Inc.

Opinion

OUR OPINION ON THE FINANCIAL STATEMENTS IS UNMODIFIED

Basis for opinion

Conclusions relating to going concern

Our approach to the audit

Key audit matters

INDEPENDENT AUDITOR’S REPORT (continued)

OUR APPLICATION OF MATERIALITY

THE QUARTO GROUP, INC. ANNUAL REPORT 2021

IDENTIFYING SIGNIFICANT COMPONENTS

TYPE OF WORK TO BE PERFORMED ON FINANCIAL INFORMATION OF PARENT AND OTHER COMPONENTS

PERFORMANCE OF OUR AUDIT

CHANGES IN APPROACH FROM PREVIOUS PERIOD

Other information

Our opinions on other matters prescribed by the Companies Act 2006, were it to apply to the parent company, are unmodified

Matter on which we are required to report under the Companies Act 2006, were it to apply to the parent company

Matters on which we are required to report by exception, were the Companies Act 2006 to apply to the parent company

Corporate governance statement

Responsibilities of directors for the financial statements

Auditor’s responsibilities for the audit of the financial statements

EXPLANATION AS TO WHAT EXTENT THE AUDIT WAS CONSIDERED CAPABLE OF DETECTING IRREGULARITIES, INCLUDING FRAUD

INDEPENDENT AUDITOR’S REPORT (continued)

Other matters which we are required to address

Use of our report

David White

Consolidated Income Statement

Consolidated Statement of Comprehensive Income

Consolidated Balance Sheet

Consolidated Statement of Changes in Equity

Consolidated Cash Flow Statement

THE QUARTO GROUP, INC. ANNUAL REPORT 2021

Notes to the Financial Statements

1 General information and significant accounting policies

CHANGE IN ESTIMATE

STATEMENT OF COMPLIANCE

BASIS OF ACCOUNTING

STANDARDS, AMENDMENTS AND INTERPRETATIONS TO EXISTING STANDARDS THAT ARE NOT YET EFFECTIVE AND HAVE NOT BEEN ADOPTED EARLY BY THE GROUP

SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENTS

GOODWILL

INTANGIBLE ASSETS

SALES RETURNS ALLOWANCE

Lion Rock Group Limited Proxy Solicitation & Information Statement 2022