Scholium Group Regulatory News (SCHO)

Scholium Group plc

Preliminary Results

7 July 2017

Scholium is engaged in the business of rare books and art. Its primary operating subsidiary is Shapero Rare Books which is one of the leading UK dealers trading internationally in rare and antiquarian books and works on paper.

The group also trades alongside other third party dealers in the broader arts and collectibles business via its subsidiary, Scholium Trading.

Operational Highlights

· Stabilisation of core markets after Brexit

· Group turnaround to profitability in the second half of the financial year

· Significant cost cuts implemented to reduce the fixed cost base of the Group by the targeted £320,000 in the new financial year

· Improved trading in the first quarter of the new financial year

Financial Highlights

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Jasper Allen, Chairman of Scholium, noted "We are delighted to have finished the year on a positive note after the uncertainty in our markets around the UK Referendum. The momentum from the profitable second half has continued into the new financial year. Furthermore, the group has a strong balance sheet and, following implementation of the programme of cost savings, is now well-placed to deliver a positive outcome."

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Chairman's Statement

I am pleased to report that the business returned to profitability in the second half of the financial year, despite the setback caused by customers' hesitancy (experienced by all traders in this market) following the UK vote on EU membership in the first half of the year. The market in our core areas has stabilised, and the upward momentum seen in the second half of the financial year to 31 March 2017 has, I am delighted to report, continued into the beginning of the current financial year.

The Group remains well capitalised with strong stock, approximately £0.97 million in cash and no debt. Furthermore, the business is now well placed in the current financial year to benefit from the cost savings we outlined in the interim report, as well as from the recent admission to the Antiquarian Booksellers' Association ("ABA") and the various international fairs that can now be accessed by the Group.

Business Review

At the end of the 2015/16 financial year, the Group's ambition was to build on the profitability of the prior year. The second half of the 2016/17 financial year showed continued progress, but the loss in the first half of the year, caused by the effect of customer indecision following the UK referendum on EU Membership, marred the year as a whole.

We have continued to attend major trade fairs as in previous years. Whilst many of these have been profitable, and are particularly important for customer acquisition, in the coming year we have taken the decision to reduce the cost of certain major art fairs and reallocate this expenditure to fairs that are now available to the group by virtue of the new membership of the ABA. We are also pleased with the results achieved generally through the circulation to customers of high quality catalogues.

Scholium Trading performed strongly in the year - it delivered a healthy contribution to the 2016/17 financial year, and we continue to see opportunities from dealers we have worked with in the past.

Revenue for the year of £6.1 million (2016: £6.7 million) generated an adjusted operating loss of £0.2 million (2016: profit of £0.02 million). Of particular note is the 88% increase in revenue in the second half of the financial year as compared to the first half.

Staff

As ever, our dedicated employees have contributed significantly to the restoration of operating profitability of the Group in the year and I would like to take this opportunity of thanking them again for their hard work and effort in what has been a challenging year.

Board Changes

As announced on 5 April 2017, Simon Southwood is stepping down from the board of the Company in August 2017 and his roles and responsibilities as Finance Director will be taken on by Peter Floyd in a part time capacity. We are grateful for Simon's considerable assistance in recent years and wish him well in his new ventures; and we look forward to welcoming Peter to the board.

Current Trading and Prospects

The start to the new financial year has been strong - the trend in trading from the second half has continued. Furthermore, the business remains well capitalised with high quality stock and, at the year end, had net assets of £9.9 million including £0.97 million of cash as at 31 March 2017, equivalent to 73.0p and 7.1p per ordinary share respectively.

The upward momentum seen in the second half of 2016/17, combined with the effect of the cost savings now fully implemented, mean that the Group is materially ahead of the equivalent position at the end of June 2016.

Whilst we have reduced the operating costs in the Modern & Contemporary division, we continue to maintain a presence in that market and continue to seek viable trading opportunities in Scholium Trading.

Strategic Report

This report provides an overview of our strategy and of our business model; gives a review of the performance of the business and of our financial position at the year-end; and sets out the principal risks to which the Group is exposed. In addition, it comments on the future prospects of the business.

Principal Activities & Review of the Business

The Group is engaged in the business of fine art and collectibles. It is typically engaged as a dealer - buying, owning and selling rare & collectible items objects for a profit. It does this on its own or alongside third party dealers in rare and collectible goods.

Shapero Rare Books is the core business of the Group. It is a leading international dealer in rare and collectible antiquarian books and works on paper with special expertise in Natural History, Russian and Travel books. It is also developing its Shapero Modern brand which deals in modern and contemporary prints and editions by better-known artists who already have commercial success.

Scholium Trading is the trading arm of the Group. Based upon recognition that art dealers are often undercapitalised, it works alongside these dealers in the broader rare and collectibles market where they have the expertise and the clients, but not the capital, to trade in their markets.

The Group maintains value from ownership of its stock and generates value through its expertise, astute buying and the profitable sale of stock.

Strategy & Key Objectives

The Company is seeking to grow its businesses organically through reinvestment of profits in high quality stock. Our key objectives are to:

• Increase the profitable trade of Shapero Rare Books and Shapero Modern through increased sales, selective purchasing and management of the cost base; 


• Develop Scholium Trading to be the 'first call' for dealers in high value rare and collectible items seeking support in their trading items which exceed their immediate financial capacity; and

• Seek to expand the group by encouraging new teams - that have specialist expertise in their markets and are seeking a well-capitalised company from which to trade - to join Scholium.

Review of the year from continuing operations

In keeping with the experience in the broader UK business environment, the business showed a marked upturn in its fortunes in the second half of 2016/17: revenue increased by 88% and gross profit increased by 49%, compared with the first half of the year; and the Group returned to profitability in that period.

The loss for the year is attributable to the weak first half, associated with uncertainty around the UK referendum on EU membership.

Notwithstanding the stronger second half of the year, we took the view that the fixed cost base of the business was too high and we have taken significant steps to bring the cost base in line with the overall performance of the Company. We have realigned employee incentives and sought to reduce costs not associated with revenue or necessary for governance and reporting requirements.

We have reduced the group's fixed cost base by approximately £320,000 on an annualized basis. This is after accounting for new fairs that the business will attend that are operated by or in association with the Antiquarian Booksellers' Association, which Shapero Rare Books has joined. We are also delighted to be exhibiting at Frieze Masters in 2017 which is the premier London art fair for livres d'artistes (artists' books) in which the Group deals.

Key Performance Indicators

The Group is managed and reports on a number of Key Performance Indicators.

Our current principal KPIs are:

· Gross margin, EBITDA, earnings per share;

· The breadth and distribution of the stock of assets held by the Group (analysed by type, department, category, area of expertise and age);

· Stock turnover of assets and gross yield (again, analysed by type, etc.); and

· Various key risk indicators including capital resources, portfolio allocation and cash.

We do not report on all of these KPIs as they would create an overly long and complex document.

Where the performance of any book category does not meet expected returns, the business actively seeks to re-allocate capital to categories and/or interests that are more fashionable and saleable.

Group Performance

Shapero Rare Books

The books department had a difficult first half of 2016/17 due to the uncertainty immediately following the referendum. It was clear that customers, in particular international customers, were not prepared to commit to material purchases whilst the Referendum created uncertainty in UK markets. Fortunately, the consequent weakness in Sterling created significant opportunities for international buyers and the second half of the financial year saw a material strengthening in the book department's core markets. To put this in context, revenue for the book department increased from £1.9 million in the first half of the year to £3.3 million in the second half of the year and gross profit increased from £0.8 million to £1.2 million. The gross margin in the second half of the year reflects the normal operation of the business.

Notwithstanding the improvement in performance in the second half of the year, the management of the department volunteered to reduce materially the fixed cost base of the Group. This has entailed reductions in the salaries of the senior management (and the introduction of appropriate incentive arrangements), withdrawal from non-performing art/collectibles fairs and reorganisation of the group's sales, marketing and PR strategy.

We are grateful to management for the consensual way this has been agreed and implemented. The cost savings were implemented as of 1 April 2017, and will be evident in the performance of the rare book department in the Group's next interim report.

Scholium Trading

Scholium Trading performed strongly in the year - it continues to provide a very valuable contribution to Group performance. We find that partners are supportive of the offering - we are a sophisticated, discrete and relatively well capitalised dealer to trade alongside. The yield on average capital commitment through the year is approximately 42%; gross margin is volatile as the structure of transactions changes from trade to trade. Gross profit for the year of £269K (2016: £204k) represents growth of 32% as compared to the prior year.

Group costs are not allocated to the trading division and, as such, this has not had any associated cost reductions.

Central Costs

Central costs include the cost of all board members as well as the those associated with an AIM listing. These costs are normally fixed but may include discretionary costs associated with governance. The variance in central costs as compared to the prior year is the consequence of an independent review of the business commissioned by the non-executive directors in the context of first half performance.

Consistent with the rest of the Group, central costs in the coming year will be reduced due to voluntary salary reductions by all the directors.

Year ending March 2017 (all figures £'000)

Year ending March 2016 (all figures £'000)

Dividend

The Board does not propose to declare a final dividend for the 2016/17 financial year.

Simon Southwood

Chief Financial Officer

Principal Risks & Uncertainties

Supply of antiquarian books and other items

By definition, rare and antiquarian books and other works on paper are rare. The availability of fresh stock of such items is often driven by major life events, such as inheritance, unrecovered debt, divorce or downsizing due to economic malaise. The business of Shapero Rare Books is reliant upon individual works and collections of works coming onto the market and upon the Group being able to access those business opportunities. There is no guarantee that fresh stock will come onto the market in sufficient quantities to meet the Group's plans for continued growth.

When works become available for sale or purchase, such sales are often dealt with privately and discretely and, accordingly, there is no guarantee that the Group's employees will be able to access such business opportunities or to negotiate successfully the purchase of fresh stock coming onto the market.

Reliance on key international trade fairs

A significant proportion of the Group's sales are made at international trade fairs, and in particular The European Fine Art Fair. If this fair were to be discontinued it would have a material effect on the ability of the Group to sell goods. There are a limited number of stands at international trade fairs and as a result places are highly sought after. Whilst members of the Group have been exhibiting at these fairs for many years, there can be no certainty that it will continue to secure a place in the future.

Competition

The market in the books and other items in which the Group trades is competitive. In the market for antiquarian books and other items in which Shapero Rare Books trades, the Group faces various competitive pressures including from the major auctioneers, Sotheby's, Christie's and Bonhams, as well as smaller auctioneers and a large number of dealers and smaller operators.

The Group is likely to face continued and/or increased competition in the future both from established competitors and/or from new entrants to the market. The Group's competitors include businesses with greater financial and other resources than the Group. Such competitors may be in a better position than the Group to compete for future business opportunities. If the Group is unable to compete effectively in any of the markets in which it operates, it could lead to material adverse effect on the Group's business, financial condition, and operations.

Co-owned rare and collectible goods

In the case of high value items or collections, the Group will often acquire the items jointly with another bookseller and if not expressly provided for there is a risk that the Group will not be able to sell the entire asset without the agreement of all joint-owners. In this and other respects the Group relies on the honesty and integrity of other dealers. Whilst the Group takes care to deal only with established counterparties and experienced dealers who are well known to senior management and/or the Directors, there can be no guarantee that co-owners will comply with the agreed terms (including, for example not charging the items) or that such co-owners will not enter into administration or other insolvency procedure, and in the event there is a loss of the co-owned goods it is not certain that the Group could claim under its insurance policy in relation thereto.

Stock valuation and liquidity

The Group will trade in rare and collectible items, which may be highly illiquid. The value of goods acquired is difficult to assess and it may not be possible for management to sell the assets at or above the price for which they were acquired. The value of assets in the balance sheet may not represent the actual resale value achievable.

Theft, loss or damage

Rare and collectible items are highly mobile goods. Furthermore such goods are frequently transported internationally for trade shows or other marketing opportunities. Whilst precautions are taken to ensure safe passage, the Group's assets may be lost, damaged or stolen. While the Group carries specialist insurance, there is no guarantee that the Group's insurance cover will be adequate in all circumstances. Assets of the Group will be placed with third parties for sale on commission. While the Group intends to take appropriate precautions when placing assets with third parties, there is a risk that these assets outside of the Group's direct control may be stolen or replaced by unscrupulous third parties with fakes or forgeries.

Authenticity and export authority

The Directors of the Company will ensure that due diligence is undertaken on the authenticity of the assets acquired for sale. Nonetheless fakes and forgeries do exist in the market and despite due diligence the Group may acquire these believing them to be authentic. Further, the attribution of works to a writer or artist is not always exact science, and there can be no guarantee that assets of the Group will not have been mistakenly attributed in this way. Lack of authenticity is not covered by the Group's insurance. Whilst the Group takes appropriate care when acquiring works which may be of material importance in the state of origin, there can be no guarantee that works acquired by the Group are not subject to restrictions on export or sale.

Insurance

The Group carries a specialist insurance policy under the Antiquarian Booksellers Association Insurance Scheme which covers each of the businesses. The Directors believe that the Group carries appropriate insurance for a business of its size and nature but there can be no guarantee that the extent or value of the cover will be sufficient, in relation to stock in transit or on consignment. The Directors review the Group's insurance arrangements on an annual basis and endeavour to insure its stock adequately, but there is no certainty that future claims will not fall within the exclusions under the policy or that the insurer will pay out any claim if made. Further, there can be no guarantee that the necessary insurance will be available to the Group in the future at an acceptable cost or at all.

Premises

Like many of the established dealers in the market, the Group has a publicly accessible gallery in Mayfair, London from where Shapero Rare Books operates. The Directors believe that the location is highly desirable and an important factor in the success of the business as a whole.

Terms of sale

To date, the contractual arrangements which the Group has entered into with clients, customers and other dealers have not always included (amongst other things) terms dealing specifically with

1. transfer of ownership and risk,

2. contract formation,

3. price and payment,

4. limitations and exclusions of liability, and

5. governing law and jurisdiction.

In light of the foregoing, there can be no guarantee that the Group's arrangements with its customers will not be terminated on short notice or that the Group will not at some future time face challenges or disputes in relation to the contractual or other arrangements with its clients.

If the Group became involved in a contractual dispute and/or a third party was successful in any contractual dispute with the Group, any resultant loss of revenues or exposure to litigation costs or other claims could have a material adverse effect on the Group's reputation, business, financial condition and/or operations or financial results. The Group has revised its standard terms of sale to seek to ensure that, going forward, the arrangements with clients, customers, dealers and others will include terms dealing with each of the aforementioned areas.

Employees

The Group is reliant on a small group of key employees for their knowledge and the reliance customers place on their integrity and service. In the event that a key employee were to leave the business may suffer a short term decrease in performance whilst it adjusts.

Currency risk

The Directors anticipate that the Group will conduct certain of its transactions other than in Pounds Sterling, the Company's functional currency. As a result, movements in foreign exchange rates may impact the Group's performance. The Group does not contract any hedging arrangements in respect of currency positions.

Consolidated Statement of Comprehensive Income

Consolidated Statement of Financial Position

Consolidated Statement of Changes in Equity

There were no transactions with owners in the year.

Consolidated Statement of Cash Flows

Company Statement of Financial Position

Statement of Changes in Company Equity

Company Cashflow

Notes to the Consolidated Financial Statements

1 General information

Scholium Group plc and its subsidiaries (together 'the Group') are engaged in the trading and retailing of rare and antiquarian books and works on paper primarily in the United Kingdom. The Company is a public company domiciled and incorporated in England and Wales (registered number 08833975). The address of its registered office is 32 St George Street, London W1S 2EA.

2 Basis of preparation and accounting policies

The consolidated financial information, which represents the results of the Company and its subsidiaries, has been prepared in accordance with International Financial Reporting Standards and IFRC Interpretations issued by the International Accounting Standards Board (together "IFRSs) as adopted by the European Union (EU) and as applied in accordance with the provisions of the Companies Act 2006. The Company financial statements have been also been prepared in accordance with IFRSs.

The consolidated and Company financial statements have been prepared on an historic cost basis.

Inventories

Inventories are valued at the lower of cost and net realisable value. Cost incurred in bringing each product to its present location and condition is accounted for as follows:

Finished goods - purchase cost on a first-in, first-out basis.

Net realisable value is the estimated selling price in the ordinary course of business.

3 Revenue

All revenues are derived from a single operating segment

4 Profit Before Taxation

5 Employee costs including Directors

All employee costs are included in administrative expenses.

6 Directors' remuneration

7 Exceptional items of expenditure

8 Income tax

9 Profit (Loss) per share

All shares shown above are authorised, issued and fully paid up. Ordinary shares carry the right to one vote per share at general meetings of the Company and the rights to share in any distribution of profits or returns of capital and to share in any residual assets available for distribution in the event of a winding up.

10 Investment in subsidiaries

11 Deferred Corporation Tax

Deferred tax is calculated in full on temporary differences under the liability method using the tax rates expected for future periods of 19%. The deferred tax asset has arisen due to the availability of trading losses The Group has unutilised tax allowances, at expected tax rates in future periods, of £357,000 (2016: £352,000) of which £277,000 has been recognised (2016 £277,000 recognised).

12 Inventories

13 Trade & other receivables

14 Share Capital