Warpaint London Regulatory News (W7L)

26 April 2022

Warpaint London PLC

("Warpaint", the "Company" or the "Group")

Results for the year ended 31 December 2021

Warpaint London plc (AIM: W7L), the specialist supplier of colour cosmetics and owner of the W7 and Technic brands is pleased to announce its audited results for the year ended 31 December 2021.

Financial Highlights

*Adjusted numbers are closer to the underlying cash flow performance of the business which is regularly monitored and measured by management, the adjustments made to the statutory numbers are set out in the table below

Operational Highlights

Post-Period End Highlights

Commenting, Clive Garston, Chairman, said: "I am pleased that despite much of the world having some level of lockdown during 2021 and the continued enforced temporary closure of a number of the Group's customers' retail outlets, sales and profits increased in 2021 to exceed the 2019 pre-pandemic level.

"In the first quarter of 2022 we have enjoyed further profitable growth as we focus on supplying additional retailers and growing sales through our existing customers, taking more warehouse space and adding further stores. In the UK the launch of our W7 products in Boots in February 2022 is a particular highlight and we anticipate adding further large store groups to our customer base in due course.

"The global cosmetics market is increasingly seeing customers transferring to more value orientated brands, such as those produced by the Group, and I believe we are very well placed with our high quality focused offering to capture further market share.

"I am optimistic that the very encouraging trends we have seen in 2021 and into 2022 will continue, and that we have the right offering and strategy in place to continue to deliver profitable future growth."

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014 which is part of UK law by virtue of the European Union (Withdrawal) Act 2018

Investor Webinar

Warpaint's management will be hosting an online presentation and Q&A session later today at 5.30 p.m. BST. This session is open to all existing and prospective shareholders. Those who wish to attend should register via the following link and they will be provided with access details:

https://us02web.zoom.us/webinar/register/WN_RAnJgEoaSdiUqNkdO9yt0w

Participants will have the opportunity to submit questions during the session, but questions are welcomed in advance and may be submitted to: warpaint@investor-focus.co.uk.

Warpaint London

Warpaint sells branded cosmetics under the lead brand names of W7 and Technic. W7 is sold in the UK primarily to retailers and internationally to local distributors or retail chains. The Technic brand is sold in the UK and continental Europe with a significant focus on the gifting market, principally for high street retailers and supermarkets. In addition, Warpaint supplies own brand white label cosmetics produced for several major high street retailers. The Group also sells cosmetics using its other brand names of Man'stuff, Body Collection, Very Vegan, and Chit Chat.

HEADLINE RESULTS FOR THE YEAR ENDED 31 DECEMBER 2021

Adjusted numbers are closer to the underlying cash flow performance of the business which is regularly monitored and measured by management, the adjustments made to the statutory numbers are as follows:

Exceptional items include £0.03 million of staff restructuring and voluntary redundancy costs (2020: £0.24million), £0.19 million of non-recurring legal costs (2020: £0.08 million), and a £0.37 million provision for content use and associated legal fees (2020: £nil).

CHAIRMAN'S STATEMENT

Warpaint entered the Covid-19 pandemic in 2020 in robust health, with a strong balance sheet and an agile management team capable of dealing with the challenges presented. As the worst effects of the pandemic receded in 2021, with the ending of lockdowns in most parts of the world, the Group has emerged in an even stronger and more focused position.

In 2021 we enjoyed a return to growth, with sales and profits exceeding those achieved in 2019, the last full period before the pandemic struck. During the year we focused on increasing our presence in larger retailers globally, through expanding existing relationships and developing new ones. This larger footprint has provided more stability and visibility for the Group, and coupled with our growing online presence, provides a strong platform for the future.

Trading has continued to improve in the first quarter of 2022, with the Group enjoying record quarterly sales and profits. We expect demand to remain at a higher level than pre pandemic and for sales to continue to grow, despite inflationary pressures and the increase in commodity prices exacerbated by the dreadful events taking place in the Ukraine. The Group has no suppliers in either Russia or Ukraine, and no significant historic sales to either country.

Results

2021 was a year of improvement in financial performance for the Group as the worst of the coronavirus pandemic receded and growth resumed. This was achieved in a time of unprecedented increases in freight cost as well as the effect of the pandemic.

Adjusted profit from operations was £7.0 million (2020: £2.5 million) on revenue of £50.0 million (2020: £40.3 million) with basic earnings per share of 3.7p (2020: (1.3)p) and adjusted earnings per share of 7.8p (2020: 3.1p). Adjusted numbers exclude exceptional costs (staff restructuring and voluntary redundancy costs, certain non-recurring legal costs, stock relocation costs and a provision for content use and associated legal fees), amortisation in relation to acquisitions and share based payments.

During the latter part of 2021, the Group increased inventory levels to ensure anticipated demand in the first quarter of 2022 could be fulfilled, with inventories at 31 December 2021 increasing to £18.1 million (31 December 2020: £14.4 million). The balance sheet remains strong, with cash at 31 December 2021 of £4.1 million (31 December 2020: £4.9 million), and the Group is now debt free with the remaining loans and hire purchase contracts totalling £0.3 million having been repaid in full in April 2021.

Dividend

In accordance with the Group's policy to continue to pay appropriate dividends, the board is pleased to recommend an increased final dividend of 3.5 pence per share which, if approved by shareholders at the AGM, will be paid on 5 July 2022 to shareholders on the register at 18 June 2022. The shares will go ex-dividend on 17 June 2022.

Board and People

The pandemic dramatically impacted the personal and working lives of everyone. At Warpaint we quickly made the required changes in 2020 to working practices and continued in 2021 to adapt and modify these as appropriate. I am delighted with the way in which everyone has met these challenges and I would like to offer my thanks in particular to the Group's employees and my fellow board members for their dedication, flexibility and exceptional efforts.

On 3 August 2021 we were pleased to announce the appointment of John Collier from 1 September 2021 as an independent non-executive director of the Company. John is a Canadian national, based in New York, USA, who has spent nearly 30 years in the consumer goods industry, primarily at Revlon, the multinational cosmetics, skin care, fragrance, and personal care company. He brings with him a wealth of experience in the cosmetics sector that is proving particularly beneficial as we seek to grow our North American business and I welcome him to the board.

Annual General Meeting

The Company's annual general meeting will be held at the Company's offices at Units B&C, Orbital Forty Six, The Ridgeway Trading Estate, Iver, Bucks, SL0 9HW on 27 June 2022 at 10 a.m. and after the restrictions caused by the Covid-19 pandemic over the last two years we will be delighted to welcome those shareholders who are able to attend in person.

Summary and Outlook

I am pleased that despite much of the world having some level of lockdown during 2021 and the continued enforced temporary closure of a number of the Group's customers' retail outlets, sales and profits recovered in 2021 to exceed the 2019 pre-pandemic level. The Warpaint team has delivered tremendous results and given this performance the board is pleased to be recommending the payment of an increased dividend.

In the first quarter of 2022 we have enjoyed further profitable growth as we focus on supplying additional retailers and growing sales through our existing customers, taking more warehouse space and adding further stores. In the UK the launch of our W7 products in Boots in February 2022 is a particular highlight and we anticipate adding further large store groups to our customer base in due course.

The global cosmetics market is increasingly seeing customers transferring to more value orientated brands, such as those produced by the Group, and I believe we are very well placed with our high quality focused offering to capture further market share.

I am optimistic that the very encouraging trends we have seen in 2021 and into 2022 will continue, and that we have the right offering and strategy in place to continue to deliver profitable future growth.

Clive Garston

Chairman

25 April 2022

CHIEF EXECUTIVE'S STATEMENT

2021 was a period of strong growth for the Group as most of Warpaint's markets emerged from the worst of the Covid-19 pandemic. Group sales increased by 24% in 2021 to £50.0 million, to surpass the level achieved in 2019, before the pandemic struck. These sales were achieved at an increased gross margin of 33.8% (2020: 31.1%) despite cost pressures, particularly regarding freight, and resulted in a return to a reported profit before tax of £3.7 million (2020: loss of £1.1 million).

Our strategy is to produce a wide range of high quality cosmetics at an affordable price. We aim to increase sales to our existing customers and to win new customers, particularly those retailers with significant sales footprints, both in the UK and internationally. We are also focussing strongly on growing our online sales. This has provided more stability and visibility for the Group and a strong platform for continued growth.

The Group has continued to reduce the focus on its close-out business and in 2021 close-out sales accounted for 9% of revenue (2020: 12%).

W7

The Group's lead brand remains W7, with sales in 2021 accounting for 52% of total Group revenue (2020: 45%). Overall W7 sales increased by 42% in 2021 to £25.9 million compared to £18.2 million in 2020 and showed an increase of 15% over 2019, the last period not impacted by the pandemic.

In the UK, W7 revenues were up 41% in 2021 at £12.0 million compared to £8.5 million in 2020. The UK is the most important market for W7, having grown in importance over the last two years to account for 46% of W7 sales in 2021, compared to 35% in 2019.

The growth in W7 UK sales has been assisted by the roll out into Tesco, together with a growth in sales from the Group's other larger customers in the UK. In February 2020 the Group's W7 products were in 56 Tesco stores, today they are in over 1,400 across the various store formats, with planned further expansion of the range of W7 and accessory products being stocked by Tesco, both in stores and online. W7 sales in the UK received a further boost post period end with Boots starting to stock a range of approximately 45 W7 products in an initial 80 stores from February 2022. We anticipate growth in the presence with Boots in due course.

Internationally W7 sales were up on 2020 in all of the Group's reported regions. In Europe sales increased by 25% compared to 2020, in the US sales increased by 83% compared to 2020, and in the rest of the world sales increased by 92% compared to 2020.

We believe that W7 has a compelling brand proposition and will continue to benefit from consumers wanting a high quality, but excellent value for money product.

Technic

The Technic brands comprise Technic, Body Collection and Man'stuff. Since the acquisition of the Technic brands, through the acquisition of Retra Holdings in November 2017, we have focused on increasing the sales of the all year round cosmetics sold under the brands. The proportion of gifting sales for Retra reduced to 37% in 2021 from 47% in 2020, with single products sold under the Technic brands accounting for 63% of sales in 2021, with an additional shift to all year round gifting products from specific Christmas focused gifting product.

Sales of branded Technic product in 2021 was 37% of total Group revenue (2020: 36%). Overall Technic sales grew by 28% in 2021 to £18.5 million, compared to £14.5 million in 2020 and £16.7 million in 2019.

In 2021, UK revenues were 48% of Technic's total sales and they increased by 11% over the year returning to a similar level seen in 2019, aided by sales of Technic and Body Collection branded products in wilko, which continue to grow.

Sales in Europe, a market almost as large for Technic as the UK, accounted for 46% of Technic's sales and increased by 16% compared to 2020 and were 6% higher than the level achieved in 2019.

Sales for the Technic Brands outside of the UK and Europe accounted for 6% of Technics sales (2020 5%). In the USA, sales decreased by 20% compared to 2020, and in the rest of the world sales increased by 133% compared to 2020, albeit the sales were small in these regions in the context of the Group as a whole being 2% of Group revenues.

The Retra business also produces and sells own brand white label cosmetics for several major high street retailers, with such sales being 2% of Group revenue (2020: 7%). We continue to assess private label opportunities on a case by case basis, based on the return they can deliver and they are not a strategic focus for the Group.

As with W7 we saw a strong recovery in sales for Technic in the UK, Europe and the rest of the world as the Covid-19 lockdowns were ended during 2021, with growth continuing in the first quarter of 2022.

Close-out

Whilst the Group's close-out division continues to provide a good and profitable source of intelligence in the colour cosmetics market, taking advantage of profitable close-out opportunities as they become available, the strategy remains to reduce close-out sales. The close-out division was therefore a smaller proportion of Group sales in 2021, representing 9% of the overall revenue of the Group, down from 12% in 2020 and 16% in 2019.

New Product Development

New product development continues to be core to the Group's proposition to provide new products that are on trend, fast to market and that meet the consumer's quickly changing needs.

In 2021 our New Product Development Team continued to develop a strong pipeline of new products, focused on the demands of our customers.

Our new product development strategy continues to utilise a variety of manufacturing partners, predominantly in China and Europe, that provide high quality products quickly, at very competitive prices, and meet our legal and ethical compliance requirements, together with ensuring continuity of delivery. This process is supported by the Group's Hong Kong based subsidiary sourcing office and its China subsidiary (Jinhua Badgequo Cosmetics Trading Company Ltd), with local employees able to explore new factories and oversee quality control and ethical sourcing.

The Group is very focused on the environmental impact of its products and all plastics have been removed from the outer packaging of its gifting and practically all of its all year-round products, and the Group has virtually eliminated the use of single use packaging in its products completely. The Group's product packaging therefore uses paper and cardboard wherever practicable, which enables the Group, the wholesaler and end user to recycle the waste effectively. In terms of the Group's product casings, the use of plastic is sometimes practically unavoidable, but recyclable packaging is used wherever possible.

All new W7 brand products are being manufactured without parabens and the Company is reformulating existing products where feasible. The Group is on track to be paraben free for all products in the next 18 to 24 months. No heavy metals such as TBTO (preservative) and other ingredients of concern are added to our products and all raw materials comply with the strict regulations applicable in the EU, USA, Canada and other markets in which we operate.

e-Commerce

During 2021 we continued to focus on driving online sales. Whilst direct online sales remain a modest proportion of the Group's overall sales at 2.7% (2020: 1.3% of Group sales), they have grown from £0.2 million in 2019 to £0.5 million in 2020 and to over £1.3 million in 2021, an increase of 159% from 2020 to 2021.

In addition to growing sales through the W7 and Technic brands' own bespoke e-commerce sites, the focus has continued on growing sales of our brands in the UK and the US on Amazon, which has helped further accelerate our online sales.

Further expansion of the Group's online sales presence was implemented in the second half of 2021 in China, with the launch of official W7 brand stores owned by the Group on Taobao Mall (Tmall), the most visited B2C online retail platform in China and Xiaohongshu (Red), one of China's foremost social media, fashion and luxury shopping platforms.

Marketing and PR

In 2021 we continued our focus on ensuring our marketing programmes were both fresh and innovative, focused on both customer loyalty and showcasing our products to new potential consumers, with a particular emphasis on social media. Our online loyalty programme, initiated in 2020, is also helping to retain customers and increase basket size.

Strategy

On an annual basis the board carries out a process of developing a three-year strategic plan for the business based on market data, experience and the Group's aims. This is targeted by year, measured monitored and reviewed as part of the board's on-going business throughout the year. The strategic plan has been updated for 2022, forming the basis of the Group's development through to 2024. The plan is designed to drive shareholder value and has defined targets for sales, EBITDA, earnings per share and cash generation with a particular emphasis on driving incremental EBITDA growth.

The strategic plan comprises six key pillars:

· Develop and build the Group's brands and provide new product development that meets changing trend and consumer needs

The Group ensures that everybody within the business has crystal clarity of the positioning of the Group's portfolio of brands; that there is a clear brand hierarchy; non-core brands and products are eliminated; that close-out continues to reduce as a proportion of sales; and the Group delivers quality new product development and gifting sets that are on-trend and meets the consumers changing needs.

· Develop and nurture the current core business

A major objective of the Group is to continue to develop and grow the presence of the Warpaint brands beyond their existing customer base. There is still, however, significant potential to be realised and further distribution gains in the current customer base and the Group is committed to ensuring this potential is maximised. The Group is focused on ensuring there is a clarity of product offering to each customer segment and to supporting its customers with relevant new products; by using appropriate marketing and innovative merchandising solution to draw consumers into customer stores; and by cross selling the Group's brands and categories for example accessories, body mists, gifting and skin care where appropriate. 

· Grow Market Share in the UK

The business continues to focus on increasing the presence of the Group's brands in channels that our consumers shop in, to increase accessibility and drive profitable market share growth. As a result of this strategy, the Group has successfully launched the W7 brand into Tesco, where distribution gains across all store formats are successfully being driven, into Boots, and the Technic and Body Collection brands into wilko. It continues to have active discussions with other major retailers who are currently in channels that the Group is yet to materially supply to and expanding the UK customer base is a key focus of management. This is particularly opportune as consumers and retailers across all sectors alike are increasingly looking to provide quality products to their customers at affordable prices. 

· Grow market share in the USA and China

The USA and China continue to provide a major growth opportunity for the Group. In the USA, the Group is establishing agency channels and using employees to directly sell to retailers. A core product range for the USA has been established with minimum margin requirements; whilst targeted discussions are now underway to gain both gifting and all year around listings. In China the Group conducts business locally through its Chinese subsidiary company. We are also continuing to register products for sale in China in order to grow our total offering and increase sales. This has led to the development of relationships with distributors in the region who have the capability to drive sales of the W7 brand via a W7 storefront on on-line market places.

· Develop the online/e-commerce strategy for brand development and profitable sales

The Group aims to grow and maximise profitable sales across the Group's on-line sales channels. As well as continuing to sell on the businesses' own websites and developing its own consumer community, plans continue to be executed to develop sales across Amazon platforms. W7 stores have been launched in the UK, USA and Europe on Amazon and are fulfilled by Amazon. Further on-line sales platforms and geographies will be evaluated and, where profitable opportunities identified, launched over the course of the three year plan. The Group continues to develop and build its brands by utilising brand ambassadors, influencers and make-up artists to engage actively with its target audience. The Group wants to ensure that consumers are adequately inspired and educated on how the Group's products can be used to experiment and achieve different looks. Developing the social media strategy also directly impacts the Group's online sales strategy.

· Develop and implement appropriate strategies that ensure Warpaint reduces its impact on the environment

The Group recognises consumers', customers' and our own requirement to reduce our environmental impact. The business has already identified and implemented a number of initiatives to reduce our environmental footprint via reduced shipping and road mileage; removing plastics where possible from packaging and improving recyclability; removing parabens from ingredients; and ensuring all products are manufactured cruelty free. Further initiatives have been identified and targeted with the aim of being implemented across the course of the three year plan. Further information is contained within the ESG section of this report.

Brands

As previously announced, in 2020 we undertook a review of all our brands, removing from sale those small number of brands that were sub-scale and did not have a compelling market position. This exercise enabled the Group to concentrate on its core W7, Technic, Body Collection, Man'stuff, Chit Chat and Very Vegan brands during the year with an improved focus.

Customers & Geographies

The largest markets for sales of our Group brands are in the UK and Europe. In 2021 our top ten customers represented 57% of revenues (2020: 48%). Group sales are made in 43 countries (2020: 43).

UK

The UK accounted for 51% of Group sales in 2021 (2020: 53%), with UK sales increasing by 20% to £25.3 million (2020: £21.1 million), led by the growth in sales of our lead brand W7, which increased by 41%. Total Group sales in 2021 in the UK were also 12% higher than the level achieved in 2019, despite continued lockdowns in the UK for much of the first half of 2021.

The top ten UK Group customers accounted for 63% of UK sales in 2021 (2020: 63%). Particularly strong growth was seen during the year with, Tesco (up 445%), T K Maxx (up 39%) and wilko (up 44%).

Europe

Prior to the onset of the Covid-19 pandemic in March 2020, Continental Europe was for some time an area of excellent growth for the Group. Following significantly reduced demand caused by country wide lockdowns in 2020, the gradual opening up in 2021 boosted Group sales in Europe by 19% to £18.0 million compared to £15.1 million in the same period in 2020. Sales for the Group's brands into Europe are mainly to Denmark, Spain, France and Sweden.

USA

USA sales, in sterling terms, increased by 39% in 2021 to £3.0 million (2020: £2.1 million) and grew by 49% in US dollar terms. This equated to 6% of overall 2021 Group sales (2020: 5%). USA sales remain below the 2019 level as the focus continues to be to increase the sales of the Group's brands rather than locally sourced close-out. In the USA 89% of sales in 2021 were from the sale of the Group's brands (2020: 83%).  

Following a successful trial with Five Below, W7 products are now being stocked in over 1,200 of their stores in the USA.

A good performance was also seen from the Group's other major customers in the USA, including Macys Backstage, Marshalls, and TJ Maxx. Going forward the focus is to continue to target the larger store groups and to focus on growing our US online sales via Amazon FBA. Six new accounts have been added in the US post period end, including with CVS, where a significant Christmas 2022 order has also been received.

Rest of the World

Sales in the rest of the world increased by 94% from £1.9 million in 2020 to £3.7 million in 2021, accounting for 7.3% of overall Group sales (2020: 4.7%), and were 31% higher in 2021 compared to the 2019 pre-pandemic level. In Australia, which is a key country for the Group in the rest of the world region, sales increased by 128% in 2021 to £2.4 million. Since the easing of the Covid-19 lockdowns in the rest of the world region we have seen a strong recovery and growth in sales of our brands.

Summary and Outlook

I am pleased with the strong performance in 2021, with a significant recovery across the Group, following a difficult 2020 for everyone and despite continuing Covid-19 lockdowns in many countries during 2021, particularly in the first half.

We have seen particularly strong growth in the UK, with sales increasing beyond the level achieved in 2019, aided by the growing sales of our W7 brand through Tesco and of our Technic and Body Collection brands through wilko. Additionally, the launch of W7 into Boots in February 2022 provides a further significant opportunity. We have also seen an improved performance globally and particularly in the US, aided by our successful roll out with Five Below.

The improved profit and gross margin performance in 2021 is despite cost headwinds, particularly with regard to freight. Group container freight costs were £3 million higher in 2021 than they were in 2020. In recent months we have seen some reduction in freight costs, although they remain above historic levels, and with changes to our logistics, such as direct shipping of product from China to the USA, we anticipate this could have a further positive impact on Group margins going forward.

Warpaint is very well positioned to take advantage of the increasing trend for consumers to move to the type of high quality value orientated products offered by the Group. We have a robust supply chain and an increasing number of outlets selling our products. We are working in partnership with our existing retailers to grow sales further and are in active discussions with additional major retailers globally.

Trading in 2022 has started strongly with a record first quarter. Sales for the first three months of 2022 are approximately 60% ahead of the same period in 2021, with sales increases seen across all of the Group's brands at improved levels of gross margin. I am encouraged by the Group's prospects for the rest of the year and beyond as we seek to further increase our retailer penetration and online sales, together with looking to grow sales through our existing customer outlets.

I look forward to updating further on our progress later in the year and with significant opportunities for further growth I look forward to the future with confidence.

Sam Bazini

Chief Executive Officer

25 April 2022

FINANCIAL REVIEW

In 2020 results were adversely impacted by the Covid-19 pandemic, however 2021 has seen the Group achieve results ahead of 2020 and 2019 a year not affected by the pandemic. Group revenue increased in the year by 24% and adjusted profit before tax increased in the year by 200%. Most pleasing in the year was the improvement in gross margin by 2.7% to 33.8%, despite some increased costs in the supply chain, particularly with freight. The Group continues its strategy of building the W7 and Technic brands in the UK and internationally, and we remain focused on margin, being debt free, and generating cash.

The Group monitors its performance using a number of key performance indicators which are agreed and monitored by the board.

Exceptional items include £0.03 million of staff restructuring and voluntary redundancy costs (2020: £0.24million), and £0.19 million of non-recurring legal costs (2020: £0.08 million), and a £0.37 million provision for content use and associated legal fees (2020: £nil).

Headline results, shown below, represent the performance comparisons between the consolidated statements of income for the years ended 31 December 2020 and 31 December 2021.

Revenue

Group revenue for the year increased by 24.1% from £40.3 million in 2020 to £50.0 million in 2021.

Company branded sales were £44.4 million in the year (2020: £32.8 million). Our W7 brand had sales in the year of £25.9 million (2020: £18.2 million). Our Technic brand contributed sales of £18.5 million in the year (2020: £14.5 million).

Our Retra subsidiary business had sales of retailer own brand white label cosmetics of £1.1 million in the year (2020: £2.6 million). The white label business is traditionally cost competitive and Retra chooses which projects to undertake based on commercial viability, and in particular margin.

The close-out business revenue reduced by 8.4% from £4.9 million in 2020 to £4.5 million in 2021 as the Group, in line with its strategy, continued to reduce its focus on close-out opportunities.

In the UK sales increased by 19.8% to £25.3 million (2020: £21.1 million). Internationally, revenue increased 28.9% from £19.1 million in 2020, to £24.7 million 2021. In Europe Group sales increased by 19.4% to £18.0 million (2020: £15.1 million). In the rest of the world Group sales increased by 93.7% to £3.7 million (2020: £1.9 million). In the US Group sales increased by 38.5% to £3.0 million (2020: £2.1 million).

E-commerce sales continued to grow in the year and now represent 2.7% / £1.3 million of group revenue (2020: 1.3% / £0.5 million).

Other income of £nil was received from the UK Government's furlough scheme in the year (2020: £0.4mil)

Product Gross Margin

Gross margin was 33.8% for the year compared to 31.1% in 2020. Since the start of 2021 we have noticed slight price increases in US dollars coming from our supply base in China and container freight rates have increased dramatically. We also noticed an increase in outbound freight costs to deliver goods to our European customers. Nevertheless, together with a weakening dollar compared to 2020, our management teams across the Group were swift to recognise and navigate cost headwinds so that new product development and sourcing helped achieve a gross margin improvement.

Container freight costs have increased as a percentage of the cost of goods by 11% in 2021, costing an additional £3.0 million, compared to container rates in 2020. As we end Q1 2022 container rates have begun to fall, and if maintained will improve our gross margin in the current year.

We remain focused on improving gross margin where possible in all our businesses and are making good use of our Hong Kong buying office to ensure this happens. To counter currency pressure, we continue to move production to new factories of equal quality to retain or improve margin and have a natural hedge from our US dollar revenue.

In the USA our strategy to exit sales of locally sourced close-out brands and to focus on the sale of our Group brands is complete and this has helped improve the gross margin in the USA to be more in line with the rest of the Group.

At 31 December 2020 options were in place for the purchase of US$18 million at US$1.3260/£, this has helped to protect our margin in the turbulent foreign exchange markets. Similarly, at 31 December 2021 options were in place for the purchase of US$27 million at US$1.3849/£. Since the start of this year we have purchased more forward options to help protect our gross margin in 2022.

Operating Expenses

Total operating expenses before exceptional items, amortisation costs, depreciation, foreign exchange movements and share based payments, grew more slowly than sales, increasing by 5.7% to £9.2 million in the year (2020: £8.7 million). Operating costs as a percentage of sales reduced from 21.6% to 18.4%.

The overall increase of £0.5 million in the year was necessary to support the growth of the business. Increased costs amounted to £0.7 million and were made up of increases in wages and salaries, office costs, the spend on PR and marketing as e-commerce sales continue to grow, professional fees and the cost of a larger sales team based in the US. There was a decrease in the charge for bad debts of £0.2 million.

Warpaint remains a business with most operating expenses relatively fixed and evenly spread across the whole year. We continue to monitor and examine significant costs to ensure they are controlled and strive to reduce them. In addition, the increased scale of the business has given the Group increased buying power.

Adjusted EBITDA

The board considers Adjusted EBITDA (adjusted for foreign exchange movements, share based payments and exceptional items) a key measure of the performance of the Group and one that is more closely aligned to the success of the business. Adjusted EBITDA for the year was £7.7 million (2020: £4.2 million).

Profit Before Tax

Group profit before tax for the year was £3.7 million (2020: £1.1 million loss). The material changes in profitability between 2021 and 2020 were:

Exceptional Items

Exceptional items include £0.03 million of staff restructuring and voluntary redundancy costs (2020: £0.24million), and £0.19 million of non-recurring legal costs (2020: £0.08 million), and a £0.37 million provision for content use and associated legal fees (2020: £nil).

The Group is currently in dispute with a third party relating to the historic use of content on the Group's social media platforms in the period 2018 through to early 2021. As a result of legal advice received as to the likely quantum of liability a provision of £370,000 has been made as the directors' best estimate of the expected liability and associated legal costs. The payment and the restriction of content use will not affect the ongoing running of the Group's business.

Tax

The tax rate for the Group for 2021 was 24% compared to the UK corporation tax standard rate of 19% for the year. Since the acquisition of LMS, the Group is exposed to tax in the USA at an effective rate of approximately 25% and in other jurisdictions the Group operates cost centres, but these are not materially exposed to changes in tax rates.

Earnings Per Share

The statutory basic and diluted earnings per share was 3.69p and 3.68p respectively in 2021 (2020: 1.31 loss).

The adjusted basic and diluted earnings per share before exceptional items, amortisation costs and share based payments was 7.80p and 7.79p respectively in 2021 (2020: 3.14p).

Dividends

The board is recommending a final dividend for 2021 of 3.5 pence per share, making a total dividend for the year of 6.0 pence per share of which 2.5 pence per share was paid on 26 November 2021 (2020: total dividend of 5.8 pence per share, of which the interim dividend was 2.8 pence per share that included a special dividend of 1.3 pence per share to reflect that no final dividend was declared for 2019, and the final dividend which was 3.0 pence per share). The dividend for the year was covered 1.3 times by adjusted earnings per share.

Cash Flow and Cash Position

Net cash flow generated from operating activities was £5.1 million (2020: £7.5 million). The Group's cash balance decreased by £0.8 million to £4.1 million in 2021 (2020: £4.9 million). The cash generated was principally used to make dividend payments in the year.

We expect capital expenditure requirements of the Group to remain low, however as part of our strategy to grow market share in the UK and US there will be occasions where investment in store furniture is required to secure that business. In 2021 £0.49 million was spent on store furniture for Tesco and wilko (2020: £0.66 million), and £0.11 million was spent on new computer software and equipment, and other general office fixtures and fittings and plant upgrades (2020: £0.18 million).

LTIP, EMI & CSOP Share Options

On 25 May 2021 CSOP share options were granted over a total of 400,000 ordinary shares of 25p each in the Company under the Warpaint London PLC Company Share Option Plan and the Warpaint London plc Enterprise Management Incentive Scheme. The options provide the right to acquire 400,000 ordinary shares at an exercise price of 122.0p per ordinary share.

The LTIP, EMI & CSOP share options had no dilutive impact on earnings per share in the period. The share-based payment charge of the LTIP, EMI and CSOP share options for the year was £0.18 million (2020: £0.66 million) and has been taken to the share option reserve.

Balance Sheet

Inventory was £3.7 million higher at the year end at £18.1 million (2020: £14.4 million). The rise in inventory is a function of growth in the business and to ensure delivery disruption is avoided for our customers. One of the Group's unique selling propositions is that it can deliver a full range of colour cosmetics to our customers, in good time all year round. Having appropriate inventory levels is vital to providing that service. The provision for old and slow inventory was £0.52 million, 2.8% at the year end (2020: £0.52 million, 3.5%). Across the Group we have worked hard in the year to sell through older stock lines, allowing for our provision for old and slow inventory to fall 0.7% in percentage terms in the year. Our Group policy is to provide for 50% of the cost of perishable items that are over two years old. However, we remain comforted by the fact that many such items in the normal course of business are eventually sold through our close-out division without a loss to the Group.

Trade receivables are monitored by management to ensure collection is made to terms, to reduce the risk of bad debt and to control debtor days, which have improved on the prior year. At the year end trade receivables, excluding other receivables, were £8.8 million (2020: £7.8 million), the increase on 2020 due to the rise in sales year on year. The provision for bad and doubtful debts carried forward at the year end was £0.07 million, 0.8% of gross trade receivables (2020: £0.04 million, 0.6%).

Included within borrowings and lease liabilities is an invoice and stock finance facility used to help fund imports in our gifting business, and term loans and hire purchase contracts. At the year end no invoice finance remained outstanding (2020: £0.3 million). The balance outstanding on the term loans and hire purchase contracts at the year end totalled £nil million, having been repaid in full in April 2021 (2020: £0.3 million). The Group was therefore debt free at the year end and does not expect to utilise its £8.5 million invoice and stock finance facility during 2022.

Working capital increased by £0.9 million in the year, to £26.2 million. The main components were an increase in inventory of £3.7 million, an increase in trade and other receivables of £1.1 million, a decrease in cash at the year end of £0.8 million, and an increase in trade and other payables of £3.1 million.

Free cash flow (cash from operating activities less capital expenditure) remained strong at £4.5 million (2020: £6.6 million).

The Group's balance sheet remains in a very healthy position. Net assets totalled £36.2 million at 31 December 2021, a decrease of £1.2 million from 2020, as a consequence of £4.2 million of dividends paid in the year. Most of the balance sheet is made up of liquid assets of inventory, trade receivables and cash. Included in the balance sheet is £7.3 million of goodwill (2020: £7.3 million) and £2.3 million of intangible fixed assets (2020: £4.7 million) arising from acquisition accounting. As at the year end cash totalled £4.1 million (31 December 2020: £4.9 million).

The balance sheet also includes £3.1 million of right-of-use assets. £3.1 million is the inclusion of the Group leasehold properties, now recognised as right-of-use assets as directed by IFRS 16. An equivalent lease liability is included of £3.2 million at the balance sheet date.

Foreign Exchange

The Group imports most of its finished goods from China paid for in US dollars, which are purchased throughout the year at spot as needed, or by taking forward purchase foreign exchange options when rates are deemed favourable, and with consideration for the budget rate set by the board for the year. Similarly, foreign exchange options are taken to sell forward our expected Euro income in the year to ensure our sales margin is protected.

We started 2021 with 42 options in place for the purchase of US$18 million at US$1.3260, and the sale of €5.1 million @ €1.1077. During 2021 when currency rates were favourable, we purchased 40 foreign exchange options which were outstanding at 31 December 2021, for the purchase of US$27 million at US$1.3849, and the sale of €3.9 million @ €1.1558.

The Group has a natural hedge from sales to the US which are entirely in US dollars, in 2021 these sales were $4.08 million (2020: $2.74 million). Together with sourcing product from new factories where it makes commercial sense to do so and by buying US dollars when rates are favourable, we are able to mitigate the effect of a strong US dollar against sterling.

Neil RodolChief Financial Officer

25 April 2022

WARPAINT LONDON PLC

INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF WARPAINT LONDON PLC

Opinion on the financial statements

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'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.

We have audited the financial statements of Warpaint London Plc (the 'Parent Company') and its subsidiaries (the 'Group') for the year ended 31 December 2021 which comprise the consolidated statement of comprehensive income, the consolidated and parent company statements of changes in equity, the consolidated and parent company statements of financial position, the consolidated statement of cash flows 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 in the United Kingdom and Republic of Ireland (United Kingdom Generally Accepted Accounting Practice).

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 believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

We remain 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 entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.

Conclusions relating to going concern

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. Our evaluation of the Directors' assessment of the Group and the Parent Company's ability to continue to adopt the going concern basis of accounting included:

- A critical evaluation of the Directors' assessment of the entity's ability to continue as a going concern, covering the period of at least 12 months from the date of approval of the financial statements by;

· Evaluating the process the Directors followed to make their assessment, including confirming the assessment and underlying projections were prepared by appropriate individuals with sufficient knowledge of the detailed figures as well as an understanding of the Group's markets, strategies and risks;

· Understanding, challenging and corroborating the key assumptions included in their cash flow forecasts against prior year, our knowledge of the business and independent market data, along with the findings from other areas of our audit;

· Consideration of the susceptibility of the Group to any counterparty default or significant delay in settlement of payments. This included corroborating post year end sales values and cash receipts;

· Evaluating via inquiry with the Directors, review of board minutes and review of external resources the potential impact of any a) macroeconomic influences (including inflationary pressures) and b) one-off cash outflows that may have been omitted from cash flow forecasts and assessing the impact these could have on future cash flows and cash reserves;

· Assessing appropriateness of stress test scenarios, and challenging whether other reasonably possible scenarios could occur and considering whether the assumptions included within these were appropriate; In doing so we also challenged the mitigations provided by the Directors in the event of a reasonable downside scenario occurring; and

· Considering the adequacy of the disclosures relating to going concern included within the annual report against the requirements of the accounting standards and consistency of the disclosures against the forecasts and going concern assessment.

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 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.

Our responsibilities and the responsibilities of the Directors with respect to going concern are described in the relevant sections of this report.

Overview

An overview of the scope of our audit

Our Group audit was scoped by obtaining an understanding of the Group and its environment, including the Group's system of internal control, and assessing the risks of material misstatement in the financial statements. We also addressed the risk of management override of internal controls, including assessing whether there was evidence of bias by the Directors that may have represented a risk of material misstatement.

The Group consists of three trading subgroups, all of which are run from the UK except for Marvin Leeds Marketing Services Inc. which is based in the USA. In establishing the overall approach to the Group audit, we completed full scope audits on the underlying subgroups and the parent company as significant components, except for Marvin Leeds Marketing Services Inc, on which we performed specific audit procedures on certain account balances. Marvin Leeds Marketing Services Inc. was not deemed to be a significant component therefore our work was tailored to focus on specific risk areas. All audit work was carried out by the Group audit team.

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, including those which 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 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.

Aside from the going concern key audit matter identified above, we identified the following areas as the key audit matters relevant to our audit of the financial statements.

Our application of materiality

We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. We consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of reasonable users that are taken on the basis of the financial statements.

In order to reduce to an appropriately low level the probability that any misstatements exceed materiality, we use a lower materiality level, performance materiality, to determine the extent of testing needed. Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also take account of the nature of identified misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements as a whole.

Based on our professional judgement, we determined materiality for the financial statements as a whole and performance materiality as follows:

Component materiality

We set materiality for each component of the Group based on a percentage of between 70% and 90% (2020: 47% and 90%) of Group materiality dependent on the size and our assessment of the risk of material misstatement of that component.

Component materiality ranged from £254,800 to £327,600 (2020: £116,000 to £221,000). In the audit of each component, we further applied performance materiality levels of 70% (2020: 75%) of the component materiality to our testing to ensure that the risk of errors exceeding component materiality was appropriately mitigated.

Reporting threshold

We agreed with the Audit Committee that we would report to them all individual audit differences in excess of £18,200 (2020: £12,250). We also agreed to report differences below this threshold that, in our view, warranted reporting on qualitative grounds.

Other information

The directors are responsible for the other information. The other information comprises the information included in the annual report and financial statements 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. 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 course of 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 this gives rise to a material misstatement in the financial statements themselves. 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.

Other Companies Act 2006 reporting

Based on the responsibilities described below and our work performed during the course of the audit, we are required by the Companies Act 2006 and ISAs (UK) to report on certain opinions and matters as described below. 

Responsibilities of Directors

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.

Extent to which the audit was 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. 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 that are applicable to the Group and the industry in which it operates. We determined that the most significant laws and regulations which are directly relevant to specific assertions in the financial statements are those related to the applicable accounting frameworks, the Companies Act 2006, industry specific regulation and employment and taxation laws and regulations in the jurisdictions in which the Group operates.

Our procedures included the following:

· We involved our internal taxation specialists to review the adequacy and appropriateness of tax provisioning;

· Agreement of the financial statement disclosures to underlying supporting documentation; and

· We understood how the Group is complying with those legal and regulatory frameworks, by making enquiries of management and those responsible for legal and compliance procedures. We corroborated our enquiries through our review of board minutes and reviewing summary of claims, litigations and regulatory inquiries that we have obtained from the Group's Compliance Officer.

We assessed the susceptibility of the Group's financial statements to material misstatement, including how fraud might occur, by meeting with management from across the Group to understand where they considered there was a susceptibility to fraud. We identified fraud risks in relation to management override of controls and appropriateness of revenue recognition around the year end where incentive might exist to accelerate (or decelerate) earnings.

Our procedures included the following:

· We obtained an understanding the processes and controls that the Group has established to address risks identified, or that otherwise prevent, deter and detect fraud, and how management monitors those processes and controls;

· We considered management's estimates and judgements applied in the preparation of the financial statements throughout the audit, individually and in aggregate, to evaluate whether there were any indications of bias in the application of these judgements. This included those set out in the key audit matters section of our report;

· Performed journal entry testing, focusing on journal entries containing defined characteristics and on large or unusual transactions based on our knowledge of the business by agreeing to supporting documentation; and

· Testing appropriateness of revenue recognised around year end, by agreeing a sample of revenue recognised to despatch notes to identify any revenue recognised in the incorrect period.

We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit.

Our audit procedures were designed to respond to risks of material misstatement in the financial statements, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery, misrepresentations or through collusion. There are inherent limitations in the audit procedures performed and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we are to become aware of it.

A further description of our responsibilities is available on the Financial Reporting Council's website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor's report.

Use of our report

This report is made solely to the Parent 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 Parent 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 Parent Company and the Parent Company's members as a body, for our audit work, for this report, or for the opinions we have formed.

David Perry FCA (Senior Statutory Auditor)

For and on behalf of BDO LLP, Statutory Auditor

London, United Kingdom

25 April 2022

BDO LLP is a limited liability partnership registered in England and Wales (registered in England and Wales (with registered number OC305127). 

WARPAINT LONDON PLC

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2021

Note 1 - Adjusted profit from operations is calculated as earnings before interest, taxation, amortisation of intangible assets, any impairment costs relating to non-current assets, share based payments and exceptional items.

The notes form part of these financial statements.

WARPAINT LONDON PLC

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 2021

The financial statements of Warpaint London PLC were approved and authorised for issue by the Board of Directors and were signed on its behalf by:

Neil Rodol

Chief Financial Officer

Date: 25 April 2022

The notes form part of these financial statements.

WARPAINT LONDON PLC

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2021

The notes form part of these financial statements.

WARPAINT LONDON PLC

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2021

WARPAINT LONDON PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AS AT ENDED 31 DECEMBER 2021

1. Significant accounting policies

Basis of preparation

The financial statements of Warpaint London PLC (the "Company" or "Warpaint") and its subsidiaries (together the "Group") for the year ended 31 December 2021 were authorised for issue by the board of directors 25th April 2022.

Warpaint London PLC is a public limited Company incorporated and registered in England and Wales. Its registered office is Units B&C, Orbital Forty-Six, The Ridgeway Trading Estate, Iver, Buckinghamshire, SL0 9HW.

The Group's financial statements have been prepared in accordance in accordance UK adopted international accounting standards and in conformity with the requirements of the Companies Act. The functional currency of the parent and its subsidiaries is pounds sterling because that is the currency of the primary economic environment in which the Group operates. The financial statements are also presented in pounds sterling. All values are rounded to the nearest thousand (£'000) except where otherwise indicated.

The annual financial statements have been prepared on the historical cost basis, except for certain financial assets and liabilities which are carried at fair value or amortised cost as appropriate.

The preparation of financial statements in accordance with UK adopted international accounting standards requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Although these estimates are based on management's best knowledge of current events and actions, actual results ultimately may differ from those estimates. The principal accounting policies adopted are set out below.

Basis of consolidation

Where the Company has control over an investee, it is classified as a subsidiary. The Company controls an investee if all three of the following elements are present: power over the investee, exposure to variable returns from the investee, and the ability of the investor to use its power to affect those variable returns. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control.

The consolidated financial statements present the results of the Company and its subsidiaries as if they formed a single entity. Intercompany transactions and balances between Group companies are therefore eliminated in full. All subsidiaries have a reporting date of December.

The consolidated financial statements incorporate the results of business combinations using the acquisition method. In the statement of financial position, the acquiree's identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of acquired operations are included in the consolidated statement of comprehensive income from the date on which control is obtained. They are deconsolidated from the date on which control ceases.

On consolidation, the results of overseas operations are translated into pounds sterling at rates approximating to those ruling when the transactions took place. All assets and liabilities of overseas operations, including goodwill arising on the acquisition of those operations, are translated at the rate ruling at the reporting date. Exchange differences arising on translating the opening net assets at opening rate and the results of overseas operations at actual rate are recognised in other comprehensive income and accumulated in the foreign exchange reserve.

Exchange differences recognised profit or loss in Group entities' separate financial statements on the translation of long-term monetary items forming part of the Group's net investment in the overseas operation concerned are reclassified to other comprehensive income and accumulated in the foreign exchange reserve on consolidation.

On disposal of a foreign operation, the cumulative exchange differences recognised in the foreign exchange reserve relating to that operation up to the date of disposal are transferred to the consolidated statement of comprehensive income as part of the profit or loss on disposal.

Going concern

The Directors have concluded that it is reasonable to adopt a going concern basis in preparing the financial statements. This is based on a reasonable expectation that the Group has adequate resources to continue in operational existence for at least twelve months from the date of signing of these accounts. The Group made a statutory profit of £2.8 million in the year to 31 December 2021 (2020: £1.0 million loss) and had net current assets of £24.8 million at 31 December 2021 (2020: £24.0 million). The Group occasionally makes use in its Retra subsidiary of a £8.5 bank million facility that can be used for confidential invoice discounting and stock finance, the facility renews each year at the end of August. As at the year end £nil of the bank facility was utilised. At the 31st March 2022 the Group had cash of £2.3 million, £nil hire purchase and term debt having repaid these in full during 2021, and had used £nil of its bank facility.

The Directors have prepared forecasts covering the period to December 2023, built from the detailed Board-approved budget for 2022. The forecasts include a number of assumptions in relation to varying levels of sales revenue. Whilst the Group's trading and cash flow forecasts have been prepared using current trading assumptions, the operating environment presents a number of challenges which could negatively impact the actual performance achieved. Excluding the potential impact of a pandemic, which is considered below, these risks include, but are not limited to, achieving forecast levels of sales and order intake, the impact on customer confidence as a result of general economic conditions and leaving the European Union, achieving forecast margin improvements, supply side price inflation, increases in freight costs, and the director's ability to implement cost saving initiatives in areas of discretionary spend where required. The forecasts used in the analysis of the Group's ability to continue in operational existence for the foreseeable future include both the base plan and downside scenarios which although the Group has no significant connections with Russia or Ukraine through its operations (no employees located there nor any major customers or suppliers in the region), include assumptions taking into account macro-economic potential indirect impacts of the events unfolding.

The Group's cash flow forecasts and projections, taking account of reasonable and possible changes in trading performance excluding the potential impact of a pandemic (which is considered below), offset by mitigating actions within the control of management including reductions in areas of discretionary spend, show that the Group will be able to operate comfortably through to the end of December 2023, and in Retra within the level of its facility.

The uncertainty as to the future impact on the Group of a pandemic has been separately considered as part of the directors' consideration of the going concern basis of preparation. In the stress test scenario analysis performed, the directors have considered the reasonably plausible impact of another significant a pandemic outbreak on the Group's trading and cash flow forecasts, together with supply side cost inflation and further increases in freight costs.

In preparing this analysis, a number of scenarios were modelled with the benefit of experience having come through the three COVID-19 lockdowns in the UK in 2020. The scenarios modelled were all based on varying levels of sales revenue, including one that assumes no growth for 2022 and 2023 as a reasonable downside scenario, and more extreme falls in revenue of up to 30% in both years as a worst-case scenario. In each scenario, mitigating actions within the control of management have been modelled. Under each of the scenarios modelled, the Group has sufficient cash to meet its liabilities as they fall due and consequently, the directors believe that the Group has sufficient financial strength to withstand the possible disruption to its activities.

Based on the above indications the directors believe that it remains appropriate to prepare the financial statements on a going concern basis.

Revenue Recognition

Performance obligations and timing of revenue recognition

The Group's revenue is derived from selling goods with revenue recognised at a point in time when control of the goods has transferred to the customer. This is generally when the goods are delivered to the customer. However, for export sales, control might also be transferred when delivered either to the port of departure or port of arrival, depending on the specific terms of the contract with a customer. There is limited judgement needed in identifying the point control passes: once physical delivery of the products to the agreed location has occurred, the Group no longer has physical possession, usually will have a present right to payment (as a single payment on delivery) and retains none of the significant risks and rewards of the goods in question.

UK sales are recognised and invoiced to the customer once the goods have been delivered to the customer. Overseas sales are recognised and invoiced to the customer once the goods have been delivered to the customer or collected by the customer from the Group's warehouse according to the terms of sale.

Where the Group has entered into distributor arrangements the satisfaction of performance obligations and transfer of control to the distributor is from the date of dispatch from either the Group's overseas supplier or from the Group's UK warehouse. Revenue is therefore recognised on the date of dispatch.

Customer loyalty

The Group operates a loyalty reward scheme for 'digital' customers where points are earned for products purchased online, with 10 points equivalent to £1. The Group accounts for loyalty points when redeemed as a sales discount on the sales transaction. A sales discount provision is recognised in the accounts in relation to points issued but not yet redeemed. When estimating this provision, the Group considers the likelihood that the customer will redeem the points. At the year-end there were 2.8 million points yet to be redeemed, leading to a provision of £14,000.

Under IFRS 15, volume rebates and early settlement discounts represent variable consideration and is estimated and recognised as a reduction to revenue as performance obligations are satisfied. Management recognises revenue based on the amount of estimated rebate to the extent that revenue is highly probably of not reversing. Management monitors this estimate at each reporting date and adjusts it as necessary.

Determining the transaction price

Most of the Group's revenue is derived from fixed price contracts and therefore the amount of revenue to be earned from each contract is determined by reference to those fixed prices. Exceptions are as follows:

· Some contracts provide customers with a limited right of return. These relate predominantly, but not exclusively, to online sales direct to consumers and retailers. Historical experience enables the Group to estimate reliably the value of goods that will be returned and restrict the amount of revenue that is recognised such that it is highly probable that there will not be a reversal of previously recognised revenue when goods are returned.

· Variable consideration relating to volume rebates has been considered in estimating revenue in order that it is highly probable that there will not be a future reversal in the amount of revenue recognised when the amount of volume rebates has been determined.

Allocating amounts to performance obligations

For most contracts, there is a fixed unit price for each product sold, with reductions given for bulk orders placed at a specific time. Therefore, there is no judgement involved in allocating the contract price to each unit ordered in such contracts (it is the total contract price divided by the number of units ordered). Where a customer orders more than one product line, the Group is able to determine the split of the total contract price between each product line by reference to each product's standalone selling prices (all product lines are capable of being, and are, sold separately).

Practical Exemptions

The Group has taken advantage of the practical exemptions:

· not to account for significant financing components where the time difference between receiving consideration and transferring control of goods (or services) to its customer is one year or less; and

· expense the incremental costs of obtaining a contract when the amortisation period of the asset otherwise recognised would have been one year or less.

Government Grants

Grants from the government are recognised at their fair value where there is reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants which are revenue in nature are recognised on a systematic basis within Other operating income in the Statement of Comprehensive income over the period in which the Group recognises as expenses the related costs for which the grants are intended to compensate.

Expenditure and provisions

Expenditure is recognised in respect of goods and services received when supplied in accordance with contractual terms. Provision is made when an obligation exists relating to a past event and where the amount of the obligation can be reliably estimated.

Retirement Benefits: Defined contribution schemes

Contributions to defined contribution schemes are charged to the consolidated statement of comprehensive income in the year to which they relate.

Exceptional items and Alternative Performance Measures

Exceptional items which have been disclosed separately on the face of the Consolidated Statement of Comprehensive Income in order to summarise the underlying results. Exceptional items in the current period relate to restructuring costs and legal and professional fees. Neither 'underlying profit or loss' nor 'exceptional items' are defined by IFRS however the directors believe that the disclosures presented in this manner provide a clearer presentation of the underlying financial performance of the Group.

Alternative performance measures (APM's) are used by the Board to assess the Group's performance and are applied consistently from one period to the next. They therefore provide additional useful information for shareholders on the underlying performance and position of the Group. Additionally, adjusted profit from operations is used to determine adjusted EPS which is used as a key performance indicator for the Long-Term Incentive Plan (LTIP) and the Company Share Option Scheme (CSOP). These measures are not defined by IFRS and are not intended to be a substitute for IFRS measures. The Group presents underlying profit / (loss) from operations, profit / (loss) before tax and EPS which are calculated as the statutory measures stated before non-underlying items, including exceptional items, amortisation of intangible assets and share-based payments where applicable.

Underlying results are used in the day-to-day management of the Group. They represent statutory measures adjusted for items which could distort the understanding of performance and comparability year on year. Non-underlying items include the amortisation of intangible assets, exceptional items and share-based payments. Exceptional items are those items which the Group consider to be significant in nature and not in the normal course of business or are consistent with items that were treated as exceptional in prior periods.

Intangible assets

Patents

Patents are used by the Group in order to generate future economic value through normal business operations. Patents are acquired separately and carried at cost less amortisation and impairment. The underlying assets are amortised over the period from which the Group expects to benefit, which is typically between five to ten years.

Intangible assets acquired separately

Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortisation and accumulated impairment losses. Amortisation is recognised on a straight-line basis over their estimated useful lives. The estimated useful life and amortisation method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Intangible assets with indefinite useful lives that are acquired separately are carried at cost less accumulated impairment losses. Amortisation is provided on Licences and Website costs so as to write off the carrying value over the expected useful economic life of five years.

Intangible assets acquired in a business combination

Intangible assets acquired in a business combination and recognised separately from goodwill are initially recognised at their fair value at the acquisition date (which is regarded as their cost). Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets that are acquired separately. Amortisation is provided on customer lists and brands so as to write off the carrying value over the expected useful economic life of five years. Other details of the acquisition are detailed in note 10.

Goodwill

Goodwill represents the excess of the cost of a business combination over the Group's interest in the fair value of identifiable assets, liabilities and contingent liabilities acquired.

Cost comprises the fair value of assets given, liabilities assumed, and equity instruments issued, plus the amount of any non-controlling interests in the acquiree. Contingent consideration is included in cost at its acquisition date fair value and, in the case of contingent consideration classified as a financial liability, remeasured subsequently through profit or loss.

Goodwill is considered to have an indefinite useful economic life and is capitalised as an intangible asset with any impairment in carrying value being charged to the consolidated statement of comprehensive income. Where the fair value of identifiable assets, liabilities and contingent liabilities exceed the fair value of consideration paid, the excess is credited in full to the consolidated statement of comprehensive income on the acquisition date.

Impairment of non-financial assets (excluding inventories and deferred tax assets)

Impairment tests on goodwill and other intangible assets with indefinite useful economic lives are undertaken annually at the financial year end. Other non-financial assets are subject to impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Where the carrying value of an asset exceeds its recoverable amount (i.e. the higher of value in use and fair value less costs to sell), the asset is written down accordingly.

Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the smallest Group of assets to which it belongs for which there are separately identifiable cash flows; its cash generating units ('CGUs'). Goodwill is allocated on initial recognition to each of the Group's CGUs that are expected to benefit from a business combination that gives rise to the goodwill.

Impairment charges are included in profit or loss, except to the extent they reverse gains previously recognised in other comprehensive income. An impairment loss recognised for goodwill is not reversed.

Derecognition of intangible assets

An intangible asset is derecognised on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognised in profit or loss when the asset is derecognised.

Property, plant and equipment

Items of property, plant and equipment are initially recognised at cost. As well as the purchase price, cost includes directly attributable costs.

Depreciation is provided on all items of property, plant and equipment so as to write off their carrying value over the expected useful economic lives. It is provided at the following rates:

Plant and machinery - 25% reducing balance and 20% straight line

Fixtures and fittings - 25% reducing balance and 20% straight line

Computer equipment - 25% reducing balance and 33.33% straight line

Motor vehicles - 20% straight line

Right-of-Use AssetsRight-of-use assets are measured at cost, which is made up of the initial measurement of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the asset at the end of the lease, less any lease 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.

The right-of-use assets are included in a separate line within non-current assets on the Consolidated Balance Sheet

Financial assets

The Group classifies its financial assets into one of the categories discussed below, depending on the purpose for which the asset was acquired. Other than financial assets in a qualifying hedging relationship, the Group's accounting policy for each category is as follows:

Fair value through profit or loss

This category comprises in-the-money derivatives and out-of-money derivatives where the time value offsets the negative intrinsic value (see "Financial liabilities" section for out-of-money derivatives classified as liabilities). They are carried in the statement of financial position at fair value with changes in fair value recognised in the consolidated statement of comprehensive income in the finance income or expense line. Other than derivative financial instruments which are not designated as hedging instruments, the Group does not have any assets held for trading nor does it voluntarily classify any financial assets as being at fair value through profit or loss.

Amortised cost

These assets arise principally from the provision of goods and services to customers (e.g. trade receivables), but also incorporate other types of financial assets where the objective is to hold these assets in order to collect contractual cash flows and the contractual cash flows are solely payments of principal and interest. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment.

Financial assets (continued)

Impairment requirements use an 'expected credit loss' ('ECL') model to recognise an allowance. Impairment is measured using a 12- month ECL method unless the credit risk on a financial instrument has increased significantly since initial recognition in which case the lifetime ECL method is adopted. For receivables, a simplified approach to measuring expected credit losses using a lifetime expected loss allowance is available and has been adopted by the Group. During this process the probability of the non-payment of the trade receivables is assessed. This probability is then multiplied by the amount of the expected loss arising from default to determine the lifetime expected credit loss for the trade receivables. For trade receivables, which are reported net, such provisions are recorded in a separate provision account with the loss being recognised within administrative expenses in the consolidated statement of comprehensive income. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision.

The Group's financial assets measured at amortised cost comprise trade and other receivables, and cash and cash equivalents in the consolidated statement of financial position.

Cash and cash equivalents include cash in hand, deposits held at call with banks, other short term highly liquid investments with original maturities of three months or less, and - for the purpose of the statement of cash flows - bank overdrafts. Bank overdrafts are shown within loans and borrowings in current liabilities on the consolidated statement of financial position.

Financial liabilities

The Group classifies its financial liabilities into one of two categories, depending on the purpose for which the liability was acquired. The Group's accounting policy for each category is as follows:

Fair value through profit or loss

This category comprises out-of-the-money derivatives where the time value does not offset the negative intrinsic value (see "Financial assets" for in-the-money derivatives and out-of-money derivatives where the time value offsets the negative intrinsic value). They are carried in the consolidated statement of financial position at fair value with changes in fair value recognised in the consolidated statement of comprehensive income. The Group does not hold or issue derivative instruments for speculative purposes, but for hedging purposes. Other than these derivative financial instruments, the Group does not have any liabilities held for trading nor has it designated any financial liabilities as being at fair value through profit or loss.

Other financial liabilities 

Other financial liabilities include the following items:

· Bank loans which are initially recognised at fair value net of any transaction costs directly attributable to the issue of the instrument. Such interest-bearing liabilities are subsequently measured at amortised cost ensuring the interest element of the borrowing is expensed over the repayment period at a constant rate.

· Trade payables, other borrowings and other short-term monetary liabilities, which are initially recognised at fair value and subsequently carried at amortised cost using the effective interest method.

Derivative financial instruments

The Group enters into a variety of derivative financial instruments to manage its exposure to foreign exchange rate risk, through the use of foreign exchange rate forward contracts.

Derivatives are initially recognised at fair value at the date the derivative contracts are entered into and are subsequently re-measured to their fair value at the end of each reporting period. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship.

Foreign currencies

Transactions entered into by Group entities in a currency other than the currency of the primary economic environment in which they operate (their "functional currency") are recorded at the rates ruling when the transactions occur. Foreign currency monetary assets and liabilities are translated at the rates ruling at the reporting date. Exchange differences arising on the retranslation of unsettled monetary assets and liabilities are recognised immediately in profit or loss, except for foreign currency borrowings qualifying as a hedge of a net investment in a foreign operation, in which case exchange differences are recognised in other comprehensive income and accumulated in the foreign exchange reserve along with the exchange differences arising on the retranslation of the foreign operation.

Leases

All leases are accounted for by recognising a right-of-use asset and a lease liability except for:

· Leases of low value assets; and

· Leases with a duration of 12 months or less.

Lease liabilities are measured at the present value of the contractual payments due to the lessor over the lease term, with the discount rate determined by reference to the rate inherent in the lease unless (as is typically the case) this is not readily determinable, in which case the Group's incremental borrowing rate on commencement of the lease is used. Variable lease payments are only included in the measurement of the lease liability if they depend on an index or rate. In such cases, the initial measurement of the lease liability assumes the variable element will remain unchanged throughout the lease term. Other variable lease payments are expensed in the period to which they relate.

On initial recognition, the carrying value of the lease liability also includes:

· amounts expected to be payable under any residual value guarantee;

· the exercise price of any purchase option granted in favour of the Group if it is reasonably certain to assess that option; and

· any penalties payable for terminating the lease, if the term of the lease has been estimated on the basis of termination option being exercised.

Leases (continued)

Right of use assets are initially measured at the amount of the lease liability, reduced for any lease

incentives received, and increased for:

· lease payments made at or before commencement of the lease;

· initial direct costs incurred; and

· the amount of any provision recognised where the Group is contractually required to dismantle, remove or restore the leased asset.

Subsequent to initial measurement lease liabilities increase as a result of interest charged at a constant rate on the balance outstanding and are reduced for lease payments made. Right-of-use assets are amortised on a straight-line basis over the remaining term of the lease or over the remaining economic life of the asset if, rarely, this is judged to be shorter than the lease term.

When the Group revises its estimate of the term of any lease (because, for example, it re-assesses the probability of a lessee extension or termination option being exercised), it adjusts the carrying amount of the lease liability to reflect the payments to make over the revised term, which are discounted at the same discount rate that applied on lease commencement. The carrying value of lease liabilities is similarly revised when the variable element of future lease payments dependent on a rate or index is revised. In both cases an equivalent adjustment is made to the carrying value of the right-of-use asset, with the revised carrying amount being amortised over the remaining (revised) lease term.

When the Group renegotiates the contractual terms of a lease with the lessor, the accounting depends

on the nature of the modification:

· if the renegotiation results in one or more additional assets being leased for an amount commensurate with the standalone price for the additional rights-of-use obtained, the modification is accounted for as a separate lease in accordance with the above policy

· in all other cases where the renegotiated increases the scope of the lease (whether that is an extension to the lease term, or one or more additional assets being leased), the lease liability is remeasured using the discount rate applicable on the modification date, with the right-of-use asset being adjusted by the same amount

· if the renegotiation results in a decrease in the scope of the lease, both the carrying amount of the lease liability and right-of-use asset are reduced by the same proportion to reflect the partial of full termination of the lease with any difference recognised in profit or loss. The lease liability is then further adjusted to ensure its carrying amount reflects the amount of the renegotiated payments over the renegotiated term, with the modified lease payments discounted at the rate applicable on the modification date. The right-of-use asset is adjusted by the same amount.

For contracts that both convey a right to the Group to use an identified asset and require services to be provided to the Group by the lessor, the Group has elected to account for the entire contract as a lease, i.e. it does allocate any amount of the contractual payments to, and account separately for, any services provided by the supplier as part of the contract.

Nature of leasing activities (in the capacity as lessee)

The Group leases a number of property, plant and equipment in the jurisdictions from which it operates with a fixed periodic rent over the lease term. The Group has a total of 6 property leases and 1 plant and machinery lease.

Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

Current tax

The tax currently payable is based on taxable profit for the year. Taxable profit differs from 'profit before tax' as reported in the consolidated statement of comprehensive income and other comprehensive income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible.

The Group's current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

Deferred taxation

Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the combined statement of financial position differs from its tax base, except for differences arising on:

· the initial recognition of goodwill;

· the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting or taxable profit; and

· investments in subsidiaries and jointly controlled entities where the Group is able to control the timing of the reversal of the difference and it is probable that the difference will not reverse in the foreseeable future.

Recognition of deferred tax assets is restricted to those instances where it is probable that taxable profit will be available against which the difference can be utilised.

The amount of the asset or liability is determined using tax rates that have been enacted or substantively enacted by the end of the reporting period and are expected to apply when the deferred tax liabilities or assets are settled or recovered. Deferred tax balances are not discounted.

Deferred tax assets and liabilities are offset when the Group has a legally enforceable right to offset current tax assets and liabilities and the deferred tax assets and liabilities relate to taxes levied by the same tax authority on either:

· the same taxable Group Company; or

· different Company entities which intend either to settle current tax assets and liabilities on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets and liabilities are expected to be settled or recovered.

Inventories

Inventories are initially recognised at cost, and subsequently at the lower of the cost and net realisable value. Cost comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

Operating segments

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision maker has been identified as the management team including the Chief Executive Officers and the Chief Financial Officer.

The Board considers that the Group's project activity constitutes the two operating and two reporting segments presented in Note 2, as defined under IFRS 8. Management reviews the performance of the Group by reference to total results against budget.

The total profit measures are operating profit and profit for the year, both disclosed on the face of the combined income statement. No differences exist between the basis of preparation of the performance measures used by management and the figures in the Group financial information.

Earnings per share

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders of the parent by the weighted average number of ordinary shares outstanding during the year, excluding treasury shares and shares in employee benefit trusts, determined in accordance with the provisions of IAS 33 earnings per Share. Diluted earnings per share is calculated by dividing earnings attributable to ordinary shareholders of the parent by the weighted average number of ordinary shares outstanding during the year adjusted for the potentially dilutive ordinary shares.

Share Capital

The Group's ordinary shares are classified as equity instruments.

Share-based payments

Where equity settled share options are awarded to employees, the fair value of the options at the date of grant is charged to the consolidated statement of comprehensive income over the vesting period. Non-market vesting conditions are considered by adjusting the number of equity instruments expected to vest at each reporting date so that, ultimately, the cumulative amount recognised over the vesting period is based on the number of options that eventually vest. Non-vesting conditions and market vesting conditions are factored into the fair value of the options granted. As long as all other vesting conditions are satisfied, a charge is made irrespective of whether the market vesting conditions are satisfied. The cumulative expense is not adjusted for failure to achieve a market vesting condition or where a non-vesting condition is not satisfied.

Where the terms and conditions of options are modified before they vest, the increase in the fair value of the options, measured immediately before and after the modification, is also charged to the consolidated statement of comprehensive income over the remaining vesting period.

Where equity instruments are granted to persons other than employees, the consolidated statement of comprehensive income is charged with the fair value of goods and services received.

Dividends

Dividends are recognised when they become legally payable. In the case of interim dividends to equity shareholders, this is when declared by the directors. In the case of final dividends, this is when approved by the shareholders at the annual general meeting.

Changes in accounting policies

New standards, interpretations and amendments effective from 1 January 2021.

There were no new standards or interpretations impacting the Group that will be adopted in the annual financial statements for the year ended 31 December 2021, and which have given rise to changes in the Group's accounting policies.

At the date of authorisation of these financial statements, certain new standards, amendments and interpretations to existing standards have been published by the IASB and adopted by the EU but are not yet effective and have not been adopted early by the Group. Management anticipates that all of the relevant pronouncements will be adopted in the Group's accounting policies for the first period beginning after the effective date of the pronouncement. Information on new standards, amendments and interpretations that are expected to be relevant to the Group's financial statements is provided below. Certain other new standards and interpretations have been issued but are not expected to have a material impact on the Group's financial statements.

Critical accounting judgements and key sources of estimation uncertainty  

The Group makes certain estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based on historical experience and other factors, including the expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

Key sources of estimation uncertainty

a) Inventories

Inventories are initially recognised at cost, and subsequently at the lower of the cost and net realisable value. There is judgement involved in assessing the level of inventory provision required in respect of slow-moving inventory. Inventory is carried at a value of £18,139,000 at the year end.

The Group makes a 50% provision for perishable items of stock that are greater than two years old. Should the Group increase the provision to 100% of perishable items that are greater than two years old, this would decrease profit by £382,955. The Group does not provide any provision on its non-perishable goods that are greater than two years old on the basis that the products have long shelf life. Should the Group increase the provision to 100% of non-perishable items that are greater than two years old, this would decrease profit by £112,370.

b) Valuation of goodwill

The assessment of the recoverable amount of goodwill allocated to Retra Holdings Limited, Marvin Leeds Marketing Services, Inc. and Treasured Scents Limited, as detailed in note 9, was based on fair value less costs to sell and value in use calculations which involved judgements over the assumptions applied. For Retra Holdings Limited, a 1% increase in the discount rate from 10.0% to 11.0% would reduce the value in use by approximately £3.9 million leaving headroom of £22.2m above the carrying value. For Marvin Leeds Marketing Services, Inc., a 1% increase in the discount rate from 11.4% to 12.4% would reduce the value in use by approximately £0.8 million leaving headroom of £4.6m above the carrying value. For Treasured Scents Limited, a 1% increase in the discount rate from 10% to 11% would reduce the value in use by approximately £0.3 million leaving headroom of £1.6m above the carrying value. None of these scenarios would therefore result in any impairment of the goodwill.

c) Provision for content use and associated legal costs

The Group have recorded a provision of £370,000 at 31 December 2021 in respect of a claim relating to historic content use and associated legal costs (see note 17). The estimation of this provision is by its nature subject to some uncertainty, and whilst the Directors are satisfied that they have recorded their best estimate of the value of the potential outflow, it is nevertheless considered to be a key source of estimation uncertainty.

Critical accounting judgements

a) Deferred tax assets

Deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the assets to be recovered.

2. Segmental information

For management purposes, the Group is organised into two operating segments; Branded and Close-out. The segment 'Branded' relates to the sale of the Group's branded products whereas 'Close-out' relates to the purchase of third-party stock which is then repackaged for sale. These segments are the basis on which the Group reports internally to the Board.

During the year ended 31 December 2021, revenues of approximately £5,033,980 were derived from a single external customer based in Denmark (10%). During the year ended 31 December 2020, there was no single material external customer from which revenues were derived exceeding 10% of annual sales.

The Directors are not able to attribute the Group's assets and liabilities by reportable business segment.

3. Other operating income

The Group did not apply for government support programs in 2021 (2020: £361,000).

Included within the consolidated statement of comprehensive income is £1,745 of interest received during the year ended 31 December 2021.

4. Operating profit / (loss)

Operating profit / (loss) for the period is stated after charging:

The expenditure incurred within the table above falls wholly within Administrative expenses except movement of inventories which falls within cost of sales.

Exceptional costs

Non-recurring costs of £187,000 relate to the costs associated with a historic legal claim connected to an acquisition that the Group is pursuing.

The Group is currently in dispute with a third party relating to the historic use of content on our social media platforms, in the period 2018 through to early 2021. As a result of legal advice received as to the likely quantum of liability a provision of £370,000 at 31 December 2021 has been made as the directors' best estimate of the expected liability and associated legal costs. The payment and the restriction of content use will not affect the ongoing running of the business.

Restructuring costs of £29,000 are considered exceptional as they form the conclusion of a restructuring process that was initiated in the previous period.

Auditor's Remuneration

Analysis of auditor's remuneration is as follows:

5. Staff costs

The average monthly number of employees during the period was as follows:

Remuneration in respect of Directors was as follows:

The directors of the Group are the only key management personnel.

6. Finance expense

7. Income tax

The reasons for the difference between the actual tax charge for the year and the standard rate of corporation tax in the United Kingdom applied to profit for the year as follows:

The UK corporation tax at the standard rate for the year is 19.0% (2020: 19.0%).

On 24 May 2021, the UK Government enacted that from 1 April 2023 the corporation tax rate would increase to 25% for companies with profits of over £250,000. A small profits rate will also be introduced for companies with profits of £50,000 or less so that they will continue to pay corporation tax at 19%. From this date companies with profits between £50,000 and £250,000 will pay tax at the main rate reduced by a marginal relief providing a gradual increase in the effective corporation tax rate.

Deferred tax balances in these financial statements account for the change in the UK Corporation Tax rate from 19% to 25% based on enacted legislation.

The Group's effective tax rate for the year is 24.03% (2020: 9.96%).

8. Subsidiaries

At the period end, the Group has the following subsidiaries:

* indicates indirect interest

All entities detailed above have been in existence for the whole of the reporting period.

The registered office for all UK incorporated subsidiaries is Units B&C, Orbital Forty-Six, The Ridgeway Trading Estate, Iver, Bucks. SL0 9HW.

The registered office for Warpaint Cosmetics Inc.is 445 Northern Boulevard - Great Neck, New York 11021.

The registered office for Badgequo Deutschland GmbH is Robert-Bosch-Straße 10, Haus 1, 56410 Montabaur, Germany.

The registered office for Badgequo Hong Kong Limited is 12F, 3 Lockhart Road, Wanchai, Hong Kong.

The registered office for Jinhua Badgequo Cosmetics Trading Co. Ltd is Room 1401, Gongyuan Building No. 307 South Shuanglong Street, Wucheng District, Jinhua, Zhejiang, China 321000.

The registered office for Marvin Leeds Marketing Services, Inc. is 34W. 33rd St. - Suite 301, New York NY 10001.

The registered office for Warpaint Cosmetics (ROI) Limited is 6th Floor, South Bank House, Barrow Street, Dublin 4, D04 TR29.

9. Goodwill

Goodwill represents the excess of consideration over the fair value of the Group's share of the net identifiable assets of the acquired business/CGU at the date of acquisition. The carrying value at 31 December 2021 includes Treasured Scents Limited (Close-out business) of £513,000, Retra Holdings Limited £6,207,000 and Marvin Leeds Marketing Services, Inc. £554,000.

Impairment is calculated by comparing the carrying amounts to the recoverable amount being the higher of value in use derived from discounted cash flow projections or the fair value less costs to sell. A CGU is deemed to be an individual division, and these have been Grouped together into similar classes for the purpose of formulating operating segments as reported in Note 2. Value in use calculations are based on a discounted cash flow model ("DCF") for the subsidiary, which discounts expected cash flows over a five-year period using a post tax discount rate of 10.0% (2020: 10.1%) for Retra Holdings Limited and 11.4% (2020: 8.0%) for Marvin Leeds Marketing Services, Inc. and 10% for Treasured Scents Limited. Cash flows beyond the five-year period are extrapolated using a long-term average growth rate of 2.0% (2020: 2.0%). The average growth rate beyond the five-year period is lower than current growth rates and is in line with Management's expectations for the business.

The fair value less costs to sell was based on a multiple of earnings less estimated costs to sell. Management have performed the annual impairment review as required by IAS 36 and have concluded that no impairment is indicated for Treasured Scents Limited, Retra Holdings Limited or Marvin Leeds Marketing Services, Inc. as the recoverable amount exceeds the carrying value.

Key Assumptions and sensitivity to changes in assumptions

The key assumptions are based upon management's historical experience. The calculation of VIU is most sensitive to the following assumptions:

· Sales and gross margin - for LMS this is based on forecasts incorporating a compound annual growth rate of 19.3% revenue over the next five years. For Retra, the compound annual growth rate over the next five years is anticipated to be 4.8%. For Treasured Scents the compound annual growth rate over the next five years is anticipated to be 4%. The gross margins for LMS, Retra and Treasured Scents are based on historical rates achieved.

· Administrative expenses are expected to increase by 18% in LMS, 23% in Retra and 5% in Treasured Scents in the year ending 31 December 2022 with 5% incremental increases annually thereafter.

· Discount Rate - pre-tax discount rate of 10.0% for Retra Holdings Limited, 11.4% for Marvin Leeds Marketing Services, Inc. and 10% for Treasured Scents reflects the Directors' estimate of an appropriate rate of return, considering the relevant risk factors.

· Growth Rate - used to extrapolate beyond the budget period (5 years from year end date) and for terminal values based on a long-term average growth rate of 2.0%.

Sensitivity to changes in assumptions

The impairment review of the Group is sensitive to changes in the key assumptions, most notably the pre-tax discount rate, the terminal growth rate, the projected operating cash flows. Reasonable changes to these assumptions are considered to be:

· 1.0% increase in the pre-tax discount rate;

· Reduction in the terminal growth rate to 1%;.and

· 10.0% reduction in projected operating cash flows

Reasonable changes to the assumptions used, considered in isolation, would not result in an impairment of goodwill for LMS, Retra or TS2014.

10. Intangible assets