Warpaint London Regulatory News (W7L)

26 April 2023

Warpaint London PLC

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

Results for the year ended 31 December 2022

Record sales and significant profitability reflect strong full year performance; positive start to 2023

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 2022.

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 very pleased with Warpaint's strong performance in 2022, which reflects the Group's consistent and focussed strategy. We have concentrated on increasing our presence in larger retailers in all our major markets, both through growing sales to existing customers and entering into new relationships. This strategy of increasing sales to larger customers and providing products that their customers want is reflected in the Group's results and provides a strong platform for the future. In addition, growing our online presence is a prime objective of the Group.

"Trading has continued to be strong in the first quarter of 2023, with the Group enjoying record first quarter sales. I am optimistic that the strong performance we have seen in 2022 and into 2023 will continue and that we have the right offering and strategy in place to continue to deliver profitable future growth, despite the backdrop of macroeconomic uncertainty."

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

Enquiries:

Warpaint London plc

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 and Chit Chat.

HEADLINE RESULTS FOR THE YEAR ENDED 31 DECEMBER 2022

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 £nil of staff restructuring and voluntary redundancy costs (2021: £0.03 million), £nil of non-recurring legal costs (2021: £0.18 million), and £0.15 million for content use and associated legal fees (2021: £0.37 million).

CHAIRMAN'S STATEMENT

Warpaint's business strategy and model has enabled it to withstand the difficult business environment driven by rampant inflation, the war in Ukraine and the aftermath of the Covid epidemic to deliver a very good performance in 2022 and to be in a position to grow further in all its markets. This is due to the dedication of all the Warpaint team and I would like to thank them very much for their energy, flexibility and exceptional efforts. Relationships with our major customers and suppliers continue to be very strong.

During the year we continued our strategy of focusing on increasing our presence in larger retailers globally, through growing sales through our existing relationships and entering into new ones, together with growing our online presence. This focus on larger customers and doing more business with them is reflected in the Group's results and provides a strong platform for the future.

Trading has continued to be strong in the first quarter of 2023, with the Group enjoying record quarterly sales. We expect demand to remain buoyant and for sales to continue to grow, despite the macroeconomic headwinds. 

Results

2022 was a year of significant achievement for the Group, with record sales and profits being delivered.

Adjusted profit from operations was £10.3 million (2021: £7.0 million) on revenue of £64.1 million (2021: £50.0 million) with basic earnings per share of 7.9p (2021: 3.7p) and adjusted earnings per share of 11.0p (2021: 7.8p). 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.

Whilst continuing to focus on quick stock turnover, the Group ensured inventory levels were appropriate at the year end to service the anticipated demand in the first quarter of 2023, with inventory at 31 December 2022 increasing to £18.7 million (31 December 2022 £18.1 million). The balance sheet remains strong, with cash at 31 December 2022 of £5.9 million (31 December 2021: £4.1 million), and the Group remains debt free.

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 4.5 pence per share which, if approved by shareholders at the AGM, will be paid on 4 July 2023 to shareholders on the register at 16 June 2023. The shares will go ex-dividend on 15 June 2023.

Board

John Collier, an independent non-executive director of the Company, left the board on 31 December 2022 to focus on his other business interests. I would like to thank John for his contribution to Warpaint and we wish him well in his future endeavours. It is the board's intention to appoint an additional non-executive director in the second half of 2023.

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 28 June 2023 at 10 a.m. and we will be delighted to welcome those shareholders who are able to attend in person.

Summary and Outlook

I am very pleased with the Group's strong performance in 2022 and that this has continued in the first quarter of 2023, with the Group enjoying record quarterly sales. This reflects Warpaint's consistent and focused strategy of increasing our presence in large retailers globally, both by growing sales through our existing relationships and entering into new ones, together with increasing our online presence. This focus on larger customers, doing more business with them and providing what their customers demand is reflected in the Group's results and provides a strong platform for the future. We also continue to develop relationships with other large retailers, particularly in the UK, Europe and the US, where they are seeing demand from their customers for quality, on trend, but more value orientated brands, such as those produced by the Group.

Notwithstanding the current situation in the Ukraine and current levels of inflation I am optimistic that the strong performance we have seen in 2022 and into 2023 will continue and that we have the right offering and strategy in place to continue to deliver profitable future growth, despite the macroeconomic headwinds.

Clive Garston

Chairman

25 April 2023

CHIEF EXECUTIVE'S STATEMENT

The Group achieved a record level of sales in 2022, reflecting the success of the Group's strategy of focusing on growing sales of its branded products. This was achieved at an improved gross margin, despite a number of continuing operational challenges being faced, particularly with regard to supply side price inflation.

In 2022, Group sales increased by 28% in 2022 to £64.1 million, reaching a record level for the Group. These sales were achieved at an increased gross margin of 36.4% (2021: 33.8%) despite continued cost pressures and resulted in a reported profit before tax of £7.7 million (2021: £3.7 million). Gross margin is being maintained in Q1 2023 despite the current economic challenges.

Our strategy of producing a wide range of high-quality cosmetics at an affordable price remains our key focus, growing sales through our existing customers' outlets and winning new customers with significant sales footprints, both in the UK and internationally, together with continuing to grow our online sales. 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.

Following the rationalisation of our brand portfolio in 2020 the Group has concentrated on its core W7, Technic, Body Collection, Man'stuff and Chit Chat brands during the year. In 2022, sales of the Group's branded products accounted for 90% of revenue (2021: 89%).

Warpaint has continued to reduce the focus on its close-out business, although profitable close-out opportunities continue to be taken where appropriate. In 2022 close-out sales accounted for £3.8 million (2021: £4.5 million), 6% of Group sales. The remainder of the Group's sales of £2.6 million (2021: £1.1 million) are white label products for major high street retailers.

W7

The Group's lead brand remains W7, with sales in 2022 accounting for 55% of total Group revenue (2021: 52%). Overall W7 sales increased by 35% in 2022 to £35.0 million compared to £25.9 million in 2021.

In the UK, W7 revenues were up 7% in 2022 compared to 2021, representing 37% of W7 sales in the year, down from 46% in 2021, as stronger sales growth was experienced in regions outside of the UK and higher than normal levels of inventory were held by certain UK retailers at the start of the year. W7 revenues in the UK grew by increased sales into Tesco, together with a growth in sales from the Group's other larger customers in the UK. W7 sales in the UK also received a further boost with Boots starting to stock a range of approximately 45 W7 products in an initial 80 stores from February 2022. Sales to date from Boots have been encouraging and we anticipate an increased presence with Boots in due course.

The strongest growth in 2022 was seen in continental Europe, with sales increasing by 77% compared to 2021, and continental Europe became the largest sales region for W7 branded products in the year, accounting for 45% of W7 sales. The Group has benefited from its post Brexit fulfilment strategy, enabling products to enter the EU without issues, and the growth in both the range of European customers served and the expansion in the number of outlets for certain larger customers.

In the US, W7 sales doubled in 2022 compared to 2021, and accounted for 13% of overall W7 sales, with the Group benefiting from the increased number of customers and outlets in the US.

In the rest of the world, W7 sales declined marginally, largely reflective of the timing of certain large orders.

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

Technic

Since the Company's acquisition of Retra Holdings Limited ("Retra") and its Technic, Body Collection and Man'stuff brands in November 2017, the focus has been on growing the sales of all year-round cosmetics in addition to continuing to grow its strong and established gifting proposition. It was pleasing to see sales of Technic and the other Retra brands, including Body Collection, grow by 23% in 2022. As a result of the ongoing successful execution of this strategy, the proportion of gifting sales for Retra reduced to 34% in 2022, from 37% in 2021 and 47% in 2020, with single products sold under the Technic brands accounting for 66% of sales in 2022.

Sales of branded Technic product in 2022 was 36% of total Group revenue (2021: 37%). Overall Technic brand sales grew by 23% in 2022 to £22.7 million compared to £18.5 million in 2021.

In 2022, UK revenues were 46% of Technic's total sales and they increased by 24% over the year, aided by sales of Technic and Body Collection branded products to the retailer, Bodycare. In April 2023, a range of 158 Technic products will be launched in an initial four Asda superstores on a trial basis with a view to a wider inclusion in Asda's cosmetic range review in Q4 2023.

As with W7, sales of the Technic brands grew strongly in continental Europe during the year and accounted for 48% of Technic's sales in 2022, an increase of 34% compared to 2021, making continental Europe the largest sales region for the Technic brands.

Sales for the Technic brands outside of the UK and Europe accounted for 6% of Technic sales (2021: 6%). In the USA, sales increased by 58% compared to 2021, and in the rest of the world sales increased by 18% compared to 2021, albeit the sales were small in these regions in the context of the Group as a whole being under 3% of total Group revenues.

Building on the successful sales of W7 branded product through Amazon, a Technic brand store was launched on Amazon in the UK in January 2023 and a number of key Technic lines will be launched on Amazon in the US in Q2 2023 and in continental Europe later in 2023.

The Technic business also produces and sells own brand white label cosmetics for several major high street retailers, with such sales more than doubling to be 4% of Group revenue (2021: 2%). Despite the growth in white label sales in 2022, we continue to assess private label opportunities on a case by case basis, based on the return they can deliver.

Close-out

Close-out sales continue not to be a core focus for the Group, although advantage is taken of profitable close-out opportunities as they become available. The close-out division reduced as a proportion of Group sales in 2022, compared to 2021, representing 6% of the overall revenue of the Group (2021: 9%). Whilst not a core focus, this side of the business continues to provide a significant and profitable source of intelligence in the colour cosmetics market and access to new market trends.

e-Commerce

During 2022 we continued to focus on driving online sales. In addition to growing sales through the W7 and Technic brands' own bespoke e-commerce sites, the Group has continued to focus on growing sales of our brands in the UK and the US on Amazon, and in China through 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. Additionally, W7 product was launched on Amazon EU in Germany, Italy and Spain in 2022.

Direct online sales as a proportion of the Group's overall sales increased to 4.3% in 2022 (2021: 2.7%), having grown from £0.5 million in 2020 to £1.3 million in 2021, to over £2.8 million in 2022, an increase of 115% from 2021 to 2022.

Online sales have grown further in the current financial year, up 188% in Q1 2023 compared to the same period in 2022, and the focus remains on ensuring a similar margin to the Group's sales through traditional physical outlets. 

In 2023 the Group will launch online sales in Japan through Amazon, a similar model to that successfully deployed in the US, together with launches of the Technic brands on Amazon in the UK, US and continental Europe.

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.

During 2022 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's cosmetic products are "cruelty free" and are not tested on animals irrespective of where the products are being supplied. We support cruelty free alternatives to animal testing to become compulsory and animal testing overall to be ceased globally. We will now be proudly displaying the PETA company logo on our products for all new products and as packaging is updated. Our commitment to the PETA "Beauty without Bunnies program" is Group wide and covers all brands within the Group.

The Group is very focused on the environmental impact of its products and the Group is committed to becoming an industry leader for sustainable products and packaging. All unrecyclable plastics have now been removed from the outer packaging of our gifting, and we are progressing well with our journey of removing unrecyclable plastics from our all year-round products. 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.

All new W7 brand products are being manufactured without parabens and the Company is reformulating existing products where feasible.  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.

Marketing and PR

We continue to ensure our marketing programmes are both fresh and innovative, focused on both customer loyalty and showcasing our products to new potential consumers, with a particular emphasis on social media using brand ambassadors, influencers and make-up artists. Our online loyalty programme, initiated in 2020, continues to help retain customers and increase basket size.

Strategy

On an annual basis the board reviews and appropriately adapts its 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 2023, forming the basis of the Group's development through to 2025. 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 have been eliminated; that close-out continues to reduce as a proportion of sales; and the Group delivers quality new product development, category extensions where appropriate to the brand 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 enhancing the customer offer by cross selling the Group's brands and category extensions 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 continue to be 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. For example a trail successfully activated in 20 New Look stores in the fashion retail sector in Autumn 2022, will be rolled out to a further 200 New Look stores in mid 2023. This is a particular focus as the business continues to capitalise on consumers and retailers across all sectors alike who 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 has established distributor and agency channels and is using employees to directly sell to retailers. A compelling core product range for the USA has been established with minimum margin requirements. The business is focused on targeted customer initiatives that have gained both gifting and all year around listings with major retailers across key channels. 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 marketplaces.

· 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 key European markets on Amazon and are fulfilled by Amazon. Further on-line sales platforms and geographies continue to be evaluated and, where profitable opportunities are identified, launched over the course of the three year plan. The first of these is planned to be Japan in 2023. 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

In 2020 we undertook a review of all our brands, and since then the Group has concentrated on its core W7, Technic, Body Collection, Man'stuff and Chit Chat brands, being those with the most compelling market position.

Customers & Geographies

The largest markets for sales of our Group brands are in the UK and continental Europe. In 2022 our top ten customers represented 60% of revenues (2021: 57%). Group sales are made in 43 countries (2021: 43).

UK

The UK accounted for 43% Group sales in 2022 (2021: 51%), with UK sales increasing by 9% to £27.6 million (2021: £25.3 million). Sales growth in the UK was seen by both our lead brand W7, which increased by 7%, and the Technic brands, which increased by 24%. UK sales in Q1 2023 are 23% ahead of the same period in 2022.

The top ten UK Group customers accounted for 74% of UK sales in 2022 (2021: 71%). Particularly strong growth was seen during the year with Asda and Bodycare. Additionally, after an initial trial of W7 product in 20 New Look stores, the Group is now rolling out W7 product to a further 200 New Look stores during 2023. We are also in continued talks with Tesco to increase the W7 offering in their stores and anticipate further expansion across their estate this year.

Europe

In 2022 Group sales in Europe increased by 56% to £28.1 million, compared to £18.0 million in the same period in 2021, making this the largest sales region for the Group, accounting for 46% of Group branded sales in 2022, and 44% of overall Group sales in 2022 (2021: 36%). Sales for the Group's brands into Europe are mainly to Denmark, Spain, France and Sweden and during the year strong growth was seen particularly through increased sales to certain existing European customers as the number of these customers stores served by the Group was expanded. Group sales in Europe in Q1 2023 continued to accelerate and were 41% ahead of the same period in 2022.

USA

USA sales, in sterling terms, increased by 79% in 2022 to £5.3 million (2021: £3.0 million) and grew by 55% in US dollar terms. This equated to 8% of overall 2022 Group sales (2021: 6%).  In the US 97% of sales in 2022 (2021 89%) were from the sale of the Group's brands as minimal close-out activity was undertaken, in line with the Group's strategy to focus on its own brands.  

A good performance was seen from the Group's major customers in the USA, including CVS, Five Below, Macys Backstage, Marshalls, and TJ Maxx.  Six significant new accounts were added in the US in 2022, including with CVS, where a large Christmas 2022 order was delivered, and with H-E-B stores, a Texas based supermarket group, where an extensive range of nail polish was launched in 280 of their stores in the last quarter of the year. From July 2023 it is expected that a full range of 120 W7 colour cosmetics products will be stocked in 80 of the H-E-B stores.

A further agreement was reached to launch a range of 60 W7 cosmetic products in 190 CVS BIRL stores, from January 2023, and initial sales have been ahead of expectations. Additional orders have also been received from Nordstrom Rack and Sallys in the US, where a significant order has been received for delivery in July 2023. US sales in Q1 2023 are 61% ahead of the same period in 2022.

Rest of the World

Sales in the rest of the world decreased by 16% from £3.7 million in 2021 to £3.1 million in 2022 accounting for 5% of overall Group sales (2021: 7%). The reduction in sales was primarily as a result of the timing of sales orders in Australia, which is a key country for Warpaint in the rest of the world region. The focus in the rest of the world region continues to be on Australia, China and other countries where profitable sales in appropriate volumes can be made.

The Group has no suppliers in either Russia or Ukraine, and no significant historic sales to either country.

People - Cost of Living Bonus

The board recognises that we are living in difficult times, with inflationary pressures causing significant increases in the cost of living. To provide some assistance with these increased living costs and to acknowledge the exceptional efforts in a record period for the Group, all of the Group's 122 employees (which excludes the board members) were awarded a payment of £1,000 over and above their normal remuneration in October 2022.

Summary and Outlook

I am delighted with the Group's performance in 2022. We have enjoyed strong growth in sales and that these sales have been achieved at a significantly improved gross margin, despite supply side inflationary pressures, is a significant achievement. To date the Group has been largely able to mitigate supply side inflation with a price rise implemented in January 2022, sourcing product from new factories, and new product development, all of which are ongoing. In 2023, together with significantly reduced transport costs, we remain confident that margins can be maintained.

Whilst we continue to experience good growth in the UK, I am particularly pleased with the growth we are seeing in continental Europe and the US. We have put in place a robust supply chain and distribution network to ensure that we are able to supply our retailer's outlets on time with the product that their customers are demanding. The Group is also in active discussions with new major retailers globally and with certain existing customers regarding expansion of the range of the Group's products stocked.

Online sales also continue to grow and the focus remains on ensuring they can deliver a similar margin to the Group's sales through traditional physical outlets. In 2023, the Group will launch online sales in Japan through Amazon, a similar model to that successfully deployed in the US.

Trading in 2023 has started strongly with a record first quarter. Sales for the first three months of 2023 are approximately 40% ahead of the same period in 2022, with sales increases seen across all of the Group's brands, both in stores and online, and at an improved gross margin to that achieved in the full year 2022.

We will update further on our progress later in the year and with significant opportunities for further growth, both already secured with our existing retailers and in discussion with additional major retailers globally, I am confident that the Group will continue to perform well for the remainder of the year and beyond.

Sam Bazini

Chief Executive Officer

25 April 2023

CHIEF FINANCIAL OFFICER'S REVIEW

2022 was a record year for the Group, with strong growth in sales, margins and profit before tax.  Group revenue increased in the year by 28% and adjusted profit before tax increased by 46%. Gross margin improved in the year by 2.6% to 36.4%. This is the second year running that gross margin has improved despite some increased costs in the supply chain. 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. Headline results, shown below, represent the performance comparisons between the consolidated statements of income for the years ended 31 December 2021 and 31 December 2022.

Revenue

Group revenue for the year increased by 28.1% from £50.0 million in 2021 to £64.1 million in 2022. 

Company branded sales were £57.7 million in 2022 (2021: £44.4 million). Our W7 brand had sales in the year of £35.0 million (2021: £25.9 million). Our Technic brand contributed sales of £22.7 million (2021: £18.5 million).

Our Retra subsidiary business had sales of retailer own brand white label cosmetics of £2.6 million in the year (2021: £1.1 million). The white label business is traditionally cost competitive and Retra chooses which projects to undertake based on commercial viability, in particular margin.

The close-out business revenue reduced by 15.8% from £4.5 million in 2021 to £3.8 million in 2022 as the Group, in line with its strategy, continued to reduce its focus on close-out opportunities.

In the UK sales increased by 8.8% to £27.6 million (2021: £25.3 million). Internationally, revenue increased 47.8% from £24.7 million in 2021, to £36.5 million 2022. In Europe Group sales increased by 55.6% to £28.1 million (2021: £18.0 million). In the rest of the world Group sales decreased by 16.0% to £3.1 million (2021: £3.7 million). In the US Group sales increased by 78.8% to £5.3 million (2021: £3.0 million).

E-commerce sales continued to grow in the year and now represent 4.3% / £2.8 million of group revenue (2021: 2.7% / £1.3 million).

Product Gross Margin

Gross margin was 36.4% for the year compared to 33.8% in 2021. Our management teams across the Group were swift to recognise and navigate cost headwinds that started in 2021. New product development, sourcing product from new factories, and an inflationary price increase to customers at the start of the year, have all helped achieve a significant gross margin improvement in 2022.

The cost of freight from the Far East is a significant cost of goods throughout the Group. Container freight rates which increased dramatically in 2021, started to slowly fall in 2022 by on average 20%. As we end Q1 2023 freight rates have fallen from record highs in 2021 to now record lows in 2023, which are currently 80% lower year on year and, if maintained, will help to 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 which is growing.

At 31 December 2021 options were in place for the purchase of US$27 million at US$1.3849/£; this has helped to protect our margin in the turbulent foreign exchange markets. Towards the end of 2022 we purchased various options to help protect our gross margin in 2023, these included traditional forward purchase foreign exchange options for US$3 million at US$1.2146, and more complex forward purchase foreign exchange options which will deliver a minimum of $18 million to a maximum of $36 million at an average rate for 2023 of $1.1984/£. Since the start of this year we have purchased more forward options to help protect our gross margin in 2023.

The currency options we have for the current year, the falling container rates, new product development, sourcing, and growing sales in the USA, will all help to protect our margin in 2023.

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 24.1% to £11.4 million in the year (2021: £9.2 million). Operating costs as a percentage of sales reduced from 18.4% to 17.8%.

The overall increase of £2.2 million in the year was necessary to support the growth of the business.

Increased costs amounted to £2.3 million and were made up of increases in wages and salaries, office costs, travel 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.

Included in the increase to wages and salaries is a one off cost of living crisis payment of £0.1 million to all of the Groups employees excluding board members.

The increase in office costs includes an extra £0.06 million of utility charges. At current rates utility costs are expected to increase in 2023 by a further £0.08 million.

There was a decrease in the charge for bad debts of £0.1 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 £11.9 million (2021: £7.7 million).

Profit Before Tax

Group profit before tax for the year was £7.7 million (2021: £3.7 million). The material changes in profitability between 2022 and 2021 were:

*Acquisition costs are amortised over 5 years. The reduction in 2022 reflects the end of the write off period since the purchase of Retra in November 2017.

Exceptional Items

Exceptional items include £nil of staff restructuring and voluntary redundancy costs (2021: £0.03 million), £nil of non-recurring legal costs (2021: £0.18 million), and £0.15 million for content use and associated legal fees (2021: £0.37 million).

During the year the Group agreed a settlement regarding a dispute with a third party relating to the historic use of content on the Group's social media platforms in the period from 2018 through to early 2021. The total settlement including associated legal costs was £0.52 million, of which £0.37 million was provided for in the year to 31 December 2021. The payment and the restriction of content use will not affect the ongoing operations of the Group's businesses.

Tax

The tax rate for the Group for 2022 was 19% 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 8.14p and 8.11p respectively in 2022 (2021: 3.69p and 3.68p).

The adjusted basic and diluted earnings per share before exceptional items, amortisation costs and share based payments was 11.19p and 11.15p respectively in 2022 (2021: 7.80p and 7.79p).

Dividends

The board is recommending a final dividend for 2022 of 4.5 pence per share, making a total dividend for the year of 7.1 pence per share of which 2.6 pence per share was paid on 25 November 2022 (2021: total dividend of 6.0 pence per share, of which the interim dividend was 2.5 pence per share and the final dividend was 3.5 pence per share). The dividend for the year was covered 1.6 times by adjusted earnings per share.

Cash Flow and Cash Position

Net cash flow generated from operating activities was £8.4 million (2021: £5.1 million). The Group's cash balance increased by £1.8 million to £5.9 million in 2022 (2021: £4.1 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 2022 £0.29 million was spent on store furniture for Tesco, Boots and wilko (2021: £0.49 million), £0.42 million was spent on warehouse improvements, new forklifts and racking (2021: £0.04 million), £0.09 million was spent on new computer software and equipment (2021: £0.02 million), and £0.03 million was spent on other general office fixtures and fittings and plant upgrades (2021: £0.04 million).

Given the growth of the Group in the last two years it is necessary and prudent to have bank facilities available to it to help fund day to day working capital requirements as the Group continues to grow. Accordingly the Group maintains a £9.5 million invoice and stock finance facility which is used to help fund imports in our gifting business during the peak season. At the year end no invoice and stock finance remained outstanding (2021: £nil million). In addition, in February 2023 the Group added a new "general purpose" facility of £3 million. These facilities, together with the Groups positive cash generation and the growing cash balance held, ensure that future growth can be funded.

LTIP, EMI & CSOP Share Options

On 17 October 2022 CSOP share options were granted over a total of 20,000 ordinary shares of 25p each in the Company under the Warpaint London plc Company Share Option Plan. The options provide the right to acquire 20,000 ordinary shares at an exercise price of 132.5p per ordinary share.

On 2 March 2022 EMI (non-qualifying) share options were granted over a total of 200,000 ordinary shares of 25p each in the Company under the Warpaint London plc Enterprise Management Incentive Scheme. The options provide the right to acquire 200,000 ordinary shares at an exercise price of 127.5p per ordinary share.

The LTIP, EMI & CSOP share options had an immaterial 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 £0.19 million (2021: £0.18 million) and has been taken to the share option reserve.

Balance Sheet

Inventory was £0.6 million higher at the year end at £18.7 million (2021: £18.1 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 £0.37 million, 1.9% at the year end (2021: £0.52 million, 2.8%). 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 0.9% in percentage terms. 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 £9.9 million (2021: £8.8 million), the increase on 2021 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, 0.7% of gross trade receivables (2021: £0.07 million, 0.8%).

The Group has no borrowings or lease liabilities outstanding at the year end (2021: £nil), apart from those associated with right-of-use assets as directed by IFRS 16 (see below). The Group was therefore debt free at the year end. 

Working capital increased by £4.1 million in the year, to £30.3 million. The main components were an increase in inventory of £0.6 million, an increase in trade and other receivables of £1.4 million, an increase in cash at the year end of £1.8 million, and a decrease in trade and other payables of £0.3 million.

Free cash flow (cash from operating activities less capital expenditure) remained strong at £7.6 million (2021: £4.5 million).

The Group's balance sheet remains in a very healthy position. Net assets totalled £37.8 million at 31 December 2022, an increase of £1.7 million from 2021. 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 (2021: £7.3 million) and £0.3 million of intangible fixed assets (2021: £2.3 million) arising from acquisition accounting. As at the year end cash totalled £5.9 million (31 December 2021: £4.1 million).

Goodwill represents the excess of consideration over the fair value of the Group's share of the net identifiable assets of the acquired business / cash generating units at the date of acquisition. The carrying value at 31 December 2022 of £7.3 million included Treasured Scents Limited (Close-out business) £0.5 million, Retra Holdings Limited £6.2 million and Marvin Leeds Marketing Services, Inc. £0.6 million. Management have performed the required annual impairment review at 31 December 2022 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.

The balance sheet also includes £5.7 million of right-of-use assets, this 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 £5.9 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 2022 with options in place for the purchase of US$27 million at US$1.3849, and the sale of €3.9 million at €1.1558. During 2022 when currency rates were favourable, we purchased additional US dollar foreign exchange options and spot rate amounts to cover our total US dollar requirement for the year.

In addition, towards the end of 2022 we purchased various options to help protect our gross margin in 2023, these included traditional forward purchase foreign exchange options for US$3 million at US$1.2146, and more complex forward purchase foreign exchange options known as Window Barrier Accruals and Counter TARFs which will deliver a minimum of $18 million to a maximum of $36 million (depending on the dollar rate at maturity of each option) at an average rate for 2023 of $1.1984/£. We also sold €3.8 million at €1.1340. All of these options were outstanding at 31 December 2022.

The Group has a natural hedge from sales to the US which are entirely in US dollars, in 2022 these sales were $6.32 million (2021: $4.08 million).

Together with sourcing product from new factories where it makes commercial sense to do so, new product development, and by buying US dollars when rates are favourable, we are able to mitigate the effect of a strong US dollar against sterling.

Section 172(1) Statement

The directors are well aware of their duty under section 172 of the Companies Act 2006 to act in the way which they consider, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:

· the likely consequences of any decision in the long term;

· the interests of the Company's employees;

· the need to foster the Company's business relationships with suppliers, customers and others;

· the impact of the Company's operations on the community and the environment;

· the desirability of the Company maintaining a reputation for high standards of business conduct, and

· the need to act fairly as between members of the Company

(the "Section 172 (1) Matters").

Induction materials provided on appointment include an explanation of directors' duties, and the board is regularly reminded of the Section 172(1) Matters, as a board meeting agenda item.

Further information on how the directors have had regard to the Section 172(1) Matters can be found in the Stakeholder Engagement and Section 172 Report. This information forms part of the strategic report and has been approved for issue by the board on 25 April 2023.

Neil RodolChief Financial Officer

25 April 2023

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2022

Note 1 - Adjusted profit from operations is calculated as earnings before interest, taxation, amortisation of intangible assets, share based payments and exceptional items.

The notes form part of these financial statements.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 2022

The notes form part of these financial statements.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 2022

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 2023

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2022

The notes form part of these financial statements.

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2022

The notes on pages 70 to 121 form part of these financial statements.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AS AT ENDED 31 DECEMBER 2022

1. Significant accounting policies

Basis of preparation

The financial statements of Warpaint London PLCPLC (the "Company" or "Warpaint") and its subsidiaries (together the "Group") for the year ended 31 December 2022 were authorised for issue by the board of directors on 25th April 2023.

Warpaint London PLCPLC 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 £6.1 million in the year to 31 December 2022 (2021: £2.8 million) and had net current assets of £27.7 million at 31 December 2022 (2021: £24.8 million).

The Group occasionally makes use in its Retra Holdings Limited ("Retra") subsidiary of a £6.0 million bank facility that can be used for confidential invoice discounting, the facility renews each year at the end of September. Retra also have a £3.5 million bank facility that can be used for stock finance, which is used if needed during the peak gift buying season, the facility renews each year at the end of November. In addition, the Group have a £3.0 million general purpose bank facility in its Warpaint Cosmetics (2014) Limited ("Warpaint Cosmetics") subsidiary which was agreed in January 2023. This facility will renew annually and was put in place to support the continued growth of the business. As at the year end £nil of the bank facilities were utilised and the Directors expect that in 2023 the facilities will only be used to modest levels well within the facility limits, to support the day to day working capital of the business. At the 31 March 2023 the company had cash of £8.6 million, no debt and had used £nil of its bank facilities.

The Directors have prepared forecasts covering the period to December 2024, built from the detailed Board-approved budget for 2023. 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. These challenges 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 Group's cash flow forecasts and projections, taking account of reasonable and possible changes in trading performance, 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 2024, and in Retra and Warpaint Cosmetics within the level of their own bank facility.

In preparing this analysis, a number of scenarios were modelled with the benefit of experience. The scenarios modelled were all based on varying levels of sales revenue, including one that assumes no growth for 2023 and 2024 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. Online sales are recognised and invoiced to the customer once the goods have been delivered to the customer.

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 6.5 million points yet to be redeemed, leading to a provision of £32,471 (2021: 2.8 million points 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:

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:

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 from operations, profit 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 9.

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:

Right-of-Use Assets

Right-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.

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:

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:

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:

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

incentives received, and increased for:

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:

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 properties in the jurisdictions from which it operates with a fixed periodic rent over the lease term. The group has a total of 7 property leases.

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:

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:

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, Managing Director 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 that are effective for the first time for the financial year beginning 31 December 2022

New standards, interpretations and amendments effective from 1 January 2023

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 £18.7 million 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 £303,327. 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 £163,653.

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 13.3% to 14.3% would reduce the value in use by approximately £5.1 million leaving headroom of £44 million above the carrying value. For Marvin Leeds Marketing Services, Inc., a 1% increase in the discount rate from 10.4% to 11.4% would reduce the value in use by approximately £0.8 million leaving headroom of £4.6 million above the carrying value. For Treasured Scents Limited, a 1% increase in the discount rate from 13.3% to 14.3% would reduce the value in use by approximately £0.6 million leaving headroom of £6.2 million above the carrying value. None of these scenarios would therefore result in any impairment of the goodwill.

Critical accounting judgements

c) 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 own 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. The executive directors Sam Bazini, Eoin Macleod and Neil Rodol together with members from the Groups senior management teams are the chief operating decision makers of the whole business.

During the year ended 31 December 2022, revenues of approximately £11.2 million (2021: £5.1 million) were derived from a single external customer based in Denmark (17.5%; 2021: 10.2%).

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

3. Operating profit

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

The expenditure incurred within the table above falls wholly within Administrative expenses.

Exceptional costs

During the year the Group agreed a settlement regarding a dispute with a third party relating to the historic use of content on the Group's social media platforms in the period from 2018 through to early 2021. The total settlement including associated legal costs was £0.52 million, of which £0.37 million was provided for in the year to 31 December 2021. The payment and the restriction of content use will not affect the ongoing operations of the Group's businesses.

Auditor's Remuneration

Analysis of auditor's remuneration is as follows:

4. Staff costs

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

Remuneration in respect of Directors was as follows:

* Shares granted to consultancy company Ward & Hagon Management Consulting LLP, of which director Paul Hagon is a member.

** Appointed 1 September 2021 and resigned 31 December 2022.

Directors' interests in share options for year ended 31 December 2022

As at 31 December 2022, the following Directors held the following performance related share awards (Enterprise Management Incentive Scheme Options, LTIPs or CSOPs) over ordinary shares of 25p each under the Warpaint London plc Enterprise Management Incentive Scheme, the Long Term Incentive Plan and the Warpaint London plc Company Share Option Plan. For details of the share option schemes see Note 21 in the Financial Statements.