InnovaDerma PLC

("InnovaDerma" or the "Company")

Interim Results for the 6 months ended 31^st December 2020

InnovaDerma (LSE: IDP), a leading UK developer and supplier of beauty, personal care and life sciences products, announces its unaudited half year results for the period ended 31 December 2020.

Business Highlights

Financial Highlights

* On a constant currency basis

** Non-recurring items include impairments, abortive and restructuring costs

*** Since period end the Company has announced a Placing to raise £4.0m and an Open Offer to raise a further £0.5m (Prospectus expected to be published in early April 2021 and general meeting in mid-April)

Outlook

The macroeconomic environment is set to remain uncertain for the remainder of the financial year.   Whilst the Government's reopening road map has been published, and vaccination rates are promising, the exact speed of a return of consumer category consumption, particularly in tanning, will only be known over the coming months as we enter peak tanning season in the UK.  We remain confident that historic consumption levels will return quickly as restrictions on social interactions are lifted and that InnovaDerma will emerge from the pandemic a stronger, more digitally agile business with the right leadership to compete and win in the digital commerce world of today.  Indeed, in the UK, 39% of consumers aged 18-34 plan to buy beauty products to celebrate the end of lockdown (The NPD Group/Covid-19 Study).

With the benefit of the previously announced fund raise the Company will close the financial year with a much-improved cash position, with sufficient capital to fund investment, and this, coupled with a sharpened digital and consumer led strategy, will enable InnovaDerma to benefit from the substantial growth opportunities anticipated for 2021 and beyond.

Blake Hughes, Chief Executive Officer, commented:

"There is no doubt that the impact of COVID-19, and its associated restrictions, has had a material impact on the Company's performance in 2020.  In the tanning category the decreased social interaction has led to a marked decline in category usage, especially in the UK. 

I do believe though that there are many reasons to be very positive about 2021 and beyond.   The entrepreneurial foundations of the business are strong with key strengths in new product development and digital marketing.  In the UK we do expect tanning consumption to return to historical levels as restrictions ease. Moreover, as Skinny Tan continues on its growth trajectory in international markets such as the US and Australia, we will be able to demonstrate both the international potential of this brand and our E-commerce model.  Finally, the initial consumer reaction to our new products for 2021 has been excellent.

This challenging period for the business has led us to sharpen our strategic focus and to review our overall operation.  The "NEW INNOVADERMA" will be built on the Company's historic brand focused foundations supported by improved organisational and financial leadership that is required to win in the digital e-commerce driven world which we live in today.  We are confident that we will emerge from the pandemic as a financially stronger business, with a road map for sustained future growth."

Further enquiries

Chairman's Statement

I am pleased to present my first statement as Chairman, having been appointed in January 2021.  The underlying performance of the Company during the period under review was negatively affected by the continued impact of COVID-19 and tighter restrictions imposed in the UK particularly over the festive season. As a result, the cash position of the Company was materially impacted.

Over the last few months, the Company has changed substantially, reconstituting its board so that it is now entirely UK based, appointing Blake Hughes as CEO and significantly strengthening the management team, including the appointment of Andrew Dunderdale, FCA, as Group Finance Director.  Andrew was previously the London Finance Director at AIM-listed digital marketing group Be Heard Group plc.  Prior to this role, Andrew spent seven years at the advertising conglomerate, WPP plc.  These changes have been made to ensure the Company has the digital, commercial and beauty sector expertise to drive profitable and sustainable growth.

Since joining, Blake has implemented a programme of significant change across the organisation, ensuring that the Company is focused on the areas that will drive both immediate and substantive performance improvements whilst also allowing the Board to start building the foundations for future growth. Changes have been implemented to the Company's logistics and technical platforms, which are already leading to an improvement in customer service. Google and Facebook digital marketing experts have been engaged to ensure that the Company is utilising its digital marketing spend more effectively, and the Company's primary Skinny Tan UK website is being improved in March.

New product development is key to InnovaDerma's future growth plans and I believe we now have the right structure and processes in place to support this area. A key focus will be to move the Company's brands (existing and new) away from being primarily promotion and discount led to having a more balanced innovation and value focus which we believe will improve gross margins. 

The Company is also implementing a range of profit, cash and gross margin protection measures including introducing strong overhead cost reductions, operating with lower year-on-year inventory, increasing marketing and promotional hurdle rates, and lowering the cost to digitally target existing customers.

Post the period end, the Company announced a £4.0m Placing and an Open Offer to raise up to a further £0.5m. The proceeds will enable the Company to accelerate its global Direct-To-Consumer strategy through capital investment in its e-commerce infrastructure and operational capacity as well as strengthening the balance sheet.

I believe we now have a "New InnovaDerma" in place and as the restrictions on movement, implemented as a result of COVID-19 begin to ease and with the new management team in place, I am excited about the opportunities for the Company for the rest of 2021 and beyond.

Ross M Andrews

Non-Executive Chairman

CEO Strategic Review

During my first 100 days in the business, I have conducted a strategic review of our business and global operations.  The objective has been to unlock sustainable, profitable growth and thereby deliver enhanced shareholder value.  The review covered strategic, operational, financial and organisation aspects of the business with input and insight from both within the Company as well as external stakeholders.

Today I am happy to report the broad elements of our action plan coming out of the review.  This action plan will form the basis of our future growth strategy and the key building blocks of our multi-year financial framework.  This plan will focus on delivering Sustainable, Profitable Growth, built on foundations of a clear set of strategic choices and transparency of financial management and accounting, to deliver enhanced shareholder value. 

Our Objective

Sustainable, Profitable Growth

The statement above is key to our focus for moving forward.  The Company's new ERP system will provide the real time sales, gross margin and cost expenditure insight which will flow into operational and organisational KPIs.  Gross margin will be of particular focus with greater process and controls of promotional strategy and hurdle rates already leading to stronger product gross margin results.  In addition, our new UK based Group Financial Director, Andrew Dunderdale, will lead an impairment review exercise on certain intangible items on the balance sheet to reflect the impact of Covid-19 and recent trading.  This impairment is likely to be substantial but will have no material impact on the Company's prospects, trading outlook or working capital position.  The Board expects to conclude this review ahead of the current financial year end.

Our Strategy

Our key 'Where to play' choices:

We are an E-commerce led business 

E-commerce includes both our own Direct-to-Consumer operation as well as winning with winning third party E-commerce sites, with Amazon being a particular opportunity.  Physical Retail will continue to have a complimentary impulse role and will naturally benefit from our digital marketing investment.

Skinny Tan is our #1 brand and still has substantial growth potential

We are focused on developing global brands.  Skinny Tan has already proven its potential across three continents but still has growth opportunities in our home UK market, our expansion markets, Australia and US, as well as future white space expansion opportunities in Europe and North America. Moving forward we will incubate our newer brands in their primary markets until there is proven performance and a strong financial case for expansion.  Charles and Lee will be the next brand we start to expand globally.  Finally, we will launch a specific review into how to maximise shareholder value from the Life Sciences portfolio and we will provide our findings later this year.

Our key 'How to win' choices:

The right team, with the right skills, in the right location

I am happy to report that a lot of this is now in place.  A refreshed and digitally focused UK based Board and CEO, complimented by recently appointed UK based Group Finance Director, will provide the strong leadership to transform the business.  This leadership team will nurture and develop the entrepreneurial culture whilst installing a data analytics backbone to unleash the individual and collective potential of the organisation.

Optimise our E-commerce Customer Journey and Experience

The entire customer journey has been mapped to deliver a multi-stage improvement roadmap.  Starting with the priority brand Skinny Tan, every step of the performance funnel is being optimised.  Google and Facebook digital marketing experts have been engaged to further strengthen and systematise the digital marketing funnel which is already delivering improvements in profitability.  Changes have been implemented to the Company's logistics and technical platforms, which is already leading to improved customer service.  There will also be functional and creative improvements to the web site experience rolling out across the coming months.  

Strong Consumer Insight Driven Brands

In an e-commerce focused world, having a robust and inspiring brand strategy is the most important foundation.  The 360-degree review has focused on distilling the brands to their core, articulating how they are unique and ensuring this is brought to life at every consumer touch point.  Core pillars of cruelty free and vegan friendly will be augmented by an accelerated sustainability focus.  We will also build further on the Company's strong innovation track record with multi-year innovation pipelines and simplified overall brand architecture for all brands.

Enhanced Shareholder Engagement

Having a UK based Board and executive leadership will benefit not only our UK business but also our UK investor community.  We will be listening to investors and aiming to ensure that the Company strategy and financial performance are transparent and well understood. We remain very grateful for our continued strong shareholder support.

Business Review

The continued impact of COVID-19 and tighter restrictions imposed in the UK, particularly over the important festive season, has affected our performance. 

Net revenue for the period was £4.1m, a decline of 19.6% on the prior year (H1 19: £5.1m).  A decline in UK sales H1 20: £2.9m (H1 19: 4.3m, down 32.3%), was partially offset by encouraging growth in our key international markets H1 20: US £0.4m, (H1 19: £0.3m, up 17.4%); and Australia £0.8m, up 52.1%) led by Skinny Tan.  Both Retail as well as Direct-to-Consumer ("DTC") sales have been impacted by a reduction in beauty category consumption, particularly in the tanning category, due to COVID-19 restrictions.   We expect the tanning category consumption to significantly improve as COVID-19 restrictions ease, and moreover as we enter the peak tanning season from April to June.

Skinny Tan sales have declined across both Retail and DTC to £3.4m (H1 19: £4.4m, down 23.9%).  Both channels have been severely impacted by the reduction in consumer consumption of the tanning category as mentioned above.  However, the launches of Notox Beauty Elixir and Strawberry & Cream Pink Whipped Gradual Tanner have been very successful on our UK DTC platform in December. Notox Beauty Elixir was sold at full retail price and was our best-selling item. Skinny Tan remains well positioned to perform with a strong roster of new products to be launched during 2021.

Charles & Lee continued to grow and show its scale potential in Australia across both Retail and DTC, H1 20: £0.3m, (H1 19: £0.2m, up 50%), despite the pandemic.  Key drivers have been new product introductions as well as a very successful Retail multipack promotion, particularly in Myer and David Jones.  The brand was launched in the UK through our DTC channel last year and we will further expand the brand internationally in 2021.

Roots revenues declined 29.1% H1 20: £0.3m, (H1 19: £0.4m) due to its predominant UK Retail focus.  The new brand packaging is now started rolling out in the UK and the pricing repositioning has been completed in Boots with Superdrug happening over the coming months.

Nuthing sales have been subdued as the UK hair removal category is very reliant on physical Retail and has been severely impacted by category consumption decline.  The 2020 brand launch coincided with the UK March lockdown and we are therefore planning further instore enhanced visibility over 2021. The Nuthing Black Cherry & Kiwi scented hair removal Wax Strips, our first product in the largest hair removal category, launched February 2021 in Superdrug. 

Life Sciences revenues remain relatively modest and the Board is focusing on the US market while we await CE accreditation which has been delayed by Covid-19.

Impact of the COVID-19 pandemic on the beauty sector

COVID-19 has had a profound impact on the beauty sector, affecting both short term sector consumption levels as well as where and how consumers shop.

From a category consumption standpoint, countries that have been hardest hit by COVID-19, and have thereby also suffered more from lockdown/ social interaction restrictions, have seen their beauty category consumption hardest hit.  For example, Prestige Beauty Sales in the UK have declined 24% in 2020 (The NPD Group/Covid-19 Study), with bricks and mortar sales declining 44%.

From a shopping standpoint, the trends witnessed in previous years have accelerated during the pandemic. This includes the growth of online sales, the importance of a multi-channel retail approach, and the influence of social media on a consumer's path to purchase.

Whilst the short-term sales outlook for the beauty sector remains depressed, the Board believes that the long-term attractiveness of the global beauty industry remains. Not only has it historically grown steadily, it has consistently created generations of loyal consumers.

Although the impact of the COVID-19 is significant, there are signs that the beauty industry will prove relatively resilient. As the vaccine roll out in the UK progresses, and social interaction restrictions ease,  the Board expects historical levels of category consumption to return. 

Finance Review

The Group has reported a decrease in revenues of 19.0% compared to the same period in the previous year.  A decline in the UK business, impacted strong by COVID-19, was somewhat offset by the strong performance of the Australia and US Direct-to-Consumer ("DTC") business as well as Charles and Lee retail. The DTC channel continues to be the priority focus and accounted for 62.4% of total revenues in the period under review. The Company generated a loss before tax of £1.0m (H1 19: loss of £0.3m) before non-recurring items.

Operating Results

Group gross margins declined over the period to 49.9%, a decrease of 1080bps versus prior year, reflecting a continuation of the trend performance from the COVID-19 impacted second half of last financial year (H2 20:  51.3%).  Similar to H2 last year the decline was driven by mix changes including reduced UK retail sales and a higher proportion of US and Australian DTC sales which have higher shipping costs.

Overall marketing expenditure totalled £1.6m (H1 19: £1.7m), a decrease to the previous period of £0.1m. The reduction was driven by lower digital marketing costs which flexed lower reflecting the decrease in DTC sales in the UK due to reduced overall category consumption.  The Company's customer lists continue to grow but no further additions have been made to the intangible asset register ahead of the previously announced impairment review exercise which will conclude ahead of the current financial year end.

The Group continues to control wage and salary costs which were (4%) to prior year excluding exceptional items.

Taxation

The Group has used the reported results to estimate the tax expense which has been reflected in the Consolidated Statement of Profit and Loss. The Group carries a Deferred Tax asset which has been calculated to reflect movements in the income tax expense.

Cash and net debt

The Group carried a cash balance of £0.2m (H1 19: £0.4m) at the end of the reported period as against an opening balance as at the 1 July 2020 of £1.2m. The reduction in cash during the period was the result of lower than expect sales as a result of continued COVID-19 impact and consumer restrictions on on-going operations, primarily in the UK.

In January the Company entered into a loan agreement in the amount of £0.5m with M. Ward, a Non-executive Director and the largest shareholder.  In addition, the Company announced on 20^th January 2021 a fundraising comprising the Placing, which was oversubscribed, and the Open Offer to raise up to approximately £4.5 million.  It has also been agreed that following shareholder approval of the Placing, the obligation to repay the £500,000 loan facility provided by M. Ward will be satisfied by the issue of Placing Shares to him. The net proceeds of the Placing and Open Offer are intended to be used to strengthen InnovaDerma's balance sheet, provide capital to accelerate the Company's global Direct-To-Consumer strategy and to enhance its e-commerce infrastructure and operational capacity.

Balance sheet

The Board also previously announced in January that the Company will be undertaking an impairment review exercise on certain intangible items on the balance sheet.  This impairment is likely to be substantial but will have no material impact on the Company's prospects, trading outlook or working capital position.  The Board expects to conclude this review ahead of the current financial year end.

Dividends

The Board has elected not to declare a dividend at this time.

Responsibility statement 

The names and functions of the Directors of the Company are as follows: 

Ross Andrews                     Non-Executive Chairman

Blake Hughes                      Chief Executive Officer

Mark Ward                           Non-Executive Director

Simon Pyper                        Non-Executive Director

The Board confirms that to the best of its knowledge the condensed set of financial statements gives a true and fair view of the assets and liabilities, financial position and profit of the Group and has been prepared in accordance with IAS 34 'Interim Financial Reporting', as adopted by the European Union and that the interim management report includes a fair review of the information required by the Disclosure and Transparency Rules as issued by the Financial Conduct Authority, namely:

·      DTR 4.2.7:  An indication of important events that have occurred during the first six months of the financial year, and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year.

·    DTR 4.2.8:  Details of related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the enterprise during that period. Together with any changes in the related parties' transactions described in the last annual report that could have a material effect on the enterprise in the first six months of the current financial year.

By order of the Board

Ross Andrews

Non-Executive Chairman                                                                          31 March 2021