Chairman's Statement

I'd like to start this year's Chairman's Statement by thanking everyone at Grafenia for their hard work during the year. During several lock-downs and re-openings we brought Covid-19 protection equipment to market quickly, helped small businesses build their on-line presence and engaged in our communities. It was a challenging year but we are emerging as a more focussed and competitive business. Thank you to everyone who helped achieve this.

On to our scorecard of the 2020/21 fiscal year:

Operational Performance

In the recent fiscal year, our turnover decreased by 37.5% to £9.75m (2020: £15.60m) and gross profit decreased by 30.1% to £5.58m (2020: £7.98m). However, the gross profit margin has increased from 51.1% to 57.2% thanks to cost management efforts and a shift in product mix toward the more profitable licence and subscription fees. The year showed a reduction in EBITDA loss, which is earnings before interest, tax, depreciation and amortisation, to £0.16m (2020: loss £1.29m). Our loss for the year came in at £2.09m versus £3.37m last year. We finished the year with a cash position of £2.74m (2020: £1.10m) and net debt (including deferred consideration and lease liabilities arising due to IFRS 16) of £4.34m (2020: £3.28m). We invested £0.18m on capex (2020: £0.43m), and capitalised £0.68m in development expenditure (2020: £0.67m).

Importantly, these results include several cost items that are either one-time in nature, or constitute up-front costs, rather than ongoing operating costs. Such costs went down in the fiscal year in comparison to the prior year.

Some firms back-out many costs from their profit and loss statement to arrive at some 'adjusted' figure. I find that a slippery slope. It opens the door to mark every cost as 'extraordinary' or 'non-recurring'. Such accounting doesn't help with internal cost discipline. Communicating what ends up being a 'profit before cost' doesn't help external readers either.

It would be an easy way out to disregard the Covid-19 impact on our business as extraordinary and to not analyse last year's figures in much detail. Clearly, the pandemic was an extraordinary event and skewed everything - right?

I beg to disagree and find a few aspects in our financial performance absolutely noteworthy and insightful:

Firstly, we managed to significantly reduce our losses, although our sales contracted substantially. In particular, the largest driver has been an intense focus on reducing operating cost in the business, making processes more efficient and reducing team sizes. When we model out our cost base from last year it gives us confidence that, with modest increases in revenue, profitability will continue to improve. That should bring us closer to reaching the mid-term objective of 10-15% EBITDA we believe this business can achieve in future years, once activity fully recovers post-Covid.

Secondly, our subscription and licence fees have proven to be incredibly resilient and stable. Most of our subscriptions and licence agreements are billed monthly and provide an essential and "infrastructure-like" service to partners and end-clients. In particular, the pandemic has shown why it makes great sense to be a Nettl partner. Nettl partners benefit from our community, our agile tools, access to new product categories like protective equipment and our inspiration for selling tactics add real value - in particular during times of crisis. Increasingly, I believe that the major sources of value in our business are the products we sell on a recurring and "software-like" basis. The great resilience of that part of the business motivates our increased focus on building the business around software. A fantastic example is our "Works Makers" initiative, allowing third party suppliers to easily list and sell their products within our platform. We once believed that we had to make most products ourselves. In fact, we spent a lot of time evaluating the roadmap to a UK-wide sign hub network. While we still - strongly - believe signage is a very complementary product category for our partners, Covid-19 has shown that we are much better at opening up to third party suppliers than we previously thought. That every partner can now sell signage to their clients doesn't necessarily mean that we have to be the largest sign maker ourselves.

People at Grafenia & Priorities in the last year

Our average number of employees went down to 159 in the year from 203 in the prior year. We are a leaner organisation now - but parting with long-term team members is never easy. Nevertheless, our actions were necessary to make it through the pandemic and I'd like to thank every manager at Grafenia for your empathy and patience in driving change. The Board is fully aware of the effects our decisions had on families and communities. On behalf of the Board, I would like to sincerely thank every team member of Grafenia - current and former - for their contributions. Last year wasn't easy. But as Peter says: "choose your hard" - and Grafenia decided to pick the road of getting leaner and more agile to emerge from Covid as a better company.

In past Chairman's statements, I wrote that there were three areas where my fellow non-executive directors and I can impact the Grafenia organisation. Firstly, get governance right. Secondly, set the right incentives. Thirdly, make rational capital allocation decisions.

We were rather quiet on the capital allocation and M&A front in the last fiscal year. With the exception of adding two smaller (but very nice indeed!) sign firms, we didn't find valuations particularly attractive. Certainly, we expected to see more opportunities during the crisis. It is not that we haven't looked at any deals - we couldn't get close enough in terms of valuation or business quality or culture (or all of the above!)

As discussed earlier, we have grown increasingly sceptical as to whether adding manufacturing capacity is the right strategic choice. We can offer our partners all kinds of capabilities by leveraging our software and systems. We are currently evaluating our way forward but opening up our system to dozens of signage firms seems like a really interesting option, whereas buying dozens of signage firms may be less promising than we originally thought.

In the end, we believe Nettl will be the leading neighbourhood design studio. That requires offering breadth of products and great capabilities. I strongly view adding signage to the offering as the right strategic choice and we clearly benefited from that last year. Nonetheless, we set out to make the group substantially larger by acquiring signage firms in a financially accretive way. The latter hasn't materialised which drove us to reconsider our strategy.

Outlook and Current Priorities

We provided a strategy update on 16 April 2021 and set out how we will think about, and report on, the business going forward. We will provide a more comprehensive update in due course but felt it was the right thing to share our thinking early.

Most importantly, we now think about the business in two groups: Works Manchester and Nettl Systems. Very broadly, that splits the business into "everything production" and "everything software and licence".

The core reason we've made that change in reporting is to create visibility and transparency on where revenue is earned and costs are incurred. Historically, Grafenia has been very much integrated. The problem with that has been that certain parts of the business (mainly in production) have been essentially cost centres helping customer facing parts (like Nettl) do business. There are clearly virtues in integrating functions but what gets lost is accountability and profit focus for each part of the value chain. For example, we have in the past declined production work because it had nothing to do with our partner business and strategy. If you thought about Works Manchester as a stand-alone profit centre within a larger group, additional production work might be quite welcome indeed, regardless of whether it has anything to do with other business of the group!

Once more, that change in perspective was motivated by our experiences during the pandemic. Our systems proved capable of opening up and adding third party supply in ways we'd not explored before. That traction inspired the insight to think about the business in a less integrated fashion.

We strongly believe that additional transparency will empower both groups and release entrepreneurial energy in our teams.

In the strategy update we also announced we'll look for complementary software acquisitions that help us broaden our offering in Nettl Systems. Today, we are already the operating system for several hundred design studios across the world and are keen to keep adding to our systems and capabilities.

We will keep you updated how our thinking evolves and how we develop both businesses going forward.

Last year we held a closed meeting. This year's AGM will be an 'in person' meeting. However, we can't be certain that travel will be allowed, so we strongly discourage any shareholders from seeking to attend the AGM in person this year. Please submit your votes by way of proxy. We received good feedback on our virtual post AGM presentation last year and will repeat that format this year. We are quite keen to resume our usual 'in person' AGM again when it's practical: did anyone not miss the saxophone after all?

The AGM will take place at 10am on Wednesday 15 September 2021 and we'd be very happy to have you join our on-line presentation afterwards where we'll answer your questions.

Jan-Hendrik Mohr

Chairman

Chief Executive's Statement

Dear Shareholders,

What for the love of

I mean, really. Another annual report and we're still banging on about some novel virus. Well, the novelty has well and truly worn off.

Our production hub and HQ is based in Manchester. Now, of course, Manchester is famous for doing things differently. Like being under local lockdown restrictions for longer than any other part of the country. It's taken its toll.

Early on in this letter, I'd like to commend our teams on your behalf. They've worked solidly throughout the pandemic. Adapting to relentless change. In times of anxiety, they've kept going. We've remained open the whole time. Maybe not 'there', but always there. It's not been easy and we recognise and appreciate the efforts of each and every team member. Thank you.

The canary in the coronamine

We're like a business barometer. A metronome of markets. A trade thermometer, taking the temperature from the throat of business sentiment.

We sell to clients of different shapes and sizes. From different sectors. In different parts of the country. Some are doing exceptionally well, despite the pandemic. And not just those in a Government minister's Whatsapp group. Others have kept going, pushing on. Reacting to an endlessly changing environment. Exhausted. And weary. And some poor souls still haven't been able to re-open. They're hurting.

It's been well over a year since events were banned. Exhibitions prohibited. Parties outlawed. Gatherings forbidden. Weddings cancelled. Stores shuttered.

That's our business. These are our clients, our friends, our families. We all know people affected. We're in hundreds of neighbourhoods and our relationships transcend transactions.

Our business relies on healthy business clients. When they're hurting, we hurt too. When doors reopen and punters return, we'll be there to help. As restrictions tightened, product sales slowed. As the taps of the economy turned on, orders flowed. Taps off, back to trickles.

But that's it. We're not going to use the c-word from here on in.

Build, buy and license

Our strategy is pretty simple. It's worth repeating. Those three words. We build performance in our company-owned Nettl locations. We buy businesses to extend our capability and resilience. And we license our know-how and systems to others. I'll go into more detail on each of the sections in turn.

Nettl company stores

We have five company-owned Nettl locations. In these stores, we sell to local businesses. The kind of things a business would want to promote themselves online and offline. That's websites, ecommerce shops, online booking systems, social media, SEO, printing, displays, exhibition and signage. We mostly sell to SME clients, who often don't have their own in-house marketing department.

Our stores are in Manchester, Birmingham, Exeter, Liverpool and Dublin.

Sales in our company stores were £1.83m (2020: £2.81m). In this revenue segment, we count all invoiced sales to end clients of our company stores, whether they be print, display, design, websites or search engine optimisation. Essentially, everything we ring through the till in our own stores.

Except those tills stood silent for many months this past year. Lights remained off. Unwashed mugs recorded vacant days. But our studios worked remotely. Helping clients who were still trading, or preparing to re-open.

In the hazy warm days of summer 2020, we rolled a Nettl partner and small sign business into the Dublin store. That brought us sign installation capability in Ireland and we've serviced new and existing clients.

Buying businesses

We've talked about our acquisition strategy in our recent update on 16 April 2021. We made two small roll-in deals last year. While we're happy with how they integrated, they didn't really move the needle. Revenues are included in the Company Stores segment, but bear in mind that they were affected by the lockdown like the rest.

You'll recall we acquired Image Group back in 2017. That's in the revenue segment, "Works sign businesses". Sales were £2.80m (2020: £4.62m). In the summer last year we were able to sell and produce floor graphics, protective screens and other pandemic paraphernalia. However, for the rest of the year, sales were impacted by the cancellation of events and exhibitions. Those make up the biggest part of Image Group's work and so that sucked.

As Jan mentioned in the Chairman's Statement, we spoke with a lot of other sign businesses last year. We just didn't find enough of the right deals at the right price. However, we learned a lot about the systems and processes these businesses were using. And it made us re-evaluate whether we could achieve our objective of national graphics installation, without buying more sign businesses. I'll come back to that.

We also discussed a change to our acquisition strategy. Take a look at www.grafenia.com/acquisition to see the full detail. We're refocusing our search on software businesses to complement the Nettl offering.

License our systems

The system we use in our company stores is called w3p Flyerlink.

If you're a long-time reader, you might recall we started public life as printing.com. We developed a system to connect the central production hub with our local studio 'spokes'. And then those studios with their clients.

In the olden days, when it was all just fields, we had one objective: to make sure the right design was printed on the right rectangle of paper, the right way up, packed into the right box, delivered to the right address, by the right date. Our software and systems made it more likely. Over the years, we improved and tweaked and licensed that software to third parties. To make their print businesses more efficient and iron out their creases.

Now think back to 2014. The Hunger Games was a movie, not a reality TV show. Pharrell Williams was Happy. One balmy autumn day we opened our first Nettl store.

We'd taken our software platform, geared for print. And we'd extended it to manage web projects too. Automating the little things that have to happen for every site launch. Hiding a load of complex stuff behind a little simple 'go live' button.

It meant that printers and folk with a graphic design skill-set could build and deploy websites. Nettl studios could do more for their clients, in less time, with the same people.

As people get more expensive, a few minutes trimmed here, a couple of hours saved there, soon start to matter. And now they matter a lot. The Nettl system helps a studio to scale, without having to recruit a load more people.

We sometimes describe Nettl as a tool-kit. A Swiss army knife of modules to write proposals, manage recurring payments, set up subscriptions and get wee stones out of horse's hooves.

Now I'm going to ask you to think of a three-legged stool. And now your brain just said stool-kit and I can't help that.

As you're sat on your Nettl stool, look down at the legs. One of them is the systems. It's got software written on it. Another says training. And, without straining your neck, good, yes that last one says marketing.

We licence Nettl and our software to other folks. Sometimes under white label, sometimes in conjunction with a brand.

A little context, if you'll allow the meander.

The longer lockdown went on, the more people got used to online shopping. It takes twenty one repetitions for a habit to form. Twenty one times of repeating something, before it becomes instinctive. A lot of folk had been buying online, pre-pandemic. But the vast majority had not. Yet, the more days that 'normal' retail was closed, the more people tried online shopping for the first time. And they liked it. Oh boy, did they like it. You've seen the stats. Once behaviours have formed, there's no going back.

Now, of course, a lot of printers had transactional websites before the pandemic. But for many, their website was somewhere to put pictures of their presses and their plant list and…. oh sorry I nodded off were you saying something?

A better way to shop

As part of our platform, there's a core ecommerce shopping cart. That's the bit that shows products and pricing, with checkout and payment gateway. It powers Marqetspace, printing.com, nettl.com and hundreds of public and private web2print websites. We call it w3shop by Nettl.

There's lots of ways an entrepreneur could start selling online. But a lot of people underestimate just how much effort there is in merchandising a product range for sale. If all you do is sell Spanish brandy or strawberry shortcake vapes or oven chips, then sure, you could be set up in a few days. But to merchandise the range of signage, display, print and promo items that businesses want. Well that's going to take, like, forever. If we were at a BBQ and your cousin started talking about that as an idea for a startup, we'd have to stage an intervention. Friends don't let friends start down that path.

Instead, our w3shop-keepers get an instant product range. In their own brand, on their own domain. Sure, they can still set their own pricing, add other products and connect their bank account. But in a few days they can be selling. Not blowing on throbbing digits, weary from typing in prices. Monthly subscriptions start at £99 and up. We've added more than 25 new w3shop subscribers during the pandemic.

Selling online has turned from nice-to-have into must-have-to-survive.

It's a huge thing. But it's not the whole thing.

The other thing

For many, an online shop is a gateway to the digital world. Clients want to do more than just buy online. They've got their own agendas. Their own problems to solve. Things they're trying to do. Some, time-consuming. Some, technically challenging.

And so the Nettl system helps SME clients to do things online. Like add QR codes to menus, for speedy table service. Or make reservations. Or fill out quote requests. Or buy online. Or all the things you do every day. And the things you want to do, but tut when you can't and have to speak to someone.

One thing is certain. The thing that made a local print store successful a decade ago, is long gone. Those that can adapt, that can learn. They'll be the survivors.

Got a first class ticket to Zoom

When someone becomes a Nettl, it's a commitment to learning. As a time-poor business owner, doing these things is hard. Even for the tech-savvy, figuring out how to do something the first time is always a leap into the unknown. Learning is never complete.

By necessity we've moved all of our training online. Not going to lie, we always wanted to do that. Travel bans forced it. And it's never going back to the way it was. It's so much better to stick in your earpods and join a group from your desk, than join a queue at Euston and stick your armpit in a stranger's face. It makes refreshing knowledge easier. Courses can be shorter. And if someone gets lost in the trainer's blue steel, then they can always watch again on catch-up.

Front of mind

That third leg of the stool was marketing. Our partners use content and promotional material, such as e-shots, website landing pages, catalogues, brochures, direct mail, point-of-sale and product samples that we create. They use that to keep in touch with existing clients and attract new ones. It helps them sell print, websites and signs. We release beautifully crafted fresh content multiple times a month, to stay in clients' front-of-mind.

Partners pay us a subscription fee, depending on the size of their exclusive territory, ranging from £300 to £1,000 per month. To grant them geographical exclusivity, they pay an initial licence fee of around £2,000. Our standard licence agreement is three or five years, sometimes with an option to break at 18 or 24 months.

It's been a tough time for the print industry. Litho print has been hit in particular and hit hard. We've supported our partners through this. Not with mutual sobbing and singing songs around a fading camp-fire. But by relentlessly marching forward with new products. Working with them to bring new services to sell. And investing in our platform and new technology to improve their productivity.

We've come out of the pandemic with a similar number of Nettl partners than we went into it with. We lost some. Some new faces joined. A few after completing a scholarship. We cheer those that made the brave choice to change. And we salute the fallen.

As lockdown has eased, and people feel more confident about the future, we're seeing a shortening of the gestation period. For, becoming a Nettl is a commitment. Jan mentioned "Choose your hard" in his statement. That message is simple. Nothing is easy in life. There are no easy answers. Entrepreneurs can plough their own track. Or they can ride the rails, as part of a proven system. Both options are valid. But we ask, doesn't it make sense to take the path that leads to the greater chance of success? If you fancy a distraction, have a read https://www.nettl.com/uk/chooseyourhard/ 

Our Nettl partner network now stands at 232 locations around the world (2020: 239). At the date of our last trading update, we had 174 active Nettl partners in the UK and Ireland, 20 in Benelux, 12 in France, 20 in the USA, 4 in New Zealand and 2 in Australia. We also currently have 46 printing.com locations (2020: 59). Upgrading from printing.com to Nettl is a path well trodden and we anticipate further partners will diversify their businesses away from simply selling print.

Subscription and Licence Fees held firm at £2.08m (2020: £2.08m). In this segment, we count initial licence fees, monthly subscriptions, website deployment royalties, the wholesale price of hosting, domain names, digital stock photography and search engine optimisation sold via our brand partners.

As well as licence fees, Nettl and printing.com partners are able to buy printing, exhibition kit, displays and signs from our Works Manchester hub. They pay a wholesale price and resell to end clients. With events mothballed and locations closed, it's not surprising that sales of product to Brand Partners was £1.92m (2020: £3.41m).

Plans for plans

No, you're thinking of an eighties pop band. Over the past two years we've been building a whole new part of our platform. We call it "Plans". And it's the central component which allowed us to migrate from the software system which Image Group was using.

The first iteration of our platform was for print. The second, web and digital services. This new layer is to enhance the whole process of quoting and managing sign and display projects.

We're big believers in self-service. Sure, people like personal service and a helping hand from a human. Being able to complete a complex task yourself, whenever you like, is the key to eternal happiness. And it's at the heart of our continuous reinvention.

With Plans, team members can build multi-part sign, display and print projects in a simple interface. Customising options and materials. As well as an instant price, a production route is automatically built. They'll add to a proposal, share online with the client and once the client has accepted, graphic files are checked and fixed automatically.

Great people are hard to find. We're grateful for the individual efforts our teams have made. And particularly where they are multiplied. Where the systems they've built enable hundreds of people to do tasks faster or even not at all.

We're rolling out Plans in stages, with upgrades available to our Nettl network in the autumn 2021.

Marqetspace.com and online channels

We sell print and signs to professional buyers through Marqetspace.com and a few other online channels. This space remains super-competitive. Marqetspace is important to us for a number of reasons. It's often where our relationships start. We get to know printers, graphic designers and sign companies with a simple trading relationship. Then we build trust. Then we figure out if any of our software tools or systems can help them achieve their own objectives. And so Marqetspace is a fertile ground for cultivating Nettl partners.

Of all our channels, Marqetspace typically had the biggest percentage of litho print to resellers. Unsurprisingly, it was hardest hit and sales were £1.12m (2020: £2.68m).

Nettl of America

Since the US travel ban in February 2020 we haven't been able to set foot on American soil. We've had to adapt how we acquire, launch and support our American friends. It's gone more slowly than we would have liked, but we've continued to add new Nettl locations. It's now a common path to start as a Nettl System user, get to know the software, and then start the process of becoming a Nettl Franchise. We now have franchisees and partners in the states of Florida, Georgia, Ohio, New Jersey and Illinois.

Brexit

We mentioned in our most recent update that since leaving the customs union, we'd experienced disruption in shipping to mainland Europe. Things haven't improved. Consignments are routinely delayed and customs charges incorrectly applied. We're now making the significant majority of products sold in mainland Europe with Works Makers on the mainland. We don't see that volume returning to the UK any time soon.

For materials we import, we're constantly having to work around supply issues. Items which were previously available in a few days can be out of stock for weeks or months. That's a combination of Brexit, the pandemic and a boat having a snooze in the Suez.

Outlook

We made significant steps reducing our overheads last year. Despite spending more of the second half of the year locked down than unlocked, we almost achieved EBITDA breakeven.

Our new financial year started in April. Trading has improved and the first quarter finished ahead of last year. July started well and should be our best month since September 2020. The roads are busier. With our new cost base, modest increases in revenue will improve profitability. And that gives us confidence of getting closer to reaching our mid-term objective of 10-15% EBITDA on a monthly run-rate during the current financial year.

But then. Will 2021 bring an alien invasion or solar flare or isn't there supposed to be an asteroid due about now or something?

See you for the presentation after the AGM*

Peter Gunning

Chief Executive

*providing Godzilla doesn't go rogue again

Financial Review

Revenue

Group revenue this year finished at £9.75m, down from £15.60m in 2020, a 38% fall year-on-year. This reflects the significant impact caused by various degrees of lockdown put in place since March 2020. Sales of products have been most severely impacted, with exhibitions and events cancelled and demand for traditional print reduced with customers unable to open or operating at reduced capacity themselves.

As highlighted in our segmental disclosure (note 2) the sales of physical products have reduced across all channels. Our Company Stores saw a fall in revenue to £1.83m (2020: £2.81m) despite the addition of Eggshell Solutions Limited during the year, which contributed £0.11m since it was acquired in September 2020. Sales of print and other products through our Brand Partner Network fell to £1.92m (2020: £3.41m), Online and Trade sales fell to £1.12m (2020: £2.68m) and Works Signs Businesses fell to £2.80m (2020: £4.62m). Despite the overall fall, Licence Fee revenue has remained consistent year-on-year at £2.08m (2020: £2.08m) with further demand for our subscription services compensating for reduced licence fee income from our Partners, as they too felt the full impact of the pandemic. At 94% (2020: 95%), the majority of our business remains in the UK & Ireland.

Gross profit

Gross Profit, defined as revenue less direct materials (including the cost of distribution when made direct to customers) fell to £5.58m (2020: £7.98m).

The improved gross margin percentage of 57.2% (2020: 51.1%) reflects a shift in the proportion of our revenue to higher margin Licence and Subscription income. Margins continue to be pressed in traditional print and signage, with the pandemic and other global supply chain issues causing scarcity of materials and increased costs of shipping.

Other operating costs

Staff costs reduced by 35% to £3.70m (2020: £5.69m). This has been achieved through a combination of permanent redundancies enacted in the prior year, £0.79m claimed during the year from the Coronavirus Job Retention Scheme and further permanent redundancy measures taken in September 2020. The average number of persons employed fell to 159 (2020: 203), a reduction that would have been greater if not for the government support received. 

Other operating charges have been reduced to £2.04m (2020: £3.58m) with non-essential spending curtailed and travel not possible. This includes restructuring costs totalling £0.10m (2020: £0.20m).

Our bad debt charge has reduced to £0.20m in the year (2020: £0.60m) with improvements in internal credit control processes and a significant impairment in the prior year, when the impact of the pandemic on our customers first became apparent. We continue to work with our customers and Partners to come through the current difficulties together, however we have to accept that some of those debts may never be paid.

Profitability

As a combination of the factors discussed above, our pre-tax loss has reduced to £2.33m (2020: £3.63m) leading to a reduced loss per share of 1.83p (2020: 3.27p). Our earnings before interest, tax, depreciation and amortisation (EBITDA) loss reduced to £0.16m (2020: £1.29m). The parent company result for the year was a loss of £0.33m (2020: £3.11m). The prior year included an impairment charge of £2.95m on subsidiary investments which has not repeated.

Operating Cash Flow

This has led to the Group generating £0.21m of cash through operating activities (2020: utilised £1.09m), reflecting the EBITDA in the respective years.

Investment activity 

The current year has seen reduced investment in plant and equipment of £0.18m (2020: £0.43m), following the completion of our factory merger in the prior year. We have also continued our investment in the Group's software platforms, totalling £0.68m (2020: £0.67m), with continued enhancements and new features to the Groups SaaS platforms.

In September 2020, the Group acquired Eggshell Solutions Limited, net of cash received, for £0.08m and merged its operations with our Birmingham Store. This was followed with the purchase of the trade and assets of Sign Right, a small sign business in Dublin for £0.03m in November 2020.

Financing activity

On 15 July 2020 we announced the creation of a £50.00m perpetual bond facility and the issue of £3.00m of the bearer bonds, at nominal value, to investors, raising approximately £2.01m before expenses.

We also secured an additional term loan for £1.00m through the Coronavirus Business Interruption Loan Scheme (CBILS) and refinanced our primary hire purchase facility through CBILS, reducing our cash repayments for 12 months.

KPIs

Management monitors a number of KPIs, which underpin the performance of the business. The number of Nettl Network Partners has been broadly flat, as discussed by Peter earlier. The average product revenue per partner reduced, reflecting the impact of the pandemic. Website deployments and hosting fees per month have continued to increase, along with the number and value of SEO subscriptions.

Outlook

The future developments of the business are included in the Chairman's statement and Chief Executive's statement. The future trading environment remains uncertain. We can only guess the pace at which the economy at large, and by extension the printing and promotional world, will recover from the COVID-19 pandemic. We have factored the potential return of restrictions over the next winter period into our forecasting, however, with the restructuring activity undertaken in this financial year and existing cash reserves, we believe the financial future of the business is secure and we have the resources to execute our expansion plans. Accordingly, the Directors continue to adopt the going concern basis in preparing the annual report and financial statements.

Principal Risks and Uncertainties

The following are the principal risks relating to the Group's operations:

·      uncertainty in the general economic environment that may impact upon revenues and profitability;

·      markets in which the Group operates are extremely competitive posing a threat to profitability;

·      technological advances in manufacturing and/or software may impact on operational effectiveness and earnings potential;

·      the Group and its clients depend on the W3P SaaS platform and all reasonable operational contingency is embedded for resilience in the event of a catastrophe;

·      the ability to retain and recruit key people, across a multitude of disciplines, is essential in maintaining and growing the business;

·      Group SaaS platforms are developed in-house but use third party components, the necessary rights exist but there is no certainty that these rights will be retained indefinitely.

Treasury Policies

Surplus funds are intended to support the Group's short-term working capital requirements and fund future acquisitions. These funds are invested through the use of short-term deposits and the policy is to maximise returns as well as provide the flexibility required to fund ongoing operations. The Board has developed a model to establish a fair value for the Company's shares and will only purchase shares when the offer price is materially below that value and funds are available. It is not the Group's policy to enter into financial derivatives for speculative or trading purposes.

Iain Brown

Group Finance Director

Consolidated statement of comprehensive income

Consolidated statement of financial position

Consolidated statement of changes in shareholders' equity

Consolidated statement of cash flows

Notes to the financial statements

1.   BASIS OF PREPARATION

GENERAL INFORMATION

Grafenia plc (the "Company") is a public limited company incorporated and domiciled in the UK. The company's registered office is Third Avenue, The Village, Trafford Park, Manchester M17 1FG.

This financial information does not include all information required for full annual financial statements and therefore does not constitute statutory accounts within the meaning of section 435(1) and (2) of the Companies Act 2006 or contain sufficient information to comply with the disclosure requirements of International Financial Reporting Standards. These should be read in conjunction with the Financial Statements of the Group as at and for the year ended 31 March 2020.

The comparative figures for the year ended 31 March 2020 are also not the Company's statutory accounts for that financial year. Those accounts have been reported on by the Company's auditors and delivered to the Registrar of Companies. The report of the auditors was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The preliminary financial information was approved by the Board of Directors on 27 July 2021.

GOING CONCERN

As part of the consideration of the appropriateness of adopting the going concern basis of accounting, the Directors have prepared a forecast and applied reasonable sensitivities, covering the cash flow impact associated with a further year of COVID-19 disruption. The primary cash flow impact identified in the sensitivity analysis is a significant reduction in cash collections driven by lower customer demand. The Directors also considered the potential levers at their discretion to improve the cash position, including a number of further reductions in operating expenditure across the group, primarily related to workforce cost reductions. Having considered these scenarios, the Group continues to have sufficient cash headroom.

Based on the above the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future and is well placed to manage its business risks successfully despite the continued uncertain economic outlook caused by Covid-19.

Accordingly, the Directors continue to adopt the going concern basis in preparing the annual report and financial statements.

CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the application of the accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.

Significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements are described below:

INTANGIBLES - CAPITALISATION AND VALUATION OF SOFTWARE AND DEVELOPMENT COSTS AND ACQUIRED INTANGIBLES

The Board consider that the Group's key differentiators stem from its proprietary software, operationally w3p, developed to support Brand Partners Nettl and printing.com, Marqetspace and online initiatives. It is essential to continue investing in these assets. Projects are agreed with user forums to improve functionality for Partners. Separate projects are defined for international expansion and for new initiatives as they are identified. Development costs are capitalised where a project has been defined, tested and expected to realise future economic benefits. Programming is carried out by third parties working to a detailed specification and schedule. The Board exercises judgement in determining the costs to be capitalised and determine the useful economic life to be applied typically 3 years or whilst the asset in question remains in use. Acquired intangibles have been identified as the customer base and brand, the valuation is based upon future discounted cash flows and expectations for the business. Further, the Board will use estimates of future incremental cash flows to periodically assess the carrying value of intangible assets.

IMPAIRMENT OF INTANGIBLE ASSETS AND INVESTMENT IN SUBSIDIARIES.

In assessing impairment, Management estimates the recoverable amount of cash generating units based on expected future cash flows and uses the weighted average cost of capital to discount them. At the end of each reporting period the Management reviews a four year forward looking financial projection including a terminal value for the Group. The Management has further evaluated the terminal growth expectations and the applied discount rate applicable to derive a Net Present Valuation (NPV) of the Group. If the NPV of the Group shows a lower valuation than the net assets or the company cost of investment in subsidiaries plus intercompany balances due, an impairment will be made. Based on this evaluation, including management estimates and assumptions, no impairment was made during the reporting period. Estimation uncertainty relates to assumptions about future operating results in particular sales volumes and the determination of a suitable discount rate.

ESTIMATION OF THE EXPECTED CREDIT LOSSES ON TRADE RECEIVABLES

In assessing the expected credit losses, in respect of the trade receivables under IFRS 9, the Group considers the past performance of the receivable book along with future factors that may affect the credit worthiness of the entire trade receivables. Estimations have therefore been made within these assumptions which could affect the carrying value of the trade receivables.

BEARER BONDS

The bearer bonds issued by the Company have no fixed maturity. In order to establish an effective interest rate, management is required to determine the expected life of the bonds and has estimated this to be 20 years from the date of issue. In assessing the fair value of the embedded derivative relating to the exclusive one way call option, judgement is required in order to assess the likelihood of the business exercising this option.

2.  REVENUE AND SEGMENTAL INFORMATION

The Group's operating and reporting segments are geographic being UK & Ireland, Europe and others. The segmental analysis by nature of service includes Licence Fees, Company owned Studio revenue, Brand Partner print and Online sales plus Trade print. This disclosure correlates with the information which is presented to the Board, which reviews revenue (which is considered to be the primary growth indicator) by segment. The Group's costs, finance income, tax charges, non-current liabilities, net assets and capital expenditure are only reviewed by the CEO at a consolidated level and therefore have not been allocated between segments in the analysis below.

Revenue generated outside the UK is attributable to partners in Australia, Belgium, France, New Zealand, The Netherlands and the USA.

No single customer provided the Group with over 6% of its revenue.

DISAGGREGATION OF REVENUE

The disaggregation of revenue from contracts with customers is as follows:

Of the Group's non-current assets (excluding deferred tax) of £8,575,000, £8,545,000 are located in the UK. Non-current assets located outside the UK are in France £5,000 (2020: £6,000) and Ireland £25,000 (2020: nil).