Final Results

RNS Number : 2824S

Real Good Food PLC

29 September 2017

 

For immediate release

Real Good Food plc

("the Company" or "Real Good Food")

Final Results for the year ended 31 March 2017

Real Good Food plc (AIM: RGD) announces Final Results for the Year Ending 31 March 2017.

Financial Highlights

·      Revenue increased by 8% from £100.4m to £108.2m

·      Gross profit reduced by 1% from £26.7m to £26.4m

·      EBITDA reduced from £5.0m to £1.2m leading to an operating loss of £(5.8)m (2016: £2.1m)

·      Delay in passing on raw material price inflation post-Brexit vote

·      Significant sugar trading dispute unresolved during the financial year

·      Increases in overheads and costs as part of growth plan

·      Poor control of central costs

·      Impairment of assets and goodwill

·      Net debt at 31 March 2017 was £16.2m (2016: £5.0m)

Operational Highlights and post period end events

·      Strategic decision taken to invest in increasing capacity at main Cake Decoration and Premium Bakery sites

·      Re-financing undertaken post-year end to fund growth plan

·      Significant Board changes

·      Review of financial processes and procedures and corporate governance being undertaken

·      Focus on cash generation

·      New banking covenants agreed

Commenting on the results Chris Thomas, Executive Director said:

"Real Good Food has recently experienced a period of substantial management change at the executive leadership and Board level as well as challenging trading conditions.  These management changes have principally been instigated following the recognition that the financial performance of the business during the reported period was substantially below the level that might reasonably have been anticipated. Poor corporate governance and controls were also identified and are being addressed.

He added: "The Board remains confident in the future prospects for the Company. With new leadership, a commitment to improve the Group's financial controls and corporate governance, the Board believes the business is now well positioned to capitalise on the investment being made to improve profitability and cashflow over the coming years for the benefit of all shareholders."

The Company's Annual General Meeting will be held at the Real Good Food Development Centre, 61 Stephenson Way, Wavertree Technology Park, Liverpool, L13  1HN at 11am on Thursday 26th October 2017.

-Ends-

The information communicated within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014. Upon the publication of this announcement, this inside information is now considered to be in the public domain.

ENQUIRIES:

Real Good Food plc

Chris Thomas, Executive Director               Tel: [phone]

Harveen Rai, Finance Director

Andrew Brown, Marketing Director

finnCap Ltd (Nomad and Broker)

Matt Goode                                                  Tel: [phone]

Carl Holmes

Belvedere Communications (PR)

John West                                                    Tel: [phone]

Kim van Beck

About Real Good Food plc

Real Good Food plc is a diversified food business serving a number of market sectors including retail, manufacturing, wholesale, foodservice and export. The Group focuses on three main markets: Cake Decoration (Renshaw, Rainbow Dust Colours), Food Ingredients (Brighter Foods, Garrett Ingredients and R&W Scott) and Premium Bakery (Haydens and Chantilly Patisserie).

Statement from the Board

2016/17 Performance

Real Good Food has recently experienced a period of substantial management change at the executive leadership and Board level as well as challenging trading conditions.  These management changes have principally been instigated following the recognition that the financial performance of the business during the reported period was substantially below the level that might reasonably have been anticipated. Poor corporate governance and controls were also identified and are being addressed.

While sales grew from £100.4 million in 2015/16 to £108.2 million in 2016/17, EBITDA dropped from £5.0 million in 2015/16 to £1.2m in 2016/17 leading to an operating loss of £(5.8) million.

There were three main reasons for this. First, there was the adverse effect of the exchange rate on key commodity prices following the Brexit vote and a lag in implementing price increases to restore margins. Secondly, there was poor financial control of central costs. Finally, a significant trading dispute regarding the non-supply of contracted sugar to Garrett Ingredients, remained unexpectedly unresolved by the year end.

The Board recognised these failings and as a result has taken the following actions.

Re-capitalisation

Shortly after the year end, the acquisition of Brighter Foods took place. The Board sees this as a very strong addition to the Group's portfolio. Following this acquisition, it became clear that the business was seriously under-funded and was not in a position to pursue its growth plan, particularly at Renshaw and Haydens.

In June, a major re-capitalisation was effected by raising £4.0 million of loans from two existing shareholders and £10.0 million of loan notes and equity from a new shareholder.

There is a peak in capital investment during the year 2017/18 and so in July 2017 a further £2.0 million was invested by the two existing major shareholders to secure an overdraft facility with Lloyds Bank plc and a further £4.0 million has been raised by all three major shareholders in September 2017 to ensure that sufficient working capital is now available to enable the Company to execute its strategy.

The major shareholders have also stated that, while this is not anticipated, they are prepared to support as required any short term working capital shortfall. In September, following the conclusion of these cash injections, new agreements on covenants were concluded with Lloyds Bank which has confirmed its continued support for the business for at least 12 months.

Board changes

On 1st August Peter Salter (Non-Executive Director) resigned and Pieter Totté (Executive Chairman) and Dave Newman (Finance Director and Company Secretary) resigned on 7th August.

The Board has been significantly strengthened by the appointment of three new Directors. Judith MacKenzie (non independent Non-Executive Director) was appointed on 29th June and Hugh Cawley (independent Non-Executive Director) joined on 7th August. Harveen Rai, was appointed as Finance Director and Company Secretary on 14th August and on 8th August, Christopher Thomas was appointed as Executive Director (from Non-Executive) and Pat Ridgwell assumed the post of Interim Non-Executive Chairman (from Deputy Chairman).

These changes were made to improve the independence and corporate governance structure of the Board and to further strengthen the strategic and turnaround expertise for the Group. The Board intends to undertake a full independent review of the Group's financial processes and procedures, corporate governance and controls in light of the previous failings.

Operating performance and outlook

Following this challenging period, the operating businesses are now focused on cash generation and on achieving short term targets with the aim of creating strategic value for all shareholders in the longer term.

Despite these unsettling times the Board is confident that the underlying position of each business is fundamentally sound. Sales growth performance is strong-in the first 22 weeks of the FY 2018, like-for-like revenue is up 10% year-on-year in both Cake Decoration and Premium Bakery and up 28% in Food Ingredients though this latter sector is partly impacted by increased commodity prices-but it is recognised that this must be converted into operating profit and operating cash flow at the Group level.

For the remainder of the 2017/2018 year, prior to the critical Christmas trading period, sales prospects continue to remain positive. The re-capitalisation and cash injections have enabled the investment programmes (£11 million at Haydens on freezing capability and a new Yum Yum line and £8 million at Renshaw on new automated icing discs and soft icing production lines) to proceed. The delays have, however deferred the delivery of benefits which are now anticipated to be fully realised in FY 2019.

Banking agreements and Debt Position

The Group and Lloyds Banking Group ("LBG") have reached agreement in relation to the resetting of covenants and other conditions on the Group's term debt as follows:

·      No covenant tests at 30 September 2017.

·      New Net Debt and Interest Cover covenant tests at 31 December 17 for the 9 month period up to that date.

·      New Net Debt and Interest Cover covenant tests at 31 Mar 18, 30 June 18 and 30 Sept 18, each for a 12 month period up to these dates.

o  Repayment of the outstanding term loan by 31 Oct 18.

o  A capital expenditure covenant from 1 Nov 17 to 31 Oct 18.

The Group's principal debt facilities now comprise:

·      A term loan with LBG subject to the above revised covenants (£2.25m outstanding at 31 August 2017)

·      An invoice discounting facility with LBG of up to £20m (c£10.0m utilised as at 31 August 2017)

·      An overdraft facility with Lloyds Bank plc of £2m.

·      Asset finance with ABN Amro (c.£3.9m outstanding at 31 August 2017)

·      Asset finance with LBG (c.£3.2m outstanding at 31 August 2017)

·      Shareholder facilities of c.£17.25m

Summary

The Board remains confident in the future prospects for the Company. With new leadership, a commitment to improve the Group's financial controls and corporate governance, the Board believes the business is now well positioned to capitalise on the investment being made to improve profitability and cashflow over the coming years for the benefit of all shareholders.

Divisional Business Review

Real Good Food

Cake Decoration

 

2016/17 Performance

After a disappointing first half, sales saw good growth in the second half of the year. Volumes of sugarpaste and caramels grew though marzipan sales fell slightly. Sales for export grew with increasing demand in the US and the launch of Renshaw 'Extra' in Europe. Rainbow Dust faced increased competition but still managed to grow sales by 13% with the Progel colours range performing particularly strongly.

Overall divisional EBITDA was down on the previous year by £0.9 million as a result of increased overheads at Rainbow Dust and in Europe as well as set up costs and people investment in the new Americas operation.

·      REVENUE of £47.0m

·      EBITDA^* of £6.5m

·      OPERATING PROFIT of £5.5m

 

Forward plans

Product plans at Renshaw include a drive on discs and plaques from the new automated line while frostings and the Simply Create ranges will begin sale in the final quarter. Significant new business is anticipated internationally with the developing American market and the launch of the brand into Australia. The Rainbow Dust range will be relaunched during the year with a refreshed logo, new designs and internationally compliant packaging.

The investment plan at the Renshaw Crown street site has begun with the installation of new sugar milling capacity, the new, automated discs and plaques line and the hot process frostings for the Simply Create brand. At Rainbow Dust, the site is being upgraded to BRC standard which will open up sales opportunities within the manufacturing sector.

12 months to March	2016/2017 £m	2015/2016 £m
Revenue	47.0	48.3
EBITDA*	6.5	7.3
Operating profit	5.5	6.5
Operating profit %	11.7%	13.5%

*Represents adjusted EBITDA see note 5 for reconciliation

Real Good Food

Food Ingredients

2016/17 Performance

Sales revenues grew by over 20% but this was largely a result of recovering commodity prices in sugar and dairy. R&W Scott increased its sales by just over 5% while Garrett's pursued a strategy of retaining customer volume despite poor margins. Both businesses suffered gross margin reverses with Garrett Ingredients particularly suffering around the sharp and unexpected currency movements after the Brexit vote leading to increased commodity costs. A dispute regarding the supply of sugar constrained Garrett's trading position and remained unresolved at the year end. As a result the division traded at an operating loss.

An annual impairment review was conducted in accordance with IAS38 'Intangible assets' and IAS36 'Impairment of assets' and this resulted in an impairment of goodwill and fixed assets of £3.6 million.

·      REVENUE of £27.3m

·      EBITDA^* of £(1.6)m

·      OPERATING LOSS of £(5.8)m

 

Forward plans

The acquisition of Brighter Foods transformed the scale and profitability of this division and met the objective of expanding our presence in the added value health sector. New supplier relationships following the trading dispute should enable margin recovery in sugar from October 2017, while dairy trading should also present opportunities during the second half of the year providing currency trends stabilise.

R&W Scott started supply of a major jam contract in September while last year's investment will deliver operational savings. R&W Scott has also worked on a number of inter-company supply contracts, particularly to Haydens, which will bring margin in-house.

12 months to March	2016/2017 £m	2015/2016 £m
Revenue	27.3	22.7
EBITDA* (loss)	(1.6)	(0.1)
Operating (loss)	(5.8)	(0.4)
Operating (loss) %	(21.2)%	(2.0)%

*Represents adjusted EBITDA see note 5 for reconciliation

Real Good Food

Premium Bakery

2016/17 Performance

Divisional sales grew 15% YOY (partly a result of the Chantilly acquisition) though Haydens like for like sales were over 7% higher. Most of the growth came from established customers such as Waitrose and Marks and Spencer. Performance at Chantilly was frustrated by capacity constraints with a delay in the proposed move to a new site nearby. At Haydens a strengthened management team was in place for the final quarter.

EBITDA increased by £0.4 million despite a delay in price recovery on raw materials (butter, Haydens' biggest raw material by value doubled in price between July and October 2016) so the strong Christmas trading period saw lower margins.

·      REVENUE of £33.9m

·      EBITDA^*of £1.2m

·      OPERATING PROFIT of £0.1m

Forward plans

The factory investment plan at Devizes will transform the operation with significant added Yum Yum capacity and freezing capability which will reduce costs and increase flexibility. A number of new products are planned with the first stage of additional capacity coming on stream in September and the second from January 2018. There is increasing interest in Haydens' product capabilities from a number of new retailers. The Haydens Distribution operation is expected to continue to perform well with Waitrose and growth in third party sales. Following the delay in moving the Chantilly operation, a review of options will be undertaken during the autumn of 2017.

12 months to March	2016/2017 £m	2015/2016 £m
Revenue	33.9	29.4
EBITDA*	1.2	0.7
Operating profit	0.1	(0.1)
Operating profit %	0.3%	(0.5)%

*Represents adjusted EBITDA see note 5 for reconciliation

Finance Review

Overview

During the audit process for these full year accounts for the year ended 31 March 2017, a number of issues were identified, which ultimately resulted in a significant profit downgrade for the Company. As a result, the finance team has been working together with the Board of Directors, the Company's auditor, financial adviser and external consultants in a comprehensive review of the Company's financial position.

Revenue

Group revenue for the 12 months ending 31 March 2017 was £108.2 million (2016: £100.4 million) which is an increase of 8% on the revenue to 31 March 2016. This is the result of growth in the Food Ingredients business of £4.6 million, and in Premium Bakery of £4.5 million offset by Cake Decoration which traded behind prior year by £1.3 million. The increase of revenue in Premium Bakery included a full year effect of the acquisition of Chantilly which amounted to £2.1 million in the year.

Results of continuing operations	31 March 2017 £'000s	31 March 2016 £'000s
Revenue	108,208	100,439
Gross Profit	26,351	26,670
Delivered Margin	21,383	21,303
EBITDA (adjusted)	1,179	5,043
Operating Loss/Profit	(5,819)	2,137
Operating Loss/Profit %	(5.4)%	2.1%
Loss/Profit before tax*	(6,462)	4,735

*The 2016 Profi-t before tax of £12,890k is made up of Continuing Operations of £4,735k and Discontinued Operations of £8,155k

Profit measure on operations

Gross profit on the continuing businesses for the overall Group was broadly flat at £26.4 million (2016: £26.7 million). At 19.8% of revenue gross margin was lower than the 21% reported in 2016. This reduction in margin has reflected higher than anticipated commodity ingredient costs, in part due to an underestimation of the impact of currency volatility post-Brexit, compounded in some cases by a later than expected price recovery from customers following the increase in raw material costs.

The operating loss for the 12 months to 31 March 2017 was £(5.8) million, down significantly from a profit of £2.1 million in 2016.

The operating loss in the year of £(5.8) million is reported after the impairment charge of £4.1 million, depreciation charge of £2.4 million, amortisation of £0.4 million and significant items of £0.1 million.

An annual impairment review has been conducted and this resulted in an impairment of goodwill of £1.6 million and an impairment of fixed assets of £2.5 million.

This has resulted in a statutory loss before tax of £6.5 million (2016: profit of £12.9 million) giving a basic loss per share of 8.50p in 2017 against an EPS of 18.36p in the prior year.

Cash flow and net debt

Given the factors described above, insufficient cash was generated to fund the Company's strategic investment programme and further borrowings were secured. Investment in tangible and intangible assets in the year amounted to £11.5 million which led to the Company's increasing net debt by £11.2 million (2016: £5.1 million) to £16.2 million as at 31 March 2017. This led to a worsened ratio of net debt to EBITDA from 1.0 in 2016 to 13.7 in 2017.

	31 March 2017 £'000s	31 March 2016 £'000s
Working Capital (inventories, trade and other receivables, trade and other payables)	14,096	16,156
Net Borrowings (incl cash)	16,231	5,066
Net Debt/EBITDA	13.7	1.0

Capital cancellation and dividend

Following the capital cancellation of the parent company share premium account and following the Company statement at the AGM, the Directors paid an interim dividend in the year of 0.04p in January 2017 (2016 - £Nil).

The Directors are not intending to recommend payment of a final dividend in respect of the 12 months ended 31 March 2017 (2016 - £Nil).

Re-financing

Following the year end, the Company undertook a major re-capitalisation exercise by raising loans from existing shareholders and loan notes and equity from a new shareholder. Together with existing loan facilities the Company's cash position has now been stabilised and this combination of sources has injected a total of £20.0 million of funds into the 2017/18 FY.

The Board is now confident that sufficient working capital is available to enable the Company to complete its investment programme and execute its growth strategy.

Outlook

A key focus for the year is to ensure that, with stronger financial controls and improved corporate governance, the management team supports the planned growth of the businesses, to increase shareholder value and returns.

Key Performance Indicators

The Board of Directors monitors a range of financial and non-financial key performance indicators, reported on a periodic basis, to measure the Group's performance. The key performance indicators, all based on continuing operations, are set out below. The Board intends to review these Key Performance Indicators in the coming year with a greater emphasis on targets for free cash flow generation.

	2017	2016	2015	2014	Comment
Revenue growth Revenue is calculated for continuing business and is from external sources only.	£108.2m	£100.4m	£104.6m	£110.2m	Revenue in the year has increased by 8% driven by Premium Bakery and Food Ingredients
EBITDA EBITDA is defined as earnings before significant items, interest, tax depreciation and amortisation.	£1.2m	£5.0m	£5.3m	£4.9m	EBITDA of £1.2 million reflecting both difficult market conditions, including commodity price increases due to currency volatility, and increased overhead costs
Net Debt Net Debt is the total Group borrowings less cash at bank.	£16.2m	£5.1m	£30.1m	£31.1m	Net debt in the year has increased to £16.2 million to fund the Group's investment strategies
Debt cover Debt cover is calculated by dividing total Net Debt by continuing EBITDA.	13.7	1.0	5.6	6.3	As a result of increased net debt the current net debt/EBITDA cover stands at 13.7
Health & Safety score Health & Safety score represents an average score across the sites and is measured against internal standards generated by an external consultant. Figures are quoted for calendar years.	88%	90%	82%	88%	For 2018 the Group will change to an industry HSE standard measurement of Accident Frequency Rate to give a more comparable measurement with other industries

Consolidated Statement of Comprehensive Income

Year ended 31 March 2017

		Year ended 31 March 2017			Year ended 31 March 2016
	Notes	Continuing Operations £'000s	Discontinued Operations £'000s	Total £'000s	Continuing Operations £'000s	Discontinued Operations £'000s	Total £'000s
REVENUE		108,208	-	108,208	100,439	13,237	113,676
Cost of sales		(81,857)	-	(81,857)	(73,769)	(11,884)	(85,653)
GROSS PROFIT		26,351	-	26,351	26,670	1,353	28,023
Distribution costs		(4,968)	-	(4,968)	(5,367)	(1,149)	(6,516)
Administration expenses		(23,006)	-	(23,006)	(18,221)	(288)	(18,509)
Impairment Charge		(4,109)	-	(4,109)	-	-	-
Significant items		(87)	-	(87)	(945)	-	(945)
OPERATING (LOSS)/PROFIT		(5,819)	-	(5,819)	2,137	(84)	2,053
Fair value gain on contingent consideration		-	-	-	3,267	-	3,267
Finance costs		(427)	-	(427)	(478)	(906)	(1,384)
Other finance costs		(216)	-	(216)	(191)	-	(191)
Profit on disposal of discontinued operations		-	-	-	-	9,145	9,145
(LOSS)/PROFIT BEFORE TAXATION		(6,462)	-	(6,462)	4,735	8,155	12,890
Income tax credit/(expense)		618	-	618	(439)	-	(439)
Tax on discontinued business		-	-	-	-	256	256
Income tax on significant items		(135)	-	(135)	113	-	113
(LOSS)/PROFIT ATTRIBUTABLE TO THE EQUITY HOLDERS OF THE PARENT		(5,979)	-	(5,979)	4,409	8,411	12,820
OTHER COMPREHENSIVE LOSS
Items that will not be reclassified to profit or loss
Foreign exchange differences on translation		(48)	-	(48)	-	-	-
Actuarial (losses) on defined benefit plan		(1,847)	-	(1,847)	(484)	-	(484)
Income tax relating to components of other comprehensive loss		351	-	351	35	-	35
OTHER COMPREHENSIVE LOSS		(1,544)	-	(1,544)	(449)	-	(449)
TOTAL COMPREHENSIVE (LOSS) FOR THE YEAR ATTRIBUTABLE TO THE EQUITY HOLDERS OF THE PARENT		(7,523)	-	(7,523)	3,960	8,411	12,371
Earnings per share
- basic		(8.50)p	-	(8.50)p	6.31p	12.05p	18.36p
- diluted		(8.50)p	-	(8.50)p	5.83p	11.13p	16.96p

The notes form part of these financial statements.

Consolidated Statement of Changes in Equity

Year ended 31 March 2017

	Issued Share Capital £'000s	Share Premium Account £'000s	Share Option Reserve £'000s	FX Translation Reserve £'000s	Retained Earnings £'000s	Total £'000s
Balance as at 31 March 2015	1,392	71,272	577	-	8,678	81,919
Total comprehensive income for the year
Profit for the year	-	-	-	-	12,820	12,820
Other comprehensive income for the year	-	-	-	-	(449)	(449)
Total comprehensive income for the year	-	-	-	-	12,371	12,371
Transactions with owners of the Group, recognised directly in equity
Contributions by and distributions to owners of the Group
Shares issued in the year	10	103	-	-	-	113
Share based payment expense	-	-	15	-	-	15
Total contributions by and distributions to owners of the Group	10	103	15	-	-	128
Balance as at 31 March 2016	1,402	71,375	592	-	21,049	94,418
Total comprehensive income for the year
Loss for the year	-	-	-	-	(5,979)	(5,979)
Other comprehensive income for the year	-	-	-	(48)	(1,496)	(1,544)
Total comprehensive income for the year	-	-	-	(48)	(7,475)	(7,523)
Transactions with owners of the Group, recognised directly in equity
Contributions by and distributions to owners of the Group
Shares issued in the year	9	19	-	-	-	28
Deferred Tax on Share based payments	-	-	(177)	-	-	(177)
Dividends paid	-	-	-	-	(28)	(28)
Cancellation of share premium	-	(71,272)	-	-	71,272	-
Total contributions by and distributions to owners of the Group	9	(71,253)	(177)	-	71,244	(177)
Balance as at 31 March 2017	1,411	122	415	(48)	84,818	86,718

Consolidated Statement of Financial Position

Year ended 31 March 2017

	Notes	31 March 2017 £'000s	31 March 2016 £'000s
NON-CURRENT ASSETS
Goodwill		69,416	71,005
Other intangible assets		1,155	834
Property, plant and equipment		23,932	18,066
Deferred tax asset		1,435	1,556
		95,938	91,461
CURRENT ASSETS
Inventories		13,323	12,360
Trade and other receivables		16,016	17,039
Current tax assets		233	-
Cash and cash equivalents		464	2,946
		30,036	32,345
TOTAL ASSETS		125,974	123,806
CURRENT LIABILITIES
Bank overdrafts		619	949
Trade and other payables		15,243	13,243
Borrowings		11,375	7,008
Financial instrument		146	-
Current tax liabilities		-	127
		27,383	21,327
NON-CURRENT LIABILITIES
Borrowings		4,701	55
Deferred tax liabilities		1,278	1,925
Retirement benefit obligation		5,894	6,081
		11,873	8,061
TOTAL LIABILITIES		39,256	29,388
NET ASSETS		86,718	94,418
EQUITY
Share capital		1,411	1,402
Share premium account		122	71,375
Share option reserve		415	592
Foreign exchange translation reserve		(48)	-
Retained earnings		84,818	21,049
TOTAL EQUITY		86,718	94,418

These financial statements were approved by the Board of Directors and authorised for issue on 28 September 2017.

They were signed on its behalf by:

C O Thomas

Executive Director

H Rai

Finance Director

The notes form part of these financial statements

Consolidated Cash Flow Statement

Year ended 31 March 2017

	12 months ended 31 March 2017 £'000s	12 months ended 31 March 2016 £'000s
CASH FLOW FROM OPERATING ACTIVITIES
Adjusted for:
(Loss)/Profit before taxation	(6,462)	12,890
Finance and other finance costs	643	1,575
Share based payment expense	-	15
Depreciation of property, plant and equipment	2,434	1,917
Impairment charge	4,109	-
Profit on disposal of Napier Brown	-	(9,061)
Fair value gain on contingent consideration	-	(3,267)
Past service gain on pension	(1,330)	-
Amortisation of intangibles	365	113
Operating Cash Flow	(241)	4,182
(Increase)/decrease in inventories	(963)	(1,900)
(Increase)/decrease in receivables	1,021	(2,034)
Pension contributions	(310)	(282)
(Decrease) in payables	1,497	(1,866)
Cash generated from operations	1,004	(1,900)
Income taxes received/(paid)	(237)	(614)
Interest paid	(427)	(1,661)
Net cash from operating activities	340	(4,175)
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from disposal of property, plant and equipment	-	160
Purchase of intangible assets	(686)	-
Purchase of property, plant and equipment	(10,820)	(6,408)
Disposal of Discontinued business	-	37,201
Acquisition of business, net of cash acquired	-	(1,666)
Net cash used in investing activities	(11,506)	29,287
CASH FLOW USED IN FINANCING ACTIVITIES
Shares issued in year	28	113
Dividends paid	(28)	-
Repayment of borrowings	-	(33,447)
Repayment of loans	(688)	-
Net movements on revolving credit facilities	5,628	3,705
Advances net of repayments on finance leases	4,074	(122)
Net cash used in financing activities	9,014	(29,751)
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS	(2,152)	(4,639)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents at beginning of period	1,997	6,636
Net movement in cash and cash equivalents	(2,152)	(4,639)
Cash and cash equivalents at end of period	(155)	1,997
Cash and cash equivalents comprise:
Cash	464	2,946
Overdrafts	(619)	(949)
	(155)	1,997

The notes form part of these financial statements.

Notes to the Financial Statements

Year ended 31 March 2017

1. Presentation of financial statements

General information

Real Good Food plc is a public limited company incorporated in England and Wales under the Companies Act (registered number 4666282). The Company is domiciled in England and Wales and its registered address is International House, 1 St Katharine's Way, London, E1W 1XB. The Company's shares are traded on the Alternative Investment Market (AIM).

Basis of preparation

These consolidated financial statements are presented on the basis of International Financial Reporting Standards (IFRS) as adopted by the European Union and have been prepared in accordance with AIM rules and the Companies Act 2006, as applicable to companies reporting under IFRS.

These consolidated financial statements have been prepared in accordance with the accounting policies set out in note 2 and under the historical cost convention, except where modified by the revaluation of certain financial instruments and commodities.

Discontinued operations

A discontinued operation is a component of the Group's business that represents a separate major line of business or geographical area of operations that has been disposed of or is held for sale, or is a subsidiary acquired exclusively with a view to resale. Classification of a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative income statement is presented as if the operation had discontinued from the start of the comparative period. The disposal of the Napier business in year to March 2016, gave rise to a discontinued operation.

New IFRS standards and interpretations adopted

A number of new standards and amendments to standards and interpretations have been issued but are not yet effective and in some cases have not been adopted by the European Union. The directors have assessed the potential impact of IFRS 15 and do not expect that the adoption of this standard will have a material impact on the financial statements of the Group in future periods. IFRS 16 may have an impact on the measurement and treatment of operating leases and the related disclosures. As at 31 March 2017 the estimated impact of the transition to IFRS 16 would be to increase tangible fixed assets and liabilities by approximately £1.9m The impact on the profit and loss account is not expected to be material to the financial statements.

2. Significant accounting policies

The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the Group's financial statements.

a) Basis of accounting

The financial statements have been prepared in accordance with applicable accounting standards.

The Group's business activities, together with the factors likely to affect its future development, performance and position, are set out in the Divisional Reviews. The financial position of the Group, its cash flows and liquidity position are described in the Finance Review. In addition, note 22 to the financial statements included in the Company's Annual Report sets out the Group's objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposure to credit risk and liquidity risk.

Also as detailed in note 22 to the financial statements, the Group has a long term banking arrangement with Lloyds Bank Plc and this, together with customer contracts and supplier agreements, enables the Directors to believe that the Group is well placed to manage its business risks.

The Directors believe that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.

b) Basis of consolidation

The Group financial statements consolidate the financial statements of the Company and its subsidiary undertakings. The purchase method of accounting has been adopted. Under this method the results of all the subsidiary undertakings are included in the Consolidated Statement of Comprehensive Income from the date of acquisition or up to the date of disposal. Intra-group revenues and profits are eliminated on consolidation and all revenue and profit figures relate to external transactions only.

Under Section 408 of the Companies Act 2006 the Company is exempt from the requirement to present its own income statement. The result for the financial year, of the holding company, as approved by the Board, was £(5,963)k (2016 - £6,004k).

c) Revenue recognition

Revenue comprises the invoiced value of goods and services supplied by the Group, exclusive of Value Added Tax and trade discounts. Revenue is recognised at the point or points at which the Group has performed its obligations in connection with the contractual terms of the revenue agreement, and in exchange obtains the right to consideration.

(a) Sales of Goods: Sales of goods are recognised when goods are delivered and title passed. Sales are recorded net of discounts, Value Added Tax (VAT) and other sales related taxes.

(b) Finance Income: Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable. Other finance costs includes net interest costs on the net defined benefit pension scheme liabilities.

(c) Rebates and discounts: all discounts, rebates etc are accounted for in line with contractual commitments and netted off gross sales to reflect the net income earned and any costs incurred in promotional activity are expensed within commercial overheads. In all cases these accounts will reflect the net position after any contractual discounts and rebates along with any promotional costs.
Full accruals are made for any unpaid elements.

d) Income tax

The charge for taxation is based on the results for the year and takes into account taxation deferred because of timing differences between the treatment of certain items for taxation and accounting purposes.

Deferred tax is recognised on temporary differences arising between the tax basis of assets and liabilities and their carrying amounts.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and is 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.

Deferred tax is calculated at the tax rates that have been applied or substantially applied by the balance sheet date. Deferred tax is charged or credited to the Statement of Comprehensive Income, except where it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities, and when they relate to income taxes levied by the same taxation authority, and the Group intends to settle its current tax assets and liabilities on a net basis.

e) Significant items

It is the Group's policy to show items that it considers are of a significant nature separately on the face of the Statement of Comprehensive Income in order to assist the reader to understand the accounts. The Group defines the term 'significant' as items that are material in respect of their size and/or nature; at a segment reporting level, for example, a major restructuring of the management of that segment. The Group believes that by identifying these items separately as significant it enhances the understanding of the true performance of the segment trading position.

f) Pension costs

The Group operates a defined contribution and a defined benefit pension scheme. Payments to the defined contribution scheme are charged as an expense as they fall due. For the defined benefit scheme the cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at each balance sheet date.

Actuarial gains and losses are recognised in full in the period in which they occur.

g) Property, plant and equipment

Property, plant and equipment are stated at historical cost or fair value at the date of acquisition, less accumulated depreciation and impairment provisions.

Depreciation is provided to write off the cost, less the estimated residual value, of property, plant and equipment by equal instalments over their estimated useful economic lives as follows:

Freehold buildings	2% - 2.5%
Short term leasehold buildings	Length of lease
Plant and equipment	7.5% - 50%
Motor vehicles	25%
Fixtures and fittings	7.5% - 25%
Computer equipment	25%

Impairment reviews of property, plant and equipment are undertaken if there are indications that the carrying values may not be recoverable or that the recoverable amounts may be less than the assets' carrying value.

Assets in the course of construction relate to plant and equipment in the process of construction, which were not complete, and hence were not in use at the year end. Assets in the course of construction are not depreciated until they are completed and available for use.

h) Intangible assets

Intangible assets consist of computer software, development costs and business relationships software is considered to have an economic life of five years; business relationships which are considered to have an estimated useful economic life of two years and development which have been internally generated and capitalised in accordance with IAS 38 which have an estimated commercial life of 5 years. All of these assets are amortised on a straight-line basis over these periods. The average remaining life of intangible assets is three years (2016 - three years). The charge for the year is included in administration expenses within the Statement of Comprehensive Income.

i) Leases

Where a lease is entered into which entails taking substantially all the risks and rewards of ownership of an asset, the lease is treated as a finance lease. The asset is recorded in the Statement of Financial Position as an item of property, plant and equipment and is depreciated over the shorter of its estimated useful life or the term of the lease. Future instalments under such leases, net of finance charges, are included within borrowings. Rentals payable are apportioned between the finance element, which is charged to the profit or loss, and the capital element, which reduces the outstanding obligation for future instalments.

All other leases are treated as operating leases and the rentals payable are charged on a straight-line basis to the profit or loss over the lease term.

j) Investments

Investments in the Company accounts relate to investments in subsidiaries and are stated at cost less provision for any impairment in value.

k) Inventories

Inventories are stated at the lower of cost and net realisable value after making due allowance for obsolete and slow-moving inventory. Cost includes all direct costs and an appropriate proportion of fixed and variable overheads. Cost is calculated using the standard cost or weighted average cost methods, appropriate to the materials and production processes involved. Net realisable value is based upon estimated selling price allowing for all further costs of completion and disposal.

l) Derivative financial instruments

The Group uses derivative financial instruments to reduce exposure to commodity price and foreign exchange rate movements. The Group does not hold or issue derivative financial instruments for speculative purposes.

Derivative financial instruments are held by the Group as assets or liabilities on the Statement of Financial Position measured at the fair values at the year end date. Changes in the value of derivative financial instruments arising from fair value hedges are recognised in the income statement.

For a hedging relationship to qualify for hedge accounting it must be documented at inception and it must be highly effective in offsetting the changes in cash flows or fair value attributed to the hedged risk.

m) Cash and cash equivalents

Cash and cash equivalents on the Statement of Financial Position consist of cash in hand and at the bank. Cash and cash equivalents recognised in the Cash Flow Statement include cash in hand and at the bank, and bank overdrafts which are payable on demand. Deposits are only included within cash and cash equivalents only when they have a short maturity of three months or less at the date of acquisition.

n) Trade receivables

Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment.

o) Trade payables

Trade payables are recognised initially at fair value and are subsequently measured at amortised cost using the effective interest method.

p) Bank borrowings

Interest bearing bank loans and overdrafts are recorded as the proceeds received net of direct issue costs and are valued at amortised cost.

q) Foreign currencies

The consolidated financial statements are presented in sterling which is the Group's functional and presentation currency.

Transactions in foreign currencies are recorded at the rate of exchange at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are reported at the rates of exchange prevailing at that date.

All foreign exchange gains and losses arising from transaction in the year are presented in the Statement of Comprehensive Income within the administration expense heading.

Foreign currency differences on the translation of foreign subsidiaries are included in other comprehensive income and are shown as a separate reserve on the Statement of Financial Position.

The Group mitigates foreign exchange risk by taking out forward exchange rate contracts. These are recognised at fair value on the Statement of Financial Position at the year end.

r) Goodwill

Goodwill is calculated as the difference between the fair value of the consideration exchanged and the net fair value of the identifiable assets and liabilities acquired, and is capitalised. Goodwill is tested for impairment annually and whenever there is an indication of impairment. Goodwill is carried at cost less accumulated impairment losses.

When the acquired interest in the net fair value of the identifiable assets and liabilities exceeds the cost of the business combination, the excess is recognised immediately in the income statement.

Gains and losses on the disposal of a business combination include the carrying amount of goodwill relating to the entity sold.

IFRS 3 "Business Combinations" requires that goodwill arising on the acquisition of subsidiaries is capitalised and included in intangible assets. IFRS 3 also requires the identification of other intangible assets at acquisition. The assumptions involved in valuing these intangible assets require the use of estimates and judgements which differ from the actual outcome. These estimates and judgements cover future growth rates, expected inflation rates and the discount rate used.

Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. The Group measures goodwill at the acquisition date as:

·      the fair value of the consideration transferred; plus

·      the recognised amount of any non-controlling interests in the acquiree; plus

·      the fair value of the existing equity interest; less

·      the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed.

Costs related to the acquisition, other than those associated with the issue of debt or equity securities, are expensed as incurred. Any contingent purchase consideration payable is recognised at fair value at the acquisition date. If the contingent purchase consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent purchase consideration are recognised in the Consolidated Income Statement.

3. Critical accounting estimates and judgements


In order to prepare these consolidated financial statements in accordance with the accounting policies set out in note 2, management have used estimates and judgements to establish the amounts at which certain items are recorded. Critical accounting estimates and judgements are those that have the greatest impact on the financial statements and require the most difficult, subjective and complex judgements about matters that are inherently uncertain. Estimates are based on factors including historical experience and expectations of future events that management believe to be reasonable. However, given the judgemental nature of such estimates, actual results could be different due to the assumptions used. The critical accounting estimates are set out below.

a) Impairment of goodwill

An impairment of goodwill has the potential significantly to impact upon the Group's Statement of Comprehensive Income for the period. In order to determine whether impairments are required the Directors estimate the recoverable amount of the goodwill. This calculation is based on the Group's cash flow forecasts for the following financial year extrapolated over a rolling 19-year period assuming a 2% growth rate. A discount factor, based upon the Group's weighted average cost of capital, which has been increased to reflect the increased risk of the Company being listed on AIM rather than the full market, is applied to obtain a current value ('value in use').

The weighted average cost of capital is impacted by estimates of interest rates, equity returns and market related risks. The Group's weighted average cost of capital is reviewed on an annual basis.

The fair value less costs to sell of the cash generating unit is used if this results in an amount in excess of value in use.

Estimated future cash flows for impairment calculations are based on management's expectations of future volumes and margins based on plans and best estimates of the productivity of the income generating units in their current condition. Future cash flows therefore exclude benefits from major expansion projects requiring future capital expenditure.

b) Retirement benefits

The Company sponsors the Napier Brown Foods Retirement Benefits Plan which is a funded defined benefit arrangement. The amounts recorded in the financial statements for this type of scheme are based on a number of assumptions, changes to which could have a material impact on the reported amounts.

Any net deficit or surplus arising on the defined benefit plan is shown in the Statement of Financial Position. The amount recorded is the difference between plan assets and liabilities at the Statement of Financial Position date. Plan assets are based on market value at that date. Plan liabilities are based on actuarial estimates of the present value of future pension or other benefits that will be payable to members.

The most sensitive assumptions involved in calculating the expected liabilities are mortality rates and the discount rate used to calculate the present value. If the mortality rate assumption changed, a one year increase to longevity would increase the liability by 5%. Changes to the discount rate of 0.5% would result in a change in the scheme liabilities of (7)% and a 0.5% movement in the rate of inflation would change the liabilities of the scheme by 2%.

The Statement of Comprehensive Income generally comprises a regular charge to operating profit for the current and past service cost. Past service costs represent the change in the present value of the benefits obligation that arises from benefit charges that are applied retrospectively to prior year benefits that have accrued. Past service costs are charged in full in the year when the changes to benefits are made. There is also a finance charge, which represents the net of expected income from plan assets and an interest charge on plan liabilities. These calculations are based on expected outcomes at the start of the financial year. The Statement of Comprehensive Income is most sensitive to changes in expected returns from plan assets and the discount rate used to calculate the interest charge on plan liabilities.

Full details of these assumptions, which are based on advice from the Group's actuaries, are set out in note 30 in the Company's Annual Report and Accounts.

c) Significant items

In determining whether an item should be classified as a significant item the Board reviews the expenditure in question and assesses whether the expenditure meets the definition of a significant item as defined in the Group's accounting policy (note 2). Items are included within significant items only if, following this review, the Board is satisfied that the expenditure meets with the definition set out in the accounting policy.

d) Business claims

In common with comparable food groups, the Group is involved in a number of disputes in the ordinary course of business which may give rise to claims. Provision representing the cost of defending and concluding claims is made in the financial statements for all claims where costs are likely to be incurred. The Group carries a wide range of insurance cover and no separate disclosure is made of the detail of claims or the costs covered by insurance, as to do so could seriously prejudice the position of the Group.

e) Going concern

The Directors have considered the Group's business activities together with the factors likely to affect its future development and performance. These assumptions have been projected and shared with the Company's bank and advisers.

The Company has now successfully renegotiated new banking covenants and confirmed the support of the bank for the next 12 months. The principal shareholders of the Group have shown considerable support for the working capital requirements and, having carefully considered the liquidity of the Company in line with future performance, the Directors believe that there are sufficient resources in place for the Group to meet its liabilities and that the Group is well placed to manage its business risks. The Directors believe the Group is a going concern and the financial statements have been prepared and submitted on that basis.

4. Revenue

The revenue for the Group for the current year arose from the sale of goods in the following areas:

Cake Decoration	Manufactures, sells and supplies cake decorating products and ingredients for the baking sector.
Food Ingredients	Manufactures and supplies a range of food ingredients from bagged sugar and dairy powders to chocolate coatings and jams.
Premium Bakery	The manufacture and supply of high quality ambient cakes and desserts to the retail and foodservice sectors.

5. Reconciliation of underlying EBITDA to operating profit

£000s	Cake Decoration	Food Ingredients	Premium Bakery	Head Office	Total Group
Operating profit/(loss)	5,494	(5,779)	97	(5,631)	(5,819)
Significant items	264	141	95	(413)	87
Impairment Charge	-	3,589	-	520	4,109
Depreciation	719	469	696	550	2,434
Amortisation	51	16	279	22	368
Underlying adjusted EBITDA	6,528	(1,564)	1,167	(4,952)	1,179

The financial information set out in this announcement does not constitute the company's statutory accounts for the years ended 31 March 2016 or 2017. The financial information for the year ended 31 March 2016 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies. The auditors reported on those accounts: their report was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under s498(2) or (3) of the Companies Act 2006.

 The financial information for the year ended 31 March 2017 is derived from Group's financial statements for the year ended 31 March 2017 which were approved by the directors on 28 September 2017. The auditors reported on those accounts: their report was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under s498(2) or (3) of the Companies Act 2006. These accounts will be delivered to the registrar in due course.

 Whilst the financial information included in this announcement has been computed in accordance with International Financial Reporting Standards (IFRS), this announcement does not in itself contain sufficient information to comply with IFRS. The accounting policies used in preparation of this announcement are consistent with those in the full financial statements that have yet to be published.

Full Notes to this statement are contained in the Company's Annual Report and Accounts a copy of which can be found on the Company's website http://www.realgoodfoodplc.com/

 

END

 

 

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