Final Results

RNS Number : 7141X

Gear4music (Holdings) PLC

10 May 2016

Gear4music (Holdings) plc

Preliminary unaudited results for the year ended 29 February 2016

Record year, with strong growth in the UK and Europe

Gear4music (Holdings) plc, ("Gear4music" or "the Group") (LSE: G4M), the largest UK based online retailer of musical instruments and music equipment, today announces its unaudited financial results for the 12 months ended 29 February 2016.

Highlights:

£'000	12 months ended 29 February 2016	12 months ended 28 February 2015	Change
Revenue	35,489	24,240	+46%
Gross profit	9,186	6,757	+36%
Adjusted EBITDA *	1,681	842	+100%
Adjusted operating profit *	895	376	+138%
Pre-tax profit **	6	(797)

* Adjusted to exclude £606,000 (FY15: £165,000) of exceptional costs relating to the IPO

** Stated after £606,000 (FY15: £165,000) of exceptional IPO-related costs, and £233,000 (FY15: £804,000) of finance expenses relating to loan notes that were repaid in full in June 2015

· The Group completed its IPO in June 2015 raising £10.3m of gross proceeds

· Continued strong sales growth with UK revenue of £26.0m (+39%) and European revenue of £9.5m (+73%)

· Impressive website visitor traffic, serving more than 10 million unique visitors (+24%), and improved conversion rates

· Active customers purchasing products in the last 12 months increased by 34% to 226,000

· Investment in platform development with new customer options including online consumer finance and weekend delivery

· Product range extending with own-brand revenue growth of 33% and new own-brand product lines including pianos, studio microphones and stage lighting

· Year-end cash of £3.5m (FY15: £0.9m)

Commenting on the results, Andrew Wass, Chief Executive Officer said:

"In our first set of annual results as a listed company, it's very pleasing to be reporting a record year with strong growth across our core UK business and excellent progress into European markets, which has led to increased revenues and profits.

"We have achieved this growth by investing into our website platform, infrastructure and product ranges, strengthening our customer offer, and establishing ourselves as the go-to online destination for musical instruments and equipment.

"With over 10m visitors to our websites during the year, improved conversion and an increasing number of active customers, our investment strategies are delivering the growth we anticipated, and following strong sales momentum in both the UK and internationally during the first two months of the new financial year, we remain optimistic for the year ahead."

ENDS

Enquiries:

Gear4music +44 20 3128 8100

Andrew Wass, Chief Executive Officer

Chris Scott, Chief Financial Officer

Panmure Gordon +44 20 7886 2500

(Financial Adviser, Nominated Adviser and Broker)

Fred Walsh / Peter Steel / Duncan Monteith - Investment Banking

Erik Anderson / Tom Salvesen - Corporate Broking

MHP Communications +44 20 3128 8100

(Financial PR)

Andrew Leach

Simon Hockridge

About Gear4music.com

Operating from an office, showroom and distribution centre in York, the Group sells own-brand musical instruments and music equipment alongside premium third party brands including Fender, Yamaha and Gibson, to customers ranging from beginners to musical enthusiasts and professionals, in the UK and, more recently, into Europe.

Having developed its own ecommerce platform, with multilingual, multicurrency and fully responsive design websites covering 19 countries, the Group has rapidly expanded its database and continues to build its overseas presence.

Chairman's statement

On behalf of the Board I would like to begin by thanking the shareholders who supported the Group on its Initial Public Offering on AIM in June 2015 raising £10.3m, and also to welcome new shareholders who have subsequently acquired shares. Like myself, you will have recognised Gear4music's potential to become a leading online retailer in a large but fragmented market.

I am very pleased to report that during our first year as a public company, we achieved many of the objectives we set ourselves, and in many ways performed ahead of our expectations. Overall sales growth was 46% including 73% growth in our European markets, and we delivered a £519,000 improvement in underlying operating profit whilst gearing up for continued expansion. This was a particularly impressive achievement given the efforts required to complete a successful IPO, and is a reflection of the commitment, drive and ambition of our Board and Senior Management team.

During the year we recruited new talent into our team, in HR, marketing, purchasing and multilingual customer service, and we have further new members starting soon to help us focus our drive into European markets. A number of these recruits have been Senior Management appointments to support the Executive team.

We remain committed to improving our customer proposition, through investment in software development to accelerate the release of new website systems and functionality, and expanding our product ranges to provide more choice for our customers, whilst incorporating new delivery options.

We are confident we have laid the foundations for long-term, sustainable, profitable growth, and in light of our anticipated strengthening position, the Board commits to review its dividend policy in the current financial year ending 28 February 2017.

On behalf of the whole Board, I would like to take this opportunity to extend my thanks and appreciation to all Gear4music's employees for their commitment and hard work which has made our first year as a public company such a success.

Ken Ford, Chairman

Chief Executive's Statement

Introduction

During the last year we took some significant strides forward in our mission to become the best musical instrument and equipment retailer in Europe.

Our IPO in June 2015 put us in a strong financial position, enabling us to repay historic private equity debt in full and providing the financial resource necessary to continue to build a scalable, market leading business.

Our unique mix of a highly competitive own-brand range, products from the biggest names in the industry, and our bespoke online retail and distribution platform has helped us to achieve revenue growth of over 46% during the year, which was ahead of market expectations.

Our business is about making great music gear accessible and affordable to all musicians, from beginners and enthusiasts to professionals, and I am very proud of what our specialist and talented staff have achieved so far.

However, we want to achieve much, much more, and we will continue to accelerate the development of our systems, websites, logistics, people and product ranges to ensure a continually improving customer experience, as part of our mission to be the best.

Business Review

We have made solid progress on both our Financial and Commercial KPIs in our first year as a listed business:

Financial KPIs
	FY16	FY15
Total Revenue	£35.5m	£24.2m (+46%)
European Revenue	£9.5m	£5.5m (+73%)
Adjusted EBITDA	£1.7m	£0.8m (+97%)
Underlying operating profit	£0.9m	£0.4m (+138%)
Adjusted PBT	£0.6m	(£0.6m)
Cash year end	£3.5m	£0.9m

Commercial KPIs
	FY16	FY15
Website visitors	10.1m	8.1m
Conversion rate	2.28%	1.96%
Average order value	£116	£109
Active customers	226,000	169,000
Products listed	31,500	27,200

These results have been delivered by the continued execution of the Group's strategy, and beginning to invest the growth capital raised on IPO in our platform, people and operations.

Exceptional costs relating to the IPO totalled £606,000 in the year, and adjusting the results to remove these one-off costs shows a marked improvement in adjusted EBITDA and PBT.

Strategy update

This time last year we outlined our strategy based on five growth pillars, with the overall objective of improving our customer proposition and increasing our market share. Our team has worked very hard to implement this strategy, and as a result we are making excellent progress in achieving our objectives. At the same time, we continuously reassess and refine our strategic aims to ensure we capitalise on our core strengths, without taking undue risks.

Platform development

Our bespoke platform has the capability to scale significantly. We have successfully deployed numerous new features during the last year, including online consumer finance, a European payments platform, weekend delivery and dispatch, and on-page customer comments, in addition to hundreds of smaller design and functionality upgrades.

As we expand our development team during the next 12 months, we will focus on projects to increase operational efficiencies, and further improve customer convenience, engagement and loyalty.

Intelligent marketing

We used the IPO proceeds to increase investment in this area, a key driver of growth in the business. At the same time we have improved our return on investment in marketing significantly during the last year, with spend as a proportion of revenue falling from 10.0% of sales in FY15 to 8.7% in FY16, as a result of higher website conversion and ever more effective targeting of our online marketing.

In June 2015 we completed our in-house video production facility, which has already created over 500 high quality product demonstration videos, adding a new dimension to our platform and own-brand proposition, driving customer engagement and conversion.

As planned we have developed a new digital personalisation platform that will be deployed during the current financial year and FY18 to ensure customers receive relevant information and offers through all our communication channels.

Product range extension

The IPO proceeds allowed us to increase the breadth and depth of our product range during the last year and we plan to accelerate that growth during the next 12 months to further improve stock availability.

We were very pleased with own-brand revenue growth of 33% during the year, with growth accelerating during the second half of the year as new product lines arrived, including our SDP-2 stage piano, our range of SubZero studio microphones, and a range of Gear4music stage lighting. Our own-brand product pipeline continues to look very positive going in the current year.

We were also delighted with strong other-brand growth of 52% during the year, although this has created a temporary sales mix effect, impacting on gross margins.

International expansion

European sales growth of 73% across our 18 countries clearly demonstrates the progress we are making internationally, but with an estimated annual value of £4.3bn for the market we are still at the beginning of this journey.

We have continued to invest in our multilingual teams, marketing, website localisation and fulfilment systems to deliver growth. On the back of these successes we will turn our attention to reducing product delivery timescales into mainland Europe, potentially by opening a number of small satellite distribution hubs. This will allow our European customers to enjoy a similar level of service to our UK customers across a much broader product range, whilst at the same time reducing our European delivery costs.

London showroom

Whilst it remains a strategic ambition, soaring central London property prices during the last two years have resulted in a commercially viable deal remaining elusive. Whilst we have come close to agreeing terms on a number of occasions, we have not been prepared to make a long term lease commitment that does not make complete financial sense, and at this time we see better value for shareholders in focusing on our European expansion.

Operations

I am pleased to report that our systems and infrastructure demonstrated their reliability and flexibility throughout the year. Our websites served more than 10 million unique visitors generating nearly 300,000 orders, with Black Friday 2015 being the busiest day in our history.

To adapt to customers' evolving expectations we introduced weekend dispatch and delivery in December 2015, which now covers more than 90% of our in-stock product range. We are fortunate to have a supportive and committed logistics workforce who embraced the required change in working hours to make this a reality.

As stated at the time of IPO, our existing York HQ has the capacity for revenues of £50m, and as such we are already considering our future requirements and options in anticipation of continued strong growth.

Trading and outlook

We have seen strong sales momentum during the first two months of the new financial year, both in the UK and internationally, and we therefore remain confident for the year ahead. We look forward to the business going from strength to strength, building on our successes to date and delivering value for our customers, staff and shareholders.

Chief Financial Officer's Statement

Overview

The Group has delivered another strong financial performance, with underlying operating profit up by 138% to £895,000 from the £376,000 achieved last year. The Group completed its IPO on 3 June 2015 and has used the growth capital raised to invest in its people, operations and software platform. Year-end cash of £3.5m provides significant resources to invest in projects to deliver continuing growth in the current year and beyond.

Revenue

	FY16	FY15	Change
	£000	£000	%
UK Revenue	26,016	18,763	39%
European Revenue	9,473	5,477	73%
Total Revenue	35,489	24,240	46%

Revenue increased by £11.2m (46%) on FY15, and that was further to growth of 37% and 44% in the previous two years. Growth in the UK of 39% was strong (FY15: 27%) but was out-stripped by our European performance which saw 73% growth on the back of last year's 87%. As a result Europe contributed 27% of Group revenues in the year (FY15: 23%).

Sales growth was 43% in the first half of the year, but accelerated to 49% in the second half as the business started to invest the IPO proceeds.

	FY16	FY15	Change
	£000	£000	%
Other-brand product sales	24,842	16,323	52%
Own-brand product sales	9,164	6,901	33%
Other revenue	1,483	1,016	46%
Total Revenue	35,489	24,240	46%

We are particularly pleased with the good progress made in our own-brand operation, reflected in sales increasing by 33%, building on 27% growth in 2015. However, post-IPO a significant investment into other-branded stock enabled sales of those products to out-pace own-brand growth. As a result, the proportion of total sales that came from own-brand products was 25.8% (FY15: 28.5%).

Other revenue includes carriage income, warranty sales, and commissions earned on facilitating point-of-sales credit for retail customers.

Gross profit

	FY16	FY15	Change
	£000	£000	%
Gross profit (£'000)	9,186	6,757	+36%
Gross margin (%)	25.9%	27.9%	-2ppts

The strong sales performance led to gross profit increasing by £2.4m on last year, with the gross margin decreasing from 27.9% to 25.9%, due to a combination of particularly competitive pricing in the run up to Christmas, a higher proportion of sales of lower margin other-branded products, and the rapid expansion into Europe that comes with associated increased unit delivery costs.

Various initiatives are underway to focus on improving gross margin where possible, and we are confident that this shift can start to be reversed as own-brand sales growth catches up, and increased buying economies boost product margins.

Administrative expenses and Operating profit

	FY16	FY15	Change
	£000	£000	%
Recurring Administrative expenses	(8,291)	(6,381)	(30%)
Exceptional Administrative expenses	(606)	(165)	(267%)
Reported Operating profit	289	211	37%
Underlying Operating profit	895	376	138%

Increases in recurring administrative expenses were kept to 30% compared to the 46% increase in sales due to improved marketing returns, tight cost control, and the impact of certain costs (including rent and rates annual charge of £538,000) being fixed.

In FY16, marketing and labour costs totalled £5.8m (FY15: £4.5m), and accounted for 70% (FY15: 71%) of total recurring administrative expenses. Increases in marketing expenses and labour costs were kept to 27% and 30% in the year respectively, taking these costs as a percentage of total sales down from 10.0% and 8.6% to 8.7% and 7.6% respectively.

Exceptional administrative expenses totalled £606,000 in FY16 and £165,000 in FY15, and all relate to costs incurred in relation to the IPO.

PBT performance improved by £803,000 to a £6,000 profit, of which £571,000 related to lower finance charges relating to the Key Capital loan notes (FY16: £233,000; FY15: £804,000). These loan notes were settled in full on IPO and as such there will be no related finance costs in the current year or beyond.

Cash-flow and net debt

The cash flow statement for the financial year reflects the Group raising £4.4m of net cash on IPO, and how this has been subsequently invested.

	FY16	FY15
	£000	£000
Opening cash	916	708
Loss post exceptional expenses	(43)	(686)
Movement in working capital	(1,416)	1,046
Depreciation and amortisation	786	466
Financial expense	280	878
Other operating adjustments	58	(154)
Net cash from operating activities:	(335)	1,550
Net cash from investing activities:	(1,509)	(953)
Net cash from financing activities:	4,476	(389)
Increase in cash in the year	2,632	208
Closing cash	3,548	916

These figures reflect movements in year-end positions and as such 'Net cash from operating activities' reflects, in particular, the Group's active investment in stock to support sales growth, and continuing to take all early-payment discounts on offer at a time when interest rates on bank deposits are negligible. In FY15, management of the stock and creditor position generated £1.1m of working capital where as in FY16, post-receipt of IPO-proceeds, there has been an £890,000 net investment in stock and creditors within working capital to support the growth during the year.

Net cash from investing activities includes £932,000 of investment in the Group's software platform that forms the cornerstone of the business, and £578,000 of capital expenditure on warehouse assets and improvements, and building of an in-house video studio. Finance leases were drawn against £252,000 of this capital expenditure.

On the 3rd June 2015, the Group successfully listed on the Alternative Investment Market (AIM) of the London Stock Exchange, generating £10.3m of gross proceeds and £9.0m of net proceeds after expenses and seller sales, of which £4.5m was used to repay Key Capital Partners debt in full, thereby removing the associated expensive interest costs and deleveraging the Group's balance sheet. Net cash into the business (represented by 'Net cash from financing activities' in the table above) was £4.4m which, in the absence of any meaningful return on cash held on deposit, has been applied to the repayment of bank loans and funding stock purchases in lieu of drawing against more expensive trade finance loans.

Balance sheet and net assets

The Group had a strong year-end balance sheet, with net assets of £9.36m (FY15: £289,000 net liabilities), and £3.5m cash (FY15: £0.9m).

	FY16	FY15
	£000	£000
Software platform	2,483	1,952
Other intangible assets	755	812
Property, plant and equipment	1,239	991
Total non-current assets	4,477	3,755
Stock	6,906	5,326
Cash	3,548	916
Other current assets	740	216
Total current assets	11,194	6,458
Trade payables	(3,718)	(3,231)
Other current liabilities	(2,304)	(2,611)
Total current liabilities	(6,022)	(5,842)
Total non-current liabilities	(290)	(4,660)
Net assets/(liabilities)	9,359	(289)

The IPO fundamentally changed the capital structure of the business - introducing £4.4m of growth capital and settling £4.5m of loan notes in full, thereby deleveraging the balance sheet. The Group has net cash of £2.6m compared to net debt of £5.0m at the last financial year end.

The software platform remains at the centre of everything the business does, and £932,000 was invested in the year to further develop its functionality and resilience. This takes total cumulative spend on the platform to the end of the year to £3,367,000.

Year-end stock was just 30% higher than at the previous year end and the Board is comfortable with the range and composition.

Dividends

The Board is of the view that the ongoing development of the business is currently best served by retaining cash reserves to support continued growth, and as such does not recommend the payment of a dividend. Reflecting the increasingly cash generative nature of our operations, the Board intends to re-visit the shareholder distribution policy during the financial year ending 28 February 2017.

Consolidated Statement of Profit and Loss and Comprehensive Income

		Note		Year ended 29 February 2016	Year ended 28 February 2015
				(Unaudited)	(Audited)
				£000	£000

Revenue		2		35,489	24,240
Cost of sales				(26,303)	(17,483)

Gross profit				9,186	6,757

Administrative expenses before exceptional items		3,4		(8,291)	(6,381)
Administrative expenses - exceptional items		3,4		(606)	(165)

Administrative expense		3,4		(8,897)	(6,546)

Operating profit		3		289	211

Financial expenses		6		(283)	(1,008)

Profit/(loss) before tax				6	(797)

Taxation		7		(49)	111

(Loss) and other comprehensive income for the year				(43)	(686)




Basic and diluted loss per share	5		(0.2p)		(5.4p)

The Group has no recognised gains or losses other than those included in the profit and loss account above.

The accompanying notes form an integral part of the consolidated financial report.

Consolidated Statement of Financial Position

		Year ended 29 February 2016	Year ended 28 February 2015
		(Unaudited)	(Audited)
	Note	£000	£000
Non-current assets
Property Plant and Equipment	8	1,239	991
Intangible assets	9	3,238	2,764

		4,477	3,755

Current assets
Inventories	10	6,906	5,326
Trade and other receivables	11	740	216
Cash and cash equivalents	12	3,548	916

		11,194	6,458

Total assets		15,671	10,213

Current liabilities
Other interest bearing loans and borrowings	13	(834)	(1,320)
Trade and other payables	14	(5,188)	(4,522)

		(6,022)	(5,842)

Non-current liabilities
Other interest-bearing loans and borrowings	13	(127)	(4,570)
Other payables	14	(59)	(35)
Deferred tax liability		(104)	(55)

		(290)	(4,660)

Total liabilities		(6,312)	(10,502)

Net assets/(liabilities)		9,359	(289)

Equity
Share capital		2,016	1,266
Share premium		8,933	-
Retained earnings		(1,590)	(1,555)

Total equity		9,359	(289)

The accompanying notes form an integral part of the consolidated financial report.

Company registered number: 07786708

Consolidated Statement of Changes in Equity

		Year ended 29 February 2016	Year ended 28 February 2015
		(Unaudited)	(Audited)
	Note	£000	£000
Share capital
Opening		1,266	1,266
Issue of share capital		750	-

At 29^th February 2016		2,016	1,266

Share premium
Opening		-	-
Issue of shares		9,255	-
Share issue costs		(322)	-

At 29^th February 2016		8,933	-


Retained earnings
Previous periods		(1,555)	(869)
Share based payment charge	15	8	-
Loss for the year		(43)	(686)

At 29^th February 2016		(1,590)	(1,555)

Total equity		9,359	(289)

The accompanying notes form an integral part of the consolidated financial report.

Consolidated Statement of Cash Flows

		Year ended 29 February 2016		Year ended 28 February 2015
	Note	(Unaudited)		(Audited)
		£000		£000
Cash flows from operating activities
Loss for the year		(43)		(686)
Adjustments for:
Depreciation and amortisation	3,8,9	786		466
Financial expense	6	280		878
Loss/(profit) on sales of property, plant and equipment		1		(9)
Taxation	7	49		(111)

		1,073		538
Increase in trade and other receivables	11	(524)		(59)
Increase in inventories	10	(1,581)		(1,104)
Increase in trade and other payables	14	689		2,209
Decrease in provisions		-		(34)
Share based payment charge	15	8		-

		(335)		1,550
Tax paid		-		-

Net cash from operating activities		(335)		1,550

Cash flows from investing activities
Proceeds from sale of property, plant and equipment	8	1		10
Acquisition of property, plant and equipment	8	(578)		(412)
Capitalised development expenditure	9	(932)		(551)

Net cash from investing activities		(1,509)		(953)

Cash flows from financing activities
Proceeds from pre-IPO issue of shares			32	-
Net proceeds from IPO			8,351	-
Proceeds from new borrowings	13		253	213
Interest paid	6		(130)	(185)
Repayment of redemption premium on loan notes	13		(602)	-
Repayment of loan notes	13		(2,484)	-
Repayment of other borrowings	13		(755)	(300)
Payment of finance lease liabilities	13		(189)	(117)

Net cash from financing activities			4,476	(389)

Net increase in cash and cash equivalents			2,632	208
Cash and cash equivalents at beginning of year			916	708

Cash and cash equivalents at end of year	12		3,548	916
				______

The accompanying notes form an integral part of the consolidated financial report.

Notes to the consolidated financial report

(forming part of the financial report)

1 General Information and basis of preparation

Gear4music (Holdings) plc is a public limited company, is incorporated and domiciled in the United Kingdom, and is listed on the Alternative Investment Market ('AIM') of the London Stock Exchange.

The group financial statements consolidate those of the Company and its subsidiary (together referred to as the "Group"). The parent company financial statements present information about the Company as a separate entity and not about its group.

The principal activity of the Group is the retail of musical instruments and equipment. The registered office of the Company and all subsidiaries is Kettlestring Lane, Clifton Moor, York, YO30 4XF. The registered number of the Company is 07786708.

Whilst the financial statements have been prepared in accordance with the AIM Rules for Companies, and apply the recognition, measurement and disclosure requirements of International Financial Reporting Standards as adopted by the EU ('Adopted IFRSs'), and make amendments where necessary in order to comply with Companies Act 2006, this announcement does not itself contain sufficient information to comply with IFRS.

The Financial Information set out in this Preliminary Announcement is unaudited and does not constitute the Group's Consolidated Financial Statements for the years ended 28 February 2015 or 29 February 2016.

The financial information is derived from the Group's Consolidated Financial Statements for the year ended 29 February 2016, which are expected to be published in July 2016 and will be delivered to the Registrar of Companies in due course. The Consolidated Financial Statements have been prepared in accordance with IFRSs as adopted for use in the EU. The Group has applied all accounting standards and interpretations issued by the IASB and International Financial Reporting Committee relevant to its operations and which are effective in respect of these Financial Statements.

Selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in financial position and performance of the Group since the last annual consolidated financial statements as presented in the Admission document which is available on the Group's investor website.

Accounting period

The financial statements presented cover the years ended 29th February 2016 and 28th February 2015.

Measurement convention

The financial statements have been prepared on the historical cost basis.

Comparative financial information

The prior year comparatives disclosed in these accounts have been extracted from the AIM Admission document issued on 28 May 2016 which were audited in this context.

Going concern

The Directors believe that given the Group has significant financial resources, and has demonstrated good growth in revenue and underlying profitability from operating activities, the Group is well placed to manage its business risks. Having duly considered these factors and having reviewed the forecasts for the coming year, the Directors have a reasonable expectation that the Group has adequate resources to continue trading for the foreseeable future, and as such continue to adopt the going concern basis of accounting in preparing the financial statements.

2 Segmental reporting

The Group's revenue and profit was derived from its principal activity which is the sale of musical instruments and equipment. The Group operates from a single location in York, all sales and marketing activities and warehouse and distribution activities occur here. Sales made outside the UK are dispatched from a single warehouse. Sales are made to 18 different countries.

In accordance with IFRS 8 'Operating segments', the Group has made the following considerations to arrive at the disclosure made in these financial statements. IFRS 8 requires consideration of the 'Chief Operating Decision Maker ('CODM') within the Group. Operating segments have been identified based on the internal reporting information and management structures with the Group. Based on this information it has been noted that the CODM reviews the business as one segment, and receives internal information on this basis. Therefore, it has been concluded that there is only one reportable segment.

Revenue by Geography

	Year ended 29 February 2016	Year ended 28 February 2015
	(Unaudited)	(Audited)
	£000	£000

UK	26,016	18,763
Europe	9,473	5,477

	35,489	24,240

Revenue by Product category

	Year ended 29 February 2016	Year ended 28 February 2015
	(Unaudited)	(Audited)
	£000	£000

Other-brand products	24,842	16,323
Own-brand products	9,164	6,901
Other	1,483	1,106

	35,489	24,240

3 Expenses

Included in profit/loss are the following:

	Year ended 29 February 2016	Year ended 28 February 2015
	(Unaudited)	(Audited)
	£000	£000


Depreciation of tangible fixed assets	328	222
Amortisation of intangible assets	458	244
Amortisation of government grants	35	15
Loss/(profit) on disposal of property, plant and equipment	1	(9)
Rentals under operating leases - land & buildings	262	291
Rentals under operating leases - plant & machinery	16	18
Auditor remuneration - audit of financial statements	28	16
Auditor remuneration - other	140	119

Exceptional items:
Exceptional deal costs	606	165

Exceptional costs in both years relate to professional fees incurred in relation to the Group's admission to the Alternative Investment Market ('AIM') on 3^rd June 2015.

Reconciliation of operating profit to adjusted earnings before interest, taxation, depreciation and amortisation ('EBITDA') and adjusted profit before tax:

	Year ended 29 February 2016	Year ended 28 February 2015
	(Unaudited)	(Audited)
	£000	£000


Operating profit	289	211
Adjusted for:
Exceptional costs within operating expenses	606	165
	---------	---------
Underlying Operating profit	895	376
Adjusted for:
Amortisation and depreciation	786	466
	---------	---------
Adjusted EBITDA	1,681	842
Adjusted for:
Amortisation and depreciation	(786)	(466)
Finance expenses	(283)	(1,008)
	---------	---------
Adjusted PBT	612	(632)
	---------	---------

4 Staff numbers and costs

The average number of persons employed (full time equivalents) by the Group (including directors) during the period, analysed by category, was as follows:

	Year ended 29 February 2016	Year ended 28 February 2015
	(Unaudited)	(Audited)
	No.	No.

Administration	59	42
Selling and Distribution	79	61

	138	103

The aggregate payroll costs of these persons were as follows:

	Year ended 29 February 2016	Year ended 28 February 2015
	(Unaudited)	(Audited)
	£000	£000

Wages and salaries	2,546	1,969
Share based payments (see note 19)	8	-
Social security costs	198	161
Contributions to defined contribution plans	13	2
Amounts paid to third parties in respect of director's service	32	-

	2,797	2,132

Directors' remuneration

	Year ended 29 February 2016	Year ended 28 February 2015
	(Unaudited)	(Audited)
	£000	£000

Directors remuneration	451	395
Company contributions to money purchase pension schemes	4	2
Amounts paid to third parties in respect of directors' service	32	-

	487	397

There are four directors (2015: 1) for whom retirement benefits are accruing under a money purchase pension scheme.

The aggregate remuneration of the highest paid director was £179,000 (2015: £157,000), including company pension contributions of £1,680 (2015: £1,680) were made to a money purchase scheme on their behalf.

5 Earnings per share

Diluted loss per share is calculated by dividing the net profit for the period attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period plus the weighted average number of ordinary shares that would be issued on the conversion of all dilutive potential ordinary shares into ordinary shares.

	Year ended 29 February (Unaudited) 2016	Year ended 28 February (Audited) 2015

Loss attributable to equity shareholders of the parent (£'000)	(43)	(686)

Basic weighted average number of shares	18,236,293	12,656,250
Dilutive potential ordinary shares	25,226	25,960

Diluted weighted average number of shares	18,261,519	12,682,210

Basic loss per share	(0.2p)	(5.4p)
Diluted loss per share	(0.2p)	(5.4p)

6 Finance expense

	Year ended 29 February 2016	Year ended 28 February 2015
	(Unaudited)	(Audited)
	£000	£000

Finance expense

Bank interest	26	52
Loan note interest measured at amortised cost	233	804
Finance leases	21	21
Net foreign exchange loss	3	131

Total finance expense	283	1,008

Loan note interest comprised £233,000 (2015: £792,000) due to Key Capital Partners, the Company's private equity investor, and in 2015 included £12,000 due to Andrew Wass on loan notes that were later repaid in full in that financial year.

On 8^th June 2015 the Group paid £4,469,477 to Key Capital Partners, of which £3,169,477 was settled in cash and £1,300,000 in equity, in full and final settlement of the loan notes and accumulated interest due. The fair value of the equity is considered to be equal to the value of the loan and therefore no gain or loss arose on this transaction.

7 Taxation

Recognised in the income statement

	Year ended 29 February 2016	Year ended 28 February 2015
	(Unaudited)	(Audited)
	£000	£000

Current tax expense
UK Corporation tax	-	-
Adjustments for prior periods	-	-

Current tax expense/(credit)	-	-

Deferred tax expense
Origination and reversal of temporary differences	188	(124)
Deferred tax rate change impact	(13)	6
Adjustments for prior periods	(126)	7

Deferred tax expense/(credit)	49	(111)

Total tax expenses/(credit)	49	(111)

The corporation tax rate applicable to the company was 20% in the years ending 29^th February 2016 and 28^th February 2015. Reductions in the UK corporation tax rate from 23% to 21% (effective from 1^st April 2014) and 20% (effective from 1^st April 2015) were substantively enacted on 2^nd July 2013. Further reductions to 19% (effective from 1^st April 2017) and to 18% (effective 1^st April 2020) were substantively enacted on 26^th October 2015. This will reduce the company's future current tax charge accordingly. The deferred tax asset at 29^th February 2016 has been calculated based on these rates.

Reconciliation of effective tax rate

	Year ended 29 February 2016	Year ended 28 February 2015
	(Unaudited)	(Audited)
	£000	£000

(Loss) for the period	(43)	(686)
Total tax (charge)/credit	(49)	111

Profit/(loss) excluding taxation	6	(797)

Current tax at 20.00% (2015: 21.17%)

Tax using the UK corporation tax rate for the relevant period:	1	(168)
Non-deductible expenses	115	44
Rate change	59	6
Adjustments relating to prior year - deferred tax	(126)	7

Total tax charge/(credit)	49	(111)

8 Property, plant and equipment

	Plant and equipment	Fixtures and fittings			Motor Vehicles	Computer equipment	Total
	£000	£000			£000	£000	£000

Cost
At 1 March 2014	205	886			8	202	1,301

Additions	8	366			-	37	411
Disposals	(20)	-			(8)	-	(28)

Balance at 28 February 2015 & 1 March 2015	193	1,252			-	239	1,684

Additions	270		218	-		90	578
Disposals	-		(6)	-		-	(6)

Balance at 29 February 2016 (unaudited)	463	1,464			-	329	2,256

Depreciation and impairment
At 1 March 2014	64	282	7	145	498

Depreciation charge for the year	38	155	-	29	222
Disposals	(20)	-	(7)	-	(27)

Balance at 28 February 2015 & 1 March 2015	82	437	-	174	693

Depreciation charge for the period	98	185	-	45	328
Disposals	-	(4)	-	-	(4)

Balance at 29 February 2016 (unaudited)	180	618	-	219	1,017

Net book value as at 29 February 2016 (unaudited)	283	846	-	110	1,239

Net book value as at 28 February 2015	111	815	-	65	991

Leased assets

At 29^th February 2015 the net carrying amount of leased tangible fixed assets was £423,000 (2015: £269,000), and the accumulated depreciation against leased assets was £284,000 (2015: £172,000).

Security

The Group's bank borrowings are secured by fixed and floating charges over the Group's assets.

9 Intangible assets

	Goodwill	Software platform	Brand	Total
	£000	£000	£000	£000

Cost
At 1 March 2014	417	1,884	564	2,865

Additions	-	551	-	551

Balance at 28 February 2015 & 1 March 2015	417	2,435	564	3,416

Additions	-	932	-	932

Balance at 29 February 2016 (unaudited)	417	3,367	564	4,348

Amortisation
At 1 March 2014	-	295	113	408

Amortisation for the year	-	188	56	244

Balance at 28 February 2015 & 1 March 2015	-	483	169	652

Amortisation for the year	-	401	57	458

Balance at 29 February 2016 (unaudited)	-	884	226	1,110




Net book value as at 29 February 2016 (unaudited)	417	2,483	338	3,238

Net book value as at 28 February 2015	417	1,952	395	2,764

Impairment testing

Goodwill arose on the acquisition of the entire share capital of Gear4music Limited (formerly known as Red Submarine Limited) on 19 March 2012. The Goodwill balance is denominated in Sterling:

	Year ended 29 February 2016	Year ended 28 February 2015
	(Unaudited)	(Audited)
	£000	£000

Gear4music Limited (formerly known as Red Submarine Limited)	417	417

Other intangible assets comprise the Gear4music brand name, and the proprietary software platform.

A Cash Generating Unit ("CGU") is defined as the smallest group of assets that generate cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups thereof. The Group is deemed to have a single CGU to which the goodwill, the software platform and the brand are allocated. An impairment review has been performed on this CGU. The recoverable amount of this CGU has been determined based on value-in-use calculations. In assessing value in use, a four-year forecast to 29th February 2020 was used to provide cash-flow projections that have been discounted at a pre-tax discount rate of 15%. The cash flow projections are subject to key assumptions in respect of sales growth, gross margin performance, and overhead expenditure. Management has reviewed and approved the assumptions inherent in the model:

· Sales forecasts based on growth by geographical market, at a range of growth levels based on trends, in-house projects underway, and Management's expectation, achieving overall growth comparable to the previous years.

· Product costs are assumed to nominally decrease and gross margins are forecast to nominally increase, from their 2016 level over the four-year management forecast period.

· Wage increases are a function of recruitment and a person-by-person review of current staff, with a range of % increases. The return on marketing costs is expected to improve year on year.

No impairment loss was identified in the current year (2015: £nil). The valuations indicate significant headroom such that a terminal growth rate assumption has not been applied, and that any reasonably possible change in other key assumptions, including the discount rate, would not result in an impairment of the related goodwill or other intangible assets.

10 Inventories

	Year ended 29 February 2016	Year ended 28 February 2015
	(Unaudited)	(Audited)
	£000	£000

Finished goods	6,906	5,326

The cost of inventories recognised as an expense and included in cost of sales in the period amounted to £24.7m (£16.4m in the year ended 28 February 2015).

Management has included a provision of £15,000 (28^th February 2015: £8,200), representing a 100% against returns stock subsequently found to be faulty, that is retained to be used for spare parts on the basis there is no direct NRV value, and a provision based on the expected product loss on dealing with returns stock.

11 Trade and other receivables

	Year ended 29 February 2016	Year ended 28 February 2015
	(Unaudited)	(Audited)
	£000	£000

Trade receivables	581	84
Prepayments	159	132

	740	216

Trade receivables includes cash lodged with payment providers and UK and International education and trade accounts. Standard terms are 30-days and over 90% of the ledger is within terms.

12 Cash and cash equivalents

	Year ended 29 February 2016	Year ended 28 February 2015
	(Unaudited)	(Audited)
	£000	£000

Cash and cash equivalents per balance sheet	3,548	916

Cash and cash equivalents per cash flow statements	3,548	916

13 Other interest-bearing loans and borrowings

This note contains information about the Group's interest bearing loans and borrowing which are carried at amortised cost.

	Year ended 29 February 2016	Year ended 28 February 2015
	(Unaudited)	(Audited)
	£000	£000
Non-current liabilities
Bank loans	-	195
Finance lease liabilities	127	138
Loan notes	-	4,237

	127	4,570

Current liabilities
Bank loans	642	1,202
Finance lease liabilities	192	118

	834	1,320

Total liabilities
Bank loans	642	1,397
Finance lease liabilities	319	256
Loan notes	-	4,237

	961	5,890

Bank loans comprise a Trade Finance facility provided by the Group's bankers, HSBC, and are secured against the by fixed and floating charges over the Group's assets. The interest rate on import loans drawn under the Trade Finance agreement is 2.45% per annum over HSBC's Sterling Base Rate, and on an overdraft if and when drawn, is 3.25% over base. Interest on import loans is paid at the maturity of the relevant loan. Interest on an overdraft would be paid monthly in arrears. The Trade finance facilities are due for review and renewal on or before 18^th July 2016.

In the year ended 28^th February 2015 'bank loans' included a term loan made under the Enterprise Finance Guarantee Scheme ('EFG'). This loan was settled in full in June 2015.

On 8^th June 2015 the Group paid £4,469,477 to KCP the Group's private equity investor, of which £3,169,477 was settled in cash and £1,300,000 in equity, in full and final settlement of the loan notes and accumulated interest due.

Finance lease liabilities

Finance leases relate to assets located at the Head Office site in York, with net book values of £423,000 (28^th February 2015: £262,000).

14 Trade and other payables

	Year ended 29 February 2016	Year ended 28 February 2015
	(Unaudited)	(Audited)
	£000	£000

Current
Trade payables	3,718	3,231
Accruals and deferred income	956	1,072
Government grants	28	15
Other taxation and social security	486	204

	5,188	4,522

Non-current
Government grants	59	35

Accruals at 29^th February 2016 include £672,000 (2015: £585,000) of rent accrued but not payable as per the commercial agreement reached with the landlord and the legal form of the property lease. This accrual will unwind in future financial years, with £37,000 unwinding within one year as the cash paid begins to exceed the expense, and £635,000 will unwind in subsequent years to the end of the lease in June 2020.

Government grants being spread over the useful economic life of the associated asset, relate to Regional Growth Fund Grants towards the acquisition of various capital items. Grant conditions exist linked to job creation, and these criteria have been satisfied.

The Directors consider the carrying amount of trade and other payables approximates their fair value.

15 Share based payments

The Group operates a share option plans for qualifying employees of the Group. Options in the plans are settled in equity in the Company and are subject to vesting conditions. On 3^rd June 2015 on Admission of the Company to AIM, an initial award of a total of 23,381 shares was made to eight key employees. On 17th February 2016 an option over a further 1,845 shares was awarded. These shares have an exercise price equal to the nominal value of the shares (10p) that the Company will subsidise by way of a bonus provided there are sufficient distributable reserves, and subject to certain conditions will be automatically exercised on the third anniversary of the date of grant.

The fair value of the share option at grant date is determined based on the Black-Scholes model.

The model inputs were the share price of 139 pence on 3^rd June 2015 and 135 pence on 17th February 2016, the exercise price of 10p, expected volatility of 1%, no expected dividends, a term of 3 years and a risk free rate of 0.7%.

The fair value of the liability is re-measured at each balance sheet date and settlement date.

The total expenses recognised for the year and the total liabilities recognised at the end of the year arising from share-based payments was £8,125.

16 Commitments

Capital commitment

As at 29^th February 2016 a contractual minimum spend arrangement was in place for £458,000 (2015: £458,000), in relation to a contract for development services of the ecommerce platform.

Operating lease commitment

Non-cancellable operating lease rentals are payable as follows:

	Year ended 29 February 2016	Year ended 28 February 2015
	(Unaudited)	(Audited)
	£000	£000

Less than one year	283	163
Between one and five years	1,603	1,627
More than five years	-	167

	1,886	1,957

The operating lease commitment relates to the property lease of the Head Office site at Clifton Moor, York.

17 Related parties

Immediately prior to admission to AIM, Chris Scott (CFO) and Gareth Bevan (CCO) were allotted an aggregate of 259,600 10p shares further to their exercise of pre-existing options, and Andrew Wass was allotted 64,920 10p shares in accordance with the investor agreement with Key Capital Partners. These shares had a market value of £451,083 on IPO.

Immediately following admission eight key employees were awarded options to an aggregate of 23,381 shares that, subject to performance criteria, will vest on the third anniversary of their award. On 17^th February 2016 an option over a further 1,845 shares was awarded to an additional key employee, subject to the same conditions.

On 17^th February 2015, an amount of £225,000 was repaid by Gear4music (Holdings) plc to Mr A Wass. Interest had been charged on the loan at a rate of 6 per cent. And repaid on a quarterly basis. Interest charged on the loan during 2015 amounted to £12,000.

Transactions with key management personnel

The compensation of key management personnel is as follows:

	Year ended 29 February 2016	Year ended 28 February 2015
	(Unaudited)	(Audited)
	£000	£000

Key management emoluments including social security costs	421	393
Company contributions to money purchase pension plans	4	2

	425	395