Brand Architekts : BAR Final Results

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION FOR THE PURPOSES OF ARTICLE 7 OF REGULATION 2014/596/EU (WHICH FORMS PART OF DOMESTIC UK LAW PURSUANT TO THE EUROPEAN UNION (WITHDRAWAL) ACT 2018 (THE "EUWA")) ("UK MAR"). UPON THE PUBLICATION OF THIS ANNOUNCEMENT, THIS INSIDE INFORMATION (AS DEFINED IN UK MAR) IS NOW CONSIDERED TO BE IN THE PUBLIC DOMAIN.

Brand Architekts Group plc

("Brand Architekts" or the "Group")

Final Results

Brand Architekts Group plc, a market leader in the development and supply of beauty and personal care brands, announces its Full Year results to 30 June 2023.

Business highlights:

• Successfully integrated Innovaderma into the Group and delivered £1.4m of ongoing Opex savings.
• Continued implementation of the strategy to invest and support problem-solving solution led Invest & Nurture brands, which command higher retail prices, engender strong consumer loyalty and deliver stronger margins.

Brand Reach:

• 49% growth vs the prior year in international channel sales driven by post COVID-19 rebound in volumes from General Merchandise stores across North America and Europe, benefitting Dirty Works.
• Confirmed Dirty Works distribution roll out to AS Watson stores in 2023 & 2024 across the Middle East and Asia (Thailand
  - 200 stores, Vietnam - 7, The Gulf - 16, Philippines - 100, Malaysia - 66, Taiwan - 200, Singapore - 40, Turkey -100).

Brand Development:

• New Super Facialist Clear Skin, targeting problematic teenage skin care needs, launched on Amazon in September and in Boots in June 23. New Super Facialist D2C site launched in March 23. Branded Super Facialist instore merchandising trays rolled out to Boots and Morrisons.
• New Skinny Tan Wonder Serum brand awareness and customer acquisition campaigns launched in July 2023 to capitalise on the second half of the tanning season.
• The Solution Menopause range to launch in 2024.
• Good sales growth from key historical Brand Architekts' Nurture and Harvest brands including Fish, MR, The Solution,
  Argan, SenSpa and Root Perfect.

Financial Highlights:

• Group sales of £20.1m (2022: £14.3m) up 41% primarily due to the full year effect of the acquisition of InnovaDerma Plc, which completed at the end of May 2022.
• Excluding InnovaDerma (IDP), revenue increased by 7% due to strong international sales offset by challenging trading conditions in UK channels.
• Underlying gross profit margins increased by 6.2% to 39.7% (2022: 33.5%) driven by a full year of sales from the InnovaDerma portfolio, chiefly Skinny Tan. Margins in the Brand Architekts business are similar year on year.
• Despite the challenging trading environment, the Group generated a reduced underlying operating loss of £1.2m, £0.6m lower than the prior year (2022: £1.8m), primarily as a result of better targeted advertising & promotions.
• The Group retains a strong net cash position of £8.2m at the year-end (31 December 2022: £8.1m).
• The increased loss before taxation of £6.8m (2022: £4.1m) is driven by a £3.5m impairment in the goodwill associated with the Innovaderma business.

¹Underlying operating loss is calculated before exceptional items, share-based payments and amortisation of acquisition-related intangibles.

Quentin Higham, Chief Executive, commented:

"Despite the challenging global and domestic macro-economic factors, we have made good progress, successfully integrating InnovaDerma and delivering £1.4m of ongoing Opex savings. The immediate priorities remain driving brand awareness of key invest and nurture brands, delivering revenue synergies through international and domestic expansion, a laser focus on brand contribution and releasing working capital tied up in harvest brands. We remain confident that our brand development and brand reach strategic pillars will enable us to return to profitability and achieve our medium and long-term goals."

For further information please contact:

Brand Architekts Group PLC

Quentin Higham / Geoff Ellis

Shaun Dobson / Jen Boorer

Chairman's Statement

Whilst we are disappointed with our overall financial performance, we have made good progress in the year under review and on successfully integrating Innovaderma into the Group and consolidating the business. We have delivered £1.4m of ongoing Opex savings, which are in line with our annualised synergy target of £1.5m and have advanced the opportunities to generate revenue synergies. We expect to be in a position to announce global omnichannel distribution gains for Skinny Tan in time for the 2024 tanning season.

Group sales for FY23 were £20.1m (FY22: £14.2m) an increase of 41% on the prior year due primarily to the full year effect of the acquisition of InnovaDerma Plc, which completed at the end of May 2022. Excluding InnovaDerma, revenue increased by 7% due to strong international sales, which was offset by challenging trading conditions in UK channels. We discontinued several non-strategic brands, namely Roots, Kind Natured, Happy Naturals and Beautopia as we continued our focus on profitability.

Skinny Tan's sales in the UK were adversely affected by the softening of the direct-to-consumer (DTC) market and our decision to focus on margin, at the expense of gross sales. We have maintained Skinny Tan's UK Customer (CRM) database (350,000 email addresses), but by dialling down our investment on Meta and reducing promotional discounting, we saw a drop in net sales, but an improvement in gross margin and contribution percentage. The Group expects these initiatives to continue when we approach the 2024 tanning season, in particular the need to promote & support more affordable self-tan products.

The Group retained a healthy net cash position of £8.2m at the year-end which was £0.1m better than the position at the half year.

Despite the challenging trading environment, the Group generated a reduced underlying operating loss of £0.4m in H2, a £0.4m improvement on the performance in H1, due to a focus on better targeted advertising & promotions resulting in improved contribution. Full year underlying operating losses were £1.2m, a £0.6m improvement on last year. Our focus for the current year is to achieve breakeven and thereafter return to profitable growth.

The Group continues to make progress on transitioning the business to focus on fewer, bigger brands that are highly efficacious, margin accretive and provide consumers with problem-solving solutions. Historically Brand Architekts brands' were retail exclusives, with little or no marketing investment, so in order to compete in today's landscape, it is vital that we transform the brands by investing in profitable brand awareness digital campaigns and customer acquisition initiatives.

I was pleased that we were able to resolve our legal dispute with Jamie Stevens Media Limited (JSML), our joint venture counterparty/co-shareholder in Mr Haircare Ltd, which alleged a breach of shareholders' agreement between the parties dating back to the company's acquisition of Fish in 2018. We agreed a full and final settlement of all claims in the sum of £200,000 together with legal costs of £225,000. We also agreed to purchase JSML's 49% shareholding in Mr Haircare Ltd in cash at a fair value price to be determined by an external valuer later in the year. JSML is entitled to 55% of the sale valuation. MR sales for FY23 were £0.54m (FY22 £0.5m). The transaction is expected to conclude before the end of the 2023 calendar year and a further announcement will be made in due course.

The proposed acquisition of the remaining JV shares is in line with the company's strategic vision to invest and build its portfolio of high-performance,problem-solving and margin accretive brands. The brand will be relaunched as MR Expert Solutions and the company's vision is to expand the brand into adjacent male grooming problem solving categories and invest in the master brand to accelerate brand awareness and stimulate consumer trial.

Although the trading environment remains extremely challenging, good progress has been made during the period and post period-end, which gives a degree of confidence for the future. Key highlights include:

• Continued implementation of the strategy to invest and support our Invest & Nurture brands, which command higher retail prices, engender strong consumer loyalty and deliver stronger margins.
• Branded Super Facialist instore merchandising trays rolled out to Boots and Morrisons. New Super Facialist Clear Skin, targeting problematic teenage skin care needs, launched on Amazon in September and in Boots in June 23. New Super Facialist D2C site launched in March 23.
• New Skinny Tan Wonder Serum brand awareness and customer acquisition campaigns launched in July 2023 to capitalise on the second half of the tanning season.
• The Solution Menopause range to launch in 2024.
• 49% growth vs the prior year in international channel sales driven by post COVID-19 rebound in volumes from General Merchandise stores across North America and Europe, benefitting Dirty Works.
• Confirmed distribution roll out to AS Watson stores in 2023 & 2024 across the Middle East and Asia (Thailand - 200 stores, Vietnam - 7, The Gulf - 16, Philippines - 100, Malaysia - 66, Taiwan - 200, Singapore - 40, Turkey -100).

• Good sales growth from key historical Brand Architekts' Nurture and Harvest brands including Fish, MR, The Solution,
  Argan, SenSpa and Root Perfect.

In line with our focus on contribution, as previously announced we streamlined the board composition, reducing the number of Non-Executive Directors by one. Geoff Ellis joined as part-time CFO in June 2023. I would like to recognise and thank the board for their support when I took a four-month sabbatical over the summer.

Notwithstanding difficult market conditions, including inflationary pressures, we are committed to returning the business to profitability and cash generation at the earliest opportunity.

On behalf of the board, I would like to thank our employees for their hard work and commitment and shareholders for their continued support.

CEO's Statement 2023

In response to the well documented changes in consumer behaviour and the wider global and domestic macro-economic factors, we pivoted our business strategy to focus on brands and products that engender high levels of consumer loyalty and reflect the redefined company purpose of focusing on high performance problem-solving solution led brands. This resulted in a reclassification of our brand portfolio and a strategic focus on brand contribution, rather than aggressive sales growth.

Rampant inflation and high interest rates exacerbated the cost-of-living crisis and in particular consumers' disposable income. This affected their appetite for masstige products and highlighted the importance of focusing on brand contribution and the need to build awareness and acquire new customers. Cash strapped consumers' initial response is to trade down, as demonstrated in the Self Tan category, where consumers have favoured gradual tanners retailing at less than £10, which resulted in our decision to reduce Skinny Tan Mousse and Whip retail prices. However, if brands are to succeed in a period of recession, it is important to invest in brand awareness and new product development, which are key tenets of our brand development strategy.

The team worked very hard to integrate the Innovaderma team and brands into the business. This is now complete, and we have delivered £1.4 operating synergies, against the £1.5m target set out at the time of acquisition. On acquisition, the team expanded to nearly 80 people which we have consolidated down to 51. To reflect the mix of business, we moved all Australian roles to the UK. There are now 42 people in the UK and 9 people who provide customer service and financial and operations support in the Philippines. To further simplify the business, we will look to close all USA & Australia entities within the next few years.

The business is now focussed on a 3-year transition strategy whereby our brand portfolio will ultimately be reduced to 9 (from

1. and we will evolve our brands and products to focus on margin accretive high performance topically applied products. It is our belief that if we successfully meet the needs of our consumers problems, this will engender loyalty and reduce the need for brand building advertising & promotion (A&P). Our mission is to become a challenger beauty business that provides
   "problem solving solutions for everyday beauty".

Portfolio & Brand Development strategy -

Invest brands (Skinny Tan and Super Facialist):

Both have a degree of scale and are masstige positioned brands, which address key problem-solving needs. They have a clear point of difference and recognisable brand personalities. They benefit from extensive annual NPD pipelines and ideally incorporate either proprietary technology or trademarked ingredients, which leads to consumers paying a premium.

They will benefit from 360-degree marketing activation plans, which will result in "fewer-bigger-better" holistic omnichannel communications; an investment in the creation of best-in-class assets, which will then be used across their organic social, paid social, PR and retail channels. Both brands will be supported with new customer acquisition initiatives (Meta; Tik Tok; Google; Affiliation etc) and we will invest in consumer mechanics such as user generated content; VIP product testing & feedback loops that will enable us to get closer to the consumer, which in turn will provide strong reasons for consumers to follow the brand and to join the email database.

We will continue to drive and support an omnichannel distribution approach and will apply a digital first lens to product launches and marketing activity.

Nurture brands (The Solution, MR Expert Solutions and Dirty Works):

The fundamental difference between our Invest and Nurture brands is the level of A&P we allocate to each category. The Solution and MR Expert Solutions are both currently sub scale but have significant growth potential by creating problem solving master brand propositions. Both brands are masstige and margin accretive. Their brand names have a clear point of difference and a distinct personality that lends itself to address beauty/personal care pain points across multiple categories. Initially we launched The Solution as "skinification" for the body, and we will be launching a Menopause range in 2024, which meets the specific needs of consumers going through the menopause and beyond. Once we have fully acquired the MR brand, we believe that its high-performance efficacious proposition will lend itself to enter into other male problem categories, such as problem skincare and perspiration. Once the master brands have been created by investment in a strong NPD pipeline, both brands will be supported with their own DTC site and 360 marketing activation campaigns.

Dirty Works has the greatest international reach of all our brands with sales in over 40 countries. The brand is being exclusively rolled out to over 700 Watsons stores across Middle East and Asia in FY24. We are also developing over 12 exclusive skincare lines for our North American retail partner. Dirty Works is a master brand, given that it participates in the Washing & Bathing, Skincare, Accessories and Gifting categories. Given its affordable, fun, fragrant & indulgent proposition,

brand investment will be focussed on supporting key retail partners around the World. We will not launch a Dirty Works DTC but will support its rollout offline and online.

Harvest Brands:

Although our objective is to focus and invest in fewer brands, we have a small portfolio of Harvest brands that play several key roles - they meet the needs of a specific category (Men's Styling); provide retail or channel exclusivity (Root Perfect); strengthen Brand Architekts trading relationship with key offline partners (Argan+ and Dr Salts) and absorb a disproportionate share of corporate overheads, given we support these brands with trade marketing spend only. For our remaining Harvest brands, we will look to discontinue over the next couple of years either as a divestment (Charles + Lee), a termination of license agreements or discontinuation, so that we can provide more focus and resource on investing in our key focus brands.

Brand Reach:

Offline & Online:

The number one objective of our brand reach strategy is to secure new distribution across our Invest and Nurture brands, both domestically and internationally. We will be aggressively pushing Dirty Works (Middle East, Asia and USA); Skinny Tan (USA, Middle East, Europe); The Solution (Europe) into new international retailers and territories. Domestically we will look to land all new product development in FY24 and to consolidate and drive productivity on Skinny Tan and Super Facialist within existing distribution. We will be looking to capitalise on the recent success of Super Facialist Clear Skin; the relaunch of MR Expert Solutions; the launch of The Solution Menopause and the relaunch of Fish and Dirty Works in 2024.

DTC:

Despite the global softening of the DTC channel, we believe that DTC sites play an integral role in our omnichannel distribution strategy. Brand Architekts believes in a digital first approach, initially to launch new products but also to generate traffic and consumer interest, prior to roll out online and offline. DTC helps with digital engagement and brand education. To drive customer acquisition, we will be increasing pay-per-click advertising and Meta spend behind our social footprint and database activity, given the upcoming reduction of third party-cookies. Our focus last year was on improving the profitability of the Skinny Tan site, potentially to the detriment of gross sales. By applying an ongoing test and learn approach, we will be focusing more on delivering actual cash contribution, rather than % contribution.

By the end of 2024 all Invest and Nurture brands will have their own DTC offering (excluding Dirty Works), we will have exited The Unexpekted Store and Skinny Tan Australia. Our strategic focus and investment will be behind four DTC sites, whereby we can generate an appropriate AOV (average order value) and margin.

Environmental & sustainability

We continue to review and improve our beauty sustainability and are making good progress against our 2025 sustainability pledge. 78% of brands use either reusable or bio sourced plastic and packaging. Our target is 100% for 2025. Please see separate sustainability section of the annual report.

Outlook:

Against a backdrop of continued challenging market conditions and inflationary pressures the management team is focused upon realising both the strategic and financial aims of the Group. The immediate priorities are driving brand awareness of key Invest and Nurture brands, delivering revenue synergies through international expansion, a laser focus on brand contribution and releasing working capital tied up in harvest brands. We remain confident that the foundations we are building will enable us to return to profitability and achieve our medium and long-term goals.

items of £1.1m which included restructuring costs (£0.4m), and costs associated with the resolution of the legal claim with MR haircare (£0.7m).

Financing costs were £0.1m (2022: £0.2m) relating to the defined benefit pension plan notional finance charge.

The effective tax rate for the period was 3% (2022: negative 3%) of pre-tax profits. The effective rate is below the statutory rate of 20.5% due to the losses in the period.

Financial position and cash flow

The Group retains a net cash position of £8.2m, a reduction of £3.1m versus the prior year (2022: £11.3m). The cash outflow was due to a mix of the underlying operating loss of £1.2m, exceptional costs relating to the InnovaDerma acquisition of £1.0m which includes restructuring costs and a £0.6m net increase in working capital following a planned investment in key product line inventory holdings to offset cost inflation. The company also made a payment of £0.3m, its annual payment commitment to its defined benefit pension scheme as outlined below.

Defined benefit pension plan

The defined benefit pension plan underwent its last triennial valuation on 5 April 2020. The scheme funding valuation at this date revealed a deficit of £21.1m. The Group entered a revised deficit recovery plan and schedule of contributions in July 2021. Under this there was a commitment to make a one-off deficit reduction payment of £1m by 31 July 2021, £318k payment per annum for four years followed by £791k for a further thirteen years, and to pay certain administration costs and the PPF levy for the life of the plan. The outcome of the next triennial valuation at 5 April 2023 is expected in late autumn 2023 and will form the basis of a potential re-assessment.

Accounting standards require the discount rate used for valuations under IAS 19 'Employee Benefits' to be based on yields on high quality (usually AA-rated) corporate bonds of appropriate currency, taking into account the term of the relevant pension plan's liabilities. Corporate bond indices are used as a proxy to determine the discount rate. At the reporting date, the yields on bonds of all types were higher than they were at 30 June 2022. This has resulted in a slightly higher discount rate being adopted for accounting purposes compared to last year. This has decreased the fair value of the plan liabilities as measured under IAS 19, and while it is also true that the fair value of the scheme's assets also decreased, the decrease in assets was lower than the decrease in liability hence the net result is a decreased liability under the IAS 19 methodology. For accounting purposes at 30 June 2023, the Group recognised under IAS 19, a net liability of £1.6m (2022: £2.4m).

Going concern

As part of its normal business practice, the Group prepares annual and longer-term plans and, in reviewing this information the directors have a reasonable expectation that the Company and Group have adequate resources to continue in operational existence for the foreseeable future. The Group has significant cash reserves of £8.2m. Accordingly, we continue to adopt the going concern basis in preparing the Annual Report and Accounts.