Samarkand Group plc (SMK)
5 September 2022
Samarkand Group plc
("Samarkand", the "Company" or together with its subsidiaries the "Group")
Samarkand Group plc, the cross-border eCommerce technology solution provider, is pleased to announce its audited results for the year ended 31 March 2022 ("FY22").
FY22 Financial highlights:
FY22 Strategic and operational highlights:
Post period end highlights:
The Company is pleased to announce that it has today published its Annual Report and Accounts for the year ended 31 March 2022 (“Annual Report”).
The Company announces that notice convening the Company's Annual General Meeting (“Notice of AGM”), to be held at 2:30 pm on Thursday 29 September 2022 at the offices of VSA Capital at Park House, 16-18 Finsbury Circus, London EC2M 7EB, will be posted to shareholders on 6 September 2022, together with the Annual Report.
Copies of the Annual Report and the Notice of AGM are also available on the Company’s website at www.samarkand.global/investors
David Hampstead, Chief Executive Officer of Samarkand Group, commented:
“Despite the unprecedented and challenging backdrop we have been faced with during the period, our resilience has come to the fore. I am proud of the way in which we have adapted to the unfavourable trading environment and our long-term confidence in the business is as unwavering as it has ever been.
With improving prospects within the Chinese market, a growing pipeline of new clients and the prudent allocation of resources this year, we are confident that we will be able to capitalise on the increasing scale of opportunities we see ahead of us. Our software’s strong prospects remain, and our acquired and now subsequently integrated brands have diversified the business and leveraged our infrastructure, expertise and technology. We are encouraged by trading levels in the current period and look forward to further updating shareholders on continued progress moving forwards.”
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Notes to Editors
Samarkand is a cross-border eCommerce technology and retail group focusing on connecting International Brands with China, the world's largest eCommerce market. The Group has developed a proprietary software platform, the Nomad platform, which is integrated across all necessary touchpoints required for eCommerce in China including eCommerce platforms, payments, logistics, social media and customs. The Nomad platform is the foundation on which the Group's Nomad technology and service solutions are built. The core products include Nomad Checkout, Nomad Storefront and Nomad Distribution.
Founded in 2016, Samarkand is headquartered in London, UK with offices in Shanghai and Tokyo.
For further information please visit https://www.samarkand.global/
I am immensely pleased with the resilient mindset and agility in which our employees have responded to the most challenging environment the Group has experienced since incorporation in 2016. We have navigated the business through unprecedented external market forces, in particular the zero-tolerance approach to COVID in mainland China which has generated a high degree of disruption in our operations across the Group.
The business has responded well to the unexpected challenging situations facing us and responded quickly to the changing marketplace in which it operates while continuing to make strategic progress in light of external volatility. By shifting focus and improving efficiency in its operations the Group has been able to make great strides in its mission to enable brands and merchants sell direct to Chinese consumers and to provide better choice of high-quality international product to Chinese consumers.
Despite the challenging year, there are improving prospects within the Chinese market, and we can look to the future with renewed optimism. The Group has demonstrated its resilience and adaptability this year and this is testimony to the hard work and commitment of everyone at Samarkand. I would like to take this opportunity to thank them all for their contribution and dedication.
The Group delivered revenues of £16.6m (2021: £14.8m excluding exceptional revenues). These results reflect the well covered disruption experienced during the year, with revenues in China increasing by 4% to £11.6m. I am confident the Group has taken appropriate measures to protect the company from future disruption and to enable it to continue progressing towards its goals, including engaging with existing strategic shareholders who are keen to increase their investment in the Group.
The focus on profitable growth will continue in the year to come.
The Samarkand team has responded well to the challenges of the year and demonstrated their ability to deal with disruption on many fronts. I would like to give a special mention to our colleagues in China who spent long periods of time isolated at home during the China lockdowns but were able to continue to operate and serve our clients in the most difficult of circumstances.
Board and Governance
Our board which was established at the time of the IPO is operating well, bringing a breadth of experience to the Group. Sustainability, Remuneration, Nomination and Audit committees have been established and I would like to thank my fellow directors for their service and flexibility in the last year in which their guidance has been invaluable.
Summary and Outlook
Despite these disruptions, the underlying trends on which the Group was founded endure - Chinese consumers’ appetite for international brands and international merchants’ desire to make their brands available to Chinese consumers. The eCommerce sector in which the Group operates remains vibrant globally and China is the world's largest eCommerce market, accounting for 50% of all eCommerce sales in the world and an even bigger share of the growth.
The recently acquired Zita West and Napiers performed strongly in the year and the Group is excited about their future potential. Our portfolio of premium health and wellness brands, including Probio7, is well positioned on key trends such as digestive health, fertility and natural herbal products, and as UK focused brands they are less dependent on the China market for future growth.
The Group is fortunate to work with a range of premium, independent beauty, health and wellness brands, as their China partner, enabling their growth and development in the China market. Strengthening our expertise in new and emerging eCommerce channels such as Douyin (TikTok in China) has given the Group the opportunity to further develop our clients’ brands in the fast-moving China eCommerce market.
Our China Checkout solution gained traction in the year in the form of partnerships with large enterprise and SME merchants and logistics providers such as FedEx and our shareholder SF Express. Enabling international merchants to make China part of their DTC strategy is a significant opportunity for the Group and we see strong growth potential as many brands prioritise their DTC strategies.
The year ahead holds many exciting opportunities for the Group linked to the continued growth of eCommerce, the increasing importance of the direct-to-consumer business model as well as the positive trends driving the health, wellness and beauty sectors.
The last year has prepared us to navigate accordingly to the unexpected and the Group has demonstrated resilience, agility and flexibility in the face of a challenging environment and is well placed to continue to make progress.
In our first full year as a public company, we have adapted to the rapidly changing environment which we encountered in the second half of the year. The well documented disruptions in China as well as the subsequent widespread logistics and operational challenges resulted in reduced revenue performance and increased losses in the last financial year.
As conditions deteriorated, we quickly re-calibrated the business, which has resulted in a stronger first quarter of the current financial year, despite it being a period of peak disruption. Our first quarter revenue increased 24% on the previous year and adjusted EBITDA loss significantly reduced from £1.1m to £0.5m, demonstrating the work completed towards the end of the financial year has led to significant improvements in our margins and reduction in overheads. The month of June 2022 was profitable on an EBITDA and net profit basis. We expect conditions to remain volatile for the remainder of this calendar year and the disruptions to logistics networks to continue during this time yet are confident we have taken the right action to prepare the business to be able to navigate any future volatility and to capitalise on the opportunities it presents. In this period, our owned brands which are less exposed to China, have performed well and our China DTC technology solution has generated strong interest from the market.
The second and third order effects of the pandemic will likely reverberate for years to come, changing many industries, and few will be affected as much as eCommerce and cross-border trade. Whilst this has created short-term challenges, it also generates mid to long-term opportunities for us to exploit.
China has contained the spread of COVID-19 using widespread lockdowns across many of its major cities. The implementation of comprehensive COVID prevention measures at the borders has meant infection rates have remained low but has also had knock-on effect on logistics, with customer orders being delayed or undeliverable. We anticipate that the normal operation of logistics routes will return in due course but in the short-term this has presented the single largest challenge to our business. Where we can, we have changed the way we service our customers in China by moving more of our fulfilment to bonded warehouses in mainland China which have fewer restrictions and have been impacted less by the COVID measures. However, this has impacted the roll-out of our Nomad Checkout solution which relies on efficient logistics from overseas markets. During this time, we have been able to lean on our well established B2B distribution networks which has allowed us to trade comparatively well.
Despite this disruption the secular trends for e-commerce, cross border e-commerce and the growth in direct-to-consumer business models and the investment brands are making in their direct-to-consumer operations remain highly positive and are encouraging for the Group. In addition, our portfolio of specialist, premium health and wellness brands are well positioned against major consumer trends of digestive/gut, fertility and natural herbal health and beauty.
Heading into FY22 the Company was experiencing triple digit growth in line with our expectations and during the first half of the year, investing the funds raised at IPO accordingly to provide the capacity needed to meet expected further growth. This investment was both in our underlying technology as well as additional personnel and logistics in China. As conditions deteriorated and the extent of the secondary lock downs in China took hold, the Board took the decision to pull back on many of the China associated costs and thereby manage exposure and risk. Although this lead to reduced headcount it is still at a higher level than it was at the time of our IPO. As conditions continue to normalise, these investments can return. Our investment in technology, which will continue to drive our anticipated growth, continued throughout.
Crucially, despite the challenging backdrop, the Group continued to make considerable strategic progress during the year.
We completed two acquisitions, both of which are performing ahead of expectations. The first, which completed in May 2021 was Zita West Products, a UK nutritional supplement brand providing specialist consumer products and information for fertility, pregnancy and post-natal needs. The product range has been developed over the past 20 years by Zita West herself, a world-renowned IVF and fertility specialist. The Zita West product range taps into the trend of increasingly popular fertility products and is well positioned on a global mega trend. The business was bought for £2.8 million and since acquisition, we have relaunched the business’ eCommerce channels domestically and internationally, including China. In the first full year since the acquisition of Zita West Products, revenue increased 43% vs prior year with strong and improving metrics in customer acquisition, lifetime value and retention. In the first quarter of FY23 net sales for Zita West grew 129% vs the same period last year.
The second acquisition in November 2021 was for the natural health and beauty brand, Napiers the Herbalists, an iconic Scottish herbalist brand which is performing well as we improve the customer experience online and in store and enhance the product range and will be entering the Chinese market, where we see great potential, this financial year.
Our eCommerce acceleration capabilities improved in the year as we added new channels and routes to the consumer to our market development playbook. Douyin live streaming commerce is a highlight in this area and we now support many brands in capitalising on this emerging commerce channel. This helped us attract new brands and improve the margins we generate in distributing brands via China eCommerce. With our acceleration capabilities and checkout technology we are able to operate as an end-to-end market development for brands and merchants seeking controlled profitable growth in China.
Our China checkout solution made good progress in the year, securing our first proof of value merchant contracts and building a healthy pipeline of Enterprise and SME prospect merchants. Our partnerships with logistics companies began to generate merchant referrals, re-enforcing our belief that partnerships with logistics, payment and commerce platforms will be critical to the scaling of our solution.
We operate in the most dynamic and innovative eCommerce market in the world which evolves at breakneck speed. Platforms and channels that are popular today barely existed a few years ago. The platforms that will be popular tomorrow are not even conceived of yet and new consumer trends and tastes are yet to emerge. Chinese consumers will continue to value international products, prioritise price and authenticity and increase the variety of brands they consider. Convenience and trust play an important role in purchasing decision making and that will only increase over time and become more important for younger consumers.
The dominance of a relatively small number of eCommerce marketplaces in China is being disrupted by new regulations and changing consumer behaviours which we believe will have a positive impact on us and the adoption of our solutions as well as our ability to develop new routes to consumer for our brands.
Our technology has the potential to give Chinese consumers access to a much wider selection of international brands and products, at a lower cost and with comparable convenience. We have now formed partnerships and completed technology integrations with three of the leading logistics companies who are at the front line of eCommerce logistics and see the value our solutions can bring to their clients.
We have made a great deal of progress in dealing with the ever-changing Chinese market, and whilst we anticipate the next 9-12 months to remain operationally challenging, we are confident that the measures we have taken this year will allow us to capitalise on the increasing scale of opportunities we see ahead of us.
The partnerships we have formed with leading logistics companies are starting to deliver a pipeline of new clients. The quarantine measures imposed on overseas parcels entering China has frustrated the launch of several projects however the situation is starting to improve, and the quarantine period has been reduced from 7-10 days to 24 hours making this route viable once again.
We have significantly raised our profile within the cross-border eCommerce industry this year through an active campaign across social media, particularly LinkedIn. This has been supported by the awards we have won this year including The Queens Award for Enterprise in the International Trade category and the Shanghai Cross-Border eCommerce Association Outstanding Enterprise Award.
The cost reduction and efficiency improvement actions taken in response to the disruption and the strategic progress we have made during FY22 put us in a good position to capitalise on the underlying positive trends in our service lines and markets as disruption eases. While future volatility cannot be ruled out, Q1 FY23 performance demonstrates the resilience and adaptability of the Group and our acquisitions have reduced our dependency on the China market.
At 31 March 2022, cash and cash equivalents was £4.0m and net current assets of £5.7m. Since closing of FY22 we have taken steps to improve our cash position, with increased investment from existing shareholders agreed in principle and encouraging ongoing dialogue with potential new strategic investors.
Chief Executive Officer
Group revenues excluding exceptional revenues for the year increased by 11.9% to £16.6m from £14.8m, and over the two-year period increased by 142% from £6.8m. Revenue growth in China was dampened by the disruptions caused by the continued impacts of the pandemic in China with revenues increasing by 4% to £11.6m. Revenue growth in UK remained strong and was augmented by the new acquisitions in the year, revenues increasing by 55% to £4.9m.
Revenues on our Nomad technology up 17.6% to £7.5m (2021: £6.4m), brand ownership revenues up 27% to £4.5m (2021: £3.5m) and distribution revenues decreased by 7.5% to £4.5m (2021: £4.8m).
The Group’s gross margin excluding exceptional revenues decreased to 50% from 62% in FY 2021 but has improved from 48% in FY 2020. Managing delays in shipment, restrictions in bonded warehouses and availability of last mile delivery has resulted in higher than usual write-off of inventory and increases in promotional activity as the group adapts to the changing market conditions.
Selling and distribution expenses, excluding exceptional revenues have increased to 42% (2021: 37%) of revenue, as a result in the increase in social selling, with transaction fees paid to Key Opinion Leaders (“KOLs”) as well as an increase in marketing investment in our own brands.
Administrative expenses, excluding exceptional revenues and costs, increased to 49% (2021: 30%) of revenue as a result significant investment in its people, marketing and the additional regulatory and compliance costs as a result of being publicly listed. The group total head count as at 31 March 2022 was 158 (2021: 99). During the year the Group incurred a number of significant non-recurring costs which have been shown as exceptional items in the financial statements. These items relate to acquisition related costs owing to the new brands acquired in May and November 2021, redundancy and restructuring costs as a result of corrective actions taken in light of the challenges presented by the disruptions and the cost of recompense for share option scheme.
Depreciation and amortisation
The total depreciation and amortisation costs were £0.32m and £0.47m respectively (2021: £0.2m and £0.3m). The Group continued to invest in its Nomad Technology platform with a total of £1.1m (2021: £0.6m) development costs capitalised during the year.
Adjusted EBITDA means the non-GAAP measure which is defined as Earnings Before Interest, Taxes, Depreciation, and Amortisation and exceptional items. It provides a useful measure of the underlying profitability of the business and is used by management to evaluate the operating performance to make financial, strategic and operating decisions and provides the underlying trends on a comparable basis year on year.
Adjusted EBITDA losses increased to £6.2m (2021: £0.4m), after deduction £0.3m in restructuring costs and £0.3m for the recompense for share options. The increase in losses reflects deeper investments made this year in our technology platform, in marketing our own brands and increasing our client service, fulfilment and operational capabilities. Furthermore, the dampened revenue growth in China due to the continued impacts of the pandemic has resulted in the increases in losses this year.
Earnings per share
Basic and diluted loss per share was 13.99 pence per share (2021: earnings 1.13 pence per share).
At the year end, the Group’s net cash position was £1.9m (2021: £11.6m), excluding the IFRS 16 lease liabilities, net cash was £2.6m (2021: £12.5m). The Group’s investment in technology, and increasing its client service, fulfilment and operational capabilities coupled with dampened revenue growth caused by the continued impacts of the pandemic in China resulted in negative operating cash flow of £7.7m (2021: £0.9m). The Group acquired Zita West Products, Baba West and Napiers the Herbalists during the year, together with the continued investment into its technology platform resulted in cash outflow from investing activities of £5m (2021: £0.6m). In May 2021, the Group received £3m from strategic investor together with the repayment of borrowings and lease liabilities, the net cash from financing activities was £2.2m (2021: £14.1m).
Financing costs of £0.17m (2021: £0.4m) comprised of interest expenses of £0.1m (2021: £0.3m).
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
NOTES FORMING PART OF THE CONSOLIDATED FINANCIAL STATEMENTS
Samarkand Group plc was incorporated in England and Wales on 12 January 2021 as a public company with limited liability under the Companies Act 2006.
Samarkand Group plc’s registered office is Unit 13 & 14 Nelson Trading Estate, The Path, Merton, London SW19 3BL.
The financial statements have been prepared in accordance in accordance with UK-adopted International Accounting Standards.
The financial information set out in this document does not constitute the Group's statutory accounts for the year ended 31 March 2022 or 31 March 2021.
Statutory accounts for the year ended 31 March 2021 have been filed with the Registrar of Companies and those for the year ended 31 March 2022 will be delivered to the Registrar in due course; both have been reported on by independent auditors. The independent auditor's report for the year ended 31 March 2022 is unmodified with the material uncertainty in respect of going concern:
We draw attention to paragraph below, which indicates that the Group made a loss of £7.7m during the year ended 31 March 2022 and had a net operating cash out flows of £7.7m for that year. The Group’s operations depend on financial support from existing shareholders and continuing operations which generate positive cash flows, indicating the existence of a material uncertainty that may cast doubt on the Group’s ability to continue as a going concern. Our opinion is not modified in respect of this matter. The financial statements do not include the adjustments that would result if the Group is unable to continue as a going concern.
The independent auditor's reports on the Annual Report and Accounts for the year ended 31 March 2021 was unqualified and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.
The Group and the Company faced its most challenging year to date, with external factors including the widespread COVID lockdowns in China generating high levels of disruptions to the Group.
For the year ended 31 March 2022, the Group reported a total comprehensive loss of £7.7m (2021: profit £0.4m), shareholders’ equity of £10.8m (2021: 14.9m) and accumulated losses of £8.5m (2021: £0.9m).
The directors have considered the going concern assumption as a significant judgement given historical trading and funding considerations requirements and have formed the conclusion that it is appropriate to consider that the Group and Company will continue to operate in the foreseeable future.
The Group reacted quickly to disruption encountered in FY22, reducing staff and operational costs in Q4. The benefits of these actions translated into reduced operating losses in Q1 FY23. Further operational cost action will be implemented in the current financial year.
The Group has received financial commitment from an existing strategic shareholder in writing that it will increase its investment in the Group to a level which will enable the Group to meet its obligations. The combined effect of committed additional funding from a strategic shareholder, the realisation of cost actions taken in Q4 plus additional planned cost actions in the short term and improved trading outlook based on Q1 FY23 results lead the Directors to conclude that the Group and Company will continue to operate for a period of at least 12 months from the date of approval of these financial statements. Whilst the directors have concluded that the accounts should be prepared using the going concern basis of accounting, these conditions give rise to a material uncertainty which may cast significant doubt on the group and Company’s ability to continue as a going concern.
Disaggregation of revenue from contracts with customers: