Trading Statement

InnovaDerma PLC

 ("InnovaDerma" or the "Company")

Pre-Close Trading Update

InnovaDerma (LSE: IDP) a UK developer of beauty, personal care, and life sciences products, issues the following trading update for the year ended 30 June 2021, for which the results are expected to be announced in October 2021.

Trading Performance

Despite the continued impact of COVID-19 restrictions, and the unseasonably poor weather in the UK over April and May, revenues for the year have performed broadly in line with expectations and we expect to report revenues of no less than £10.2 million for the year ended 30 June 2021.

We have made strong progress in rebuilding our gross margin, delivering a substantial H2 improvement of over 700 basis points versus same period in 2020. The margin improvement has been achieved by selling new products at higher gross margin, strictly controlling our global promotional spending and greater recovery of e-commerce delivery costs. This gross margin improvement strategy will continue into next year and we expect it to deliver enhanced profitability for the Company moving forward.

Our Direct to Consumer ("DTC") revenues saw a marked and seasonal improvement during the second half of the year as expected but remains behind historical levels, which reflects lower category consumption due to UK Government restrictions on social gatherings and also the weather, as described above. However, we do expect trading conditions to improve in the new financial year as Government imposed restrictions are eased and a number of new product initiatives are launched.

Our Retail revenue momentum is returning, with our H2 revenue greater than the same period in the previous year, but levels have remained materially impacted by the restrictions on movement and social gatherings. We expect our retail performance to return as and when restrictions are relaxed, and social interaction norms return.

Trading EBITDA

Trading EBITDA before accounting changes is expected be broadly in line with consensus forecasts for the year of £(0.9) million, which is a satisfactory performance given the challenges we have faced.

As previously announced the Company has been undertaking a comprehensive impairment review and validation exercise with regards to all assets held on the balance sheet. As part of this, the new executive management team have reversed the accounting treatment incorrectly adopted by the previous executive management team and their auditors in relation to the capitalisation of internally generated intangible assets; specifically marketing costs relating to customer acquisition. In reversing the accounting treatment, the marketing costs will now be included in the calculation of the Company's EBITDA and consequently this reduced the Company's EBITDA by circa £0.6 million. As a result, the Company expects to report trading EBITDA for the year ended 30 June 2021 of circa £(1.5) million.

Prior Year Balance Sheet Adjustments

In addition to the above accounting policy change, the balance sheet review identified further goodwill and other balance sheet write downs that will require non-cash prior year adjustment to the 2020 accounts. The total of these prior year adjustments is circa £8.9 million. These include:

- Incorrect adoption of accounting standards relating to marketing cost and product development amortisation (£3.0m)

- Goodwill write-down of acquisitions where brands were not adequately supported by the previous executive management team (£4.0m)

- Overstated inventory position due to incorrect accounting treatment including inventory write down of out-of-date stock which should have been written off in prior years (£1.5m)

- Additional assets written off (£0.4m).

Cashflow and Funding

The Company had net cash of £2.2 million at the end of the Period (£0.2 million as at 31 December 2020) following a fundraise of £4.5 million (£4.0 million net of expenses) completed in April 2021. The Company's positive cash position is further improved by access to a CBILS loan of £0.95 million, which at year end remained undrawn. The Directors believe that the Company has more than sufficient working capital to return the business to profitability.

Outlook

Irrespective of the non-cash impact of unwinding a number of accounting policies the results for the year ended 30 June 2021, particularly for the second half of the year, confirm the Company's belief that the future prospects will improve once Covid-19 restrictions are lifted and social norms return. The organization is now UK led and focused with key foundations for future growth in place; higher gross margins, enhanced new product development pipeline and stronger cost control. Moreover, the new executive management team now have a solid foundation from which to return the Company to profitability and fully expect to achieve that in the year ending 30 June 2022.

Blake Hughes, CEO, said:

"Our strategic review, as announced in our interim results, highlighted that important measures needed to be taken to improve the financial and structural foundations of the company in order to move forward and generate profitable and sustainable growth. These actions have and continue to take place and it is pleasing to see our strategy has already delivered a strong improvement in gross margin. 

"In addition, we have strengthened our key e-commerce infrastructure, with over 76% of customer reviews rating us 5 stars, which together with investments in new product development and our renewed focus on cost control are important pillars in our growth strategy. I am confident that InnovaDerma is now well-placed to return to profitability as social interactions return to historical norms."

Further enquiries

This announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) 596/2014 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018 ("MAR"), and is disclosed in accordance with the company's obligations under Article 17 of MAR.