TIDMTUNE

RNS Number : 5586M

Focusrite PLC

12 May 2020

Strictly embargoed until 07:00: 12 May 2020.

Focusrite plc ("Focusrite" or "the Group")

Half year results for the period ended 29 February 2020

Focusrite plc, the global audio products group of companies, today announces its half year results for the six months ended 29 February 2020.

Key financial metrics

 
                                                HY20    HY19 
 
 Revenue (GBP million)                          49.9    40.4 
                                              -------  ----- 
 Adjusted EBITDA(2) (GBP million)               9.1     8.9 
                                              -------  ----- 
 Adjusted(3) operating profit (GBP million)     6.4     7.3 
                                              -------  ----- 
 Adjusted(3) diluted earnings per share (p)     9.3     11.0 
                                              -------  ----- 
 Interim dividend per share (p)                  -      1.2 
                                              -------  ----- 
 Net (debt) cash (GBP million)                 (19.9)   26.2 
                                              -------  ----- 
 
 Statutory results 
                                              -------  ----- 
 Operating profit (GBP million)                 3.0     7.3 
                                              -------  ----- 
 Basic earnings per share (p)                   3.6     11.1 
                                              -------  ----- 
 
 

Highlights

-- Group revenue up by 23.5% to GBP49.9 million (25.3% at constant currency(1) ) (HY19: GBP40.4 million)

-- Acquisition of Martin Audio in December 2019 for GBP39.6 million

-- Integration of ADAM Audio progressing well and contributing to both revenue growth and profits

-- Consumer demand remained strong across the Focusrite and Novation ranges although revenue down slightly like for like in the period due to the initial impact of COVID-19 in China

-- Gross margin improved to 46.1% (FY19: 44.3%)

-- EBITDA(2) up by 2.9% to GBP9.1 million (HY19: GBP8.9 million)

-- Net debt of GBP19.9 million having bought Martin Audio for GBP39.6 million (FY19: net cash GBP14.9 million, HY19: net cash GBP26.2 million)

-- Interim dividend decision deferred in view of the uncertainty caused by COVID-19

Tim Carroll, Chief Executive Officer, commented:

"We are delighted to have acquired Martin Audio in December 2019, adding another complementary high quality business, following on the heels of our acquisition of ADAM Audio in July 2019. That was closely followed by the COVID-19 pandemic. We have managed the challenges well and I salute the whole team. As a result of their agile management of the situation, the impact of supply chain issues as a result of COVID-19 was limited to approximately GBP2 million of revenue in February 2020.

Since the half year, consumer demand for Focusrite and ADAM Audio products has been high especially via ecommerce and we have seen record levels of product registrations at Focusrite indicating positive sell-through to end-users . Manufacturing in China is back up to speed and we are working hard to ensure that consumers can still get the product they wish to buy without delay. Demand for Martin Audio products is being affected by the lack of live music events due to COVID-19 but we believe this will recover in time. Our people are adapting well to the unusual working conditions, supported by state-of-the-art IT and communications facilities that enable working at home. We are confident that the Group will come through this upheaval stronger than ever. However, for the time being we must remain appropriately cautious given the unprecedented circumstances in which we all find ourselves."

(1) The constant currency revenue growth rate is calculated by dividing the sum of all transactions in HY20, translated at the average exchange rate for the relevant currency in HY19, by the sum of all transactions in HY19, translated at the same average exchange rate.

(2) Comprising earnings adjusted for interest, taxation, depreciation, amortisation and non-underlying items. This is shown on the face of the income statement.

(3) Adjusted for non-underlying items which comprise costs relating to acquisition (GBP1.8m), amortisation of acquired intangibles (GBP1.2m), and other costs (GBP0.4m).

Enquiries:

 
Focusrite Plc :            +44 1494 836301 
Tim Carroll (CEO) 
Jeremy Wilson (CFO) 
 
Panmure Gordon             +44 20 7886 2500 
(Nominated Adviser and 
 Broker) 
Freddy Crossley 
 Erik Anderson 
 
Belvedere Communications   +44 74 070 23147 
John West 
Llew Angus 
 

The information communicated in this announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) No. 596/2014 .

Notes to Editors

Focusrite plc is a global audio products group that develops and markets proprietary hardware and software products. Used by audio professionals and musicians, its solutions facilitate the high-quality production of recorded and live sound. The Focusrite Group trades under six established brands: Focusrite, Focusrite Pro, Novation, Ampify, ADAM Audio and Martin Audio.

With a high-quality reputation and a rich heritage spanning decades, its brands are category leaders in the music-making and audio recording industries. Focusrite and Focusrite Pro offer audio interfaces and other products for recording musicians, producers and professional audio facilities. Novation and Ampify products are used in the creation of electronic music, from synthesisers and grooveboxes to industry-shaping controllers and inspirational music-making apps. ADAM Audio studio monitors have earned a worldwide reputation based on technological innovation in the field of studio loudspeaker technology. Martin Audio designs and manufactures performance-ready systems across the spectrum of sound reinforcement applications.

The Focusrite Group has a global customer base with a distribution network covering approximately 160 territories. Both Focusrite and Martin Audio are headquartered in High Wycombe, UK, with marketing offices in Los Angeles and Hong Kong. ADAM Audio has offices in Berlin, Nashville and Dongguan, China.

Focusrite plc is traded on the AIM market, London Stock Exchange.

Business and operating review

Overview

We are pleased to share with you our financial results and summary of operations for the first half of our financial year ending 31 August 2020. This year has been an incredibly busy time for the Group as we launched a number of new products; began the integration of ADAM Audio which was acquired in July 2019; and completed our second acquisition, Martin Audio, in December 2019. The Group has continued to grow on many of its key metrics: including revenue, EBITDA, product portfolio and customer base. Through all of this, we remain focused delivering on our mission of 'Removing Barriers to Creativity'. Indeed, it was paramount for both acquired companies to have this in their DNA as well. Our customers, spread widely across beginners, enthusiasts, aspiring pros, and enterprise facilities and professionals, depend on the Focusrite Group to deliver solutions that allow them to realise top-quality results from all the amazing capabilities that our technology offers. We strive to deliver this with our focus on ease of use and a deep understanding of our customers' needs.

COVID-19

All three principle business units and subsidiary operations are operating successfully with the majority of employees working at home. That said, the Group's ADAM Audio and Martin Audio facilities that assemble the larger, higher priced products of each brand remain operational under safe-working mandates. All other manufacturing, of all brands, is outsourced to third parties in China or Malaysia. Of these, the Chinese manufacturers have now restored their output to near pre-COVID levels, while Malaysia is currently moving out of lockdown. Logistics including warehousing in multiple locations, is also outsourced. This is our well-established business model which, to date, has enabled the companies in the Group to continue their operations successfully during the crisis.

While traditional retail stores are closed in many countries the online retail industry is fulfilling the demand so successfully that we are seeing record levels of product registrations at Focusrite, indicating positive sell-through to end-users. On the other hand, d emand for Martin Audio products is being affected by the lack of live music events due to COVID-19 although we believe this will recover in time. Our people are adapting well to the unusual working conditions, supported by state-of-the-art IT and communications facilities that enable working at home.

Operating review

Our Group now comprises six powerful brands across three business units: Focusrite, Focusrite Pro, Novation, Ampify, which make up the Focusrite Audio Engineering ('FAEL') business unit, ADAM Audio and Martin Audio.

 
                                                                                                 Year to 
                                        Six months to       Six months to                      31 August 
                                     29 February 2020    28 February 2019                           2019 
                                              GBP'000             GBP'000                        GBP'000 
---------------------------------  ------------------  ------------------  ----------------------------- 
 Revenue from external customers 
 Focusrite                                     25,574              26,308                         57,644 
 Focusrite Pro                                  1,884               2,594                          4,704 
 Novation                                       9,935               9,827                         17,719 
 ADAM Audio                                     7,041                   -                          1,750 
 Martin Audio                                   4,526 
 Distribution                                     966               1,696                          2,848 
 Total                                         49,926              40,425                         84,665 
---------------------------------  ------------------  ------------------  ----------------------------- 
 

Focusrite Audio Engineering Ltd ('FAEL')

Within FAEL, Focusrite, comprising our market-leading Scarlett audio interfaces and mid-range Clarett interfaces, was flat year on year. The first three months were spent clearing our inventory and channel inventory of the older generation Scarlett product, which had some impact on re-orders for the new generation Scarlett. However, total end-user registrations were significantly up year on year with both versions selling in the channel for a period of time and this has continued as the older generation stock has been phased out. Additionally, net promoter scores ('NPS') are also up as we have greatly improved the customer onboarding journey to get users up and running with the product quickly.

Focusrite Pro, comprising our Red and RedNet solutions, had a difficult first half, coming in 27% down versus prior year. Part of this is due to a number of product releases, which were originally scheduled for the first half, being pushed out to the second half. Additionally, we have restructured the team to ensure we are more tightly aligned with the different verticals we want to pursue namely broadcast, education, installed sound and post production.

Novation revenue was up 1% year on year, mainly driven by the introduction of new Launchpads and the first of a new generation of Launchkeys. Just like the new Focusrite Scarlett interfaces, all the new Launch products have a new and enhanced 'out of the box' and onboarding journey to get both new users and professionals alike up and running quickly. This improved 'out of the box' experience has resulted in higher NPS scores for the Novation brand as well.

Ampify has continued to update and enhance our world-class iOS music creation apps and, in addition, has just debuted our first cross platform Mac/Windows music creation software and content label, Ampify Studio and Ampify Sounds. Both releases will be well integrated into the onboarding journey for both Focusrite and Novation customers and are an important component of our growth strategy focused on customer lifetime value.

Additionally, following the acquisition of ADAM Audio, the Group will cease distributing third-party brands by the end of August 2020. Performance on these units has been poor and resulted in a drag on our overall business.

ADAM Audio GmbH

Our ADAM Audio brand prides itself by offering a comprehensive portfolio of high precision studio monitors. Our AX and S Series monitors are chosen by some of the most discerning ears in the industry as their go-to monitors for recording and mixing the biggest titles in music and film. The T Series, bringing ADAM sonic performance to a price point for home studio and aspiring professionals, continues to gain share in the music instrument ('MI') retail space.

The integration of ADAM has progressed well and performance for the first half is in line with our expectations and approximately 13% up over its prior year. Numerous initiatives across sales and marketing, engineering and operations are in play to bring the scale of the entire Group to bear and maximise our opportunities with consolidation and cross-selling. The Group has already had some early wins in terms of consolidating distribution in various markets which are partially responsible for the year-on-year growth.

Martin Audio Ltd

Martin Audio, our latest acquisition, was completed on 30 December 2019. The business rallies around the central theme of 'Unite Your Audience', offering a wealth of solutions for the live/tour sound and installed sound market. Martin has a robust product roadmap that even in the first few months of trade has resulted in extensions to their award-winning Adorn and X Series portfolio, as well as a number of new products specifically for the Chinese market. In the two months Martin has been with the Group, revenue has been up 22% year on year within the period and 11% ahead of budget. The majority of the increase is in the point-source solutions and subwoofers. Point-source solutions are primarily used for monitoring live bands, DJs, corporate events and installations in dance clubs, ballrooms and performing arts centres.

Group summary

As a whole, the Group achieved revenue of GBP49.9 million for the first half, up from GBP40.4 million for the first half last year, including a full six months of ADAM Audio and two months of Martin Audio. Gross margin increased to 46.1% from 44.3% last half. Resulting EBITDA was GBP9.1 million compared to GBP8.9 million last year; the prior year was flattered by a one-off GBP700,000 increase from tariff-induced price increases in the US.

Research and development remains a cornerstone of our Group's strategy. In this period, we had a number of new products come to market, including the third generation of Novation Launchpads, the first of a new series of Launchkeys, extensions to the Martin Audio Adorn and X Series, and a host of software and hardware upgrades across many of the product groups. The second half has a number of new products and product transitions as well; some have been slightly impacted by COVID-19 but are still on track for release before the year end.

Regional review

 
                                                 Six months        Six months      Year to 
                                             to 29 February    to 28 February    31 August 
                                                       2020              2019         2019 
                                                    GBP'000           GBP'000      GBP'000 
-----------------------------------------  ----------------  ----------------  ----------- 
 Europe, Middle East and Africa ('EMEA')             23,115            19,315       34,033 
 North America                                       18,094            14,963       36,345 
 Rest of World ('ROW')                                8,717             6,147       14,287 
-----------------------------------------  ----------------  ----------------  ----------- 
 Total                                               49,926            40,425       84,665 
-----------------------------------------  ----------------  ----------------  ----------- 
 

EMEA

EMEA represented 46% of the Group's revenue for the first half. For FAEL (comprising the Focusrite, Focusrite Pro, Novation and Ampify brands), the region was down 4.2% year on year. Two primary factors made up the majority of the impact. First, distribution changes: our Scandinavian distributor ceased trading, resulting in a loss of business for approximately two months as we searched for and successfully brought online a new distributor. Additionally, our Italian distributor was purchased by a large company that resulted in approximately a two-month lapse in orders while they completed their transaction. Second, we had a tough comparative period as in February 2019, many European distributors opted to take on more stock in anticipation of potential Brexit issues. Business has settled down from these occurrences and we are watching closely to see what the short and mid-term impacts could be from COVID-19. For ADAM and Martin, the first half was roughly on plan, with both showing double digit revenue growth year-on-year. For now, demand for the Group's products has remained strong, with increased levels of sales of FAEL and ADAM solutions through more e-commerce focused resellers and the same for Martin's installed sound solutions.

North America

North America is an important region for the Group and during the first half, contributed 36% to the Group's total revenue. Our North American operations have expanded with the acquisition of ADAM and Martin. Both these brands utilise the same third party logistics provider ('3PL') and have in-field demand generation groups comprising sales, marketing, operations and support. FAEL sells product to a North American distributor which then supplies the dealers. FAEL also employs a local team of specialists whose aim is to stimulate consumer demand.

Both FAEL and ADAM products are sold through a very similar sales channel, with almost entire overlap. Martin Audio's North America business is transacted through a mix of live/tour sound rental companies, system integrators and direct to end-users. FAEL revenue in North America was down 3.5% for the first half. When factoring in the one-off gain realised last year from the tariff price actions, FAEL was roughly flat year on year. ADAM's performance was up 14% year on year, with a continued adoption of the lower price T Series as well as continued growth in the upper end AX series monitors. Martin Audio's North America business for the two months since acquisition was up 17%, driven by increases in fixed installations.

ROW

ROW comprises Asia and South America. ROW contributed 18% to the Group's total revenue for the first half. For FAEL, Asia was down by 7% compared with HY19. This was driven partially by bringing in a new management team for the region in mid-January 2020 and partially due to COVID-19 issues across China during February 2020, which resulted in very weak sales in China for the month. Latin America, with the team located in Mexico and Brazil, had a very positive result for the first half, up 48% year on year. The management team has done an excellent job of renewing distribution contracts in key markets and focusing on localised support and marketing tools for the various countries. ADAM Audio's result in ROW for the half year was up 26% year on year, comprising an increase of 6% in Latin America and 31% across Asia. Part of the increase in Asia was achieved by consolidating distribution across FAEL and ADAM in a few key markets. Martin Audio's ROW revenue was up 30% year on year, driven primarily in

Asia and from bringing on board a sales and marketing team focused on the Asian market with localised marketing and demand generation.

Financial review

Overview

Since February 2019, the Group has acquired both ADAM Audio and Martin Audio. These have made a major contribution to the strong revenue growth of 23.5% over HY20. Within other areas of the income statement, the picture is more complex and it is set out below.

Income statement

 
                                     HY20       HY20             HY20       HY19       HY19             HY19 
                                      GBPm       GBPm             GBPm       GBPm       GBPm             GBPm 
---------------------------------- 
                                     Adjusted   Non-underlying   Reported   Adjusted   Non-underlying   Reported 
----------------------------------  ---------  ---------------  ---------  ---------  ---------------  --------- 
 Revenue                             49.9       -                49.9       40.4       -                40.4 
 Cost of sales                       (26.9)     -                (26.9)     (22.5)     -                (22.5) 
----------------------------------  ---------  ---------------  ---------  ---------  ---------------  --------- 
 Gross profit                         23.0      -                23.0        17.9      -                17.9 
 Administrative expenses             (16.6)     (3.4)            (20.0)     (10.6)     -                (10.6) 
----------------------------------  ---------  ---------------  ---------  ---------  ---------------  --------- 
 Operating profit                    6.4        (3.4)            3.0        7.3        -                7.3 
 Net finance income                  (0.3)      -                (0.3)      (0.1)      -                (0.1) 
----------------------------------  ---------  ---------------  ---------  ---------  ---------------  --------- 
 Profit before tax                   6.1        (3.4)            2.7        7.2        -                7.2 
 Income tax expense                  (0.7)      -                (0.7)      (0.8)      -                (0.8) 
----------------------------------  ---------  ---------------  ---------  ---------  ---------------  --------- 
 Profit for the period               5.4        (3.4)            2.0        6.4        -                6.4 
----------------------------------  ---------  ---------------  ---------  ---------  ---------------  --------- 
 
                                     HY20       HY20             HY20       HY19       HY19             HY19 
                                      GBPm       GBPm             GBPm       GBPm       GBPm             GBPm 
---------------------------------- 
                                     Adjusted   Non-underlying   Reported   Adjusted   Non-underlying   Reported 
----------------------------------  ---------  ---------------  ---------  ---------  ---------------  --------- 
                                                (3.4) 
 Operating profit                    6.4         (4)             3.0        7.3        -                7.3 
 Add - amortisation of intangible 
  assets                             2.0        1.2              3.2        1.2        -                1.2 
 Add - depreciation of tangible 
  assets                             0.7        -                0.7        0.4        -                0.4 
----------------------------------  ---------  ---------------  ---------  ---------  ---------------  --------- 
 EBITDA                              9.1        (2.2)            6.9        8.9        -                8.9 
----------------------------------  ---------  ---------------  ---------  ---------  ---------------  --------- 
 

(4) Non-underlying items set out in Note 5 of the Interim Statements

Revenue

Revenue for the Group grew 23.5% to GBP49.9 million (HY19: GBP40.4 million). Within this total, ADAM Audio contributed GBP7.0 million over the whole six-month period (HY19: GBPnil) and Martin Audio contributed GBP4.5 million in the period from acquisition on 30 December 2019 to 29 February 2020 (HY19: GBPnil). Therefore, the underlying business that was Focusrite plc last year had revenue of GBP38.4 million (HY19: GBP40.4 million). Despite this decline of 5.1%, the Board was very pleased with this result. The first half of last year benefited from the one-off advantage of a selling price increase in the US, generating a revenue (and profit) of approximately GBP0.7 million. The comparative period also had a revenue boost due to customers in continental Europe buying more to protect themselves against possible Brexit upheaval. Both of these were discussed last year. This year, the initial supply chain issues in China caused by COVID-19 delayed the delivery of approximately GBP2 million of orders.

In general, GBP was stronger in HY20 than in HY19. The Euro weakened and the average exchange rate moved from EUR1.13 in HY19 to EUR1.16 in HY20. The USD was broadly similar to last year at $1.28 (HY19: $1.29). The effect of the Euro movement is to reduce the revenue for HY20 relative to HY19. However, at the profit level the Euro is largely mitigated by the Group's hedging policy (approximately 75% of Euro exposure is hedged in the current financial year and approximately 50% is hedged in the following financial year) and the USD is mitigated by the purchases of stock in USD from the manufacturers in China and Malaysia.

Segment profit

Segment profit is disclosed in more detail in the note to the accounts named, 'Business Segments'. In FY19, the segments consisted of Focusrite, Focusrite Pro, Novation, Distribution and ADAM Audio. With the addition of Martin Audio, the Group will now have three major operating companies, six brands and have six business segments. With the two acquisitions, the management of the Group is evolving towards an operating company basis. Therefore, the Board will reconsider the reporting segments at the year end. The revenue is compared with the directly attributable costs to create a segment profit.

Gross profit

In HY19, the gross margin was 44.3%, helped by the boost from the pricing increase in the US. Excluding that, the underlying gross margin was approximately 43.3%. By contrast, in HY20, the gross margin grew to 46.1%. This is a useful increase as a result of several important factors. These include certain cases where the specification of a new product was substantially greater than its predecessor allowing the selling price to be increased. Additionally, US import duties were mitigated partially and royalties were reduced. Finally, the mix of business moved towards higher margin products with the arrival of the higher margin ADAM and Martin businesses together with the decline of the lower margin Distribution segment.

Administrative expenses

Administrative expenses consist of sales, marketing, operations, the uncapitalised element of research and development, and central functions such as legal, finance and the Group Board. These expenses were GBP20.0 million, up from GBP10.7 million last year. Within the total for HY20, there were non-underlying expenses of GBP2.3 million, relating largely to the acquisition costs for the purchase of Martin Audio. In addition, there was amortisation relating to acquired intangible assets totalling GBP1.2 million. Excluding these non-underlying costs, the operating costs were GBP16.6 million, of which GBP4.2 million were incurred by ADAM Audio and Martin Audio. Within the Focusrite business, marketing costs were increased by the greatest proportion with particular focus on online marketing via Google and Facebook as well as face-to-face marketing via the pop-up store in London prior to Christmas and the continued importance of the largest trade shows. The Board supports the continued investment in marketing whilst guiding the business to manage the costs tightly and in trying to get the biggest benefit when deciding how to invest the money.

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP measure but it is widely recognised in the financial markets as a proxy for the ongoing trading performance of the business. It is also used within the Group as the basis for some of the incentivisation of senior management at both the operating company level and the Group level. EBITDA increased from GBP8.9 million in HY19 to GBP9.1 million in HY20, an increase of 2.9%. This increase includes GBP0.4m of rental costs that, due to adoption of IFRS 16, have been accounted for as depreciation rather than administrative expense. The other major metric used for the incentivisation of management is cash generation (measured as free cash flow as a percentage of revenue). This is discussed later.

Depreciation and amortisation

Depreciation is charged on tangible fixed assets on a straight-line basis over the assets' estimated useful lives, normally ranging between two and five years. Additionally, with the adoption of IFRS 16, this now includes the depreciation of leases brought onto the balance sheet.

Amortisation is mainly charged on capitalised development costs, writing off the development cost over the life of the resultant product. It has always been intended that the costs are capitalised prudently and amortised sensibly, with all development costs relating to an individual product written off over a period up to three years for Focusrite and Novation, up to eight years for ADAM Audio and up to eleven years for Martin Audio, reflecting the different lifespans of the products.

Following the purchase of Martin Audio, the Group commissioned PwC to carry out the purchase price allocation to evaluate the relative value and useful lives of intangible assets such as brand, developed products, products in development, patents and goodwill. The results of this initial assessment were that the brand was valued at GBP6.8 million and is assumed to be amortised over 20 years; developed products and related patents are being amortised over eight years and products in development and associated patents are being amortised over eleven years, reflecting the longer marketable life of these products. Goodwill is not amortised unless there is a permanent diminution in value. The amortisation of the acquired intangible assets for both ADAM Audio and Martin Audio totalled GBP1.2 million during the period (HY19: GBPnil) and has been disclosed within non-underlying costs.

Within the Focusrite business, GBP2.1 million of development costs were capitalised (HY19: GBP1.8 million) and the amortisation of capitalised development costs was GBP1.5 million (HY19: GBP1.0 million).

Non-underlying items

In HY20, the Group acquired Martin Audio and the costs associated with the acquisition were GBP1.8 million. In addition, the Group made a number of changes to the senior employees which contributed to additional non-underlying costs of approximately GBP0.4 million. These were generally employment costs relating to gardening leave periods. Finally, the non-underlying costs included amortisation on acquired intangible assets totalling GBP1.2 million.

Foreign exchange and hedging

The exchange rates have been more consistent in the last financial year.

 
 Exchange rates    HY20   HY19   FY19 
----------------  -----  -----  ----- 
 Average 
 USD:GBP           1.28   1.29   1.29 
----------------  -----  -----  ----- 
 EUR:GBP           1.16   1.13   1.13 
----------------  -----  -----  ----- 
 
 Period end 
----------------  -----  -----  ----- 
 USD:GBP           1.28   1.33   1.22 
----------------  -----  -----  ----- 
 EUR:GBP           1.16   1.17   1.11 
----------------  -----  -----  ----- 
 

The average USD rate has been broadly unchanged at $1.28:GBP1.00 for HY20 (HY19: $1.29). The USD accounts for over half of Group revenue but nearly all of the cost of sales so there is a useful natural hedge.

As the Euro comprises approximately a quarter of revenue but little cost, the weaker Euro (stronger GBP) is unhelpful. That said, the Group enters into forward contracts to convert Euro to GBP. The policy adopted by the Group is to hedge approximately 75% of the Euro flows for the current financial year (year ending August 2020) and approximately 50% of the Euro flows for the following financial year (FY21).

In HY19, approximately three-quarters of Euro flows were hedged at EUR1.10, and the average transaction rate was EUR1.13, thereby creating a blended exchange rate of approximately EUR1.11. In HY20, the equivalent hedging contracts were at EUR1.12, versus the transactional rate of EUR1.16 and so creating a blended exchange rate of EUR1.13.

Hedge accounting is used, meaning that the hedging contracts have been matched to income flows and, providing the hedging contracts remain effective, movements in fair value are shown in a hedging reserve in the balance sheet, until the hedge transaction occurs.

Corporation tax

Historically, the effective corporation tax rate as a proportion of profit before tax has been in the range 10-12%. In HY19, it was 11.0%. By contrast, in HY20 the effective tax rate is 23.8%. The reason for this is that the non-underlying costs are assumed not to be allowable for corporation tax. Excluding these costs, the effective tax rate would be 10.5%. Most of the Group's profits are taxed in the UK, where the headline rate is 19%. The effective tax rate is lower than this headline rate, due largely to enhanced tax relief on development costs. As the Group grows, it will move from the Small or Medium-sized Enterprise regime ('SME') for the treatment of R&D costs to the Research and Development Expenditure Credit regime ('RDEC') which is markedly less beneficial. Therefore, it is expected that the effective tax rate will increase in the coming years.

Earnings per share ('EPS')

The basic EPS for the year was 3.6 pence, down 68% from 11.1 pence in HY19. This decline has largely followed the decline in reported profit after tax and the large non-underlying costs incurred in HY20. The weighted average number of shares used for the calculation has increased compared to the prior year at 57,537,000 shares (HY19: 57,222,000 shares). The more comparable measure, excluding non-underlying items and including the dilutive effect of share options, is the adjusted diluted EPS. This declined to 9.3 pence, from 11.0 pence in HY19.

 
                     HY20    HY19    FY19 
                     Pence   Pence   Pence 
------------------  ------  ------  ------ 
 Basic               3.6     11.1    20.4 
 Diluted             3.5     11.0    20.1 
 Adjusted basic      9.4     11.1    21.7 
 Adjusted diluted    9.3     11.0    21.4 
------------------  ------  ------  ------ 
 

Balance sheet

 
                                  HY20     HY19    FY19 
                                  GBPm     GBPm    GBPm 
-------------------------------  -------  ------  ------- 
 Non-current assets               63.3     7.9     25.7 
 Current assets 
 Inventories                      18.6     12.3    15.2 
 Trade and other receivables      19.3     13.1    18.2 
 Cash                             12.8     26.2    15.5 
 Current liabilities 
 Bank loan or overdraft           -        -       (0.6) 
 Other current liabilities        (18.2)   (9.4)   (16.3) 
 Non-current liabilities 
 Bank loan or overdraft           (32.7)   -       - 
 Other non-current liabilities    (8.1)    (0.8)   (4.3) 
-------------------------------  -------  ------  ------- 
 Net assets                       55.0     49.3    53.4 
-------------------------------  -------  ------  ------- 
 

Non-current assets

The non-current assets comprise: goodwill; brands, patents and capitalised development costs; property, plant and equipment; and software. The goodwill totals GBP17.6 million (HY19: GBP0.4 million). This comprises Martin Audio GBP12.3 million, ADAM Audio GBP4.9 million and Novation GBP0.4 million. In both Martin Audio and ADAM Audio, the goodwill represented approximately 30% of the acquisition cost.

The brands were valued at GBP14.3 million (HY19: nil). This comprises Martin Audio GBP6.8 million, which is to be amortised over 20 years, and ADAM Audio GBP7.5 million, which is to be amortised over ten years.

The capitalised development costs comprise acquired developments in relation to both completed products and products currently in development. The amortisation periods range from three years to eleven years depending on the expected life of the products. The shorter amortisation periods are more usual for Focusrite and Novation products and the longer periods for the ADAM Audio monitors and the Martin Audio live speakers. The capitalised development costs have a carrying value of GBP20.8 million (HY19: GBP5.4m).

Based on current trading and management base forecasts no impairments to the carrying value of the intangible assets have been deemed necessary as a consequence of COVID-19. This will be reassessed at the year-end for evidence of any permanent diminution in value.

Overall, the amortisation of the intangible assets totals GBP3.2 million (HY19: GBP1.2 million). This is split between amortisation of intangible assets acquired as part of the acquisition of either ADAM Audio in July 2019 or Martin Audio in December 2019 of GBP1.2 million (HY19: GBPnil), and other amortisation of GBP2.0 million (HY19: GBP1.2 million). The amortisation of acquired intangible assets has been treated as a non-underlying expense. The ongoing amortisation relates to the capitalised development costs credited to the income statement. The difference between ongoing amortisation and capitalised development costs is GBP0.6 million (HY19: GBP0.8 million).

Working capital

Working capital was 20.9% of revenue (HY19: 19.8%). This remains at an acceptable level but it has increased over the comparative period. This is largely due to the acquisition of Martin Audio. Within ADAM Audio, the working capital is low and the Board is considering how to use a modest investment in working capital to drive further revenue growth.

The management of stock and debtors remain a key focus across the Group. With stock the Board aims for a sensible balance that minimises stock value whilst maximising the ability to satisfy customer demand and with some degree of protection for unforeseen events. This has proved useful in the COVID-19 lock-downs. With debtors, the ambition is to get the customers to pay on time, i.e. according to the contractual terms that they have accepted when placing the order. Finally, we aim to pay suppliers on time.

Cash flow

 
                                       HY20     HY19   FY19 
                                       GBPm     GBPm   GBPm 
 Free cash flow(5)                     (33.2)   4.9    (5.9) 
 Add - non-underlying cash outflows    37.6            16.1 
------------------------------------  -------  -----  ------ 
 Underlying free cash flow             4.4      4.9    10.2 
------------------------------------  -------  -----  ------ 
 

(5) Defined as net cash from operating activities less net cash used in investing activities.

The net debt balance at the period end was GBP19.9 million (HY19: Net cash of GBP26.2 million and FY19: GBP14.9 million). During the 12 months from February 2019 to February 2020, the Group acquired ADAM Audio for GBP16.1 million, Martin Audio for GBP35.3 million (net of acquired cash), and also incurred non-underlying costs totalling GBP2.3 million. As part of the acquisition of Martin Audio, the Group took a GBP40 million loan facility split evenly between HSBC and NatWest. The facility lasts for five years to December 2024.

Excluding these acquisitions and financing activities, such as issues of equity shares or equity dividends paid, the underlying free cash flow in HY20 was GBP4.4 million, which was 8.8% of revenue. In the comparative period, the free cash flow was GBP4.9 million which was 12.0% of revenue. Free cash flow as a percentage of revenue is a key performance measure within the Group: if the Group sells product, it is reasonable to assume that some of the revenue converts to profit which then converts to cash. This forms an important element of the incentivisation metrics of senior management across the Group.

Going concern

The Board of Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, the interim statements have been prepared on a going concern basis.

The COVID-19 virus has caused upheaval worldwide with many businesses experiencing a significant decline in revenue. The Directors have prepared projected cash flow information (base case forecasts) for the period ending twelve months from the date of their approval of this interim statement. These projections did not take full account of the improvements the Group is experiencing as a result of the impact of COVID-19 (see below). On the basis of this cash flow information, the Directors consider that at the end of the 12-month period, the Group will have reduced its current net debt position from GBP19.9m (the Group's RCF facility of GBP40.0 million is due for renewal in December 2024). Throughout the period the forecast cash flow information indicates that the Group will comfortably comply with the leverage and interest cover covenants contained within the facility.

Management's view is that a severe yet plausible downside assumption against their base case forecasts is estimated to be a revenue shortfall of 30% for a 6-month period commencing May 2020. This model assumes that purchases of stock will, in time, reduce to reflect reduced sales and the Group will respond to the shortfall by taking reasonable steps to reduce overheads within its control. Even at that level, the Group would be expected to remain well within the terms of its loan facility with the leverage covenant (net debt to adjusted EBITDA) in the period not exceeding 1.0 compared to the maximum of 2.5. The Group's net debt position under this severe plausible downside scenario is still expected to improve at the end of the 12-month period.

In their sensitivity analyses, the Directors estimate that if the Group were to experience a shortfall in revenue of greater than 60% for six months, this could result in leverage beyond that permitted by the current facility by November 2020, despite consequential reductions in the purchases of stock and overheads. As an additional measure the Directors could also stop the dividend. However, the Directors view is that this scenario of a revenue shortfall of greater than 60% is not plausible.

In reality, the Group is currently experiencing record levels of consumer registrations and customer demand, partially as a result of the COVID-19 restrictions on people's movement, and therefore revenue growth has accelerated since the half year end. This is evidenced by improvements in the Group's net debt position which had reduced by GBP4 million to GBP16 million at 30 April 2020. Consequently, the directors are confident that the company will have sufficient funds to continue to meet its liabilities as they fall due for at least 12 months from the date of approval of the interim statements and therefore have prepared the interim statements on a going concern basis.

Chief Financial Officer

Following the announcement on 18 March that Jeremy Wilson has decided to leave the Company at the end of December, an executive search firm has been appointed to carry out a search for his successor. A further update on this process will be made as and when appropriate.

Dividend

Following this successful half year, the Board would normally expect to propose an interim dividend in line with its consistent dividend policy. However, in light of the highly unusual circumstances caused by the COVID-19 virus, and the uncertainty about future trading conditions this inevitably brings, the Board has decided that the prudent approach is to defer the declaration of a dividend until later in 2020.

Summary and outlook

"We are delighted to have acquired Martin Audio in December 2019, adding another high quality business, following the acquisition of ADAM Audio in July 2019. That was closely followed by the COVID-19 pandemic. We have managed the challenges well and I salute the whole team. As a result of their agile management of the situation, the impact of supply chain issues as a result of COVID-19 was limited to approximately GBP2 million of revenue in February 2020.

Since the half year, consumer demand for Focusrite and ADAM Audio products has been high especially via ecommerce and we have seen record levels of product registrations at Focusrite indicating positive sell-through to end-users . Manufacturing in China is back up to speed and we are working hard to ensure that consumers can still get the product they wish to buy without delay. Demand for Martin Audio products is being affected by the lack of live music events due to COVID-19 but we believe this will recover in time. Our people are adapting well to the unusual working conditions, supported by state-of-the-art IT and communications facilities that enable working at home. We are confident that the Group will come through this upheaval stronger than ever. However, for the time being we must remain appropriately cautious given the unprecedented circumstances in which we all find ourselves."

   Tim Carroll                                                          Jeremy Wilson 
   Chief Executive Officer                                 Chief Financial Officer 

Principal Risks and Uncertainties

In common with all businesses, the key area in which the Group currently faces risks is the impact of COVID-19. The Group focuses on the effective management of its risks in order to achieve its strategic objectives and secure the resilience of the business for the long term. Management of risk is critical to the effective running of the business and is considered as part of the Group's decision-making processes.

 
 Risk area                Description                           Mitigation 
-----------------------  ------------------------------------  -------------------------------------- 
 COVID-19                 At the time of writing,               While the virus is likely 
                           the risks that COVID-19               to impact our operations, 
                           pose to the business are              the Group has supply agreements 
                           the most prevalent. When              with manufacturers located 
                           the pandemic first occurred           in both China and Malaysia 
                           in China, the initial threat          thus lessening the impact 
                           was to our manufacturing              of the virus occurring in 
                           and Asian supply chain                one region. Additionally, 
                           but more recently the threat          the Group has stock in two 
                           has become the risk to                third party logistics firms, 
                           the global supply chain.              one in China and one in the 
                           The Group cannot predict              UK. The Group also works 
                           the extent that the effect            with its resellers and distributors 
                           of the virus will have                to ensure they are holding 
                           on consumer demand, nor               sufficient stocks should 
                           is it known how widespread            there be disruption to the 
                           the virus will be in any              supply chain. The Group's 
                           one country or how long               distribution network comprises 
                           the pandemic will last.               both bricks and mortar and 
                           Our priority is to keep               online resellers and covers 
                           our workplaces and people             all major regions of the 
                           as safe as possible. At               world. Therefore, while many 
                           the same time we must consider        physical stores are currently 
                           other ways of getting the             shut the increased demand 
                           products to the consumers             from online resellers has 
                           that wish to buy them.                more than compensated. Currently 
                                                                 consumer demand for Focusrite 
                                                                 and ADAM products has risen 
                                                                 and while many live sound 
                                                                 tours and installed sound 
                                                                 projects have been postponed, 
                                                                 Martin Audio has not seen 
                                                                 any material cancellations 
                                                                 in future business. The Group 
                                                                 has also transformed its 
                                                                 own e-commerce offering whose 
                                                                 improvement continues month 
                                                                 on month. 
                                                                 The Group has invested significantly 
                                                                 in its information technology 
                                                                 and communications structure 
                                                                 so that nearly all of the 
                                                                 workforce can work from home, 
                                                                 therefore the Group has been 
                                                                 able to continue its efforts 
                                                                 to develop new products. 
                                                                 At an unknown point in time 
                                                                 the pandemic will pass and 
                                                                 while the Group does not 
                                                                 rely on this as a mitigation, 
                                                                 COVID-19 is expected to be 
                                                                 a short-term rather than 
                                                                 a long-term risk. That said, 
                                                                 it is expected that there 
                                                                 will be lasting structural 
                                                                 changes to the retail market 
                                                                 therefore, the Group's serving 
                                                                 of its customers will also 
                                                                 evolve. 
-----------------------  ------------------------------------  -------------------------------------- 
 Economic environment     The Group operates in the             The Group sells products 
                           global economy and ultimately         at all levels of the market 
                           within the retail environment         in c.160 territories worldwide 
                           with products being sold              via three distinct product 
                           to consumer end-user musicians.       categories and is working 
                           Such operations are influenced        to reduce reliance on any 
                           by global and national                single product or territory, 
                           economic factors and particularly     helped by the acquisition 
                           current is the unknown                of ADAM Audio and the more 
                           impact the global pandemic            recent acquisition of Martin 
                           caused by the coronavirus             Audio. 
                           will have. 
-----------------------  ------------------------------------  -------------------------------------- 
 Brexit                   The prospect of a free                A large proportion of product 
                           trade agreement not being             is shipped directly from 
                           in place at the end of                the manufacture to the distributors, 
                           the transition period continues       particularly in the US and 
                           to cause uncertainty as               Asia. Product destined for 
                           changes in trade relationships        continental Europe travels 
                           between Europe and the                via the UK. The Group is 
                           UK as a result of Brexit              positioning itself to be 
                           could give rise to both               able to continue to supply 
                           a supply and cost issue.              products from the UK to continental 
                           There has already been                Europe after the end of the 
                           foreign exchange volatility           transition period. The Group 
                           and the imposition of some            has previously increased 
                           additional duties and minor           selling prices in the UK 
                           disruption to the logistics           to correct the imbalance 
                           network.                              caused by the significant 
                                                                 foreign exchange rate changes. 
                                                                 The Group's continues to 
                                                                 monitor the possible impacts 
                                                                 of no-deal and plans are 
                                                                 being put in place to mitigate 
                                                                 these risks, for example 
                                                                 the rights of EU employees 
                                                                 to live and work in the UK, 
                                                                 the ability to trade on our 
                                                                 existing contractual terms, 
                                                                 how we will manage the personal 
                                                                 data of customers if the 
                                                                 UK is deemed to be a third 
                                                                 country and other matters 
                                                                 as they become known. 
-----------------------  ------------------------------------  -------------------------------------- 
 US import tariffs        The Group has product manufactured    In 2018, the Group increased 
                           in China and Malaysia.                the minimum advertised price 
                           The volatile China/US relationship    to cover the additional tariffs. 
                           has seen tariffs of between           This mitigated much of the 
                           10%-25% being imposed on              effect of the higher tariffs. 
                           most products manufactured            Additionally, the Group started 
                           in China and then rolled              to manufacture some products 
                           back partially following              in Malaysia. 
                           agreement between the two 
                           countries. The changing 
                           nature of the relationship 
                           and the subsequent retaliatory 
                           tariff impositions mean 
                           that import tariffs could 
                           be reimposed or rise further. 
-----------------------  ------------------------------------  -------------------------------------- 
 Product innovation       The market for the Group's            Research and development 
                           products is characterised             remains one of the Group's 
                           by continued evolution                largest investments. The 
                           in technology, evolving               Group has a bespoke project 
                           industry standards, changes           system that facilitates the 
                           in customer needs and frequent        operation of a rigorous, 
                           new competitive product               disciplined product introduction 
                           introductions. If the Group           process to ensure that as 
                           is unable to anticipate               far as possible the fast-changing 
                           or respond to these challenges        needs of its target markets 
                           or fails to develop and               are met. In addition, the 
                           introduce successful products         Group continuously seeks 
                           on a timely basis, it could           efficiencies and minimises 
                           have an adverse impact                costs where possible. 
                           on the Group's business 
                           and prospects. 
-----------------------  ------------------------------------  -------------------------------------- 
 Supplier concentration   The Group is dependent                The Group has supply agreements 
                           on a small number of suppliers,       with four major manufacturers. 
                           in particular its largest             The Group works with its 
                           supplier, which provides              resellers and distributors 
                           Focusrite interfaces. Failure         to ensure they are holding 
                           or material delay by its              sufficient stock levels should 
                           suppliers to perform, or              there be disruption to the 
                           failure by the Group to               supply chain and this has 
                           renew such arrangements,              been successfully tested 
                           could have a material adverse         following the recent reduction 
                           effect on the Group's business,       in industrial output levels 
                           operating results and financial       in China. In addition, the 
                           position.                             Group's largest selling product 
                                                                 line, Scarlett, is dual-sourced 
                                                                 in both China and Malaysia 
                                                                 with lines running in parallel 
                                                                 to mitigate any regional 
                                                                 risk. Relationships are long-lasting 
                                                                 and strong. Members of the 
                                                                 operations department within 
                                                                 Focusrite meet each supplier 
                                                                 three to four times per year 
                                                                 to review performance and 
                                                                 costs. 
-----------------------  ------------------------------------  -------------------------------------- 
 Customer concentration   In certain countries, including       In cases where there is a 
                           the US, the Group operates            large distributor in a significant 
                           via a single distributor              market, the Group also communicates 
                           or has large individual               with the major retailers. 
                           reseller customers. In                In addition, the Group carefully 
                           certain cases, a failure              monitors customer credit 
                           of or breakdown in the                limits and has credit insurance 
                           relationship with a key               which typically covers the 
                           reseller or distributor,              majority of the customer 
                           or even the failure of                debts outstanding at any 
                           a major customer of that              point in time. 
                           distributor, could significantly 
                           and adversely affect the 
                           Group's business. 
-----------------------  ------------------------------------  -------------------------------------- 
 Channels to market       Significant change in the             The Group or its distributors 
                           methods by which end-users            sell to both 'bricks and 
                           wish to buy Focusrite products        mortar' and e-commerce retailers 
                           could significantly affect            so that the Group can satisfy 
                           the Group's business.                 customer demand via both 
                                                                 methods. 
-----------------------  ------------------------------------  -------------------------------------- 
 Currency                 The Group is exposed to               There is a largely effective 
                           currency and exchange rate            natural hedge for USD transactions 
                           fluctuations which may                as the Group uses its generation 
                           affect the Group's revenue            of USD to buy product in 
                           and costs when reported               USD. 
                           in GBP. 
                                                                 Conversely, the Group has 
                                                                 substantial Euro revenue 
                                                                 and little cost. The Group 
                                                                 mitigates this Euro exposure 
                                                                 by entering into forward 
                                                                 foreign exchange hedging 
                                                                 contracts for the conversion 
                                                                 of Euro to GBP. 
-----------------------  ------------------------------------  -------------------------------------- 
 People                   The nature of the Group's             The Group is a leading company 
                           business requires its employees       in the UK music industry 
                           in the technical and development      and so attracts high-quality 
                           teams to be highly skilled            technical personnel. The 
                           and experienced in their              Group also attracts graduates 
                           respective fields. The                from music technology, electronics 
                           Group is dependent for                and engineering courses at 
                           its continued success on              renowned universities. The 
                           being able to attract,                Group invests in developing 
                           retain and motivate such              its employees and incentivises 
                           individuals.                          them through wide-ranging 
                                                                 share ownership incentives 
                                                                 and other employment benefits 
                                                                 to aid retention. 
-----------------------  ------------------------------------  -------------------------------------- 
 Intellectual property    The intellectual property             The Group has established 
                           and data developed by the             a programme for protecting 
                           Group is valuable and the             its intellectual property 
                           Group could be harmed by              and pursues infringements. 
                           infringement or loss.                 The Group has data and information 
                                                                 technology controls which 
                                                                 are reviewed by the Group 
                                                                 Board. Additionally, the 
                                                                 Group includes data protection 
                                                                 provisions in the contracts 
                                                                 of all Group employees and 
                                                                 requires all employees to 
                                                                 undertake annual data protection 
                                                                 training. 
-----------------------  ------------------------------------  -------------------------------------- 
 Information security     Information security and              Following the Group's detailed 
                           cyber threats are currently           review of its IT systems 
                           a priority across all industries      there has already been a 
                           and remain a key government           widespread upgrade of core 
                           agenda item.                          IT functionality including 
                                                                 cybersecurity (firewalls, 
                                                                 anti-virus, mobile device 
                                                                 management) and the implementation 
                                                                 of cloud backup processes. 
                                                                 The Group has moved all its 
                                                                 core enterprise resource 
                                                                 planning systems to the cloud 
                                                                 with robust service level 
                                                                 agreements in place to ensure 
                                                                 data availability and security. 
                                                                 The Group has also reviewed 
                                                                 its processes and procedures 
                                                                 to ensure GDPR compliance, 
                                                                 has engaged an external adviser 
                                                                 to assist with the Group's 
                                                                 privacy programme and updated 
                                                                 its cookie and privacy policies. 
                                                                 There is an improving business 
                                                                 continuity framework and 
                                                                 a dedicated internal IT support 
                                                                 team aided by external support 
                                                                 providers. 
-----------------------  ------------------------------------  -------------------------------------- 
 

FORWARD-LOOKING STATEMENTS

Certain statements in this half year report are forward looking. Although the Directors believe that their expectations are based on reasonable assumptions, any statements about future outlook may be influenced by factors that could cause actual outcomes and results to be materially different.

Condensed Consolidated Income Statement

For the six months ended 29 February 2020

 
                                                           Six months to       Six months to           Year to 
                                                Note    29 February 2020    28 February 2019    31 August 2019 
                                                             (unaudited)         (unaudited)         (audited) 
                                                                 GBP'000             GBP'000           GBP'000 
-------------------------------------------  -------  ------------------  ------------------  ---------------- 
 Revenue                                           3              49,926              40,425            84,665 
 Cost of sales                                                  (26,920)            (22,504)          (48,899) 
-------------------------------------------  -------  ------------------  ------------------  ---------------- 
 Gross profit                                                     23,006              17,921            35,766 
 Administrative expenses                                        (19,991)            (10,670)          (22,954) 
 EBITDA (non-GAAP measure)                                         9,139               8,881            17,197 
 Depreciation and amortisation                                   (2,757)             (1,630)           (3,648) 
 Non-underlying items                              5             (3,367)                                 (737) 
 Operating profit                                                  3,015               7,251            12,812 
 Finance income                                                       28                  75               246 
 Finance costs                                                     (353)               (176)              (45) 
-------------------------------------------  -------  ------------------  ------------------  ---------------- 
 Profit before tax                                                 2,690               7,150            13,013 
 Income tax expense                                6               (639)               (790)           (1,349) 
-------------------------------------------  -------  ------------------  ------------------  ---------------- 
 Profit for the period from continuing operations                  2,051               6,360            11,664 
----------------------------------------------------  ------------------  ------------------  ---------------- 
 
 Earnings per share 
 From continuing operations 
 Basic (pence per share)                           8                 3.6                11.1              20.4 
-------------------------------------------  -------  ------------------  ------------------  ---------------- 
 Diluted (pence per share)                         8                 3.5                11.0              20.1 
-------------------------------------------  -------  ------------------  ------------------  ---------------- 
 

Condensed Consolidated Statement of Other Comprehensive Income

For the six months ended 29 February 2020

 
                                                             Six months to       Six months to           Year to 
                                                          29 February 2020    28 February 2019    31 August 2019 
                                                               (unaudited)         (unaudited)         (audited) 
                                                                   GBP'000             GBP'000           GBP'000 
-----------------------------------------------------   ------------------  ------------------  ---------------- 
 Profit for the period                                               2,051               6,360            11,664 
 Items that may be reclassified subsequently to the income statement 
 Exchange differences on translation of foreign 
  operations                                                            88                (24)                42 
 Gain on forward foreign exchange contracts designated 
  and effective as a hedging instrument                              1,069              ---785             (245) 
 Tax on hedging instrument                                           (203)               (149)                47 
------------------------------------------------------  ------------------  ------------------  ---------------- 
 Total comprehensive income for the period                           3,005               6,972            11,508 
------------------------------------------------------  ------------------  ------------------  ---------------- 
 Profit attributable to: 
 Equity holders of the Company                                       3,005               6,972            11,508 
------------------------------------------------------  ------------------  ------------------  ---------------- 
                                                                     3,005               6,972            11,508 
 -----------------------------------------------------  ------------------  ------------------  ---------------- 
 

Condensed Consolidated Statement of Financial Position

 
 
                                                 Note    28 February 2020    28 February 2019    31 August 2019 
                                                              (unaudited)         (unaudited)         (audited) 
                                                                  GBP'000             GBP'000           GBP'000 
----------------------------------------------  -----  ------------------  ------------------  ---------------- 
 Assets 
 Non-current assets 
 Goodwill                                                          17,587                 419             5,271 
 Other intangible assets                          9                41,539               6,308            18,832 
 Property, plant and equipment                                      4,170               1,211             1,602 
----------------------------------------------  -----  ------------------  ------------------  ---------------- 
 Total non-current assets                         4                63,296               7,938            25,705 
----------------------------------------------  -----  ------------------  ------------------  ---------------- 
 
 Current assets 
 Inventories                                                       18,589              12,295            15,182 
 Trade and other receivables                                       18,437              12,254            18,188 
 Derivative financial instruments                 10                  881                 842                 - 
 Cash and cash equivalents                        10               12,767              26,172            15,505 
----------------------------------------------  -----  ------------------  ------------------  ---------------- 
 Total current assets                                              50,674              51,563            48,875 
----------------------------------------------  -----  ------------------  ------------------  ---------------- 
 Total assets                                                     113,970              59,501            74,580 
----------------------------------------------  -----  ------------------  ------------------  ---------------- 
 
 Equity and liabilities 
 Capital and reserves 
 Share capital                                                         58                  58                58 
 Share premium                                                        115                 115               115 
 Merger reserve                                                    14,595              14,595            14,595 
 Merger difference reserve                                       (13,147)            (13,147)          (13,147) 
 Translation reserve                                                  180                  26                92 
 Hedging reserve                                                      714                 682             (152) 
 EBT reserve                                                          (1)                 (1)               (1) 
 Retained earnings                                                 52,474              46,949            51,827 
 Equity attributable to owners of the Company                      54,988              49,277            53,387 
----------------------------------------------  -----  ------------------  ------------------  ---------------- 
 Total equity                                                      54,988              49,277            53,387 
----------------------------------------------  -----  ------------------  ------------------  ---------------- 
 
 Current liabilities 
 Trade and other payables                                          17,644               8,437            15,664 
 Current tax liabilities                                              551                 728               430 
 Provisions                                                             -                 200                 - 
 Derivative financial instruments                                       -                   -               188 
 Bank loan and overdraft                          10                    -                   -               627 
 Total current liabilities                                         18,195               9,365            16,909 
----------------------------------------------  -----  ------------------  ------------------  ---------------- 
 
 Non-current liabilities 
 Deferred tax                                                       8,147                 859             4,284 
 Bank loan and overdraft                          10               32,640                   -                 - 
 Total liabilities                                                 58,982              10,224            21,193 
----------------------------------------------  -----  ------------------  ------------------  ---------------- 
 Total equity and liabilities                                     113,970              59,501            74,580 
----------------------------------------------  -----  ------------------  ------------------  ---------------- 
 

Condensed Consolidated Statements of Changes in Equity

 
 For the six 
 months ended                                          Merger 
 29 February         Share      Share     Merger   difference   Translation    Hedging        EBT   Retained 
 2020              capital    premium    reserve      reserve       reserve    reserve    reserve   earnings     Total 
                   GBP'000    GBP'000    GBP'000      GBP'000       GBP'000    GBP'000    GBP'000    GBP'000   GBP'000 
 Balance at 1 
  September 
  2019                  58        115     14,595     (13,147)            92      (152)        (1)     51,827    53,387 
---------------  ---------  ---------  ---------  -----------  ------------  ---------  ---------  ---------  -------- 
 Profit for the 
  period                 -          -          -            -             -          -          -      2,051     2,051 
 Other 
  comprehensive 
  income for 
  the period             -          -          -            -            88        866          -          -       954 
---------------  ---------  ---------  ---------  -----------  ------------  ---------  ---------  ---------  -------- 
 Total 
  comprehensive 
  income for 
  the period             -          -          -            -            88        866          -      2,051     3,005 
---------------  ---------  ---------  ---------  -----------  ------------  ---------  ---------  ---------  -------- 
 Transactions 
 with owners of 
 the Company: 
 Share-based 
  payment 
  deferred tax 
  deduction in 
  excess of 
  remuneration 
  expense                -          -          -            -             -          -          -      (147)     (147) 
 Shares from 
  EBT exercised          -          -          -            -             -          -          -        233       233 
 Share-based 
  payments               -          -          -            -             -          -          -        225       225 
 Shares 
  withheld to 
  settle 
  employees' 
  tax 
  obligations 
  associated 
  with 
  share-based 
  payments               -          -          -            -             -          -          -      (214)     (214) 
 Dividends paid          -          -          -            -             -          -          -    (1,501)   (1,501) 
 Balance at 29 
  February 2020         58        115     14,595     (13,147)           180        714        (1)     52,474    54,988 
---------------  ---------  ---------  ---------  -----------  ------------  ---------  ---------  ---------  -------- 
 

Condensed Consolidated Statements of Changes in Equity (Continued)

 
 For the six 
 months ended                                          Merger 
 28 February         Share      Share     Merger   difference   Translation    Hedging        EBT   Retained 
 2019              capital    premium    reserve      reserve       reserve    reserve    reserve   earnings     Total 
                   GBP'000    GBP'000    GBP'000      GBP'000       GBP'000    GBP'000    GBP'000    GBP'000   GBP'000 
 Balance at 1 
  September 
  2018                  58        115     14,595     (13,147)            50         46        (1)     41,731    43,447 
---------------  ---------  ---------  ---------  -----------  ------------  ---------  ---------  ---------  -------- 
 Profit for the 
  period                 -          -          -            -             -          -          -      6,360     6,360 
 Other 
  comprehensive 
  income for 
  the period             -          -          -            -          (24)        636          -          -       612 
---------------  ---------  ---------  ---------  -----------  ------------  ---------  ---------  ---------  -------- 
 Total 
  comprehensive 
  income for 
  the period             -          -          -            -          (24)        636          -      6,360     6,972 
---------------  ---------  ---------  ---------  -----------  ------------  ---------  ---------  ---------  -------- 
 Transactions 
 with owners of 
 the Company: 
 Share-based 
  payment 
  deferred tax 
  deduction in 
  excess of 
  remuneration 
  expense                -          -          -            -             -          -          -      (303)     (303) 
 Share-based 
  payment 
  current tax 
  deduction in 
  excess of 
  remuneration 
  expense                -          -          -            -             -          -          -        303       303 
 Shares from 
  EBT exercised          -          -          -            -             -          -          -         44        44 
 Share-based 
  payments               -          -          -            -             -          -          -        162       162 
 Shares 
  withheld to 
  settle 
  employees' 
  tax 
  obligations 
  associated 
  with 
  share-based 
  payments               -          -          -            -             -          -          -      (205)     (205) 
 Premium on 
  shares 
  awarded in 
  lieu of 
  bonuses                -          -          -            -             -          -          -        175       175 
 Dividends paid          -          -          -            -             -          -          -    (1,318)   (1,318) 
 Balance at 28 
  February 2019         58        115     14,595     (13,147)            26        682        (1)     46,949    49,277 
---------------  ---------  ---------  ---------  -----------  ------------  ---------  ---------  ---------  -------- 
 

Condensed Consolidated Statements of Changes in Equity (Continued)

 
 For the year                                          Merger 
 ended 31            Share      Share     Merger   difference   Translation    Hedging        EBT   Retained 
 August 2019       capital    premium    reserve      reserve       reserve    reserve    reserve   earnings     Total 
                   GBP'000    GBP'000    GBP'000      GBP'000       GBP'000    GBP'000    GBP'000    GBP'000   GBP'000 
 Balance at 1 
  September 
  2018                  58        115     14,595     (13,147)            50         46        (1)     41,731    43,447 
---------------  ---------  ---------  ---------  -----------  ------------  ---------  ---------  ---------  -------- 
 Profit for the 
  period                 -          -          -            -             -          -          -     11,664    11,664 
 Other 
  comprehensive 
  income for 
  the period             -          -          -            -            42      (198)          -          -     (156) 
---------------  ---------  ---------  ---------  -----------  ------------  ---------  ---------  ---------  -------- 
 Total 
  comprehensive 
  income for 
  the period             -          -          -            -            42      (198)          -     11,664    11,508 
---------------  ---------  ---------  ---------  -----------  ------------  ---------  ---------  ---------  -------- 
 Transactions 
 with owners of 
 the Company: 
 Share-based 
  payment 
  deferred tax 
  deduction in 
  excess of 
  remuneration 
  expense                -          -          -            -             -          -          -      (238)     (238) 
 Share-based 
  payment 
  current tax 
  deduction in 
  excess of 
  remuneration 
  expense                -          -          -            -             -          -          -        310       310 
 Shares from 
  EBT exercised          -          -          -            -             -          -          -         46        46 
 Share-based 
  payments               -          -          -            -             -          -          -        348       348 
 Shares 
  withheld to 
  settle 
  employees' 
  tax 
  obligations 
  associated 
  with 
  share-based            -          -          -            -             -          -          -      (204)     (204) 
 Premium on 
  shares 
  awarded in 
  lieu of 
  bonuses                -          -          -            -             -          -          -        175       175 
 Dividends paid          -          -          -            -             -          -          -    (2,005)   (2,005) 
 Balance at 31 
  August 2019           58        115     14,595     (13,147)            92      (152)        (1)     51,827    53,387 
---------------  ---------  ---------  ---------  -----------  ------------  ---------  ---------  ---------  -------- 
 

Consolidated Statement of Cash Flow

For the six months ended 29 February 2020

 
                                                                 Six months to       Six months to           Year to 
                                                              29 February 2020    28 February 2019    31 August 2019 
                                                                       GBP'000             GBP'000           GBP'000 
 Cash flows from operating activities 
 Profit for the period                                                   2,051               6,360            11,664 
 Adjustments for: 
 Income tax expense                                                        639                 790             1,349 
 Net finance charge/(income)                                               325                 101             (201) 
 Loss/(profit) on disposal of property, plant and 
  equipment                                                                (1)                   -                 3 
 Amortisation of intangibles                                             3,244               1,271             2,936 
 Depreciation of property, plant and equipment                             644                 359               712 
 Movement in provisions                                                      -                 200                 - 
 Share-based payment charge                                                225                 162               348 
 Operating cash flow before movements in working capital                 7,127               9,243            16,811 
 Decrease/(increase) in trade and other receivables                      3,535               1,056           (4,203) 
 (Increase) in inventories                                               2,579               (904)             (696) 
 (Decrease)/increase in trade and other payables                       (4,222)             (2,272)             2,681 
 Operating cash flow before interest and tax paid                        9,019               7,123            14,593 
 Net interest received/(paid)                                            (155)                  75                58 
 Income tax paid                                                         (816)                (79)             (825) 
 Net cash inflow from operating activities                               8,048               7,119            13,826 
----------------------------------------------------------  ------------------  ------------------  ---------------- 
 Cash flows from investing activities 
 Purchases of property, plant and equipment                            (2,698)               (295)             (808) 
 Development of intangible assets                                      (3,251)             (1,959)           (4,135) 
 Acquisition of subsidiary, net of cash acquired                      (35,265)                   -          (14,996) 
----------------------------------------------------------  ------------------  ------------------  ---------------- 
 Net cash used in investing activities                                (41,214)             (2,254)          (19,939) 
----------------------------------------------------------  ------------------  ------------------  ---------------- 
 Cash flows from financing activities 
 Issue of equity shares                                                      1                  14                 - 
 New bank and other loans raised                                        32,640                   -                 - 
 Equity dividends paid                                                 (1,501)             (1,318)           (2,005) 
 Net cash generated/(used) in financing activities                      31,140             (1,304)           (2,005) 
----------------------------------------------------------  ------------------  ------------------  ---------------- 
 Net increase in cash and cash equivalents                             (2,026)               3,561           (8,118) 
 Net foreign exchange movement                                            (85)               (200)               185 
 Cash and cash equivalents at beginning of the period                   14,878              22,811            22,811 
----------------------------------------------------------  ------------------  ------------------  ---------------- 
 Cash and cash equivalents at end of the period                         12,767              26,172            14,878 
----------------------------------------------------------  ------------------  ------------------  ---------------- 
 

Notes to the Condensed Consolidated Interim Financial Statements

   1.      Basis of preparation and significant accounting policies 

Focusrite plc (the 'Company') is a company incorporated in the UK. The condensed consolidated interim financial statements ('interim financial statements') as at and for the six months ended 29 February 2020 comprised the Company and its subsidiaries (together referred to as the 'Group').

The Group is a business engaged in the development, manufacture and marketing of professional audio and electronic music products.

Statement of compliance

The interim financial statements are for the six months ended 29 February 2020 and are presented in pounds Sterling ('GBP'). This is the functional currency of the Group. The statement is presented to the nearest GBP1,000 ('GBP'000'). The interim financial report has been prepared in accordance with the International Financial Reporting Standards ('IFRS'), International Accounting Standards ('IAS') and interpretations currently endorsed by the International Accounting Standards Board ('IASB') and its committees as adopted by the EU and as required to be adopted by AIM listed companies. AIM listed companies are not required to comply with IAS 34 'Interim Financial Reporting' and accordingly the Company has taken advantage of this exemption. They do not include all the information required for a complete set of IFRS financial statements. However, selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in the Group's financial position and performance since the last annual consolidated financial statements as at and for the year ended 31 August 2019.

These interim financial statements were authorised for issue by the Company's Board of Directors on 12 May 2020.

The comparative figures for the financial year ended 31 August 2019 are not the Company's statutory accounts for that financial year. Those accounts have been reported on by the Company's auditor and delivered to the registrar of companies. The report of the auditor was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

Significant accounting policies

The interim financial statements have been prepared in accordance with the accounting policies adopted in the Group's financial statements for the year ended 31 August 2019, with the exception of the following:

Adoption of IFRS 16 'Leases'

IFRS 16 is effective for annual periods beginning on or after 1 January 2019. The new standard replaces existing leases guidance, principally IAS 17 'Leases'.

IFRS 16 introduces a single, on-balance sheet lease accounting model for lessees. A lessee recognises a right -- of -- use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. There are recognition exemptions for short-term leases of 12 months or less and leases of low-value items. Lessor accounting remains similar to the current standard - i.e. lessors continue to classify leases as finance or operating leases.

The Group applied IFRS 16 initially on 1 September 2019, using the modified retrospective approach. IFRS 16 has a number of practical expedients for first time adoption. The Group has utilised the following practical expedients at the transition date:

-- apply a single discount rate to a portfolio of leases with reasonably similar characteristics;

-- exclude initial direct costs from the measurement of the right-of-use asset on transition;

-- use hindsight to determine the term;

-- use onerous contract assessment under IAS 37 'Provisions, Contingent Liabilities and Contingent Assets' immediately before transition instead of performing an impairment review under IAS 36 'Impairment'; and

-- for leases with a remaining term of less than 12 months at 1 September 2019, the short-term lease exemption in IFRS 16 has been taken.

Right-of-use assets and lease liabilities of approximately GBP2.4 million have been recognised by the Group at 1 September 2019. The impact on net profit after tax is not material. However, adjusted EBITDA has increased by GBP0.4 million in HY20 as the operating lease payments were previously included in HY19 in EBITDA as an administrative expense, but the amortisation of the right-of-use assets and interest on the lease liability will be excluded from this measure. The impact on operating profit is not material.

Repayment of the principal portion of the lease liabilities will be classified as cash flows from financing activities, while currently these payments are classified as operating cash flows. In HY20, the value of these payments was approximately GBP0.4 million.

   1.1          Basis of consolidation 

The consolidated financial statements comprise the financial statements of the Company and subsidiaries controlled by the Company drawn up to 29 February 2020.

   1.2       Subsidiaries 

Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, the Group takes into consideration potential voting rights that are currently exercisable. The acquisition date is the date on which control is transferred to the acquirer. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date control ceases.

   1.3       Going concern 

The Board of Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, the interim statements have been prepared on a going concern basis.

The COVID-19 virus has caused upheaval worldwide with many businesses experiencing a significant decline in revenue. The Directors have prepared projected cash flow information (base case forecasts) for the period ending twelve months from the date of their approval of this interim statement. These projections did not take full account of the improvements the Group is experiencing as a result of the impact of COVID-19 (see below). On the basis of this cash flow information, the Directors consider that at the end of the 12-month period, the Group will have reduced its current net debt position from GBP19.9m (the Group's RCF facility of GBP40.0 million is due for renewal in December 2024). Throughout the period the forecast cash flow information indicates that the Group will comfortably comply with the leverage and interest cover covenants contained within the facility.

Management's view is that a severe yet plausible downside assumption against their base case forecasts is estimated to be a revenue shortfall of 30% for a 6-month period commencing May 2020. This model assumes that purchases of stock will, in time, reduce to reflect reduced sales and the Group will respond to the shortfall by taking reasonable steps to reduce overheads within its control. Even at that level, the Group would be expected to remain well within the terms of its loan facility with the leverage covenant (net debt to adjusted EBITDA) in the period not exceeding 1.0 compared to the maximum of 2.5. The Group's net debt position under this severe plausible downside scenario is still expected to improve at the end of the 12-month period.

In their sensitivity analyses, the Directors estimate that if the Group were to experience a shortfall in revenue of greater than 60% for six months, this could result in leverage beyond that permitted by the current facility by November 2020, despite consequential reductions in the purchases of stock and overheads. As an additional measure, the Directors could also stop the dividend. However, the Directors view is that this scenario of a revenue shortfall of greater than 60% is not plausible.

In reality, the Group is currently experiencing record levels of consumer registrations and customer demand, partially as a result of the COVID-19 restrictions on people's movement, and therefore revenue growth has accelerated since the half year end. This is evidenced by improvements in the Group's net debt position which had reduced by GBP4 million to GBP16 million at 30 April 2020. Consequently, the directors are confident that the company will have sufficient funds to continue to meet its liabilities as they fall due for at least 12 months from the date of approval of the interim statements and therefore have prepared the interim statements on a going concern basis.

   1.4       Earnings per share 

The Group presents basic and diluted earnings per share ('EPS') data for its ordinary shares. Basic EPS is calculated by dividing the profit attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. For diluted EPS, the weighted average number of ordinary shares is adjusted for the dilutive effect of potential ordinary shares arising from the exercise of granted share options.

   1.5       Accounting estimates and judgements 

In application of the Group's accounting policies, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

In preparing these condensed consolidated interim financial statements, the significant judgements made by the Directors in applying the Group's accounting policies and key sources of estimation uncertainty were the same as those applied to the Group's financial statements for the year ended 31 August 2019 with the addition of judgements relating to the acquisition of Martin Audio in December 2019.

   1.6       Foreign currencies 

The individual financial statements of each subsidiary are presented in the currency of the primary economic environment in which it operates (its functional currency). Sterling is the predominant functional currency of the Group and presentation currency for the consolidated financial information.

In preparing the financial statements of the individual companies, transactions in currencies other than the entity's functional currency (foreign currencies) are recognised at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences are recognised in profit or loss in the period in which they arise except for:

-- exchange differences on transactions entered into to hedge certain foreign currency risks; and

-- exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur (therefore forming part of the net investment in the foreign operation), which are recognised initially in other comprehensive income and reclassified from equity to profit or loss on disposal or partial disposal of the net investment.

For the purpose of presenting consolidated financial information, the assets and liabilities of the Group's foreign operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the date of the transactions are used. Exchange differences arising, if any, are recognised in the income statement.

   1.7       Hedge accounting 

The Group has adopted hedge accounting for qualifying transactions. Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair value at each balance sheet date. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship. The Group designates certain derivatives as either hedges of the fair value of recognised assets or liabilities of firm commitments (fair value hedges), hedges of highly probable forecast transactions or hedges of foreign currency risk of firm commitments (cash flow hedges), or hedges of net investments in foreign operations.

Cash flow hedges

Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecast transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in the hedging reserve. Any ineffective portion of the hedge is recognised immediately in the income statement.

For cash flow hedges, the associated cumulative gain or loss is removed from equity and recognised in the income statement in the same period or periods during which the hedged forecast transaction affects profit or loss.

When a hedging instrument expires or is sold, terminated or exercised, or the entity revokes designation of the hedge relationship but the hedged forecast transaction is still expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, the cumulative unrealised gain or loss recognised in equity is recognised in the income statement immediately.

A derivative with a positive fair value is recognised as a financial asset whereas a derivative with a negative fair value is recognised as a financial liability.

   2.            Acquisition of a subsidiary 

On 30 December 2019, the Group acquired 100% of the shares and voting interests in Optimal Audio Group Limited (hereafter referred to as Martin Audio), comprising subsidiaries Martin Audio Limited and Martin Audio US LLC and 18 shares (10%) of associated company Martin Audio Japan Inc. The total consideration paid was GBP39,610,000 of which GBP33,000,000 was funded through use of the Group's Revolving Credit Facility and the remainder was satisfied in cash. The Group paid GBP372,000 to arrange the credit facility. There was no deferred consideration.

Martin Audio, designs, manufactures and distributes premium professional sound systems across the globe. It employs some 74 people worldwide, with the vast majority based at its head o ce and co-located manufacturing facilities. Martin Audio is recognised as a market leader and places great emphasis on product design and innovation to sustain and drive growth with a strong product roadmap in place.

By extending the Group's business into new products and markets, which complement its existing o erings, the acquisition is strategically aligned with the Company's previously communicated aims to grow the core customer base, expand into new markets and increase lifetime value for customers.

For the two-month period between the acquisition and 29 February 2020 Martin Audio contributed revenue of GBP4,526,000 and a profit before tax of GBP333,000 to the Group's interim results. If the acquisition had occurred on 1 September 2019, management estimates that Martin Audio's revenue would have been GBP13,405,000 and profit before tax for the half year would have been GBP1,563,000. In determining these amounts management has assumed that the fair value adjustments, determined provisionally, that arose on the date of acquisition would have been the same if the acquisition had occurred on 1 September 2019.

Acquisition-related costs

The Group incurred acquisition-related costs of GBP1,721,000 on legal fees and due diligence costs. These have been included in non-underlying costs.

Identifiable assets acquired and liabilities assumed

The following table summarises the recognised amounts of assets acquired, and liabilities assumed at the date of acquisition:

 
 Recognised values on acquisition            GBP'000 
-----------------------------------------   -------- 
 Brand                                         6,800 
 Patent designs                               11,300 
 Patent designs in development                 4,600 
------------------------------------------  -------- 
 Other intangible assets                      22,700 
 Property, plant and equipment                   514 
 Cash                                          4,345 
 Inventories                                   5,986 
 Trade and other receivables                   3,783 
 Deferred tax                                (3,859) 
 Trade and other payables                    (6,175) 
------------------------------------------  -------- 
 Net identifiable assets and liabilities 
  at fair value                               27,294 
 Goodwill recognised on acquisition           12,316 
------------------------------------------  -------- 
 Consideration paid                           39,610 
------------------------------------------  -------- 
 

Measurement of fair values

The valuation techniques used for measuring the fair value of material assets acquired were as follows:

 
 Assets acquired                                     Valuation technique 
 Property, plant and equipment                       Cost approach 
                                                    ------------------------------------------------------ 
 Intangible assets- Product design and development   Market approach (cost to replace) 
                                                    ------------------------------------------------------ 
 Intangible assets- Brand                            Income approach (multi-period excess earnings method) 
                                                    ------------------------------------------------------ 
 Inventories                                         Cost approach 
                                                    ------------------------------------------------------ 
 

The trade receivables amounts included within 'trade and other receivables' comprise gross contractual amounts due of GBP3,390,000, of which GBP455,000 was expected to be uncollectable at the date of acquisition.

Fair values measure on a provisional basis

Martin Audio was acquired only two months prior to the end of this reporting period. If new information is obtained within one year of the date of acquisition about the facts and circumstances that existed at the date of acquisition that identifies adjustments to the above amounts or any additional provisions that existed at the date of acquisition, then the accounting for the acquisition will be revised.

Goodwill

The goodwill is attributable to:

   --    the skills and technical talent of the Martin Audio workforce; 
   --    worldwide reputation based on patent design and technological innovation; 
   --    alignment to the Group's existing customer base; and 

-- strong strategic fit to grow the core customer base; and expand into new markets and increase lifetime value for customers

Intangible assets sensitivity analysis

In assessing the estimated useful life of the intangible assets, management considered the sensitivity in the estimated life of the brand and patent development. The following table details the sensitivity to a one-year increase and decrease in the amortisation period, and ultimately reflecting the impact on the net profit (or loss).

Amortisation is calculated based on the constant that brand is recognised at cost of GBP6,800,000, patented design at GBP11,200,000 and patented design in development at GBP4,600,000.

 
                                   Brand                      Patent designs                Patent designs in 
                                                                                                development 
                       19 years   20 years   21 years   7 years   8 years   9 years   10 years   11 years   12 years 
                       GBP'000    GBP'000    GBP'000    GBP'000   GBP'000   GBP'000   GBP'000    GBP'000    GBP'000 
 -------------------                                             --------  -------- 
 Annual amortisation     358        341        324       1,614     1,413     1,256      460        418        383 
--------------------  ---------  ---------             --------  --------  --------             ---------  --------- 
 Impact on profit        (17)        -          17       (201)       -        157       (42)        -          35 
--------------------  ---------  ---------  ---------  --------  --------  --------  ---------  ---------  --------- 
 
 

The following table assesses the impact of differing estimated useful lives of products on the valuation of the intangible assets.

 
                                   Brand                      Patent designs                Patent designs in 
                                                                                                development 
                       19 years   20 years   21 years   7 years   8 years   9 years   10 years   11 years   12 years 
                       GBP'000    GBP'000    GBP'000    GBP'000   GBP'000   GBP'000   GBP'000    GBP'000    GBP'000 
 -------------------                                             --------  -------- 
 Fair Value                        6,800                          11,300                          4,600 
--------------------  ---------  ---------             --------  --------  --------             ---------  --------- 
 Impact on valuation    (116)        -         143       (274)       -        143      (130)        -          74 
--------------------  ---------  ---------  ---------  --------  --------  --------  ---------  ---------  --------- 
 
 

Based on the above, we concluded that the impact would not be material, and therefore a more detailed sensitivity analysis has not been done.

   3.            Revenue 

An analysis of the Group's revenue is as follows:

 
                                  Six months to February                Six months to February 
                                           2020                                  2019 
                        -----------------------------------------  -------------------------------  -------- 
                            EMEA      North        Rest     Total      EMEA      North        Rest     Total 
                                    America    of World                        America    of World 
                         GBP'000    GBP'000     GBP'000   GBP'000   GBP'000    GBP'000     GBP'000   GBP'000 
----------------------  --------  ---------  ----------  --------  --------  ---------  ----------  -------- 
 Focusrite                11,748     10,077       3,749    25,574    11,975     10,580       3,753    26,308 
 Focusrite Pro               607        853         424     1,884       642      1,562         390     2,594 
                        --------  ---------  ----------  --------  --------  ---------  ----------  -------- 
 Focusrite segment        12,355     10,930       4,173    27,458    12,617     12,142       4,143    28,902 
 Novation segment          4,521      3,506       1,908     9,935     5,002      2,821       2,004     9,827 
 ADAM Audio                3,700      2,205       1,136     7,041         -          -           -         - 
 Martin Audio              1,573      1,453       1,500     4,526         -          -           -         - 
 Distribution segment        966          -           -       966     1,696          -           -     1,696 
----------------------  --------  ---------  ----------  --------  --------  ---------  ----------  -------- 
 Total                    23,115     18,094       8,717    49,926    19,315     14,963       6,147    40,425 
----------------------  --------  ---------  ----------  --------  --------  ---------  ----------  -------- 
 
 
 
                                   Year to August 2019 
                        ----------------------------------------- 
                            EMEA      North        Rest     Total 
                                    America    of World 
                         GBP'000    GBP'000     GBP'000   GBP'000 
----------------------  --------  ---------  ----------  -------- 
 Focusrite                22,059     26,366       9,219    57,644 
 Focusrite Pro             1,316      2,537         851     4,704 
                        --------  ---------  ----------  -------- 
 Focusrite segment        23,375     28,903      10,070    62,348 
 Novation segment          7,096      6,684       3,939    17,719 
 ADAM Audio                  714        758         278     1,750 
 Distribution segment      2,848          -           -     2,848 
----------------------  --------  ---------  ----------  -------- 
 Total                    34,033     36,345      14,287    84,665 
----------------------  --------  ---------  ----------  -------- 
 
   4.            Operating segments 

Products and services from which reportable segments derive their revenues

Information reported to the Group's Chief Executive Officer (who has been determined to be the Group's Chief Operating Decision Maker) for the purposes of resource allocation and assessment of segment performance is focused on the main product groups which the Group sells. While the results of Novation and Ampify are reported separately to the Board, they meet the aggregation criteria set out in IFRS 8 'Operating Segments'. The Group's reportable segments under IFRS 8 are therefore as follows:

Focusrite - Sales of Focusrite and Focusrite Pro branded products

Novation - Sales of Novation and Ampify branded products

Distribution - Distribution of third-party brands, including

KRK speakers, Stanton, Cerwin Vega,            Cakewalk and sE Electronics 

ADAM Audio - Sale of ADAM Audio products. Only applies after acquisition on 16 July 2019

Martin Audio - Sale of Martin Audio products. Only applies after acquisition on 30 December 2019

The revenue and profit generated by each of the Group's operating segments are summarised as follows:

 
                                                                         Six months to                         Year to 
                                                         Six months to     28 February                       31 August 
                                                      29 February 2020            2019                            2019 
                                                           (unaudited)     (unaudited)                       (audited) 
                                                               GBP'000         GBP'000                         GBP'000 
--------------------------------------------------  ------------------  --------------  ------------------------------ 
 Revenue from external customers 
 Focusrite                                                      25,574          26,308                          57,644 
 Focusrite Pro                                                   1,884           2,594                           4,704 
 Novation                                                        9,935           9,827                          17,719 
 ADAM Audio                                                      7,041               -                           1,750 
 Martin Audio                                                    4,526               -                               - 
 Distribution                                                      966           1,696                           2,848 
 Total                                                          49,926          40,425                          84,665 
--------------------------------------------------  ------------------  --------------  ------------------------------ 
 Segment profit 
 Focusrite                                                      13,203          13,219                          28,785 
 Focusrite Pro                                                   1,137           1,631                           2,908 
 Novation                                                        5,073           5,013                           8,680 
 ADAM Audio                                                      3,856               -                             159 
 Martin Audio                                                    1,943               -                               - 
 Distribution                                                      241             424                             807 
--------------------------------------------------  ------------------  --------------  ------------------------------ 
                                                                25,453          20,287                          41,339 
 Central distribution costs and administrative 
  expenses                                                    (19,071)        (13,036)                        (27,790) 
 Non-underlying items                                          (3,367)               -                           (737) 
 Operating profit                                                3,015           7,251                          12,812 
 Finance income                                                     28              75                             246 
 Finance costs                                                   (353)           (176)                            (45) 
--------------------------------------------------  ------------------  --------------  ------------------------------ 
 Profit before tax                                               2,690           7,150                          13,013 
 Tax                                                             (639)           (790)                         (1,349) 
 Profit after tax                                                2,051           6,360                          11,664 
--------------------------------------------------  ------------------  --------------  ------------------------------ 
 

Segment profit represents the profit earned by each segment without allocation of the share of central administration costs, including Directors' salaries, finance income and finance costs, and income tax expense. This is the measure reported to the Group's Chief Executive Officer for the purpose of resource allocation and assessment of segment performance.

Central administration costs comprise principally the employment-related costs and other overheads incurred by the Group. Also included within central administration costs is the charge relating to the share option scheme of GBP225,000 for the six-month period to 29 February 2020 (six months to 28 February 2019: GBP162,000; year to 31 August 2019: GBP348,000).

Segment net assets and other segment information

Management does not make use of segmental data relating to net assets and other balance sheet information for the purposes of monitoring segment performance and allocating resources between segments. Accordingly, other than the analysis of the Group's non-current assets by region shown below, this information is not available for disclosure in the consolidated financial information.

The Group's non-current assets, analysed by region, were as follows:

 
                                   29 February   28 February                        31 August 
                                          2020          2019                             2019 
                                   (unaudited)   (unaudited)                        (audited) 
                                       GBP'000       GBP'000                          GBP'000 
--------------------------------  ------------  ------------  ------------------------------- 
 Non-current assets 
 US                                        124            68                              124 
 Europe, Middle East and Africa         61,464         7,335                           24,900 
 Rest of World                           1,708           535                              681 
 Total non-current assets               63,296         7,938                           25,705 
--------------------------------  ------------  ------------  ------------------------------- 
 
   5.            Non-Underlying Costs 

The following non-underlying costs have been declared in the period

 
                                               29 February   28 February   31 August 
                                                      2020          2019        2019 
                                               (unaudited)   (unaudited)   (audited) 
                                                   GBP'000       GBP'000     GBP'000 
--------------------------------------------  ------------  ------------  ---------- 
 Non-underlying costs 
 Acquisition Costs                                   1,813             -         737 
 Amortisation of Acquired Intangible Assets          1,144             -           - 
 Other                                                 410             -           - 
 Total non-underlying costs                          3,367             -         737 
--------------------------------------------  ------------  ------------  ---------- 
 

Acquisition costs in the six months to 29 February 2020 included costs of GBP1,721,000 relating to Martin Audio and additional costs of GBP92,000 relating to the acquisition of ADAM Audio in July 2019 not previously accrued for. Other costs relate largely to the costs of people changes.

   6.            Taxation 

The tax charge for the six months to 29 February 2020 is based on the estimated tax rate for the full year in each jurisdiction.

   7.            Dividends 

The following equity dividends have been declared:

 
                                                                                                               Year to 
                                                     Six months to                    Six months to     31 August 2019 
                                      29 February 2020 (unaudited)     28 February 2019 (unaudited)          (audited) 
--------------------------------  --------------------------------  -------------------------------  ----------------- 
 Dividend per qualifying 
  ordinary share                                               nil                            1.20p              3.80p 
--------------------------------  --------------------------------  -------------------------------  ----------------- 
 

In light of the highly unusual circumstances caused by the COVID-19 virus the Board has decided to defer the declaration of a dividend until later in 2020.

Du ring the period, the Company paid a final dividend in respect of the year ended 31 August 2019 of 2.60 pence per share, amounting to GBP1,501,000.

   8.            Earnings per share 

Reported EPS

The calculation of the basic and diluted EPS is based on the following data:

 
                                                           Six months to                                       Year to 
                                                             29 February        Six months to                31 August 
                                                                    2020     28 February 2019                     2019 
                                                             (unaudited)          (unaudited)                (audited) 
 Earnings                                                        GBP'000              GBP'000                  GBP'000 
------------------------------------------------------  ----------------  -------------------  ----------------------- 
 Earnings for the purposes of basic and diluted EPS 
  being net profit for the period                                  2,051                6,360                   11,664 
 Non-underlying items                                              3,367                    -                      737 
 Tax on non-underlying items                                           -                    -                        - 
------------------------------------------------------  ----------------  -------------------  ----------------------- 
 Total underlying profit for adjusted EPS calculation              5,418                6,360                   12,401 
------------------------------------------------------  ----------------  -------------------  ----------------------- 
 
 
 
                                                           Six months to        Six months to                  Year to 
                                                             29 February          28 February                31 August 
                                                                    2020                 2019                     2019 
                                                                  number               number                   number 
  Number of shares                                                  '000                 '000                     '000 
------------------------------------------------------  ----------------  -------------------  ----------------------- 
 Weighted average number of ordinary shares for the 
  purposes of basic EPS calculation                               57,537               57,222                   57,221 
 Effect of dilutive potential ordinary shares: 
 EMI share option scheme and unapproved share option 
  plan                                                               733                  856                      824 
 Weighted average number of ordinary shares for the 
  purposes of diluted EPS calculation                             58,270               58,078                   58,045 
------------------------------------------------------  ----------------  -------------------  ----------------------- 
 
 EPS                                                               Pence                Pence                    Pence 
------------------------------------------------------  ----------------  -------------------  ----------------------- 
 Basic EPS                                                           3.6                 11.1                     20.4 
 Diluted EPS                                                         3.5                 11.0                     20.1 
 Adjusted basic EPS                                                  9.4                 11.1                     21.7 
 Adjusted diluted EPS                                                9.3                 11.0                     21.4 
------------------------------------------------------  ----------------  -------------------  ----------------------- 
 

At 29 February 2020, the total number of ordinary shares issued and fully paid was 58,111,639. This included 383,114 shares held by the Employee Benefit Trust ('EBT') to satisfy options vesting in future years. The operation of this EBT is funded by the Group so the EBT is required to be consolidated, with the result that the weighted average number of ordinary shares for the purpose of the basic EPS calculation is the net of the weighted average number of shares in issue (58,111,639) less the weighted average number of shares held by the EBT (574,649). It should be noted that the only right relinquished by the Trustees of the EBT is the right to receive dividends. In all other respects, the shares held by the EBT have full voting rights.

The effect of dilutive potential ordinary share issues is calculated in accordance with IAS 33 and arises from the employee share options currently outstanding, adjusted by the profit element as a proportion of the average share price during the period.

   9.            Other Intangible Assets 
 
                 Intellectual     Internally       Acquired   Licences   Trademark        Computer    Brands     Total 
                     property      Generated    Development                               software 
                                 Development          costs 
                                       costs 
 
                      GBP'000        GBP'000        GBP'000    GBP'000     GBP'000         GBP'000   GBP'000   GBP'000 
--------------  -------------  -------------  -------------  ---------  ----------  --------------  --------  -------- 
 Cost 
 At 1 
  September 
  2018                    495         18,336              -         89         286             857         -    20,063 
 Additions - 
  products 
  previously 
  under 
  development              91              -              -         14         136             151         -       392 
 Additions - 
  products 
  developed 
  during the 
  year                      -          2,934              -          -           -               -         -     2,934 
 Additions - 
  from 
  development 
  in progress               -            887                         -           -               -         -       887 
 Additions 
  through 
  business 
  combination               -              -          4,485          -           -               -     7,500    11,985 
 Disposals               (50)        (2,495)              -          -           -               -         -   (2,545) 
--------------  -------------  -------------  -------------  ---------  ----------  --------------  --------  -------- 
 At 1 
  September 
  2019                    536         19,662          4,485        103         422           1,008     7,500    33,716 
--------------  -------------  -------------  -------------  ---------  ----------  --------------  --------  -------- 
 
 
                  Intellectual     Internally       Acquired   Licences    Trademark        Computer   Brands    Total 
                      property      Generated    Development                                software 
                                  Development          costs 
                                        costs 
 At 1 
  September 
  2019                     536         19,662          4,485        103          422           1,008    7,500   33,716 
 Additions - 
  products 
  previously 
  under 
  development               38              -              -         57          192             399        -      686 
 Additions - 
  products 
  developed 
  during the 
  period                     -          1,267              -          -            -               -        -    1,267 
 Additions - 
  from 
  development 
  in progress                -          1,298              -          -            -               -        -    1,298 
 Additions 
  through 
  business 
  combination                -              -         15,900          -            -               -    6,800   22,700 
 Disposals                   -              -              -          -          (1)               -        -      (1) 
 At 29 
  February 
  2020                     574         22,227         20,385        160          613           1,407   14,300   59,666 
--------------  --------------  -------------  -------------  ---------  -----------  --------------  -------  ------- 
 
 
                  Intellectual     Internally       Acquired   Licences   Trademark        Computer   Brands     Total 
                      property      Generated    Development                               software 
                                  Development          costs 
                                        costs 
 Amortisation 
 At 1 
  September 
  2018                     208         13,695              -         88         114             338        -    14,443 
 Charge for 
  the year                 145          2,186            110          7         155             238       95     2,936 
 Eliminated on 
  disposal                   -        (2,495)              -          -           -               -        -   (2,495) 
 At 1 
  September 
  2019                     353         13,386            110         95         269             576       95    14,884 
 Charge for 
  the period                84          1,837            519         10          78              91      625     3,244 
 Eliminated on 
  disposal                   -              -              -          -         (1)               -        -       (1) 
 At 29 
  February 
  2020                     437         15,223            629        105         346             667      720    18,127 
--------------  --------------  -------------  -------------  ---------  ----------  --------------  -------  -------- 
 
 
                   Intellectual     Internally       Acquired   Licences   Trademark        Computer   Brands    Total 
                       property      Generated    Development                               software 
                                   Development          costs 
                                         costs 
 Carrying 
 amount 
 At 29 February 
  2020                      137          7,004         19,756         55         267             740   13,580   41,539 
---------------  --------------  -------------  -------------  ---------  ----------  --------------  -------  ------- 
 At 31 August 
  2019                      183          6,276          4,375          8         153             432    7,405   18,832 
---------------  --------------  -------------  -------------  ---------  ----------  --------------  -------  ------- 
 
   10.          Financial instruments 

The fair value of the Group's derivative financial instruments is calculated using the quoted prices. Where such prices are not available, a discounted cash flow analysis is performed using applicable yield curve for the duration of the instruments for non-optional derivatives, and option pricing model for optional derivatives. Foreign currency forward contracts are measured using quoted forward exchange rates and yield curves derived from quoted interest rates matching maturities of the contract.

IFRS 13 'Fair Value Measurements' requires the Group's derivative financial instruments to be disclosed at fair value and categorised in three levels according to the inputs used in the calculation of their fair value.

Financial instruments carried at fair value should be measured with reference to the following levels:

-- Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;

-- Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or

liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

-- Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

The financial instruments held by the Group that are measured at fair value all related to financial assets/(liabilities) measured using a Level 2 valuation method.

The fair value of financial assets and liabilities held by the Group are:

 
 
                                                        29 February 2020            28 February 2019    31 August 2019 
                                                             (unaudited)                 (unaudited)         (audited) 
                                                                 GBP'000                     GBP'000           GBP'000 
--------------------------------------------  --------------------------  --------------------------  ---------------- 
 Financial assets 
 Amortised cost 
 Cash and cash equivalents                                        12,767                      26,172            15,505 
 Trade and other receivables                                      16,306                      11,533            16,181 
 Designated cash flow hedge relationships 
 Derivative financial assets designated and 
  effective as cash flow hedging instruments                         881                         842                 - 
                                                                  29,954                      38,547            31,686 
--------------------------------------------  --------------------------  --------------------------  ---------------- 
 Financial liabilities 
 Designated cash flow hedge relationships 
 Derivative financial liabilities designated 
  and effective as cash flow                                           -                           -               188 
 Amortised cost 
 Trade and other payables                                          9,133                       5,326             8,953 
 Bank loan and overdraft                                          32,640                           -               627 
                                                                  41,773                       5,326             9,768 
--------------------------------------------  --------------------------  --------------------------  ---------------- 
 

Independent Review Report to Focusrite plc

Conclusion

We have been engaged by the company to review the condensed set of financial statements in the half-yearly report for the six months ended 29 February 2020 which comprises Condensed Consolidated Income Statement, Condensed Consolidated Statement of Other Comprehensive Income, Condensed Consolidated Statement of Financial Position, Condensed Consolidated Statements of Changes in Equity, Consolidated Statement of Cash Flow and the related explanatory notes.

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly report for the six months ended 29 February 2020 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted by the EU and the AIM Rules.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. We read the other information contained in the half-yearly report and consider whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Directors' responsibilities

The half-yearly report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly report in accordance with the AIM Rules.

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with International Financial Reporting Standards as adopted by the EU. The directors are responsible for preparing the condensed set of financial statements included in the half-yearly financial report in accordance with IAS 34 as adopted by the EU.

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly report based on our review

The purpose of our review work and to whom we owe our responsibilities

This report is made solely to the company in accordance with the terms of our engagement. Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached.

Michael Froom

for and on behalf of KPMG LLP

Chartered Accountants

One Snowhill

Snow Hill Queensway

Birmingham

B4 6GH

12 May 2020

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

END

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