Condensed consolidated cash flow statement

for the period ended 31 December 2019 (continued)

*Refer to Note 20.

The cash and bank balances of $5.1million on the face of the balance sheet includes restricted cash amounting to $51,000 which is excluded from the cash flow statement.

The net cash outflow for the purchases of property, plant and equipment during the financial is as follows:

Reconciliation of bank borrowings arising from financing activities:

Notes to interim financial statements

1.    General information

The Company was incorporated and registered as a private limited company in Bermuda, under the Companies (Bermuda) Law 1981. The Company is listed on the Main Market of the London Stock Exchange.

The Company is engaged principally in the business of investment holding whilst the principal activities of the rest of the Group are the production, marketing and distribution of speciality natural ingredients based upon high purity stevia.

The unaudited condensed consolidated interim financial statements have been authorised for issue by the Board of Directors on 8 April 2020.

The prior period financial position and comprehensive income have been restated to correct errors with respect of revenue, inventory and cost of goods sold. Although there was no impact to our actual cash generation, the Group has restated the statement of cash flows to reflect the impact of these changes on profit and other relevant financial statement line items. Please refer to Note 20 for additional details.

2.    Basis of preparation

The condensed consolidated financial information comprises the unaudited interim financial information for the six months to 31 December 2019 and 31 December 2018. The condensed consolidated interim financial statements has been prepared on a going concern basis in accordance with IAS 34, "Interim Financial reporting" as issued by International Accounting Standards Board ("IASB") and the Disclosure and Transparency Rules issued by the Financial Conduct Authority.

The condensed consolidated interim financial statement does not include all the notes of the type normally included in an annual financial report. Accordingly, the condensed consolidated interim financial statements should be read in conjunction with the annual report for the year ended 30 June 2019 and any public announcements made by PureCircle Limited during the interim reporting period.

Changes in accounting policy and disclosures

This condensed consolidated information has been prepared under the historical cost convention and on a basis consistent with the IFRS accounting policies as set out in the Annual Report for the year ended 30 June 2019, except that the Group has adopted the following new standard that are first effective for the current accounting period of the Group:

a)    IFRS 16, "Leases" (effective from 1 July 2019) supersedes IAS 17 "Leases" and the related interpretations. IFRS 16 eliminates the classification of leases by the lessee as either finance leases or operating leases. IFRS 16 introduces a single accounting model, requiring the lessee to recognise the "right-of-use" of the underlying asset and the lease liability reflecting future lease payment liabilities in the statement of financial position. The right-of-use asset is depreciated in accordance with the principles in IFRS 116 "Property, Plant and Equipment" and the lease liability is accreted over time with interest expense recognised in the statement of comprehensive income.

The Group will adopt IFRS 16 retrospectively from 1 July 2019, via the simplified transition approach and will therefore not restate the comparatives for the 2018 reporting period, as permitted under the specific transitional provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules will therefore be recognised in the opening consolidated statement of financial position on 1 July 2019.

Key judgements and estimates made in calculating the initial impact of adoption include assessing whether arrangements contain a lease, determining the lease term, and calculating the discount rate. The lessee's incremental borrowing rate applied to the lease liabilities on 1 July 2019 will be a range of 4.0% to 12.1%.

On adoption of IFRS 16, the Group will recognise lease liabilities in relation to leases which had previously been classified as "operating leases" under the principles of IAS 17. These liabilities are measured at the present value of the remaining lease payments.

On a lease-by-lease basis, the Group measures the associated right-of-use asset on a retrospective basis either at its carrying amount as if the new rules had always been applied or at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the statement of financial position as at 30 June 2019.

In applying IFRS 16 for the first time, the Group will apply the following practical expedients:

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

-      Reliance on previous assessments on whether leases are onerous;

-      The accounting for operating leases with remaining lease terms of less than 12 months as short term leases as at the date of initial application;

-      The exclusion of initial direct costs for the measurement of the right-of-use assets at the date of initial application; and

-      The use of hindsight in determining the lease terms where the contracts contain options to extend or terminate the leases. The Group has also elected not to reassess whether a contract is, or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date, the Group relied on its assessment made by applying IFRS 117 and IFRIC 4 "Determining whether an Arrangement contains a Lease".

The Group will recognise new assets and liabilities for its operating leases of warehouses, offices, apartments, gas tanks, laptops, and photocopiers. The Group recognise lease liabilities equal to the right-of-use assets of USD 5,408,138 upon initial adoption as follows:

Upon the adoption of IFRS 16, there will be an immaterial benefit to operating profit and a corresponding increase in finance expense from the presentation of a portion of lease costs as interest costs. Profit before tax and earnings per share are not expected to be significantly impacted. The adoption of IFRS 16 will have no impact on the Group's cash flows except to present cash outflows as financing, instead of operating.

There are no other standards that are not yet effective and that would be expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions.

3.    Exceptional items

*Refer to Note 20.

Exceptional items are one-off and are non-recurring in nature. No exceptional costs incurred in 1H FY19.

During the period there are professional costs of $418,000 in relation to the provision of legal and advisory services from professionals arising from the review of the Group's inventory costs allocation methodology and debt covenants.

4.    Other income

Other income represents interest income and government grant income. In prior period, the Group recognised $5.5 million on the termination of the joint collaboration R&D project.

5.      Other expenses

Other expenses represent net foreign exchange loss, and other operating expenses. In prior period, the Group recognized $2.5 million on the termination of the joint collaboration R&D project.

6.      Principal risks and uncertainties

Our Board of Directors and Risk Committee have reviewed our principal risks in the context of the first half of FY2020. The level of risk arising from Long Term Funding, Working Capital and Inventory Management increased significantly following breach of debt covenants, inventory costing and valuation issues, which has impacted the Company's financial position and reputation.

At the time of writing, in view of the current COVID-19 outbreak and given the rapidly evolving nature of the pandemic, the Group has done a detailed assessment on the existing production plan and sales channel condition. The Group is also mindful that current sales target assumptions may be adjusted during this uncertain period as sales may not be achieved in accordance with planned sales target schedule and fall short of actual target achievement. In addition, cash collections may not be in accordance with planned collection schedule and fall short of actual collection.

The Group has also considered the impact of COVID-19 on customers, suppliers and staff. The Group is cautiously optimistic that the customers will continue to place sales orders but it may not be according to usual sales plan schedule in the coming months. We could face difficulties in maintaining supplier relationships due to closure of manufacturing businesses during COVID-19 outbreak. We are monitoring closely these relationships in the coming months to ensure smooth production and delivery.

Our Board of Directors and Risk Committee believe that there have been no new emerging risks other than the broad key risk areas outlined below; and that identified mitigation actions remain appropriate to manage these identified risks. 

Our principal risks are as follows. However, these are not intended to be an exhaustive analysis of all risks currently facing the Group.

i.   Long-term funding 

PureCircle is reliant on funding from a consortium of banks to fund the ongoing operations of the business and to enable ongoing product innovation and investment in technology. The current funding arrangements are subject to bank covenants. The debt is due to mature in November 2020 and is subject to compliance with certain bank covenants. The Group needs to maintain sufficient liquidity to balance operating requirements with financial obligations and covenants.

The Group's debt covenants were re-set multiple times during the year, there was a default at the last financial year end. Subsequent to FY2019, the Group experienced severe cash flow constraints in meeting its working capital requirements and needed additional funding. In addition, the Group renegotiated and secured approval for the full waiver of non-compliance of bank covenants.

Going forward, the Group's liquidity will be tight with very little covenant headroom. The Group intends to refinance its existing term loan before it matures in November 2020.

ii.  Working capital funding to support operations

PureCircle fully controls the end-to-end process of its entire supply chain from leaf sourcing to manufacturing; sales; distribution and customer relationship management. The Company needs to fund its working capital from leaf purchases to sales and receivables. Working capital requirement at PureCircle is particularly influenced by its inventory levels.

During the year, the Group experienced severe cash flow constraints in meeting its working capital requirements and needed additional funding to meet its payment obligations. There will be an urgency to secure additional funding in the event of a failure by our business to generate sufficient operating cash flows or if there is a restricted access to funding or if existing bank facilities are longer available for drawdown. This will impact our financial performance and liquidity.

iii. Inventory management

Inventory management is a key area of the Business. Ensuring PureCircle manufactures the appropriate mix of finished goods inventory is of paramount importance as failure to do so may result in high level of cash being tied up in the business.

In 2019, it was noted that PureCircle maintained high inventory balances, in relation to by-products, some of which have been subsequently found to be obsolete and in excess of market requirements, despite efforts to sell in the market.

Fluctuations in the market demand for PureCircle products can cause inventory levels to rise. In addition, changes in the market or viable uses of by-products may potentially cause inventory obsolescence and write-offs.

iv.   Competition

As the stevia industry continues to evolve, larger food and beverage ingredient suppliers may enter the market and erode the Group's current market share. Failure to anticipate movements in the market/ accurately forecast customer demand and industry trends could undermine PureCircle's business performance.

The Group needs to adequately price its products to remain competitive.

v.    Leaf sourcing/ procurement

Dried leaf is PureCircle's primary raw material and constitutes a significant proportion of the Company's variable costs of production. The Company's financial performance can be materially impacted by rising leaf cost and nature of contractual conditions, if not managed effectively.

A significant majority of PureCircle's total leaf supply is sourced from China. The Group adopts a logical purchasing plan differentiated by province and purchase timing. This mitigates any potential risk of supply disruption within China.

Going forward, the Group's leaf sourcing strategy will comprise of combination of different leaf varieties, and the gradual phase in of new leaf cultivation, with better extract yields. This will drive improvements in terms of lower overall extract cost per metric tonne of processed leaf.

vi.   Intellectual property

Innovation is why PureCircle is the market leader in the stevia industry. PureCircle's continuous investment in research, development and innovation (RD&I) must be protected by robust intellectual property (IP) strategies, including obtaining patents and protecting other forms of IP, to help sustain and grow the Company's position in an ever-competitive market.

vii.  Manufacturing capacity

PureCircle is a potentially fast growing company with production chain covering both extraction and refinery activities. It is imperative that our capacity keeps up with increasing customer demand.

In addition, the Group needs to maintain reasonably accurate sales forecast to facilitate the planning for manufacturing capacity, purchasing needs and inventory holding levels.

The ability to manufacture however, is subject to available capacity and raw material extract to produce the required product according to customer's requirements at specified volumes.

Our manufacturing capacity is dependent on process and product, and was built in anticipation of growth and increased market demand. Our refinery utilisation is currently running at 75% capacity post restarting operations after securing approval from authorities in view of Malaysian government's movement control order and expected to run at full capacity when normalcy returns. In addition, we are also purchasing certain products externally, on an exceptional approval basis, to close off any potential supply gaps.

Management will continue to monitor the situation and adjust its production plan, in order to achieve better efficiency in capacity usage and to produce intermediary/ end-products that will yield better margins and cash flow.

In conclusion, long term funding, working capital funding to support operations and inventory management remain as key focus areas for the Group for the remaining half of FY2020.

7.      Going concern

The Directors have considered the risks associated with upcoming repayment obligations for the Group's senior debt facility. The facility will mature on 30 November 2020. The Directors intend to carry out a refinancing of its debt obligations to raise cash to fund the business and operations. Bearing in mind that in the absence of any committed external funds over the next 7 months, there is a risk that that Group may not be able to repay the facility at maturity.  

There are therefore risks that the Group will not be able to maintain access to its lending facility and otherwise meet its obligations as they fall due. Together, these matters indicate the existence of a material uncertainty with which may cast significant doubt about the Group's ability to continue as a going concern.

8.    Segment information

Management determines the Group's operating segments based on the criteria used by the Chief Operating Decision Maker who has been identified as the Chief Executive Officer ("CEO") for making strategic decisions. Management considers the Group to be a single operating segment whose activities are the production, marketing and distribution of natural sweeteners and flavours.

From a geographical perspective, the Group is a multinational with operations located on all continents but managed as one unified global organisation. 

*Refer to Note 20.

In the reporting of financial information, the Group uses certain alternative performance measures that are not required under IFRS, the generally accepted accounting principles ("GAAP") under which the Group reports. The Group believes that these additional measures, which are used internally, are useful to users of the financial information in helping them to understand the underlying business performance.

The Group has determined that disaggregation of revenue using existing segments and timing of the transfer of goods (at a point in time) is adequate.

The primary performance indicators used by the Group are revenue, gross margin, gross margin %, adjusted EBITDA, net cash from operations, net debt and headroom.

The above measures are considered useful by management because:

-      In the Group's high operationally geared business model profitability is sensitive to revenue and gross margin %

-      Adjusted EBITDA is considered the most efficient profit and loss account indicator of "operating cash flow profitability"

-      Adjusted EBITDA is calculated as EBITDA with other expenses (principally the charge of the exceptional items) added back

-      Net cash generated from operations, net debt and headroom are important measures of cash flow and debt capacity  

-      Gross margin is calculated as revenue less cost of sales including sales duty and freight costs

-      Gross margin % is calculated as gross margin as a % of revenue 

-      Operating profit is calculated as gross margin less administrative expenses plus other income

-      Other expenses comprise one-off professional costs incurred and specific and general provisions on receivables.

-      Net debt is calculated as total bank borrowings (both short and long-term) less gross cash and bank balances and restricted cash

Seasonality

Due to the seasonal nature of the Group operations, higher revenue and operating profit are usually expected in the second half of the year than the first six months.

In the financial year ended 30 June 2019, 40% of revenue accumulated in the first half of the year, with 60% accumulating in the second half.

Geographical information

9.      Property, plant and equipment and intangible assets

During the period, the Group invested $2.0 million in property, plant and equipment.

The addition of $1.6million to intangible assets is in respect of capitalisation of product developments, intellectual property and leaf development during the period, net of amortisation for products now launched commercially.

The Group recognised right-of-use assets of $5.4 million on adopting IFRS16.

10.   Inventories

No further provision on slow moving inventory as well as net realisable value in the current period other than as disclosed as at 30 June 2019.

11.   Financial liabilities

The following tables detail the remaining contractual maturities at the reporting date of the Group's non-derivative financial liabilities, which are based on contractual undiscounted cash flows (including interest payments computed using contractual rates or, if floating, based on rates current at the reporting date) and the earliest date the Group can be required to pay and settled derivative financial instruments for which the contractual maturities are essential for an understanding of the timing of the cash flows:

Owing to the breach in covenants in both FY19 and FY18, the term loan and the revolving credit facility have been reclassified as current debt as in accordance with terms in the facility agreement.

On 18 February 2020, the Group secured an approval from its lenders for Waivers and Amendments to its Senior Facility Agreement ("Waivers and Amendments") that provides a waiver for all past breaches of covenants up to and including 31 December 2019. In addition, all lenders have also agreed to amend the covenants for the periods to 31 March 2020 and 30 June 2020 respectively.

12.   Derivative financial instruments

13.   Income taxes

Income tax expense is recognised based on management's best estimate of the weighted average annual income tax rate expected for the full financial year. The expected estimated tax rate is 10%.

The Company was granted a tax assurance certificate dated 1 February 2012 under the Exempted Undertakings Tax Protection Act, 1966 pursuant to which it is exempted from any Bermuda taxes (other than local property taxes) until 31 March 2035.

The subsidiary, PureCircle Sdn. Bhd. ("PCSB"), has been granted the Bio-Nexus Status by the Malaysian Biotechnology Corporation Sdn. Bhd. in which PCSB is entitled to a 100% income tax exemption for a period of 10 years on its first statutory income commencing in year of assessment (YA) 2008. The 10-year incentive period expired in (YA) 2017. Subject to the Ministry of Finances (MOF) approval, PCSB will be entitled to a concessionary tax rate of 20% on income derived from qualifying activities for a further period of 10 years from (YA) 2018. However, given that the approval from the MOF is still pending, PCSB adopted the normal corporate tax rate at 24% (2018: 24%) on the income derived from the qualifying activities for the financial year end 30 June 2019.

Another subsidiary, PureCircle Trading Sdn. Bhd. ("PCT") has been granted the Principal Hub Status by the Malaysian Investment Development Authority in which PCT is entitled to a 100% income tax exemption for a period of 10 years on its statutory income commencing from YA 2017.

Another subsidiary of the Group, PureCircle (Jiangxi) Co. Ltd. ("PCJX"), has also been granted a 10% exemption on corporate tax from 1 January 2013 to 31 December 2020 by Ganzhou State Tax Revenue Department under the Western Ganzhou State Development program.

14.   Share capital and share premium

15.  Loss per share

The basic loss per share is calculated by dividing the loss attributable to owners of the Company by the weighted average number of ordinary shares in issue during the period.

*Refer to Note 20.

16.   Dividends

No dividends were declared or paid by the Company during the interim period.

17.   Contingent liabilities and capital commitments

(a)    On 19 December 2019, the Department of Homeland Security U.S. Customs and Border Protection's ("CBP") issued the Group with twenty (20) Notices of Penalty or Liquidated Damages Incurred and Demand for Payment seeking payment of USD 8,377,920.00 in penalties for shipments from December 4, 2014 to February 4, 2016, that CBP asserts may have included Stevia that derived from convict or forced labor from the Baoanzhao region of China. As at the date of releasing of the unaudited interim results, management is of the view that the contingent liability of USD8,377,920 is very unlikely to be a liability as CBP has not provided any proof of its claims. No provision should be made as at 31 December 2019.

(b)    On 23 December 2019, one of the Group's subsidiary, PureCircle Sendirian Berhad ("PCSB") received a letter of notification from the Royal Malaysian Customs Department of Selangor ("Customs") claiming back-payment of import duties of USD8,800,000 on the import of ethanol between March 2017 and April 2019 because imported ethanol purity levels did not agree with the approved exemption letter from the Malaysian Investment Development Authority ("MIDA"). On 31 January 2020, PCSB subsequently obtained a new exemption letter from MIDA on the import of ethanol without specification of the purity level for import from January 2020 to December 2020. An appeal letter has been issued to MIDA to obtain waiver on the import duties of the past transactions. As at the date of releasing the unaudited interim results, the Directors are unable to reliably estimate the cost to settle any potential claim with respect to this matter as no demand has yet to be received. Accordingly, no provision has been made as at 31 December 2019.

As disclosed above, at the end of the period, there are no material contingent liabilities which, upon becoming enforceable, may have a material impact on the financial position of the Group.

Capital commitments amounting to approximately $1.0million were approved and contracted for the upgrading of plant and machinery in China and Malaysia.

18.   Events after the end of the reporting period

Events after the end of the reporting period has been included in the FY19 full year RNS announced on 31 March 2020.

19.   Material related party transactions

Identities of related parties:

The Group have related party relationships with its joint venture and the following transactions were carried out by the Group during the period:

   * Rent is payable to a significant shareholder that is controlled by a Director.

20.   Prior period adjustments

During the year ended 30 June 2019, it was identified that the Group's revenue was not appropriately recorded in the prior period due to cut off errors. As a result, historical revenue was overstated.

During the financial year ended 30 June 2019, it was identified that the Group's costing methodology was not appropriately allocating the full cost of inventory sold to comprehensive income, but instead, certain costs remained capitalised in inventory. As such, historical inventory was overstated and historical cost of sales was understated. In addition, the Group reclassified its provision of net realisable value on inventory from other expenses to cost of sales for the financial year ended 31 December 2018 to be consistent with the classification made in the audited profit or loss for the financial year ended 30 June 2019. The Group has also reclassified its long-term incentive plan ("LTIP) expenses from other expenses to administrative expenses to be consistent with the classification made in the audited profit of loss for the financial year ended 30 June 2019.

As a result of the above restatements to prior year revenue and cost of sales, the Group did not comply with certain of their debt covenants as at 30 June 2018 and therefore debt was reclassified to current for this period. 

Revenue, receivables, inventory, and cost of sales for the financial year then ended 30 June 2018 as well as the opening balance in retained earnings as at 1 July 2017 was restated and the related tax impact was considered. Additionally, as a result of covenant breaches in FY18 and FY19, borrowings have been reclassified to current from non-current.

Accordingly, the comparative financial information has now been restated as follows: 

*The adjustment relates to application of IFRS 9's impairment requirements at 1 July 2018 results in an additional allowance for impairment.       

Given that the Group's key performance indicators include non-GAAP measures, a schedule below is included to provide detail on the impact to earnings per share (EPS), gross margins, and earnings before profit, taxes, depreciation and amortisation (EBITDA).