Company Registration Number: C 88405
Annual Financial Report and Consolidated
Financial Statements
31 December 2021
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
Pages
Directors’ report1 - 6
Corporate Governance – Statement of Compliance 7 - 19
Statements of financial position20 - 21
Income statements22
Statements of comprehensive income23
Statements of changes in equity24 - 25
Statements of cash flows26
Notes to the consolidated financial statements 27 - 62
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
1
Directors’ report
The Directors present their report and the audited consolidated and parent company financial statements for the year ended 31 December 2021.
Principal activity
The principal activity of the Company which forms part of the Melite Retail Group, is to act as a finance company by advancing amounts on loan to its subsidiary Melite Properties S.r.l (Melite Properties). The subsidiary holds investment property in Italy through its rights to properties which it lets out to related and non-related parties.
The principal activity of the Melite Retail Group is the operation of international retail and franchise networks involving costume jewelry and related fashion accessories.
Financial performance
Revenue for the Group, which was primarily generated from rental operations, amounts to €1,475,601 (2020: €1,569,523) - net of concessions granted to tenants amounting to €104,832 (2020: €2,768,720), resulting in a gross loss of €274,388 (2020: €695,848). The decrease reflects the closure of outlets during the COVID-19 pandemic that caused disruption to the economic environment in Italy as from the end of February 2020. The Group registered a loss before tax of €2,074,368 (2020: €4,829,978) after taking into consideration impairments on the value of leasehold premia of €748,134 (2020: €1,026,118), which are consequences of the COVID-19 pandemic.
Financial Position
The Group’s total asset base stands at €21,050,728 (2020: €22,175,674). The main non-current assets comprise right-of-use assets of €18,702,707 (2020: €19,245,756). At 31 December 2021, the Group’s current assets amounted to €1,770,878 (2020: €1,723,687) while current liabilities amounted to €2,233,619 (2020: €2,270,208). The Group’s non-current liabilities amounted to €19,252,486 (2020: €18,581,449) which mainly consist of borrowings of €9,866,913 (2020: €9,914,997) and lease liabilities of €9,385,573 (2020: €8,666,452).
Financial risk management and uncertainties
For principal risks and uncertainties, refer to Note 2, ‘Financial Risk Management’ that details the key risk factors including market risk, credit risk, liquidity risk and the Group’s approach towards managing these risks.
Business update
The emergence of the COVID-19 pandemic which continued in 2021, caused disruption to businesses and economic activity, and this has been significant to the Melite Finance Group.
The Company’s dependence on Melite Properties
The Melite Finance Group is largely dependent on the business and prospects of its subsidiary, Melite Properties. As set out in the Prospectus, the proceeds from the issue of the Bonds were loaned, in part (circa €5.9 million), by the Company to Melite Properties for the purposes of: settlement of debts due; and refurbishing and embellishing retail outlets located in leading locations in Italy over which, from time to time, it enjoys the rights attached to the lease of such immovable property, and/or for acquiring such rights over additional retail outlets for sub-letting. The continued servicing of the Bonds is entirely dependent – and the redemption of the Bonds is in part dependent – on Melite Properties being able to fulfil its repayment obligations towards the Company in terms of the said loan.
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Directors’ report - continued
Business update - continued
The current situation
Melite Properties’ principal operation consists of the letting and sub-letting of retail outlets located in Italy, and therefore the longer-term prospects of the Melite Finance Group are intrinsically linked to the development in the retail real estate market in Italy, particularly the market for prime locations on the primary high streets of the Italian peninsula and islands. The Melite Finance Group’s commercial lease agreements typically relate to retail outlets located in the prime positions in high streets of cities such as Milan and Turin and in the main retail area of towns such as Pavia, Como and Treviso.
As described in the financial statements for the year ended 31 December 2020, both the retail landscape and the commercial real estate landscape in Northern Italy, where the vast majority of the Stores are located, have been subjected to significant and unprecedented disruption as a result of the pandemic. Following the outbreak of COVID-19 in Italy, particularly in Northern Italy where most of the leases held by Melite Properties are situated, all retail outlets in Italy were shut with effect from 10 March 2020. Retail outlets were permitted to re-open as from 18 May 2020 but virtually all of Melite Properties’ tenants had elected not to re-open for the major part of the year, in common with many retail outlets across Italy. Further to a spike in the number of positive COVID-19 cases recorded across Italy over the latter months of 2020, the Italian government re-introduced a series of restrictive measures as from early November. Such measures subsisted throughout the month of December 2020 and only started to be gradually relaxed in parts of Italy in mid-2021. Whilst 2021 experienced some recovery in the retail sector, the outlook remained uncertain given that COVID-19 continued to persist throughout 2021. The current uncertainty in the market is compounded by the situation in Ukraine.
Melite Properties has so far maintained payments of rent to landlords (as reduced, where possible, further to negotiations conducted by management) and remains in contact with them as this is considered essential for the purpose of the safeguarding of the company’s property rights over the Stores it has retained.
As stated in the Directors’ report on the financial statements for the year ended 31 December 2020, Melite Italia entered into a restructuring of its business and debts in terms of a procedure available in terms of Italian law. Accordingly, sourcing alternative tenants for the Stores which were operated by Melite Italia became a key priority for the Company and Melite Properties (together the “Melite Finance Group”). During the course of 2020 and 2021, new tenants were successfully found for all the properties retained by Melite Properties and appropriate agreements entered into accordingly.
In the context of the above, the Board of Directors of the Company remained focussed on taking such steps as may be necessary to ensure that the underlying business retains as much value as possible to enable the Company to continue, insofar as is possible, to service its obligations to the holders of the €9,250,000 secured bonds 2028 issued by the Company (the “Bonds”).
Following the onset of COVID-19 and the decision by Melite Italia to enter into voluntary administration, and as described in the financial statements for the year ended 31 December 2020, a restructuring plan was agreed to by the Board of Directors of the Company. As part of the restructuring plan, Melite Properties rescinded ten stores during the course of 2020 and 2021. This was necessary to channel all available cash towards safeguarding what the Board of Directors of Melite Properties believe to be the more valuable leases that are essential to secure the fulfilment of its obligations towards the Company and, in turn, the Melite Finance Group’s long-term survival. The leases that were rescinded relate to those stores (such as stores located within commercial centres) which, based on advice from real estate specialists, were expected to take longer to sub-let.
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Directors’ report - continued
Business update - continued
Following the rescission of these contracts Melite Properties was left with a total of 19 stores (the “Retained Stores”), with a combined valuation, as at 31 December 2021, of €9,172,385 million. These 19 stores had a value of €8,527,424 million as at 31 December 2020 reflecting the slight improvement in trading conditions that are now prevalent in Italy. Notwithstanding the challenging economic climate and rapidly evolving conditions, management concluded or retained agreements for the sub-letting of eight stores to third party operators. Furthermore, in June 2021, management signed an agreement with a third-party retail operator which secured the sub-letting of another nine stores for a fixed rent and an additional two stores on a profit-sharing basis.
During 2021 Melite Properties was successful in securing Italian state credits for the amount of €521,775 as compensation for loss of rent during the forced closure of the retail outlets.
In view of the state credits received from the Italian state referred to above and the capital injection referred to below, and subject to no significant deterioration in market conditions that may arise from the uncertainties referred to earlier, the Group’s cashflow for the next 12 months appears to be manageable.
Events after the reporting period
(i)Issue of preference share capital
On 19 November 2021, one of the shareholders of the parent company, had advanced €448,625. On 28 January 2022 a further €209,375 was advanced to the Company and the Group, with a view of the total advance being converted into preference share capital. The capitalisation was approved by the shareholders of the company on 28 January 2022 and effected on 1 February 2022.
(ii)Melite Italia restructuring
On the 27 April 2022, the Melite Italia S.r.l. voluntary restructuring process was concluded whereby an irrevocable offer by a third-party retail operator to acquire Melite Italia S.r.l.’s branch of business was accepted by the Italian Court following a judicial auction process. This has the effect of the third-party retail operator stepping into the shoes of Melite Italia S.r.l. in terms of its tenancy of 11 of the 19 stores to which Melite Properties S.r.l. holds title. The successful bidder has 30 days to meet certain obligations included in its offer as confirmed by the Court.
Based on the analysis referred to above, the Directors continue to consider the going concern assumption in the preparation of the Group’s financial statements as appropriate as at the date of authorisation for issue of the 2021 financial statements. However, the above conditions surrounding the retail sector in Italy, the impact of the pandemic on the operations and financial position of the Group, and the tenancy risk that will remain, indicate the existence of a material uncertainty, which may cast significant doubt on the ability of the Group to continue as a going concern.
Results and dividends
The income statements and the statements of comprehensive income are set out on pages 22 and 23. The Directors do not recommend the payment of a dividend for the current year.
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Directors’ report - continued
Principal risks and uncertainties faced by the Company
Whilst COVID-19 has caused disruption to businesses and economic activity, and this has been significant on the Melite Finance Group, the retail sector has registered improvement albeit not yet to pre-COVID-19 levels.
The ability of the Group to continue as a going concern is, as always, critically dependent on the success of the retail sector in Italy and on the ability of its tenants to meet their financial obligations.
In assessing the appropriateness of the going concern assumption in the preparation of Melite Finance p.l.c.’s consolidated financial statements, the Directors have taken into account the Group’s projected cashflows and the improved general market conditions. Based on the above considerations, it is the view of the Board of Directors that there is a reasonable expectation that Melite Finance p.l.c. is able to continue in business for a period of at least 12 months from the end of the reporting period. Accordingly, the Directors continue to adopt the going concern basis in preparing the financial statements. The financial statements however do not include any adjustments in the event that the assumptions do not materialise as planned.
Directors
The Directors of the company who held office during the year were:
Paul Mercieca - Chairman
Jacqueline Briffa
Alan Frendo Jones
Christian Ganado
Stanley Portelli
Andrew Ganado (resigned on 21 September 2021)
In accordance with the Articles of Association, the Directors of the Company are not required to retire by rotation.
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Directors’ report - continued
Statement of directors’ responsibilities for the financial statements
The Directors are required by the Maltese Companies Act (Cap. 386) to prepare consolidated financial statements which give a true and fair view of the state of affairs of the Group as at the end of each reporting period and of the profit or loss for that period.
In preparing the financial statements, the Directors are responsible for:
•ensuring that the financial statements have been drawn up in accordance with International Financial Reporting Standards as adopted by the EU;
•selecting and applying appropriate accounting policies;
•making accounting estimates that are reasonable in the circumstances;
•ensuring that the financial statements are prepared on the going concern basis unless it is inappropriate to presume that the group and the parent company will continue in business as a going concern.
The Directors are also responsible for designing, implementing and maintaining internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and that comply with the Maltese Companies Act (Cap. 386). They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Disclosure in terms of the Listing Rules
Going concern statement pursuant to Listing Rule 5.62
After making enquiries and considering the developments and circumstances that have been articulated in note 1.1.1, the Directors have reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Directors continue to consider the going concern assumption in the preparation of the Group’s financial statements as appropriate as at the date of authorisation for issue of the 2021 financial statements.
Auditors
PricewaterhouseCoopers have indicated their willingness to continue in office and a resolution for their re-appointment will be proposed at the Annual General Meeting.
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Directors’ report - continued
Statement by the Directors on the Financial Statements and Other Information included in the Annual Financial Report
The Directors declare that to the best of their knowledge, the consolidated financial statements included in the Annual Financial Report are prepared in accordance with the requirements of International Financial Reporting Standards as adopted by the EU and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and that this report includes a fair review of the development and performance of the business and position of the Company, together with a description of the principal risks and uncertainties that it faces.
Signed on behalf of the Board of Directors on 29 April 2022 by Paul Mercieca (Chairman) and Christian Ganado (Director) as per the Directors' Declaration on ESEF Annual Financial Report submitted in conjunction with the Annual Financial Report.
Registered Office:
Level 3, Valletta Buildings,
South Street
Valletta
VLT 1103
29 April 2022
MELITE FINANCE P.L.C.
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Corporate Governance – Statement of Compliance
Introduction
The Capital Markets Rules issued by the Malta Financial Services Authority require companies listed on the Official List of the Malta Stock Exchange to endeavour to adopt and observe The Code of Principles of Good Corporate Governance contained in Appendix 5.1 to Chapter 5 of the Capital Markets Rules (the “Code”).
Although the Code sets out (non-mandatory) recommended principles of good practice, the Board of Directors of the Company (the “Board” or the “Directors”) consider that such practices are generally in the best interests of the Company, its shareholders and other stakeholders, and that compliance with the Code evidences the Company’s and the Directors’ commitment to high standards of good corporate governance.
This Corporate Governance Statement (the “Statement”) sets out the organisational structures, controls practices and processes in place within the Company and explains how these effectively achieve the goals set out in the Code. For this purpose, the Statement will make reference to the pertinent provisions and principles of the Code and set out the manner in which the Directors believe these have been adhered to. Where the Company has not complied with any of the principles of the Code, this Statement provides an explanation for such non-compliance. Reference in this Statement to compliance with the principles of the Code means compliance with the Code’s main principles and provisions.
The Board has carried out a review of the Company’s compliance with the Code during the period under review and is hereby reporting on the extent of its adoption of the provisions and principles of the Code for the financial period being reported, as required in terms of Capital Markets Rule 5.97.
Compliance
The Company has adopted a corporate decision-making and supervisory structure that is tailored to suit its requirements and designed to ensure the existence of adequate controls and procedures within the Company, whilst retaining an element of flexibility essential to allow the Company to react promptly and efficiently to circumstances arising in respect of its business, taking into account its size and the economic conditions in which it operates.
The Directors are of the view that it has employed structures which are most suitable and complementary for the size, nature, operations and level of complexity of the Company. Accordingly, in general the Directors believe that the Company has adopted appropriate structures to achieve an adequate level of good corporate governance, together with an adequate system of control in line with the Company’s requirements.
The Company has no employees of its own and its principal purpose is to act as a financing vehicle for the Melite Finance Group, consisting of the Company and its wholly owned subsidiary, Melite Properties S.r.l. As a result, the Directors deem some of the principles and provisions of the Code to be disproportionate or inapplicable to the Company, as explained further below.
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Corporate Governance – Statement of Compliance - continued
Principle 1: The Board
The Directors believe that for the period under review, the Company has generally complied with the requirements of this principle and the relative Code provisions.
The Board is composed of members who are fit and proper to direct and manage the business of the Company with honesty, competence and integrity. All the members of the Board are fully aware of, and conversant with, the statutory and regulatory requirements connected to the business of the Company and its status as a listed company and the Board is cognisant of its accountability for its own performance and that of its delegates. The Board of Directors is primarily responsible for:
•devising the corporate and business strategy of the Company;
•setting and reviewing internal policies, procedures and controls of the Company;
•the overall management and supervision of the Company;
•reviewing and evaluating internal control procedures, financial performance and business risks and opportunities facing the Company.
Until his resignation on the 21st September 2021, the Executive Director reported to the Board, at regular intervals or as and when the need arose. During the year under review, the Financial Controller reported to the Board on a similar basis.
The former Executive Director remains responsible for the overall day-to-day management of Melite Properties S.r.l., being the main trading and operating arm of the Melite Finance Group, leading its senior management team (consisting principally of the Executive Director in his capacity as executive director of Melite Properties S.r.l. and as at the date hereof, the Financial Controller) acting as a channel of communication between the Board, senior management and other individuals within the Melite Finance Group, with a view to ensuring an effective contribution to the decision-making process.
During the period under review, Mr. Paul Cutajar, the Financial Controller of the Company led the finance function of the Company and played a central role in the preparation of the Company’s consolidated financial statements, the appraisal of investment opportunities, as well as the monitoring of the operational performance of the Company’s business, cash flow and capital requirements. The Financial Controller was also generally responsible for ensuring that the Company complies with its statutory financial and fiscal reporting obligations. The Board of Directors was informed of the present Financial Controller’s intention to resign from his position upon completion of the audit process for the period under review. Whilst the Board of Directors will continue to draw on the support of local and Italian service providers who to date have assisted the Financial Controller in the performance of his duties, the Board is seeking to fill this role on a permanent basis.
The Board has delegated specific responsibilities to the Audit Committee, under formal terms of reference approved by the Board. Further detail in relation to the Audit Committee may be found in the sections headed ‘Principles 4 and 5’ of this Statement hereunder.
Principle 2: Chairman and Chief Executive Officer
Given that the Company acts as the financing arm of the Melite Finance Group and does not carry out other operations of its own, the Company has not appointed a Chief Executive Officer. Nevertheless, it has appointed a separate Chairman, whose role is to lead the Board. During the period under review, Mr Paul Mercieca (an independent non-executive director of the Company) occupied the post of Chairman.
At the same time, the responsibility for the day-to-day management of Melite Properties S.r.l., the latter being the operating and trading company of the Melite Finance Group, was subsumed into the role of the former Executive Director of the Company. At the level of Melite Properties S.r.l, this role was and still is occupied by Mr Andrew Ganado.
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Corporate Governance – Statement of Compliance - continued
Principle 2: Chairman and Chief Executive Officer - continued
The Chairman is responsible for:
•leading the Board and setting its agenda;
•ensuring that the Board is in receipt of precise, timely and objective information to enable the Board to take sound and commercially reasonable decisions and effectively monitor the performance of the Company;
•encouraging and supporting active engagement by all directors for discussion of complex and contentious issues and ensuring that all directors are afforded ample opportunity to contribute to the issues on the agenda and present their views; and
•ensuring effective communication and relationship management with the Company’s shareholders.
Principle 3: Composition of the Board
In terms of the Articles of Association of the Company, the board of directors of the Company shall consist of a minimum of five (5) directors and a maximum of ten (10) directors.
Directors are appointed during the Company’s Annual General Meeting for periods of one year until the next annual general meeting, at which they may stand again for re-election. The Articles of Association of the Company clearly set out the procedures to be followed in the appointment of directors, the salient aspects of which are summarised hereunder:
•Any member or members who in the aggregate hold not less than two hundred thousand (200,000) shares having voting rights in the Company are entitled to nominate fit and proper persons for appointment as directors of the Company;
•In the event that there are either less nominations than there are vacancies on the Board, of if there are as many nominations as there are vacancies on the Board, then each nominated person shall be automatically appointed a director;
•In the event that there are more nominations than vacancies on the Board, then an election shall take place in accordance with the procedure laid down in the Articles of Association of the Company.
The Board is comprised of five (5) non-executive directors, all of whom were appointed upon incorporation of the Company. As at the date of this Statement, the Directors of the Company are:
DirectorCapacityDate of Appointment
Paul MerciecaIndependent Non-Executive (Chairman)27th September 2018
Stanley PortelliIndependent Non-Executive27th September 2018
Jacqueline BriffaNon-Executive Director27th September 2018
Alan Frendo JonesNon-Executive Director27th September 2018
Christian GanadoNon-Executive Director27th September 2018
Andrew Ganado resigned from the post of Executive Director on 21st September 2021.
For the purpose of Code Provision 3.2, two of the Directors are considered by the Board to be independent within the meaning of the Capital Markets Rules, such independent Directors being Mr. Paul Mercieca and Dr. Stanley Portelli.
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Corporate Governance – Statement of Compliance - continued
Principle 3: Composition of the Board - continued
The non-executive Directors contribute to the strategic development of the Company and the creation of long-term growth of the Company and are responsible for:
•constructively challenging and developing strategy;
•monitoring reporting of performance;
•scrutinising performance of management; and
•ensuring the integrity of financial information, financial controls and risk management systems.
Save as disclosed above, none of the non-executive Directors of the Company:
(a) are or have been employed in any capacity by the Company;
(b) receive significant additional remuneration from the Company;
(c) have close family ties with any of the executive members of the Board;
(d) have been within the last three years an engagement partner or a member of the audit team of the
present or past external auditor of the Company; and
(e) have a significant business relationship with the Company.
In terms of Code Provision 3.4, each non-executive director has declared in writing to the Board that he/she undertakes:
•to maintain in all circumstances his/her independence of analysis, decision and action;
•not to seek or accept any unreasonable advantages that could be considered as compromising his/her
•independence; and
to clearly express his/her opposition in the event that he/she finds that a decision of the Board may harm the Company.
Principles 4 and 5: The Responsibilities of the Board and Board Meetings
The Board of Directors is entrusted with the overall direction, administration and management of the Company and meets on a regular basis to discuss and take decisions on matters concerning the strategy, operational performance and financial performance of the Company.
In fulfilling its mandate, the Board assumes responsibility, to the extent applicable and possible to:
a) establish appropriate corporate governance standards;
b) review, evaluate and approve, on a regular basis, long-term plans for the Company;
c) review, evaluate and approve the Company’s budgets and forecasts;
d) review, evaluate and approve major resource allocations and capital investments;
e) review the financial and operating results of the Company;
f)ensure appropriate policies and procedures are in place to manage risks and internal control;
g) review, evaluate and approve the overall corporate organisation structure, the assignment of
management responsibilities and plans for senior management development including succession;
h) review, evaluate and approve compensation to senior management;
i)ensure effective communication with shareholders, stakeholders and the market.
In fulfilling its responsibilities, the Board continuously assesses and monitors the Company’s present and future operations, opportunities, threats, and risks in the external environment, and its current and future strengths and weaknesses in its internal environment.
The Board delegates certain specific responsibilities to the Audit Committee.
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Corporate Governance – Statement of Compliance - continued
Principles 4 and 5: The Responsibilities of the Board and Board Meetings - continued
The Board believes that it has systems in place to fully comply with Principle 5 and the relative Code Provisions, in that it adopts a system designed to ensure reasonable notice of meetings of the Board and to ensure that the Directors receive, where required, the relevant material for discussion in advance of meetings so as to provide adequate time for Directors to adequately and suitably prepare themselves and enable them to make an informed decision during meetings of the Board. In light of the significantly high frequency of meetings held by the Board of Directors during the year under review, notice periods were often reduced to a minimum, however at all times seeking to allow for attendance by all Board members and, where necessary, the Financial Controller and Melite Properties S.r.l. management.
The Directors are assisted by the company secretary, who is consulted to ensure compliance with statutory requirements and with continuing listing obligations. The company secretary keeps minutes of all meetings of the Board and of its committees, which minutes are subsequently circulated to the Board as soon as practicable after the meeting.
The company secretary also maintains detailed records of all dealings - by Directors of the Company, directors of its subsidiary and, senior management - in the Company’s bonds, and assists the Board and senior management in being duly informed of and conversant with their obligations emanating from the Market Abuse Regulation (EU Regulation 596/2014) and ensuring compliance therewith, and prevention and detection of insider dealing, unlawful disclosure of inside information and, or market abuse. In particular, cognisant of the material consequences of non-compliance with MAR and the effects thereof on investor confidence and market integrity, the Board has in place written policies and procedures relating to the keeping of insiders’ lists, dealing in bonds of the Company, and procedures for persons in possession of inside information.
The Directors have access to independent professional advice on any aspect of their duties and responsibilities, or the business and activities of the Company, at the Company’s expense should they so require.
In light of the difficulties and challenges encountered by the Company and the underlying business since the onset, in Italy, of the COVID-19 pandemic in March 2020, the Board felt the need to constantly monitor the evolving situation with a view of taking such measures as it may have considered necessary and appropriate in the circumstances, in a timely manner. Accordingly, a total of seventy four (74) Board meetings were held during the year under review. The number of board meetings attended by the individual Directors for the year ended 31 December 2021 is as follows:
NameCapacityMeetings attended while in office
Paul MerciecaIndependent Non-Executive (Chairman)74/74
Stanley PortelliIndependent Non-Executive71/74
Jacqueline BriffaNon-Executive Director74/74
Alan Frendo JonesNon-Executive Director73/74
Christian GanadoNon-Executive Director54/74
Andrew GanadoExecutive Director40/48 (resigned 21st September 2021)
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Corporate Governance – Statement of Compliance - continued
Principle 6: Information and Professional Development
On joining the Board, Board members underwent an introductory induction programme, whereby the company secretary informed the incoming members of their statutory duties and obligations, the requirements and implications of relevant legislation, as well as their rights, duties, and obligations under the Company’s Articles of Association and internal policies and procedures.
The Directors received and reviewed periodic information on the Group’s financial performance and position.
Principle 7: Evaluation of the Board’s Performance
The Board does not consider it necessary to appoint a committee to carry out a performance evaluation of its role, as the Board’s performance is evaluated on an ongoing basis by, and is subject to the constant scrutiny of, the Board itself, the Company’s shareholders, the market and the rules by which the Company is regulated as a listed company.
Principle 8: Committees
The Directors believe that, due to the Company’s size and operations, it is not necessary to establish committees regarding remuneration, board evaluation and nominations as suggested by the Code and the Directors have formulated the view that these functions can efficiently and effectively be undertaken by the Board itself.
In view of the above, the Board undertakes an annual review of the remuneration structure applicable to Directors (specifically the independent non-executive Directors), and carries out a self-evaluation of the performance of the Board, as and when considered necessary. The aggregate remuneration that may be paid to the Company Directors is subject to the approval of the shareholders at the annual general meeting of the Company.
Audit Committee
In preparation of the listing of its securities on the regulated market, the Board established an Audit Committee (the “Committee”), and has formally set out Terms of Reference governing the scope of its composition, role, functions, powers, duties and responsibilities, as well as the procedures and processes to be complied with in its activities.
The principal purpose of the Committee is to protect the interest of the Company and the Company’s shareholders and bondholders, and to assist the Directors in conducting their role effectively vis-à-vis its responsibilities over the financial reporting processes, financial policies and internal controls structures. The Audit Committee oversees the conduct of the external audit and acts to facilitate communication between the Board, management and the external auditors. The external auditors are invited to attend the Audit Committee meetings. The Audit Committee reports directly to the Board.
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Corporate Governance – Statement of Compliance - continued
Principle 8: Committees - continued
Audit Committee - continued
The Audit Committee is expected to deal with and advise the Board on issues of financial risk, control and compliance, and associated assurance of the Company, including:
i.ensuring that the Company adopts, maintains and, at all times, applies appropriate accounting and financial reporting processes and procedures;
ii.monitoring of the audit of the Company’s annual accounts;
iii.facilitating the independence of the external audit process and addressing issues arising from the audit process, as applicable;
iv.reviewing of the systems and procedures of internal control implemented by management and of the financial statements, disclosures and adequacy of financial reporting;
v.making recommendations to the Board in relation to the appointment of the external auditors and the approval of the remuneration and terms of engagement of the external auditors, following the relative appointment by the shareholders in the annual general meeting;
vi.monitoring and reviewing of the external auditors’ independence and, in particular, the provision of additional services to the Company;
vii.considering and evaluating the arm’s length nature of related party transactions that the Company carries out to ensure that the execution of any such transactions are, indeed, at arm’s length and on a sound commercial basis and ultimately in the best interests of the Company;
viii.ensuring that the Company, at all times, maintains effective financial risk management and internal financial and auditing control systems, including compliance functions;
ix.assessing any potential conflicts of interests between the duties of directors and their respective private interests, or their duties and interests unrelated to the Company.
Additionally, it is responsible for monitoring the performance of the entity borrowing funds from the Company, to ensure that budgets are achieved and if not that corrective action is taken as necessary.
With reference to the Audit Committee’s role and function of evaluating any proposed transaction to be entered into by the Company and a related party, it should be noted that the Audit Committee has a crucial role in monitoring the activities and conduct of the business of Melite Properties S.r.l, in so far as these may affect the ability of the Company to fulfil its obligations in terms of the €9,250,000 secured bonds of a nominal value of €100 per bond redeemable at their nominal value on 23 November 2028 bearing interest at the rate of 4.85% per annum and having ISIN MT0002031202 (the “Bonds”). Such role is specified in the Audit Committee’s Terms of Reference and also forms the subject of a contractual undertaking by the Company in favour of Melite Properties S.r.l (in the loan agreement regulating the transfer of part of the Bond Issue proceeds by the Company to Melite Properties S.r.l), pursuant to which Melite Properties S.r.l has vested the Audit Committee of the Company with certain monitoring functions in light of the Company’s dependence on Melite Properties S.r.l.
The Audit Committee is made up entirely of non-executive Directors, the majority of whom are independent of the Company. Audit Committee members are appointed for a period of three years, unless, their position as member of the Audit Committee is terminated earlier by the Board; or a member of the Audit Committee resigns or is otherwise removed from his/her position as a Director of the Company (resulting in automatic termination of membership within the Audit Committee). During the year under review, the Audit Committee was composed of Paul Mercieca (independent non-executive director, Chairman of the Board and Chairman of the Audit Committee), Stanley Portelli (independent non-executive director and Audit Committee member) and Jacqueline Briffa (non-executive director and Audit Committee member), who commenced their second three year term as Audit Committee members in September, 2021.
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
14
Corporate Governance – Statement of Compliance - continued
Principle 8: Committees - continued
Audit Committee - continued
The Chairman of the Audit Committee, appointed by the Board, is entrusted with reporting to the Board on the workings and findings of the Audit Committee. Mr Paul Mercieca occupied the post of Chairman of the Audit Committee during the period under review.
Paul Mercieca and Jacqueline Briffa are considered by the Board to be competent in accounting and/or auditing in terms of the Capital Markets Rules, based on their respective extensive experience occupying financial management and auditing roles within various private and public entities, as well as their respective skills and competencies in financial reporting, financial management, financial auditing and general financial advisory.
During the year ended 31 December 2021, the Audit Committee met two (2) times. The meetings were attended by all its members. In 2022, the Audit Committee is scheduled to meet at least four times.
Principle 9: Remuneration Statement
In terms of Rule 8A.4 of the Code, the Company is to include a remuneration statement in its annual financial report which shall include details of the remuneration policy of the Company and the financial packages of the Board of Directors.
In terms of Article 63 of the Articles of Association of the Company, it is the shareholders of the Company in the General Meeting who determine the maximum annual aggregate remuneration payable to the Directors. The aggregate amount approved for this purpose during the last Annual General Meeting was €20,000 plus VAT.
None of the Directors of the Company is employed by the Company. The Directors are party to service contracts with the Company.
No part of the remuneration paid to the Directors is performance-based, and until his resignation on the 21st September 2021, the Executive Director received no additional remuneration from the Company for occupying such role. None of the Directors, in their capacity as a Director of the Company, is entitled to profit sharing, share options or pension benefits.
The independent non-executive Directors received €20,000 plus VAT in aggregate for services rendered during the year ended 31 December 2021.
Principle 10: Relations with shareholders (and bondholders) and the market
The Company is committed to ensuring an open channel of communication with its shareholders, bondholders and the wider market. The publication of interim and annual financial statements, together with ongoing company announcements keep the market informed of developments relating to the Company and, in the case of bondholders, of developments pertinent to their investment in the Bonds. The Board feels that such communication provides the market with adequate information about its activities. In addition, the Company’s website (http://meliteproperties.com/melite-finance/) acts a central source of information about the Company and, its business.
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
15
Corporate Governance – Statement of Compliance - continued
Principle 11: Conflicts of Interest
The Directors are fully aware of their responsibility to always act in the best interests of the Company and its shareholders irrespective of whoever appointed or elected them to serve on the Board.
On joining the Board and regularly thereafter, Directors and officers of the Company are informed and reminded of their obligations on dealing in securities of the Company within the parameters of law and Capital Markets Rules. The Company has also established an internal code of dealing and reporting procedures.
It is the practice of the Board that when a potential conflict of interest arises in connection with any transaction or other matter, the potential conflict of interest is declared, so that steps may be taken to ensure that such items are appropriately addressed. By virtue of the Memorandum and Articles of Association, the Directors are obliged to keep the Board advised, on an ongoing basis, of any interest that could potentially conflict with that of the Company. The Board member concerned shall not take part in the assessment by the Board as to whether a conflict of interest exists. A Director shall not vote in respect of any contract, arrangement, transaction or proposal in which he/she has a material interest in accordance with the Memorandum and Articles of Association of the Company. The Board believes that this is a procedure that achieves compliance with both the letter and rationale of Principle Eleven of the Code.
Any material transactions with related parties, which pose intrinsic potential conflicts of interests, require the approval of the Audit Committee, which is charged with ensuring that such transactions are necessary for the conduct of the Company’s business and are transacted on an arm’s length basis.
Save as stated below, the Directors are not aware of any potential conflicts of interest which could relate to their roles within the Company:
•During the year under review, Andrew Ganado and Christian Ganado were officers of Melite Properties S.r.l and other related companies of which Melite Retail Limited
•Melite Italia S.r.l, a company forming part of the Melite Retail Group, leases a substantial number of immovable properties over which Melite Properties S.r.l enjoys certain rights. This commercial relationship may therefore give rise to potential conflicts of interests should the interests of the two companies in relation to such lease agreements not be aligned;
•Furthermore, both Jacqueline Briffa and Alan Frendo Jones are officers of Alf Mizzi & Sons Ltd (C 203) and MMGH Ltd (C 343) respectively, and each of Andrew Ganado (who resigned as Executive Director on the 21st September 2021) and Christian Ganado are officers and shareholders of Lidsdale (OC-636). Each of these companies are shareholders of Melite Retail Limited (C 74224), the parent company of the Melite Group. Potential conflicts may therefore arise between the interests of the Company and the Melite Finance Group on the one hand, and those of the shareholders of Melite Retail Limited on the other;
•In view of the lender-borrower relationship which exists between the Company and Melite Properties S.r.l, there may be situations which could give rise to conflicts between the potentially diverging interests of both companies. In these situations, the Directors shall act in accordance with the majority decision of those Directors who would not have a conflict in the situation and in line with the advice of outside legal counsel.
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
16
Corporate Governance – Statement of Compliance - continued
Principle 12: Corporate Social Responsibility
The Directors seek to promote the adherence by management to accepted principles of corporate social responsibility in its management of the Melite Finance Group.
Non-compliance with the Code
The Directors believe that good corporate governance is a function of a mix of checks and balances that best suit the Company and its business. Accordingly, whilst there are best practices that can be of general application, the structures that may be required within the context of larger companies are not necessarily and objectively the structures for companies whose size and/or business dictate otherwise. It is in this context that the Directors have adopted a corporate governance framework within the Company that is designed to better suit the Company, its business, scale, and complexity, whilst ensuring proper checks and balances.
Taking the above into account and considering that the Code is not mandatory and that the provisions thereof may be departed from provided that reasonable and justifiable circumstances exist and are adequately explained, the Directors set out below the Code Provisions with which the Company does not comply and what are, in its view, a reasonable and justifiable basis for such departure from the recommendations set out in the Code relating to the composition of the Board.
Principle 4: Succession Policy for the Board (Code provision 4.2.7)
While the Board of Directors itself is responsible for the recruitment and appointment of senior management, the Company has not established a formal succession plan.
Principle 7: Evaluation of the Board’s Performance (Code provision 7.1)
The Board has not appointed a committee for the purpose of undertaking an evaluation of the Board’s performance in accordance with the requirements of Code Provision 7.1.
The Board believes that the size of the Company and the Board itself does not warrant the establishment of a committee specifically for the purpose of carrying out a performance evaluation of its role. Whilst the requirement under Code Provision 7.1 might be useful in the context of larger companies having a more complex set-up and a larger Board, the size of the Company’s Board is such that it should enable it to evaluate its own performance without the requirement of setting up an ad-hoc committee for this purpose. The Board shall retain this matter under review over the coming year.
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
17
Corporate Governance – Statement of Compliance - continued
Non-compliance with the Code - continued
Principle 8A: Remuneration Committee (Code provision 8.A.1) and Nominations Committee (Code provision 8.B.1)
Principle 9: Relations with shareholders and the market (Code provision 9.3)
The Board has not established a Remuneration and/or Nominations Committee.
The Board has formulated the view that the size, structure and management of the Company are such that the establishment of an ad hoc Remuneration Committee is not warranted, and the responsibility for the establishment, review and implementation of the Company’s remuneration policies has been retained within the remit of the Board itself. In particular, the Board notes that the current remuneration policy of the Company comprises purely fixed-rate remuneration, with no entitlement to any performance-based remuneration, or any entitlement to share options, retirement pension benefits or other benefits.
Furthermore, the Board believes that the formal and transparent procedure for the nomination and appointment of directors contained in the Articles of Association is commensurate to the size and operations of the Company, and does not consider the requirement to establish an ad hoc Nominations Committee to be necessary for the Company.
There are no formal procedures in place within the Company for the resolution of conflicts between minority and controlling shareholders, nor do the Memorandum and Articles of Association of the Company contemplate any mechanism for arbitration in these instances.
Principle 9: Relations with shareholders and the market (Code provision 9.4)
The Company does not have a formal policy in place to allow minority shareholders to present an issue to the Board. In practice, however, the open channel of communication between the Company and minority shareholders via the office of the company secretary and the Chairman is such that any issue that may merit bringing to the attention of the Board may be transmitted via the company secretary or the Chairman, who is in attendance at all meetings of the Board of Directors.
Internal Controls
The key features of the Company’s systems of internal controls are as follows:
The Board is responsible for the Company’s system of internal controls and for reviewing its effectiveness. Such a system is designed to achieve business objectives and to manage rather than to eliminate the risk of failure to achieve business objectives and can only provide reasonable assurance against material error, losses or fraud.
Notwithstanding his resignation on 21st September, 2021 as Executive Director of the Company, authority to manage the Company’s subsidiary was and remains delegated to Mr. Andrew Ganado within the limits set by the Board of Directors and the other Directors of Melite Properties S.r.l. In this respect, Mr.Ganado is responsible to control, report, monitor and assess risks and their financial implications, and report same to the said boards, and to take timely corrective actions where necessary.
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
18
Corporate Governance – Statement of Compliance - continued
Internal Controls - continued
The Board also approves, after review and recommendation by the Audit Committee, the transfer of funds and other amounts payable to companies within the same group, and ensures that these are subject to terms and conditions which are on an arm’s length basis.
Annual General Meeting
Annual General Meeting (AGM)
The AGM is the highest decision-making body of the Company.
All shareholders registered in the shareholders’ register at the relevant registration record date, have the right to participate in the AGM and to vote thereat. A shareholder who cannot participate in at the AGM can be represented by proxy.
A general meeting is deemed to have been duly convened if at least twenty-one (21) days’ notice is given in writing to all persons entitled to receive such notice, which must specify the place, the day and the hour of the meeting, and in case of special business, the general nature of that business, and shall be accompanied by a statement regarding the effect and scope of any proposed resolution in respect of such special business. The notice period may be reduced to fourteen (14) days if certain conditions are satisfied. The quorum of shareholders required is not less than 51% of the nominal value of the issued shares entitled to attend and vote at the meeting.
The agenda of the AGM will comprise of the ordinary business of the AGM, covering the presentation and approval of the Annual Financial Report and Financial Statements, the declaration of dividends, election of directors and the approval of their remuneration, the appointment of the auditors and the authorisation of the directors to set the auditors’ fees, together with any special business specified in the notice calling the AGM.
Extraordinary general meetings (EGMs)
The Directors may convene an extraordinary general meeting whenever they think fit. In addition, any member/s of the Company holding at least ten per cent (10%) of the equity securities of the Company conferring a right to attend and vote at general meetings of the Company, may convene an extraordinary general meeting. During the year under review, the Company held one EGM, on 30 August 2021.
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
19
Corporate Governance – Statement of Compliance - continued
Extraordinary general meetings (EGMs) - continued
As explained in a company announcement published on 31 August, 2021 (MTE24), during such meeting, the shareholders were requested, by the Board of Directors of the Company, to consider whether the shareholders would be in a position to provide additional support to the Company (over and above the support provided until such date) notwithstanding that there had been a delay in the convening of a bondholders’ meeting. At the time, the Board of Directors of the Company was informed that, in the circumstances, the shareholders were not in a position to uphold the request tabled at the meeting. The Board of Directors of the Company undertook to convene a further Extraordinary General Meeting of the Company immediately following conclusion of the Bondholders’ meeting, once held. The bondholders’ meeting was held and adjourned on 12 November, 2021 as reported in the company announcement published on the same date (MTE32). The ensuing extraordinary general meeting was eventually held on 28 January, 2022 as reported in the company announcement published on the same date (MTE34). During such meeting, it was resolved: (1) to re-designate the authorised share capital of the Company from ten million Euro (€10,000,000) divided into ten million (10,000,000) Ordinary Shares of a nominal value of one Euro (€1) each to nine million three hundred and forty-two thousand (9,342,000) Ordinary Shares of a nominal value of one Euro (€1) each and six hundred and fifty-eight thousand (658,000) redeemable Preference Shares of a nominal value of one Euro (€1) each; 2. to increase the issued share capital of the Company by the issue and allotment of six hundred and fifty-eight thousand (658,000) redeemable Preference Shares of a nominal value of one Euro (€1), fully paid up, in favour of Alf Mizzi & Sons Ltd, in consideration for the ex gratia contribution of €658,000 made by Alf Mizzi & Sons Ltd as described in company announcements MTE31 and MTE32, and to approve the terms of issuance of such redeemable Preference Shares contained in the proposed new Memorandum and Articles of Association of the Company referred to in the following resolution; and 3. that the Memorandum and Articles of Association of the Company be replaced in their entirety with the new Memorandum and Articles of Association tabled at the meeting.
Approved by the Board of Directors on 29 April 2022.
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
20
Statements of financial position
As at 31 December
Group
Company
2021
2020
2021
2020
Notes
€
€
€
€
ASSETS
Non-current assets
Right-of-use assets
4
-
-
Property, plant and equipment
5
-
-
Investment in subsidiary
6
-
-
2,585,647
5,005,775
Equity instruments at FVTOCI
7
-
-
Loans receivable
8
-
-
6,505,626
6,505,626
Deferred tax asset
13
-
-
Total non-current assets
9,091,273
11,511,401
Current assets
Trade and other receivables
9
27,167
710,526
Cash and cash equivalents
10
5,479
239,415
Total current assets
32,646
949,941
Total assets
9,123,919
12,461,342
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
21
Statements of financial position - continued
As at 31 December
Group
Company
2021
2020
2021
2020
Notes
€
€
€
€
EQUITY AND LIABILITIES
Capital and reserves
Share capital
11
5,874,406
5,874,406
Other reserves
12
1,086,185
637,560
Fair value reserve
-
-
Accumulated losses
(7,395,968 )
(5,270,775 )
(7,770,070)
(3,816,958)
(Net deficiency)/total equity
(435,377 )
(809,479)
2,695,008
Liabilities
Non-current liabilities
Borrowings
14
9,404,473
9,452,557
Lease liabilities
15
-
-
Total non-current liabilities
9,404,473
9,452,557
Current liabilities
Borrowings
14
94,546
-
Lease liabilities
15
-
-
Trade and other payables
16
434,379
313,777
Current tax liabilities
-
-
Total current liabilities
528,925
313,777
Total liabilities
9,933,398
9,766,334
Total equity and liabilities
9,123,919
12,461,342
The accompanying notes are an integral part of these consolidated financial statements.
The consolidated financial statements were approved and authorised for issue by the Board of Directors on 29 April 2022. The financial statements were signed on behalf of the Board of Directors by Paul Mercieca (Chairman) and Christian Ganado (Director) as per the Directors' Declaration on ESEF Annual Financial Report submitted in conjunction with the Annual Financial Report.
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
22
Income statements
Year ended 31 December
Group
Company
2021
2020
2021
2020
Notes
€
€
€
€
Revenue
17
-
-
Cost of sales
18
(1,749,989 )
(2,265,101 )
-
-
Gross loss
(274,388 )
(695,848 )
-
-
Administrative expenses
18
(582,430 )
(1,883,800 )
(370,099)
(273,071)
Impairment on leasehold premia, net of recovery
19
(748,134 )
(1,026,118 )
-
-
Other operating income
20
160,000
170,000
Operating loss
(929,683 )
(3,573,842 )
(210,099)
(103,071)
Impairment of investment in subsidiary
6
-
-
(3,603,317)
(2,498,998)
Finance income
8
-
-
396,843
372,396
Finance costs
21
(1,144,685 )
(1,256,136 )
(493,555)
(481,658)
Loss before tax
(2,074,368 )
(4,829,978 )
(3,910,128)
(2,711,331)
Income tax (expense)/credit
23
(50,825 )
(42,984)
7,570
Loss for the year
(2,125,193 )
(4,235,351 )
(3,953,112)
(2,703,761)
Attributable to:
Owners of the company
(2,125,193 )
(4,235,351 )
(3,953,112)
(2,703,761)
The accompanying notes are an integral part of these consolidated financial statements.
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
23
Statements of comprehensive income
Year ended 31 December
Group
Company
2021
2020
2021
2020
€
€
€
€
Loss for the year
(2,125,193 )
(4,235,351 )
(3,953,112)
(2,703,761)
Items that will not be reclassified subsequently to profit or loss
Released on disposal of equity instruments designated at FVTOCI
(82,826 )
-
-
Total comprehensive expense
(2,208,019 )
(4,235,351 )
(3,953,112)
(2,703,761)
Attributable to:
Owners of the company
(2,208,019 )
(4,235,351 )
(3,953,112)
(2,703,761)
The accompanying notes are an integral part of these consolidated financial statements.
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
24
Statements of changes in equity
Group
Share capital
Other reserves
Fair valuereserve
Accumulated losses
Total
Note
€
€
€
€
€
Balance as at 1 January 2020
(1,035,424 )
Comprehensive expense
Loss for the year - total comprehensive expense for the year
(4,235,351 )
(4,235,351 )
Transactions with owners
Additional capital contribution
12
Balance as at 31 December 2020
(5,270,775 )
Balance as at 1 January 2021
(5,270,775 )
Comprehensive expense
Loss for the year
(2,125,193 )
(2,125,193 )
Other comprehensive expense
(82,826 )
(82,826 )
Total comprehensive expense for the year
(82,826 )
(2,125,193 )
(2,208,019 )
Transactions with owners
Ex-gratia contribution recevied from one of the shareholders of the parent company
12
Balance as at 31 December 2021
(7,395,968 )
(435,377 )
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
25
Statements of changes in equity - continued
Company
Share capital
Other reserves
Accumulated losses
Total
Note
€
€
€
€
Balance as at 1 January 2020
5,874,406
-
(1,113,197)
4,761,209
Comprehensive expense
Loss for the year - total comprehensive expense for the year
-
-
(2,703,761)
(2,703,761)
Transactions with owners
Additional capital contribution
12
-
637,560
-
637,560
Balance as at 31 December 2020
5,874,406
637,560
(3,816,958)
2,695,008
Balance as at 1 January 2021
5,874,406
637,560
(3,816,958)
2,695,008
Comprehensive expense
Loss for the year – total comprehensive expense for the year
-
-
(3,953,112)
(3,953,112)
Transactions with owners
Ex-gratia contribution recevied from one of the shareholders of the parent company
12
-
448,625
-
448,625
Balance as at 31 December 2021
5,874,406
1,086,185
(7,770,070)
(809,479)
The accompanying notes are an integral part of these consolidated financial statements.
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
26
Statements of cash flows
Year ended 31 December
Group
Company
2021
2020
2021
2020
Notes
€
€
€
€
Cash flows from operating activities
Cash generated from/(used in) operations
24
(588,147)
(449,205)
Finance costs
(446,257 )
(450,198 )
(446,257)
(450,198)
Finance income
-
-
396,843
372,396
Tax paid/refunds
-
-
Government grants received
-
-
Net cash generated from/(used in) operating activities
(637,561)
(527,007)
Cash flows from investing activities
Additions of right-of-use assets
4
(2,229 )
(59,901 )
-
-
Purchase of property, plant and equipment
5
(320 )
-
-
Loans to subsidiary
8
-
-
-
(575,626)
Purchase of equity instruments at fair value through other comprehensive income
7
(89,683 )
-
-
Proceeds from sale of equity instruments at fair value through other comprehensive income
7
-
-
Net cash generated from/(used in) investing activities
-
(575,626)
Cash flow from financing activities
Principal elements of lease payments
(1,767,759 )
(2,164,498 )
-
-
Proceeds from capital contribution
448,625
637,560
Proceeds from loans
-
449,000
Net advances to landlords as security guarantees
(279,964 )
-
-
Net cash (used in)/generated from financing activities
(1,599,098 )
(615,498 )
448,625
1,086,560
Net movement in cash and cash equivalents
(106,782 )
(188,936)
(16,073)
Cash and cash equivalents at beginning of year
10
194,415
210,488
Cash and cash equivalents at end of year
10
5,479
194,415
The accompanying notes are an integral part of these consolidated financial statements.
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
27
Notes to the financial statements
1.Summary of significant accounting policies
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below.
1.1 Basis of preparation
Standards, interpretations and amendments to published standards effective in 2021
In 2021, the company adopted new standards, amendments and interpretations to existing standards that are mandatory for the company’s accounting year beginning on 1 January 2021. The adoption of these revisions to the requirements of IFRSs as adopted by the EU did not result in substantial changes to the company’s accounting policies, not impacting the company’s financial performance and position.
Standards, interpretations and amendments to published standards that are not yet effective
Certain new standards, amendments and interpretations to existing standards have been published by the date of authorisation for issue of these financial statements but are mandatory for the company’s accounting periods beginning after 1 January 2021. The company has not early adopted these revisions to the requirements of IFRSs as adopted by the EU and the company’s Directors are of the opinion that there are no requirements that will have a possible significant impact on the company’s financial statements in the period of initial application.
1.1.1 Assessment of going concern assumption
The Group’s financial results for the year ended 31 December 2021 are impacted by impairment charges amounting to €748,134 (2020: €1,026,118) attributable to impairments, net of recoveries on leasehold premia and losses on leasehold premia related to rescinded properties. In view of the subsidiary’s losses referred to above, the parent company has reflected in its standalone financial information an impairment charge of €3,603,317 (2020: €2,498,998) on the carrying amount of the investment in subsidiary.
As at 31 December 2021, the Group is in a net current liability position of €462,741 (2020: €546,521) as a result of the recognition of lease liabilities on the Group’s rental commitments, in accordance with IFRS 16, with no corresponding asset recognised for the related rental income streams. As at year end the Group is also in a net current liability position of €435,377 (2020: net asset position of €1,324,017).
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
28
1.Summary of significant accounting policies - continued
1.1 Basis of preparation - continued
1.1.1 Assessment of going concern assumption - continued
The emergence of the COVID-19 pandemic which continued in 2021, caused disruption to businesses and economic activity, and this has been significant to the Melite Finance Group.
The Company’s dependence on Melite Properties
The Melite Finance Group is largely dependent on the business and prospects of its subsidiary, Melite Properties. As set out in the Prospectus, the proceeds from the issue of the Bonds were loaned, in part (circa €5.9 million), by the Company to Melite Properties for the purposes of: settlement of debts due; and refurbishing and embellishing retail outlets located in leading locations in Italy over which, from time to time, it enjoys the rights attached to the lease of such immovable property, and/or for acquiring such rights over additional retail outlets for sub-letting. The continued servicing of the Bonds is entirely dependent – and the redemption of the Bonds is in part dependent – on Melite Properties being able to fulfil its repayment obligations towards the Company in terms of the said loan.
The current situation
Melite Properties’ principal operation consists of the letting and sub-letting of retail outlets located in Italy, and therefore the longer-term prospects of the Melite Finance Group are intrinsically linked to the development in the retail real estate market in Italy, particularly the market for prime locations on the primary high streets of the Italian peninsula and islands. The Melite Finance Group’s commercial lease agreements typically relate to retail outlets located in the prime positions in high streets of cities such as Milan and Turin and in the main retail area of towns such as Pavia, Como and Treviso.
As described in the financial statements for the year ended 31 December 2020, both the retail landscape and the commercial real estate landscape in Northern Italy, where the vast majority of the Stores are located, have been subjected to significant and unprecedented disruption as a result of the pandemic. Following the outbreak of COVID-19 in Italy, particularly in Northern Italy where most of the leases held by Melite Properties are situated, all retail outlets in Italy were shut with effect from 10 March 2020. Retail outlets were permitted to re-open as from 18 May 2020 but virtually all of Melite Properties’ tenants had elected not to re-open for the major part of the year, in common with many retail outlets across Italy. Further to a spike in the number of positive COVID-19 cases recorded across Italy over the latter months of 2020, the Italian government re-introduced a series of restrictive measures as from early November. Such measures subsisted throughout the month of December 2020 and only started to be gradually relaxed in parts of Italy in mid-2021. Whilst 2021 experienced some recovery in the retail sector, the outlook remained uncertain given that COVID-19 continued to persist throughout 2021. The current uncertainty in the market is compounded by the situation in Ukraine.
Melite Properties has so far maintained payments of rent to landlords (as reduced, where possible, further to negotiations conducted by management) and remains in contact with them as this is considered essential for the purpose of the safeguarding of the company’s property rights over the Stores it has retained.
As stated in the Directors’ report on the financial statements for the year ended 31 December 2020, Melite Italia entered into a restructuring of its business and debts in terms of a procedure available in terms of Italian law. Accordingly, sourcing alternative tenants for the Stores which were operated by Melite Italia became a key priority for the Company and Melite Properties (together the “Melite Finance Group”). During the course of 2020 and 2021, new tenants were successfully found for all the properties retained by Melite Properties and appropriate agreements entered into accordingly.
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1.Summary of significant accounting policies - continued
1.1 Basis of preparation - continued
1.1.1 Assessment of going concern assumption - continued
In the context of the above, the Board of Directors of the Company remained focussed on taking such steps as may be necessary to ensure that the underlying business retains as much value as possible to enable the Company to continue, insofar as is possible, to service its obligations to the holders of the €9,250,000 secured bonds 2028 issued by the Company (the “Bonds”).
Following the onset of COVID-19 and the decision by Melite Italia to enter into voluntary administration, and as described in the financial statements for the year ended 31 December 2020, a restructuring plan was agreed to by the Board of Directors of the Company. As part of the restructuring plan, Melite Properties rescinded ten stores during the course of 2020 and 2021. This was necessary to channel all available cash towards safeguarding what the Board of Directors of Melite Properties believe to be the more valuable leases that are essential to secure the fulfilment of its obligations towards the Company and, in turn, the Melite Finance Group’s long-term survival. The leases that were rescinded relate to those stores (such as stores located within commercial centres) which, based on advice from real estate specialists, were expected to take longer to sub-let.
Following the rescission of these contracts Melite Properties was left with a total of 19 stores (the “Retained Stores”), with a combined valuation, as at 31 December 2021, of €9,172,385 million. These 19 stores had a value of €8,527,424 million as at 31 December 2020 reflecting the slight improvement in trading conditions that are now prevalent in Italy. Notwithstanding the challenging economic climate and rapidly evolving conditions, management concluded or retained agreements for the sub-letting of eight stores to third party operators. Furthermore, in June 2021, management signed an agreement with a third-party retail operator which secured the sub-letting of another nine stores for a fixed rent and an additional two stores on a profit-sharing basis.
During 2021 Melite Properties was successful in securing Italian state credits for the amount of €521,775 as compensation for loss of rent during the forced closure of the retail outlets.
In view of the state credits received from the Italian state referred to above and the capital injection referred to below, and subject to no significant deterioration in market conditions that may arise from the uncertainties referred to earlier, the Group’s cashflow for the next 12 months appears to be manageable.
Events after the reporting period
(i)Issue of preference share capital
On 19 November 2021, one of the shareholders of the parent company, had advanced €448,625. On 28 January 2022 a further €209,375 was advanced to the Company and the Group, with a view of the total advance being converted into preference share capital. The capitalisation was approved by the shareholders of the company on 28 January 2022 and effected on 1 February 2022.
(ii)Melite Italia restructuring
On the 27 April 2022, the Melite Italia S.r.l. voluntary restructuring process was concluded whereby an irrevocable offer by a third-party retail operator to acquire Melite Italia S.r.l.’s branch of business was accepted by the Italian Court following a judicial auction process. This has the effect of the third-party retail operator stepping into the shoes of Melite Italia S.r.l. in terms of its tenancy of 11 of the 19 stores to which Melite Properties S.r.l. holds title. The successful bidder has 30 days to meet certain obligations included in its offer as confirmed by the Court.
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1.Summary of significant accounting policies - continued
1.1 Basis of preparation - continued
1.1.1 Assessment of going concern assumption - continued
Based on the analysis referred to above, the Directors continue to consider the going concern assumption in the preparation of the Group’s financial statements as appropriate as at the date of authorisation for issue of the 2021 financial statements. However, the above conditions surrounding the retail sector in Italy, the impact of the pandemic on the operations and financial position of the Group, and the tenancy risk that will remain, indicate the existence of a material uncertainty, which may cast significant doubt on the ability of the Group to continue as a going concern.
1.2 Consolidation
(a) Subsidiaries
Subsidiaries are all entities (including structured entities) over which the group has control. The group controls an entity when the group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.
The Group applies the acquisition method of accounting to account for business combinations that fall within the scope of IFRS 3. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed (identifiable net assets) in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the recognised amounts of the acquiree’s identifiable net assets.
Goodwill is initially measured as the excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired. If this is less than the fair value of the identifiable net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in profit or loss.
Upon consolidation, inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated but considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.
When the Group ceases to have control, any retained interest in the entity is remeasured to its fair value at the date when control is lost, with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss.
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1.Summary of significant accounting policies - continued
1.2 Consolidation
(a) Subsidiaries
In the company’s separate financial statements, investments in subsidiaries are accounted for by the cost method of accounting, i.e. at cost less impairment. Cost includes directly attributable costs of the investment. Provisions are recorded where, in the opinion of the Directors, there is an impairment in value. Where there has been an impairment in the value of an investment, it is recognised as an expense in the period in which the diminution is identified. The results of subsidiaries are reflected in the Company’s separate financial statements only to the extent of dividends receivable. On disposal of an investment, the difference between the net disposal proceeds and the carrying amount is charged or credited to profit or loss.
1.3 Segment reporting
The Group determines and presents operating segments based on the information that internally is provided to the Board of Directors, which is the Group’s chief operating decision-maker in accordance with the requirements of IFRS 8, ‘Operating Segments’.
An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components, and for which discrete financial information is available. An operating segment’s operating results are reviewed regularly by the Board of Directors to make decisions about resources to be allocated to the segment and to assess its performance executing the function of the chief operating decision-maker. The Board of Directors considers the Group to be made up of one operating segment.
1.4 Foreign currency translation
(a) Functional and presentation currency
Items included in these financial statements are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The financial statements are presented in euro which is the Group’s functional and presentation currency.
(b)Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss.
1.5 Property, plant and equipment
Property, plant and equipment comprising furniture, fittings and fixtures is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items.
Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to profit or loss during the financial period in which they are incurred.
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1.Summary of significant accounting policies - continued
1.5 Property, plant and equipment – continued
Depreciation is calculated on the straight line method to write off the cost of the assets to their residual values over their estimated useful life as follows:
%
Fixtures, furniture and fittings
12 - 15
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.
An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.
Gains and losses on disposals of property, plant and equipment are determined by comparing the proceeds with carrying amount and are recognised within ‘operating expenses’ in the statement of comprehensive income.
1.6 Impairment of non-financial assets
Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at the end of each reporting period.
1.7 Financial assets
1.7.1 Classification
The Group classifies its financial assets in the following measurement categories;
•those to be measured subsequently at fair value (either through OCI or through profit or loss), and
•those to be measured at amortised cost.
The classification depends on the Group’s business model for managing the financial assets and the contractual terms of the cash flows.
For assets measured at fair value, gains and losses will either be recorded in profit or loss or OCI. For investments in equity instruments that are not held-for-trading, this will depend on whether the Group has made an irrevocable election at the time of initial recognition to account for the equity investment at fair value through other comprehensive income (FVOCI).
The Group reclassifies debt instruments when and only when its business model for managing those assets changes.
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1.Summary of significant accounting policies - continued
1.7 Financial assets
1.7.2 Recognition and derecognition
Regular way purchases and sales of financial assets are recognised on trade-date, the date on which the Company commits to purchase or sell the asset. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the company has transferred substantially all the risks and rewards of ownership.
1.7.3 Measurement
At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss (FVPL), transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at FVPL are expensed in profit or loss.
Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest.
Debt instruments
Subsequent measurement of debt instruments depends on the Group’s business model for managing the asset and the cash flow characteristics of the asset. There are three measurement categories into which the Group classifies its debt instruments:
•Amortised cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortised cost. Interest income from these financial assets is included in finance income using the effective interest rate method. Any gain or loss arising on derecognition is recognised directly in profit or loss and presented in other gains/(losses) together with foreign exchange gains and losses. Impairment losses are presented as separate line item in the statement of profit or loss.
•FVOCI: Assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets’ cash flows represent solely payments of principal and interest, are measured at FVOCI. Movements in the carrying amount are taken through OCI, except for the recognition of impairment gains or losses, interest income and foreign exchange gains and losses which are recognised in profit or loss. When the financial asset is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to profit or loss and recognised in other gains/(losses).
Interest income from these financial assets is included in finance income using the effective interest rate method. Foreign exchange gains and losses are presented in other gains/(losses) and impairment expenses are presented as a separate line item in the statement of profit or loss.
•FVPL: Assets that do not meet the criteria for amortised cost or FVOCI are measured at FVPL. A gain or loss on a debt investment that is subsequently measured at FVPL is recognised in profit or loss and presented net within other gains/(losses) in the period in which it arises.
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1.Summary of significant accounting policies - continued
1.7 Financial assets - continued
1.7.3 Measurement - continued
Equity instruments
The Group subsequently measures all equity investments at fair value. Where the Group’s management has elected to present fair value gains and losses on equity investments in OCI, there is no subsequent reclassification of fair value gains and losses to profit or loss following the derecognition of the investment. Dividends from such investments are recognised in profit or loss as other income when the Group’s right to receive payments is established.
Changes in the fair value of financial assets at FVPL are recognised in other gains/(losses) in profit or loss as applicable. Impairment losses (and reversal of impairment losses) on equity investments measured at FVOCI are not reported separately from other changes in fair value.
1.7.4 Impairment
The Group assesses on a forward looking basis the expected credit losses associated with its debt instruments carried at amortised cost and FVOCI. The impairment methodology applied depends on whether there has been a significant increase in credit risk.
For trade and other receivables, the Group applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognised from initial recognition of the receivables.
1.8 Trade and other receivables
Trade receivables comprise amounts due from customers for merchandise sold or services performed in the ordinary course of business. If collection is expected in one year or less (or in the normal operating cycle of the business if longer), they are presented as current assets. If not, they are presented as non-current assets.
Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less expected credit loss allowances (Note 1.7.3). The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in profit or loss. When a receivable is uncollectible, it is written off against the allowance account for trade and other receivables. Subsequent recoveries of amounts previously written off are credited against profit or loss. Impairment of financial assets is described in Note 1.7.4 above.
1.9 Cash and cash equivalents
Cash and cash equivalents are carried in the statement of financial position at face value. In the statement of cash flows, cash and cash equivalents include cash in hand and deposits held at call with banks.
1.10 Share capital
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new ordinary shares are shown in equity as a deduction, net of tax, from the proceeds.
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1.Summary of significant accounting policies - continued
1.11 Financial liabilities
The Group recognises a financial liability in its statement of financial position when it becomes a party to the contractual provisions of the instrument. The Group’s financial liabilities are classified as financial liabilities which are not at fair value through profit or loss (classified as ‘Other liabilities’) under IFRS 9. Financial liabilities not at fair value through profit or loss are recognised initially at fair value, being the fair value of the consideration received, net of transaction costs that are directly attributable to the acquisition or the issue of the financial liability. These liabilities are subsequently measured at amortised cost. The Group derecognises a financial liability from its statement of financial position when the obligation specified in the contract or arrangement is discharged, is cancelled or expires.
1.12 Borrowings
Borrowings are recognised initially at the fair value of proceeds received, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in profit or loss over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least twelve months after the end of the reporting period.
Issue costs incurred in connection with the issue of the bonds include professional fees, printing, listing, registration, underwriting, management fees, selling costs and other miscellaneous costs.
1.13 Trade and other payables
Trade payables comprise obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities.
Trade and other payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.
1.14 Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.
1.15 Provisions
Provisions for legal claims are recognised when the group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Provisions are not recognised for future operating losses.
Provisions are measured at the present value of the expenditure expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense.
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1.Summary of significant accounting policies - continued
1.16 Current and deferred tax
The tax expense for the period comprises current and deferred tax. Tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively.
Deferred tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the end of the reporting period and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.
Deferred tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.
1.17 Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of the group’s activities. Revenue is shown net of value-added tax, returns, rebates and discounts.
The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and when specific criteria have been met for each of the Group’s activities as described below.
(a) Sales of services
Revenue from services is generally recognised in the period the services are provided, based on the services performed to date as a percentage of the total services to be performed. Accordingly, revenue is recognised by reference to the stage of completion of the transaction under the percentage of completion method.
(a)Rental income
Rental income is recognised in profit or loss on a straight-line basis over the term of the lease.
(c) Interest income
Interest income is recognised for all interest-bearing instruments using the effective interest method.
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1.Summary of significant accounting policies - continued
1.18 Leases
The Group is the lessee
At inception of a contract, the Group assesses whether the contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
Leases are recognised as a right of use asset and a corresponding liability at the date at which the leased asset is available for use by the Group.
Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments:
•fixed payments (including in-substance fixed payments), less any lease incentives receivable;
•variable lease payments that are based on an index or a rate, initially measured using the index or rate as at the commencement date;
•amounts expected to be payable by the Group under residual value guarantees;
•the exercise price of a purchase option if the Group is reasonably certain to exercise that option; and
•payments of penalties for terminating the lease, if the lease term reflects the Group exercising that option.
Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability.
The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, which is generally the case for leases in the Group, the respective lessee’s incremental borrowing rate is used, being the rate that the individual lessee would have to pay to borrow the funds necessary to obtain an asset of similar value to the right of use asset in a similar economic environment with similar terms, security and conditions.
To determine the incremental borrowing rate, the Group:
•where possible, uses recent third-party financing received by the lessee as a starting point, adjusted to reflect changes in financing conditions since third party financing was received;
•uses a build-up approach that starts with a risk-free interest rate adjusted for credit risk for leases held by the Group, where there is no third party financing; and
•makes adjustments specific to the lease, e.g. term, country, currency and security.
Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.
Right of use assets are measured at cost comprising the following:
•the amount of the initial measurement of lease liability;
•any lease payments made at or before the commencement date less any lease incentives received; and
•any initial direct costs.
Initial direct costs include premia paid on leasehold property. Premium paid on leasehold property are shown at historical cost. Premium paid on outlets held under a contratto di locazione have an indefinite useful life. Therefore, such premia are not depreciated but are subject to an annual impairment test at the end of each financial year (Note 1.7). Premium paid on outlets held under a contratto d’affitto di ramo d’azienda are depreciated on a straight-line basis over the lease term of the leasehold property, net of any residual value.
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1.Summary of significant accounting policies - continued
1.18 Leases - continued
The Group is the lessee - continued
Right of use assets are generally depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. If the Group is reasonably certain to exercise a purchase option, the right of use asset is depreciated over the underlying asset’s useful life.
Payments associated with short-term leases of equipment and vehicles and all leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less.
In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options are only included in the lease term if the lease is reasonably certain to be extended. Periods after termination options are included in the lease term unless it is reasonably certain that the lease will be terminated.
For leases of properties, the following factors are normally the most relevant:
•If there are significant penalties to terminate (or not extend), the Group is typically reasonably certain to extend (or not terminate);
•If any leasehold improvements are expected to have a significant remaining value, the Group is typically reasonably certain to extend (or not terminate);
•Otherwise, the Group considers other factors including historical lease durations and the costs and business disruption required to replace the leased asset.
The lease term is reassessed if an option is actually exercised (or not exercised) or the Group becomes obliged to exercise (or not exercise) it. The assessment of reasonable certainty is only revised if a significant event or a significant change in circumstances occurs, which affects this assessment, and that is within the control of the lessee.
The Group is the lessor
Assets leased out under operating leases are included in right of use assets in the statement of financial position and are accounted for as per above. Rental income from operating leases is recognised in profit or loss on a straight-line basis over the lease term. The Group did not need to make any adjustments to the accounting for assets held as lessor as a result of the adoption of the new leasing standard.
1.19 Government grants
Government grants are recognised where there is reasonable assurance that the grant will be received and all attached conditions will be complied with.
Government grants relating to costs are deferred and recognised in profit or loss on a systematic basis over the period necessary to match them with the costs that they are intended to compensate.
Government grants relating to the purchase of property, plant and equipment or other assets are included in non-current liabilities as deferred income and they are credited to profit or loss on a straight-line basis over the expected lives of the related assets.
Grants related to income are presented either as a credit in the income statement, separately under a general heading ‘other income’.
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1.Summary of significant accounting policies - continued
1.20 Borrowing costs
Borrowing costs which are incurred for the purpose of acquiring or constructing qualifying property, plant and equipment are capitalised as part of its cost. Qualifying assets are assets that necessarily take a substantial period of time to get ready for their intended use or sale. Borrowing costs are capitalised while acquisition or construction is actively underway, during the period of time that is required to complete and prepare the asset for its intended use. Capitalisation of borrowing costs is ceased once the asset is substantially ready for their intended use or sale and is suspended if the development of the asset is suspended. All other borrowing costs are expensed.
Borrowing costs are recognised for all interest-bearing instruments on an accrual basis using the effective interest method. Interest costs include the effect of amortising any difference between initial net proceeds and redemption value in respect of the Group’s interest-bearing borrowings.
1.21 Dividend distribution
Dividend distribution to the Group’s shareholders is recognised as a liability in the Group’s financial statements in the period in which the dividends are approved by the Group’s shareholders.
2.Financial risk management
2.1 Financial risk factors
The Group’s activities potentially expose it to a variety of financial risks: market risk (including foreign exchange risk, price risk and cash flow and fair value interest rate risk), credit risk and liquidity risk. The Group’s overall risk management focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. The Group did not make use of derivative financial instruments to hedge its risk exposures during the current and preceding financial years.
The Board provides principles for overall risk management, as well as policies covering risks referred to above and specific areas such as investment of excess liquidity.
(a)Market risk
(i)Foreign exchange risk
The Group is not exposed to foreign exchange risk because its principal assets and liabilities, are denominated in euro. The Group’s interest income, interest expense and other operating expenses are also denominated in euro. Accordingly, a sensitivity analysis for foreign exchange risk disclosing how profit or loss and equity would have been affected by changes in foreign exchange rates that were reasonably possible at the end of the reporting period is not deemed necessary.
(ii)Price risk
As at 31 December 2020 and prior to their disposal, the group was exposed to equity securities price risk because of investments held by the group amounting to €563,972 and classified in the statement of financial position as equity investments at fair value through other comprehensive income. All the equity instruments were disposed during the year under review, and hence such risk has been fully eliminated. In previous accounting periods, the Directors managed this risk by reviewing on a regular basis investment and market performance.
The sensitivity analysis for equity risk illustrates how changes in fair value of equity securities will fluctuate because of changes in market prices, whether these changes are caused by factors specific to the individual equity issuer, or factors affecting all similar equity securities traded in the market. As at 31 December 2020, had the equity prices increased/decreased by 10%, with all other variables held constant, the impact on equity would have been €56,397.
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2.Financial risk management - continued
2.1 Financial risk factors - continued
(a)Market risk - continued
(iii)Cash flow and fair value interest rate risk
The Group is exposed to risks associated with the effects of fluctuations in the prevailing levels of the market interest rates on its financing position and cash flows. As at the reporting date, the Company has fixed rate interest-bearing assets comprising of amounts loaned to subsidiary. Accordingly, its revenue and operating cash flows are substantially independent of changes in market interest rates.
As at the statement of financial position date, the Group’s exposure to changes in interest rates on bank accounts held with financial institutions and on interest bearing liabilities was limited as the Group is predominantly subject to fixed interest rates.
Based on the above, the board considers the potential impact on profit or loss of a defined interest rate shift that is reasonably possible at the reporting date to be immaterial.
(b) Credit risk
Credit risk arises from loans receivable from subsidiary, cash and cash equivalents and credit exposures to customers, including outstanding receivables and committed transactions.
The maximum exposure to credit risk at the end of the reporting period in respect of the Group’s financial assets is equivalent to their carrying amount, which is analysed as follows:
At 31 December
Group
Company
2021
2020
2021
2020
€
€
€
€
Financial assets at amortised cost:
Loan receivable from subsidiary (Note 8)
-
-
6,505,626
6,505,626
Trade and other receivables (Note 9)
717,848
979,867
21,087
706,526
Cash and cash equivalents (Note 10)
896,781
540,381
5,479
239,415
1,614,629
1,520,248
6,532,192
7,451,567
The figures disclosed in the table above in respect of trade and other receivables exclude prepayments.
Loan receivable and trade and other receivables
The Company’s loan receivable is due from subsidiary undertaking. The Company monitors intra-group credit exposures at individual entity level on a regular basis and ensures timely performance of these assets in the context of its overall liquidity management.
The loss allowances for these financial assets are based on assumptions about risk of default and expected loss rates. The Company’s management uses judgement in making these assumptions, based on the counterparty’s past history, existing market conditions, as well as forward looking estimates at the end of each reporting period.
As at year-end, based on the Directors’ assessments of these factors and the equity position of the respective counterparty, no impairment charge is considered necessary.
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
41
2.Financial risk management - continued
2.1 Financial risk factors - continued
(b) Credit risk - continued
The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables. The Directors consider both historical analysis and forward-looking information in determining any expected credit loss. Trade receivables were analysed to identify a history of default with its customers and expected payment trends and settlement periods. Management estimates any risk of default to be minimal and the impact would thus be immaterial.
Cash at bank
The credit risk for cash and cash equivalents is considered negligible since the counterparties are reputable banks with high quality external credit ratings. While cash and cash equivalents are also subject to the impairment requirements of IFRS 9, the identified impairment loss was insignificant.
The following table provides information regarding the credit risk exposure with external credit ratings as at 31 December 2021 and 2020:
Group
Company
`
2021
2020
2021
2020
€
€
€
€
BBB+ to BBB-
894,993
307,156
3,691
6,190
Unrated
1,788
233,225
1,788
233,225
896,781
540,381
5,479
239,415
(c) Liquidity risk
The Group is exposed to liquidity risk in relation to meeting future obligations associated with its financial liabilities, which comprise principally the bonds issued to the general public, lease liabilities and other payables (refer to Notes 14, 15 and 16 respectively). Prudent liquidity risk management includes maintaining sufficient cash and liquid assets to ensure the availability of an adequate amount of funding to meet the Group’s obligations.
The Group’s liquidity risk is managed actively by ensuring that cash inflows arising from expected maturities of the Group’s advances to related parties effected out of the bond issue proceeds, together with any related interest receivable, match the cash outflows in respect of the Group’s bond borrowings, covering principal and interest payments, as referred to in Note 14 and reflected in the table below.
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Annual Financial Report and Consolidated Financial Statements - 31 December 2021
42
2.Financial risk management - continued
2.1 Financial risk factors - continued
(c) Liquidity risk - continued
The following table analyses the Group’s financial liabilities into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the tables below are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances, as the impact of discounting is not significant.
Contractual cashflows
Group
Carrying amount
Total
Within 1 year
Between 1and 2 years
Between 2and 5 years
Over5 years
€
€
€
€
€
€
Borrowings
9,961,458
13,334,033
549,025
549,025
2,088,733
10,147,250
Lease liabilities
10,749,244
13,707,819
1,853,545
1,656,537
3,931,951
6,265,786
Trade payables
732,418
732,418
732,418
-
-
-
Balance as at 31 December 2021
21,443,120
27,774,270
3,134,988
2,205,562
6,020,684
16,413,036
Borrowings
9,914,997
13,903,840
448,625
549,025
2,109,515
10,796,675
Lease liabilities
10,063,142
11,159,434
1,328,964
1,461,612
4,070,313
4,298,545
Trade payables
873,518
833,766
833,766
-
-
-
Balance as at 31 December 2020
20,851,657
25,897,040
2,611,355
2,010,637
6,179,828
15,095,220
Contractual cashflows
Company
Carrying amount
Total
Within 1 year
Between 1and 2 years
Between 2and 5 years
Over5 years
€
€
€
€
€
€
Borrowings
9,499,018
12,871,593
549,025
549,025
1,626,293
10,147,250
Trade payables
434,379
434,379
434,379
-
-
-
Balance as at 31 December 2021
9,933,397
13,305,972
983,404
549,025
1,626,293
10,147,250
Borrowings
9,452,557
13,441,400
448,625
549,025
1,647,075
10,796,675
Trade payables
313,777
274,025
274,025
-
-
-
Balance as at 31 December 2020
9,766,334
13,715,425
722,650
549,025
1,647,075
10,796,675
Contractual cashflows for trade payables exclude accrued interest which is included in the Borrowings’ contractual cashflows.
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
43
2.Financial risk management - continued
2.2 Capital risk management
The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders, and to maintain an optimal capital structure to reduce the cost of capital.
The Group monitors capital on the basis of the gearing ratio. The ratio is calculated as net debt divided by total capital. Structural borrowings include borrowings and lease liabilities, less cash and cash equivalents. The gearing ratios at 31 December were as follows:
Group
Company
2021
2020
2021
2020
€
€
€
€
Total borrowings (Note 14)
9,961,458
9,914,997
9,499,018
9,452,557
Total lease liabilities (Note 15)
10,749,244
10,063,142
-
-
Less: Cash in hand and in bank
(Note 10)
(896,781)
(540,381)
(5,479)
(239,415)
Net borrowings
19,813,921
19,437,758
9,493,539
9,213,142
Total equity
(435,377)
1,324,017
(809,479)
2,695,008
Total capital
19,378,544
20,761,775
8,684,060
11,908,150
Gearing
102.2%
93.6%
109.3%
77.4%
2.3 Fair values of financial instruments
At 31 December 2021 and 2020 the carrying amounts of cash at bank, receivables, payables, accrued expenses and short-term borrowings reflected in the financial statements are reasonable estimates of fair value in view of the nature of these instruments or the relatively short period of time between the origination of the instruments and their expected realisation.
The fair values of the interest bearing loans receivable were not significantly different from their carrying amounts at the end of the reporting period based on discounted cash flows using market interest rates prevailing at 31 December 2021 and 2020. The current market interest rates utilised for discounting purposes, which were almost equivalent to the respective instruments’ contractual interest rates, are deemed observable and accordingly these fair value estimates have been categorised as Level 2 within the fair value measurement hierarchy required by IFRS 7, ‘Financial instruments: Disclosures’. Information on the fair value of the Group’s bonds issued to the general public is disclosed in Note 14 to the financial statements. The fair value estimate in this respect is deemed Level 1 as it constitutes a quoted price in an active market.
The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:
•Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).
•Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2).
•Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).
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Annual Financial Report and Consolidated Financial Statements - 31 December 2021
44
2.Financial risk management - continued
2.3 Fair values of financial instruments - continued
The following table presents the Group’s assets that are measured at fair value at 31 December 2021 and 2020.
Group
Level 1
2021
2020
€
€
At 31 December
Available-for-sale financial investments:
- Listed equity securities
-
563,972
Total financial assets at fair value
-
563,972
The fair value of financial instruments traded in active markets is based on quoted market prices at the reporting date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The quoted market price used for financial assets held by the Group is the current bid price and has been obtained directly from the custodian. These instruments are included in Level 1.
3.Critical accounting estimates and judgments
Estimates and judgments are continually evaluated and based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances.
The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions present a risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. The Group’s management also makes judgements, apart from those involving estimations, in the process of applying the entity's accounting policies that may have a significant effect on the amounts recognised in the financial statements.
3.1Fair valuation of right of use assets
As at 31 December 2021, the Group’s right of use assets include leasehold premia amounting to €9,337,882 (2020: €9,943,863). These premia are fair valued on the basis of professional advice, given that such valuation requires the extensive use of judgement and estimates.
There is an active market for the transfer of property rights attached to leases of retail outlets located in Italy, whereby the current holders transfer their residual rights to the retail outlet to other parties for a consideration. The consideration paid typically reflects the differential between the current market rental rate for an outlet and the rental rate stipulated in the lease agreement with the landlord.
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Annual Financial Report and Consolidated Financial Statements - 31 December 2021
45
3.Critical accounting estimates and judgments - continued
3.1Fair valuation of right of use assets - continued
Valuations are performed annually using projected rental streams and the residual value of the property following lapse of the rental period, taking into consideration also the location of the property. The most significant judgements and estimates affecting the valuations include projected rental streams, the residual value of the property and the current market rate for the leasing of outlets in the location of the outlet being valued.
The Directors obtained an assessment of the current market value of the property rights attached to its lease agreements from a specialised real estate valuer based in Italy. These valuations were used as a basis for the initial transfer of the property rights from Melite Italia S.r.l to Melite Properties S.r.l. The valuations were carried out by reference to the current average rental value per sqm (valore locativo mq/anno) for each outlet, which reflects external market factors including the supply and demand for retail outlets in a particular location. In this respect, the valuers made reference to data derived from recent comparable market transactions that would have occurred in the same street where each property is located.
For the purposes of the current year financial statements, the Directors have requested the valuer to update the valuation for the same property based on the market conditions as at 31 December 2021. The valuations are based on the same methodology assumed in the previous valuations used for the purposes of the initial transfer.
4.Right-of-use assets
Right of use assets recognised during the course of the current financial year relates to leasehold properties and premia paid on such properties.
Group
Right-of-use assets
€
At 1 January 2020
Cost
28,370,952
Accumulated depreciation
(2,831,939)
Provision for impairment on leasehold premia
(760,046)
Net book amount
24,778,967
Year ended 31 December 2020
Opening net book value
24,778,967
Additions
59,901
Termination of leasehold agreements
(3,488,963)
Depreciation
(2,349,839)
Impairment on leasehold premia (note 19)
(999,863)
Depreciation released on termination of leasehold agreement
1,245,553
Closing net book value
19,245,756
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Annual Financial Report and Consolidated Financial Statements - 31 December 2021
46
4.Right-of-use assets - continued
Group
Right-of-use assets
€
At 31 December 2020
Cost
24,941,890
Accumulated depreciation
(3,936,225)
Provision for impairment on leasehold premia
(1,759,909)
Net book amount
19,245,756
Year ended 31 December 2021
Opening net book value
19,245,756
Additions
2,229
Lease modifications
2,144,803
Termination of leasehold agreements
(1,511,724)
Depreciation
(1,599,833)
Impairment on leasehold premia (note 19)
(176,185)
Reversal of impairment on leasehold premia (note 19)
264,087
Depreciation released on termination of leasehold agreement
333,574
Closing net book value
18,702,707
At 31 December 2021
Cost
26,171,436
Accumulated depreciation
(5,235,702)
Provision for impairment on leasehold premia
(2,233,027)
Net book amount
18,702,707
The lease modifications to the right-of-use assets amounting to €2,144,803 represent leases whereby the Group renegotiated its lease arrangement with the lessor during the course of the current year.
The income statements show the following amounts relating to leases:
Group
2021
2020
€
€
Depreciation charge of right-of-use assets
1,599,833
2,349,839
Interest expense (included in finance cost) (Note 21)
651,172
774,478
Expense relating to leases of low-value assets (included in administrative expenses)
3,380
-
Lease payments on rescinded lease agreements
82,273
-
Total amount recognised in profit or loss
2,336,658
3,124,317
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Annual Financial Report and Consolidated Financial Statements - 31 December 2021
47
5.Property, plant and equipment
Group
Fixtures,furnitureand fittings
Total
€
€
At 1 January 2020
Cost
592,683
592,683
Accumulated depreciation
(173,913)
(173,913)
Net book amount
418,770
418,770
Year ended 31 December 2020
Opening net book value
418,770
418,770
Disposals
(232,579)
(232,579)
Depreciation
(73,535)
(73,535)
Released of depreciation on disposals
117,434
117,434
Closing net book value
230,090
230,090
At 31 December 2020
Cost
632,369
632,369
Accumulated depreciation
(402,279)
(402,279)
Net book amount
230,090
230,090
Year ended 31 December 2021
Opening net book value
230,090
230,090
Additions
320
320
Depreciation
(57,595)
(57,595)
Closing net book value
172,815
172,815
At 31 December 2021
Cost
632,689
632,689
Accumulated depreciation
(459,874)
(459,874)
Net book amount
172,815
172,815
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
48
6.Investment in subsidiary
Company
2021
2020
€
€
Year ended 31 December
Opening carrying amount
5,005,775
7,504,773
Capital contribution (note i)
1,183,189
-
Impairment loss (note ii)
(3,603,317)
(2,498,998)
Closing carrying amount
2,585,647
5,005,775
At 31 December
Cost
9,807,595
8,624,406
Provision for impairment
(7,221,948)
(3,618,631)
Closing carrying amount
2,585,647
5,005,775
(i)On 31 December 2021, the company waived its right to settlement of the amounts due from its subsidiary. The waiver has been recognised as an additional investment in the subsidiary in the separate financial statements, in accordance with IAS 8 because the substance of the transaction is deemed to be a capital contribution by the parent in its capacity as shareholder.
(ii)The impairment losses on the investment in the subsidiary recognised in the income statement during the year amounted to €3,603,317 (2020: €2,498,998). During the period, the company carried out a review of the recoverable amount of its investment in subsidiary, this led to the recognition of an additional impairment loss. In determining the amount of impairment, the Directors took into consideration the net asset value of the subsidiary which reported a significant decrease in the current year due to the losses incurred during the period, future projected rental, rental margins and the fair value of the leasehold premia.
The subsidiary at 31 December 2021 and 2020, whose results and financial position affected the figures of the Group, is shown below:
Registered office
Class of shares held
Percentage of shares held
2021
2020
%
%
Melite Properties S.r.l
Vittor Pisani 20, 20124, Milan, Italy
Ordinary shares
100
100
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
49
7.Equity investments at fair value through other comprehensive income
Group
2021
2020
€
€
Opening net book amount
563,972
670,065
Additions
-
89,683
Disposals
(563,972)
(195,776)
Closing carrying amount
-
563,972
The Group’s equity investments, as at 31 December 2020 consisted of equity instruments in listed foreign companies, namely Banca Popolare di Milano, Anima Sforzesco and Anima Alto Potenziale Globale and Anima FO Trading. These investments presented the Group with opportunity for return through dividend or capital appreciation. Upon initial recognition, the Directors had elected to designate these investments as equity instruments designated at fair value through OCI as the Group believed that recognising short-term fluctuations in the investment’s fair value in profit or loss would not have been consistent with the Group’s strategy for holding these investments for long-term purposes and realising their performance potential in the long run. Accordingly, these equity investments were categorised as Level 1 within the fair value measurement hierarchy required by IFRS 13. The change in the fair value of these investments is recognised in other comprehensive income in a fair value reserve.
These financial assets were held as security on properties. During the year, the group disposed of all its equity investments designated at FVOCI as these investments were no longer required following the rescission of a number of properties. The fair value of these equity instruments on the date of sale was €549,710 and the accumulated gains on the derecognition of the investments amounted to €68,564. In 2021, the group received dividends amounting to €2,000 (2020: €2,000).
8.Loans receivable
Company
2021
2020
€
€
Non-current
Loans to subsidiary
6,505,626
6,505,626
The loans to subsidiary are subject to interest at a fixed interest rate of 6.1% (2020: 6.1%) per annum, are unsecured and repayable by not later than 23 November 2028. The interest charged on the loan is recognised in profit or loss and presented as finance income.
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
50
9.Trade and other receivables
Group
Company
2021
2020
2021
2020
€
€
€
€
Current
Trade receivables
138,272
146,923
-
-
Amounts due from parent
121,006
-
11,661
-
Amounts due from subsidiary
-
-
-
700,329
Amounts due from fellow subsidiary
1,376
1,376
-
-
Accrued income - fellow subsidiary, net of provision
351,915
393,627
-
-
Accrued income – parent
-
286,123
-
-
Prepayments and accrued income
156,249
203,439
6,080
4,000
Other receivables and indirect taxation
105,279
151,818
9,426
6,197
874,097
1,183,306
27,167
710,526
Amounts due from parent, subsidiary and fellow subsidiary are unsecured, interest free and repayable on demand.
Amounts due from subsidiary include a management fee recognised in profit or loss and presented as other income.As disclosed in note 6, the company waived its right to settlement of amounts due from its subsidiary and hence this financial asset measured at amortised cost was derecognised against an additional investment in the subsidiary in the separate financial statements.
10.Cash and cash equivalents
For the purposes of the statement of cash flows, cash and cash equivalents comprise the following:
Group
Company
2021
2020
2021
2020
€
€
€
€
Cash at bank and in hand
896,781
540,381
5,479
239,415
Less: Restricted cash
(504,908)
(224,943)
-
(45,000)
Cash and cash equivalents in the statement of cash flows
391,873
315,438
5,479
194,415
Cash and cash equivalents include €504,908 (2020: €224,943) of other cash deposits which are held by Banca Intesa Sanpaolo. These deposits are subject to regulatory restrictions and are therefore not available for general use by the entities within the Group. Furthermore, as at the end of the previous financial year, the Group and the Company had a bank deposit with Lombard Bank Malta p.l.c amounting to €45,000 (2021: nil) which was pledged as part security for the bank facilities. The pledge was released during the year as the security was transferred to the Company's parent.
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
51
11.Share capital
Group and Company
2021
2020
€
€
Authorised
10,000,000 ordinary shares of €1 each
10,000,000
10,000,000
Issued and fully paid
5,874,406 ordinary shares of €1 each
5,874,406
5,874,406
On 27 September 2018, the Company was incorporated with an issued share capital of €250,000 made up of 250,000 ordinary shares of €1 each.
On 5 November 2018, a further 5,624,406 shares of €1 each were issued and allotted to the company’s parent as consideration for an amount due by the Company to its parent.
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Group.
On 19 November 2021, one of the shareholders of the parent company advanced €448,625. On 28 January 2022 a further €209,375 were advanced to the Company and the Group, with a view of this being converted into preference share capital. The capitalisation was approved by the shareholders of the company on 28 January 2022, whereby it was resolved to:
•Re-designate the authorized share capital of the Company from ten million Euro (€10,000,000) divided into ten million (10,000,000) Ordinary Shares of a nominal value of one Euro (€1) each to nine million three hundred and forty-two thousand (9,342,000) Ordinary Shares of a nominal value of one Euro (€1) each and six hundred and fifty-eight thousand (658,000) redeemable Preference Shares of a nominal value of one Euro (€1) each.
•Increase the issued share capital of the Company by the issue and allotment of six hundred and fifty-eight thousand (658,000) redeemable Preference Shares of a nominal value of one Euro (€1), fully paid up, in favour of Alf Mizzi & Sons Ltd, in consideration for the ex gratia contribution of €658,000 referred to above.
The above was formalised on 1 February 2022 upon filing with the Registry of Companies of the amendments to the company’s Memorandum and Articles of Association required in light of the change in the company’s capital structure and the increase in the authorised preference share capital of the company.
12.Other reserves
Group and Company
Capital contribution
Advances for shares to be issued
Total
2021
2020
2021
2020
2021
2020
€
€
€
€
€
€
At 31 December
637,560
637,560
448,625
-
1,086,185
637,560
The other reserves comprise of capital contributions from shareholders of the parent company.
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
52
12.Other reserves - continued
On 26 May 2020, the Company received additional capital contribution from the shareholders of the parent company amounting to €637,560.
On 11 November 2021, one of the shareholders of the parent company advanced €448,625 to the Company and the Group, with a view of this being converted into preference share capital. The capitalisation was approved by the shareholders of the company on 28 January 2022 and formalised on 1 February 2022 upon filing with the Registry of Companies of the amendments to the company’s Memorandum and Articles of Association required in light of the change in the company’s capital structure and the increase in the authorised preference share capital of the company (Note 11).
13.Deferred tax asset
Group
Company
2021
2020
2021
2020
€
€
€
€
Balance as at 1 January
412,169
213,321
-
-
(Expensed)/credited to profit or loss (note 23)
(7,841)
198,848
-
-
At end of year
404,328
412,169
-
-
Deferred income taxes are calculated on all temporary differences under the liability method using a principal tax rate of each of the jurisdictions in which the Group’s companies operate.
The balance at 31 December represents:
Group
Company
2021
2020
2021
2020
€
€
€
€
Temporary differences arising on:
- unutilised tax losses
87,865
95,706
-
-
- provisions
316,463
316,463
-
-
404,328
412,169
-
-
At 31 December 2021, the Group had unrecognised deferred tax assets arising on tax losses and credits amounting to €788,878 (2020: €85,699).
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
53
14.Borrowings
Group
Company
2021
2020
2021
2020
€
€
€
€
Non-current
4.85% Secured Bonds 2028
9,034,659
9,003,557
9,034,659
9,003,557
Bank loan
369,814
449,000
369,814
449,000
Loans from related parties
462,440
462,440
-
-
9,866,913
9,914,997
9,404,473
9,452,557
Current
Bank loan
94,546
-
94,546
-
Total borrowings
9,961,459
9,914,997
9,499,019
9,452,557
The bonds are measured at the amount of the net proceeds adjusted for the amortisation of the difference between the net proceeds and the redemption value of such bonds, using the effective interest method as follows:
Group and Company
2021
2020
€
€
Original face value of bonds issued
9,250,000
9,250,000
Bond issue costs
(314,560)
(314,560)
Accumulated amortisation
99,219
68,117
Closing net book amount of bond issue costs
9,034,659
9,003,557
Amortised cost and closing carrying amount
9,034,659
9,003,557
By virtue of an offering memorandum dated 12 November 2018, the Company issued €9,250,000 bonds with a face value of €100 each. The bonds have a coupon interest of 4.85% which is payable annually in arrears, on 23 November of each year. The bonds are redeemable at par and are due for redemption on 23 November 2028. The bonds were admitted on the Official List of the Malta Stock Exchange on 12 November 2018. The quoted market price as at 31 December 2021 for the bonds was €80 (2020: €80), which in the opinion of the Directors fairly represents the fair value of these financial liabilities.
In accordance with the provisions of the prospectus, the proceeds from the bond issue have been advanced by the Group to group related parties.
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Annual Financial Report and Consolidated Financial Statements - 31 December 2021
54
14.Borrowings - continued
The effective interest rates on the bank borrowings as at 31 December 2021 is 3.0% (2020: 3%) per annum. The company and the group were granted a 12-month moratorium period during which no principal and interest payments would be made. The loan is repayable in equal quarterly instalments starting from the first quarter of financial year ended 31 December 2022 and is to be repaid in full by not later than 30 May 2026.
The bank borrowings are secured by:
•Pledge over deposit account held in the name of the company’s parent.
•Guarantee by the Malta Development Bank.
•Various undertakings by the Directors, shareholders and sureties.
•Subsidiary’s joint and several guarantee on Bank’s form.
Loans from related parties obtained by the Group are unsecured, interest free and repayable on 26 May 2025. The estimated future cash payments on these loans have not been discounted through the expected life of the loans as the effect of discounting was deemed to be immaterial.
15.Lease liabilities
The lease liabilities associated with the right-of-use assets relate to the following types of assets:
Group
2021
2020
€
€
Non-current
Leasehold properties
9,385,573
8,666,452
Current
Leasehold properties
1,363,671
1,396,690
Total lease liabilities
10,749,244
10,063,142
The total cash outflows for leases during the reporting period was €1,767,759 (2020: €2,164,498). The contractual undiscounted cash flows attributable to lease liabilities as at 31 December are analysed in Note 2.1(c).
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
55
15.Lease liabilities - continued
Set out below are the carrying amounts of lease liabilities and the movements during the year:
Group
2021
2020
€
€
As at 1 January
10,063,142
13,944,423
Lease modifications
2,144,803
(332,277)
Terminated leases
(342,114)
(2,158,984)
Accretion of interest
651,172
774,478
Payments
(1,767,759)
(2,164,498)
As at 31 December
10,749,244
10,063,142
16.Trade and other payables
Group
Company
2021
2020
2021
2020
€
€
€
€
Current
Trade and other payables
253,654
507,518
159,633
100,173
Amounts owed to related parties
54,362
35,909
54,362
31,529
Amounts owed to parent
-
33,339
-
33,339
Accrued interest and expenses
424,402
296,752
220,384
148,736
732,418
873,518
434,379
313,777
Amounts owed to parent and related parties are unsecured, interest free and repayable on demand.
17.Revenue
Group
2021
2020
€
€
Rental income
1,475,601
1,569,253
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
56
17.Revenue - continued
The Group’s revenues are derived from operations carried out in Italy. Considering the nature of the Group’s activities, its non-current assets are predominantly located in Italy. During the year ended 31 December 2021, the Group granted concessions and discounts to tenants and consequently conceded an aggregate of €104,832 (2020: €2,768,720) representing rent charges forgone during the year. These concessions are deemed to be equivalent to partial waiver of lease payments emanating from the currently applicable terms and conditions within the lease agreements, taking into account the substance implied in the content of specific clauses within the agreements in place. These concessions are not considered to have arisen out of a modification of the lease agreements. The term of the respective leases remained unchanged and similarly the scope of the lease was not modified. The amounts of the concessions have been treated as negative variable lease payments. Consequently, the waived lease income arising from the relief given to tenants has been recognised as a deduction in revenue during the financial period in which the condition that triggered the reduced payments occurred.
The Directors assess the operations of the group as one reporting segment on the basis that the Group has one line of activity based in the Italian jurisdiction. Accordingly, no segment disclosures are being presented.
18.Expenses by nature
Group
Company
2021
2020
2021
2020
€
€
€
€
Depreciation of right of use assets (Note 4) - net of rent discounts
1,599,833
2,017,562
-
-
Depreciation of property, plant and equipment (Note 5)
57,595
73,535
-
-
Directors' fees (note 22)
17,700
16,412
17,700
16,412
Legal and professional fees
380,081
337,570
270,623
199,390
Management fee
57,834
50,004
57,834
50,004
Salaries and wages
47,002
32,348
-
-
Provision for doubtful debts
-
1,327,968
-
-
Other expenses
172,374
293,502
23,942
7,263
Total cost of sales and administrative expenses
2,332,419
4,148,901
370,099
273,069
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
57
18.Expenses by nature - continued
Auditor’s fees
Fees charged by the auditor for services rendered during the financial year ended 31 December 2021 and 2020 relates to the following:
Group
Company
2021
2020
2021
2020
€
€
€
€
Annual statutory audit
35,200
15,750
35,200
15,750
Non-audit services
25,500
25,755
25,500
25,755
Other assurance services
-
6,000
-
6,000
Other non-assurance services
12,500
-
12,500
-
73,200
47,505
73,200
47,505
The following non-audit services have been provided by the auditor to the Group and Company:
Group
Company
2021
2020
2021
2020
€
€
€
€
Tax advisory and compliance services
-
755
-
755
Assistance with review of business plans and assessment of going concern
-
25,000
-
25,000
Advisory services in respect of the
review of valuations and projections
and drafting of circular
25,500
-
25,500
-
25,500
25,755
25,500
25,755
During the current year fees amounting to €1,020 have been charged by connected undertakings of the Company’s auditor to the Group and Company for tax compliance and advisory services.
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
58
19.Impairment on leasehold premia, net of recovery
Group
Company
2021
2020
2021
2020
€
€
€
€
Impairment on leasehold premia (Note 4)
176,185
999,863
-
-
Reversal of prior year impairment losses on leasehold
premia (Note 4)
(264,087)
-
-
-
Loss on termination of leasehold agreement
836,036
26,255
-
-
Net impairment on leasehold premia
748,134
1,026,118
-
-
20.Other operating income
Group
Company
2021
2020
2021
2020
€
€
€
€
Government grants and assistance
521,775
-
-
-
Management fee income
-
-
160,000
170,000
Gain on disposal of equity instruments
68,564
-
-
-
Administrative and accounting support services
37,128
-
Other ancillary income
47,802
31,924
-
-
675,269
31,924
160,000
170,000
21.Finance costs
Group
Company
2021
2020
2021
2020
€
€
€
€
Interest charges on lease liabilities
651,172
774,478
-
-
Bond interest cost
479,725
480,086
479,725
480,086
Interest charges on bank loans
13,788
1,572
13,830
1,572
Total finance costs
1,144,685
1,256,136
493,555
481,658
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
59
22.Directors’ emoluments
Group
Company
2021
2020
2021
2020
€
€
€
€
Directors' fees
17,700
16,412
17,700
16,412
23.Tax expense/(credit)
The major components of income tax expense for the years ended 31 December 2021 and 2020 are:
Group
Company
2021
2020
2021
2020
€
€
€
€
Deferred tax expense/(credit)
7,841
(198,848)
-
-
Withholding tax on interest
42,984
-
42,984
-
Overprovision in prior year
-
(30,869)
-
(7,570)
Tax credits granted
-
(364,910)
-
-
Income tax expense/(credit)
reported in the income statements
50,825
(594,627)
42,984
(7,570)
The tax on the loss before tax differs from the theoretical amount that would arise using the applicable tax rate as follows:
Group
Company
2021
2020
2021
2020
€
€
€
€
Loss before tax
(2,074,368)
(4,829,978)
(3,910,128)
(2,711,333)
Tax on loss at 35% (2020 - 35%)
(726,028)
(1,690,492)
(1,368,545)
(948,966)
Tax effect of:
Disallowed expenditure
733,869
1,026,855
107,383
74,317
Provision for doubtful debts
-
464,789
-
-
Impairment of investment in subsidiary
-
-
1,261,162
874,649
Overprovision in prior year
-
(30,869)
-
(7,570)
Withholding tax on interest payment received
42,984
-
42,984
-
Tax credits granted
-
(364,910)
-
-
Tax expense/(credit) for the year
50,825
(594,627)
42,984
(7,570)
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
60
24.Cash generated from/(used in) operations
Group
Company
2021
2020
2021
2020
€
€
€
€
Cash flows from operating activities
Operating loss
(929,683)
(3,573,842)
(210,099)
(103,071)
Adjustments for:
Depreciation (Notes 4 and 5)
1,657,428
2,091,097
-
-
Loss on termination of leasehold agreements (Note 19)
836,036
26,255
-
-
Loss on disposal of right-of-use assets
-
58,171
-
-
Loss on disposal of property, plant and equipment
-
115,145
-
-
Gain on disposal of equity instruments designated at FVOCI (Note 20)
(68,564)
-
-
-
Government grants and assistance (Note 20)
(521,775)
-
-
-
Impairment of leasehold premia - net of recovery and reversals (Note 19)
(87,902)
999,863
-
-
Operating profit/(loss) before working capital movements
885,540
(283,311)
(210,099)
(103,071)
Changes in working capital:
Movement in trade and other receivables
727,449
716,501
(498,650)
(527,014)
Movement in trade and other payables
(141,100)
247,324
120,602
180,880
Cash generated from/(used in) operations
1,471,889
680,514
(588,147)
(449,205)
25.Net debt reconciliation
The table below sets out an analysis of net debt as at 31 December 2021 and 2020:
Group
Company
2021
2020
2021
2020
€
€
€
€
Cash and cash equivalents
896,781
540,381
5,479
239,415
Borrowings
(9,961,459)
(9,914,997)
(9,499,019)
(9,452,557)
Lease liabilities
(10,749,244)
(10,063,142)
-
-
Net debt
(19,813,922)
(19,437,758)
(9,493,540)
(9,213,142)
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
61
25.Net debt reconciliation - continued
All the movements in the Company’s net debt (borrowings and finance lease liabilities, net of cash and cash equivalents) related only to cash flow movements and disclosed as part of the financing activities in the statement of cash flows.
26.Related parties
The Group forms part of the Melite Retail Group. All companies forming part of the Melite Retail Group, which are all ultimately owned by Melite Retail Limited, are considered to be related parties in view of common ultimate shareholding.
The principal transactions carried out by the Group with related parties during the year ended 31 December 2021 and 2020 are outlined below:
Group
Company
2021
2020
2021
2020
€
€
€
€
Revenue:
Related party transactions with:
Fellow subsidiary
-
1,020,262
-
-
Administrative expenses:
Related party transactions with:
Parent
-
50,004
50,004
Fellow subsidiary
20,834
-
20,834
-
Key management personnel
54,700
16,412
54,700
16,412
75,534
66,416
75,534
66,416
Other income:
Related party transactions with:
Subsidiary
-
-
160,000
170,000
Fellow subsidiary
13,548
11,048
-
-
13,548
11,048
160,000
170,000
Finance income:
Related party transactions with:
Subsidiary
-
-
396,843
372,396
No expense has been recognised in the period for bad or doubtful debts in respect of amounts due by related parties. The accumulated provisions for doubtful debts in respect of outstanding amounts due by related parties as at the end of the reporting period amounted to €1,327,968 (2020: €1,327,968).
Amounts due to or from related parties are disclosed in Notes 8, 9, 14 and 16 to the financial statements. The terms and conditions in respect of the related party balances do not specify the nature of the consideration to be provided in settlement. The terms and conditions of the amounts recognised in other reserves are disclosed in note 12.
Bonds of the Company held by directors at 31 December 2021 amounted to €50,000 (2020: €50,000).
MELITE FINANCE P.L.C.
Annual Financial Report and Consolidated Financial Statements - 31 December 2021
62
27.Events after the end of the reporting period
(i)Issue of preference share capital
On 19 November 2021, one of the shareholders of the parent company advanced €448,625. On 28 January 2022 a further €209,375 was advanced to the Company and the Group, with a view of this being converted into preference share capital. The capitalisation was approved by the shareholders of the company on 28 January 2022, whereby it was resolved to:
•Re-designate the authorized share capital of the Company from ten million Euro (€10,000,000) divided into ten million (10,000,000) Ordinary Shares of a nominal value of one Euro (€1) each to nine million three hundred and forty-two thousand (9,342,000) Ordinary Shares of a nominal value of one Euro (€1) each and six hundred and fifty-eight thousand (658,000) redeemable Preference Shares of a nominal value of one Euro (€1) each.
•Increase the issued share capital of the Company by the issue and allotment of six hundred and fifty-eight thousand (658,000) redeemable Preference Shares of a nominal value of one Euro (€1), fully paid up, in favour of Alf Mizzi & Sons Ltd, in consideration for the ex gratia contribution of €658,000 referred to above.
The above was formalised on 1 February 2022 upon filing with the Registry of Companies of the amendments to the company’s Memorandum and Articles of Association required in light of the change in the company’s capital structure and the increase in the authorised preference share capital of the company.
(ii)Melite Italia S.r.l. restructuring
On the 27 April 2022, the Melite Italia S.r.l. voluntary restructuring process was concluded whereby an irrevocable offer by a third-party retail operator to acquire Melite Italia S.r.l.’s branch of business was accepted by the Italian Court following a judicial auction process. This has the effect of the third-party retail operator stepping into the shoes of Melite Italia S.r.l. in terms of its tenancy of 11 of the 19 stores to which Melite Properties S.r.l. holds title. The successful bidder has 30 days to meet certain obligations included in its offer as confirmed by the Court.
28.Statutory information
The Melite Finance p.l.c. is a limited liability company and is incorporated in Malta.
The immediate parent company of Melite Finance p.l.c. is Melite Retail Limited, a company registered in Malta, with its registered address at Level 3, Valletta Buildings, South Street, Valletta, VLT1103.
29.Comparative information
Comparative figures disclosed in the main components of these financial statements have been reclassified to conform with the current year’s disclosure format for the purpose of fairer presentation.
Independent auditor’s report
To the Shareholders of Melite Finance p.l.c.
Report on the audit of the financial statements
Our opinion
In our opinion:
● The Group financial statements and Parent Company financial statements (the “financial statements”) give a true and fair view of the Group and the Parent Company’s financial position of Melite Finance p.l.c. as at 31 December 2021, and of the Group’s and the Parent Company’s financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the EU; and
● The financial statements have been prepared in accordance with the requirements of the Maltese Companies Act (Cap. 386).
Our opinion is consistent with our additional report to the Audit Committee.
What we have audited
Melite Finance p.l.c.’s financial statements comprise:
● the Consolidated and Parent Company statements of financial position as at 31 December 2021;
● the Consolidated and Parent Company income statements and statements of comprehensive income for the year then ended;
● the Consolidated and Parent Company statements of changes in equity for the year then ended;
● the Consolidated and Parent Company statements of cash flows for the year then ended; and
● the notes to the financial statements, which include significant accounting policies and other explanatory information.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We are independent of the Group and the Parent Company in accordance with the International Code of Ethics for Professional Accountants (including International Independence Standards) issued by the International Ethics Standards Board for Accountants (IESBA Code) together with the ethical requirements of the Accountancy Profession (Code of Ethics for Warrant Holders) Directive issued in terms of the Accountancy Profession Act (Cap. 281) that are relevant to our audit of the financial statements in Malta. We have fulfilled our other ethical responsibilities in accordance with these Codes.
To the best of our knowledge and belief, we declare that non-audit services that we have provided to the parent company and its subsidiaries are in accordance with the applicable law and regulations in Malta and that we have not provided non-audit services that are prohibited under Article 18A of the Accountancy Profession Act (Cap. 281).
The non-audit services that we have provided to the parent company and its subsidiaries, in the period from 1 January 2021 to 31 December 2021, are disclosed in note 18 to the financial statements.
Material uncertainty related to going concern
We draw attention to note 1.1.1 to the financial statements which discusses the impact of COVID-19 on the operations and financial position of the Group, and its ability to continue as a going concern. The ability of the Group to continue as a going concern is critically dependent on the conditions and speed of recovery of the retail sector in Italy, and its ability to identify, and retain, tenants for its properties while, at the same time, addressing short and medium term funding needs following the impact of the pandemic on the Group’s balance sheet and cashflows. These conditions, along with other matters explained in note 1.1.1 to the financial statements, indicate the existence of a material uncertainty that may cast significant doubt on the Group’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.
Our audit approach
Overview
|
|
● Overall group materiality: €211,000, which represents approximately 1% of total assets.
|
|
● The audit carried out by the group engagement team covered the parent company and its subsidiary.
|
|
|
● Fair valuation of right-of-use assets
|
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the consolidated financial statements. In particular, we considered where the directors made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.
Materiality
The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated financial statements.
Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall group materiality for the consolidated financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate on the financial statements as a whole.
|
Overall group materiality |
€211,000 |
|
How we determined it |
Approximately 1% of total assets |
|
Rationale for the materiality benchmark applied |
We chose total assets as the benchmark because, in our view, it is an appropriate measure for this type of entity. We chose 1% which is within the range of materiality thresholds that we consider acceptable. |
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above €21,100 as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In addition to the matter described in the Material Uncertainty related to going concern section, we have determined the matter described below to be the key audit matter to be communicated in our report.
|
How our audit addressed the Key audit matter |
|
|
Fair valuation of right-of-use assets
The Group’s right-of-use assets include property rights attached to the leasehold properties (Note 4).
There is an active market for the transfer of property rights attached to leases of retail outlets located in Italy, whereby the current holders transfer their residual rights to the retail outlet to other parties for a consideration. The consideration paid typically reflects the differential between the current market rental rate for an outlet and the rental rate stipulated in the lease agreement with the landlord.
The directors obtained an assessment of the current market value of the property rights attached to its lease agreements from a specialised real estate valuer based in Italy. These valuations were used as a basis for the initial transfer of the property rights from Melite Italia S.r.l to Melite Properties S.r.l. The valuations were carried out by reference to the current average rental value per sqm (valore locativo mq/anno) for each outlet, which reflects external market factors including the supply and demand for retail outlets in a particular location. In this respect, the valuers made reference to data derived from recent comparable market transactions that would have occurred in the same street where each property is located.
For the purposes of the current year financial statements, the directors have requested the valuer to update the valuation for the same properties based on the market conditions as at 31 December 2021. The valuations are based on the same methodology assumed in the previous valuations used for the purposes of the initial transfer.
|
We agreed the property information in the valuation to the underlying property records held by the company.
We understood the methodology underlying the valuations and confirmed, via discussion with the valuers, that the valuation approach adopted was suitable for the purpose of valuing these type of property rights.
We compared the values as at 31 December 2021 to the valuations underlying the initial transfer of the property rights from Melite Italia S.r.l to Melite Properties S.r.l. We identified and followed up on the principal movements in relation to the original valuations.
We held meetings with the directors and the audit committee on the period-end valuations and found that they were able to provide explanations and refer to appropriate supporting evidence.
In addition, we evaluated the adequacy of the disclosures made in Notes 3 and 4 to the financial statements, including those regarding the key assumptions.
|
|
Valuations are performed annually using projected rental streams and the residual value of the property following lapse of the rental period, taking into consideration also the location of the property. As explained in Note 3 to the financial statements, the most significant judgements and estimates affecting the valuations include projected rental streams, the residual value of the property and the current market rate for the leasing of outlets in the location of the outlet being valued.
The existence of significant estimates referred to previously could result in material misstatement, which is why we have given specific focus and attention to this area.
|
|
We have no key audit matters to report with respect to our audit of the parent company financial statements.
How we tailored our group audit scope
The Group is composed of 2 components: Melite Finance p.l.c. (the parent company) and its wholly owned subsidiary. We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the financial statements as a whole, taking into account the structure of the Group, the accounting processes and controls, and the industry in which the Group operates.
The group audit team performed all of this work by applying the overall Group materiality, together with additional procedures performed on the consolidation. This gave us sufficient appropriate audit evidence for our opinion on the Group financial statements as a whole.
Other information
The directors are responsible for the other information. The other information comprises the Directors’ report and the Corporate Governance – Statement of Compliance (but does not include the financial statements and our auditor’s report thereon).
Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon except as explicitly stated within the Report on other legal and regulatory requirements.
In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.
If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.
Responsibilities of the directors and those charged with governance for the financial statements
The directors are responsible for the preparation of financial statements that give a true and fair view in accordance with IFRSs as adopted by the EU and the requirements of the Maltese Companies Act (Cap. 386), and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the Group’s and the Parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Group’s financial reporting process.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:
● Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
● Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s and the Parent Company’s internal control.
● Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.
● Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s or the Parent Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group or the Parent company to cease to continue as a going concern.
● Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
● Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
Report on other legal and regulatory requirements
Report on compliance with the requirements of the European Single Electronic Format Regulatory Technical Standard (the “ESEF RTS”), by reference to Capital Markets Rule 5.55.6
We have undertaken a reasonable assurance engagement in accordance with the requirements of Directive 6 issued by the Accountancy Board in terms of the Accountancy Profession Act (Cap. 281) - the Accountancy Profession (European Single Electronic Format) Assurance Directive (the “ESEF Directive 6”) on the Annual Financial Report of Melite Finance p.l.c. for the year ended 31 December 2021, entirely prepared in a single electronic reporting format.
Responsibilities of the directors
The directors are responsible for the preparation of the Annual Financial Report, including the consolidated financial statements and the relevant mark-up requirements therein, by reference to Capital Markets Rule 5.56A, in accordance with the requirements of the ESEF RTS.
Our responsibilities
Our responsibility is to obtain reasonable assurance about whether the Annual Financial Report, including the consolidated financial statements and the relevant electronic tagging therein, complies in all material respects with the ESEF RTS based on the evidence we have obtained. We conducted our reasonable assurance engagement in accordance with the requirements of ESEF Directive 6.
Our procedures included:
● Obtaining an understanding of the entity's financial reporting process, including the preparation of the Annual Financial Report, in accordance with the requirements of the ESEF RTS.
● Obtaining the Annual Financial Report and performing validations to determine whether the Annual Financial Report has been prepared in accordance with the requirements of the technical specifications of the ESEF RTS.
● Examining the information in the Annual Financial Report to determine whether all the required taggings therein have been applied and whether, in all material respects, they are in accordance with the requirements of the ESEF RTS.
We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Opinion
In our opinion, the Annual Financial Report for the year ended 31 December 2021 has been prepared, in all material respects, in accordance with the requirements of the ESEF RTS.
Other reporting requirements
The Annual Financial Report and Consolidated Financial Statements 2021 contains other areas required by legislation or regulation on which we are required to report. The Directors are responsible for these other areas.
The table below sets out these areas presented within the Annual Financial Report, our related responsibilities and reporting, in addition to our responsibilities and reporting reflected in the Other information section of our report. Except as outlined in the table, we have not provided an audit opinion or any form of assurance.
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Area of the Annual Financial Report and Consolidated Financial Statements 2021 and the related Directors’ responsibilities |
Our responsibilities |
Our reporting |
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Directors’ report The Maltese Companies Act (Cap. 386) requires the directors to prepare a Directors’ report, which includes the contents required by Article 177 of the Act and the Sixth Schedule to the Act. |
We are required to consider whether the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements.
We are also required to express an opinion as to whether the Directors’ report has been prepared in accordance with the applicable legal requirements.
In addition, we are required to state whether, in the light of the knowledge and understanding of the Company and its environment obtained in the course of our audit, we have identified any material misstatements in the Directors’ report, and if so to give an indication of the nature of any such misstatements.
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In our opinion: ● the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and ● the Directors’ report has been prepared in accordance with the Maltese Companies Act (Cap. 386).
We have nothing to report to you in respect of the other responsibilities, as explicitly stated within the Other information section.
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Corporate Governance - Statement of Compliance The Capital Markets Rules issued by the Malta Financial Services Authority require the directors to prepare and include in the Annual Financial Report a Statement of Compliance with the Code of Principles of Good Corporate Governance within Appendix 5.1 to Chapter 5 of the Capital Markets Rules. The Statement’s required minimum contents are determined by reference to Capital Markets Rule 5.97. The Statement provides explanations as to how the Company has complied with the provisions of the Code, presenting the extent to which the Company has adopted the Code and the effective measures that the Board has taken to ensure compliance throughout the accounting period with those Principles.
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We are required to report on the Statement of Compliance by expressing an opinion as to whether, in light of the knowledge and understanding of the Company and its environment obtained in the course of the audit, we have identified any material misstatements with respect to the information referred to in Capital Markets Rules 5.97.4 and 5.97.5, giving an indication of the nature of any such misstatements.
We are also required to assess whether the Statement of Compliance includes all the other information required to be presented as per Capital Markets Rule 5.97.
We are not required to, and we do not, consider whether the Board’s statements on internal control included in the Statement of Compliance cover all risks and controls, or form an opinion on the effectiveness of the Company’s corporate governance procedures or its risk and control procedures.
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In our opinion, the Statement of Compliance has been properly prepared in accordance with the requirements of the Capital Markets Rules issued by the Malta Financial Services Authority.
We have nothing to report to you in respect of the other responsibilities, as explicitly stated within the Other information section. |
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Other matters on which we are required to report by exception We also have responsibilities under the Maltese Companies Act (Cap. 386) to report to you if, in our opinion: ● adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us. ● the financial statements are not in agreement with the accounting records and returns. ● we have not received all the information and explanations which, to the best of our knowledge and belief, we require for our audit.
We also have responsibilities under the Capital Markets Rules to review the statement made by the directors that the business is a going concern together with supporting assumptions or qualifications as necessary.
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We have nothing to report to you in respect of these responsibilities. |
Other matter – use of this report
Our report, including the opinions, has been prepared for and only for the Parent Company’s shareholders as a body in accordance with Article 179 of the Maltese Companies Act (Cap. 386) and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior written consent.
Appointment
We were first appointed as auditors of the Company on 22 August 2019. Our appointment has been renewed annually by shareholder resolution representing a total period of uninterrupted engagement appointment of 3 years.
PricewaterhouseCoopers
78, Mill Street
Zone 5, Central Business District
Qormi
Malta
David Valenzia
Partner
29 April 2022