Deed of Variation - Ignite Energy LTD

Inspired PLC

22 May 2023

 

22 May 2023

Inspired PLC 

("Inspired" or the "Company" or the "Group") 

Deed of Variation - Ignite Energy LTD

Maximising our Optimisation Services opportunities

Inspired (AIM: INSE), a leading technology enabled service provider supporting businesses in their drive to net-zero and controlling energy costs, announces that it has entered into a deed of variation (the "Deed") to the share purchase agreement dated 9 July 2020 (the "SPA") between the Company and vendors of Ignite Energy LTD ("Ignite") being Benjamin Higgins, David Higgins, Vanessa Higgins and Ethan Higgins (the "Vendors"). 

Summary

·    Over the past year the Group's Optimisation Services Division has gained significant traction and this agreement is designed to further incentivise the Ignite Vendors for the long term so they can continue to add substantial value to the Group.

·     The Deed provides the opportunity for the Vendors to secure up to £9.25 million of additional earn out consideration (the "Additional Contingent Consideration") subject to challenging performance thresholds.

·      To secure the entire Additional Contingent Consideration, Ignite will be required to deliver year on year EBITDA growth in excess of Group management's current expectations from FY24 until H1 2027 and generate cumulative EBITDA (before deduction of central overheads) of c.£64.1 million including in excess of £20.4 million of EBITDA (before deduction of central overheads) in FY26.[1]

·    The Additional Contingent Consideration is entirely self-funding and payment is subject to an 80% cash conversion hurdle, to ensure alignment to the Group's focus on cash generation.

Mark Dickinson, CEO of Inspired PLC commented: "The Optimisation Division delivered significant growth in FY22, driven by an increase in demand as the ongoing energy crisis sharpened clients' focus on the economics of investment in energy reductions, combined with the drive for delivering net-zero. With national Covid restrictions behind us we are able to deliver on-site services once again, a material factor which is driving strong demand for our Optimisation Services.  Now is the right time to incentivise the Ignite Vendors to deliver for the long term for Inspired PLC."

Background to and rationale for the Deed

The Company announced the acquisition of the outstanding 60% of Ignite on 10 July 2020 pursuant to the SPA (the "Ignite Acquisition"). The consideration paid by the Company for the Ignite Acquisition was an initial consideration of £11.0 million and further performance related consideration of up to a maximum of £19.0 million in cash and shares in the Company ("Original Earn-out Consideration"), dependent on the achievement of certain financial performance criteria for the period to 31 December 2023 ("Earn-out Period"). To date, £6.0 million of the £19.0 million of the Original Earn-out Consideration has been paid in cash.

The Deed, alongside the final payments due and potentially payable under the SPA, increases the maximum contingent consideration which could currently still be payable to £22.5 million[2] should the Vendors achieve the challenging performance thresholds set. The maximum Earn-out Consideration that could be earned by the Vendors in relation to FY23 EBITDA performance (before deduction of central overheads), to be paid in cash and shares, totals £5.2 million. In respect of FY22 EBITDA performance, £2.6 million in shares remains due to the Vendors under the Original Earn-Out Consideration and these will be issued shortly. The table in the Appendix sets out the current status of the Original Earn-out Consideration.

As outlined in the Company's FY22 results, there is a substantial growth opportunity for Optimisation Services, underpinned by a strong current pipeline and growing demand for solutions to deliver net-zero and reduce costs, accelerated further by the current energy crisis. The Board believes that the Vendors are highly talented individuals and have a strong track record of growing the Ignite business. The Board has therefore concluded it is appropriate to enter into the Deed in order to maximise the current opportunity. This Deed will re-incentivise the Vendors, as management recognise that the Vendors have only had one full year of the three to demonstrate the full scale of the opportunity due to Covid-19 disruption.

The payment of the Additional Contingent Consideration is conditional upon the achievement of challenging financial performance targets relating to the growth of EBITDA in Ignite (before deduction of central overheads) against the prior year's performance and is subject to an 80 per cent cash conversion hurdle. The H1 2027 element is designed to ensure the Vendors are incentivised to build a strong pipeline to underpin sustained growth into 2027 and beyond.

To earn the entire Additional Contingent Consideration, under the terms of the Deed, Ignite would be required to deliver year on year EBITDA growth in excess of current management expectations from FY24 to H127 and generate, as a minimum, in excess of £20.4 million of EBITDA before central overheads in FY26. This would result in a cumulative EBITDA (before deduction of central overheads) of c.£64.1 million between FY24 and H127.[1] The Additional Contingent Consideration is structured to be entirely self-funding given the criteria as set out in Table 1 below. As the Additional Contingent Consideration is payable for year on year EBITDA performance in excess of current management expectations, the contingent consideration liability on the balance sheet in relation to FY24 to H127 will remain unchanged at this time.

Summary of the key changes pursuant to the Deed

Further detail on the Additional Contingent Consideration is set out below. All Additional Contingent Consideration will be settled in cash and is subject to cash generation from operations of Ignite being in excess of 80% of the EBITDA generated in each period tested.

Table 1: Details of the Additional Contingent Consideration   

Tranche	Additional Contingent Consideration
	Cash	Test Period	Criteria	Minimum required EBITDA before central overheads to maximise Additional Contingent Consideration*	See through EBITDA multiple***
Tranche 1	Up to a maximum of £2,337,500	Financial Year ending 31 December 2024	£0.85 consideration for every £1.00 growth in EBITDA before deduction of central overheads in FY24 over FY23	c.£14.9m	c.2.70x
Tranche 2	Up to a maximum of £2,337,500	Financial Year ending 31 December 2025	£0.85 consideration for every £1.00 growth in EBITDA before deduction of central overheads in FY25 over FY24	c.£17.7m	c.2.45x
Tranche 3	Up to a maximum of £2,337,500	Financial Year ending 31 December 2026	£0.85 consideration for every £1.00 growth in EBITDA before deduction of central overheads in FY26 over FY25	c.£20.4m	c.2.28x
Tranche 4	Up to a maximum of £2,237,500	6 months ending 30 June 2027	Payable if EBITDA before deduction of central overheads 2027 is 10% or more higher than the aggregate of the Gross Margin for the highest two Quarters in the year ending 31 December 2026.	c.£22.4m**
Total	Up to a maximum of £9,250,00

*Assumes that Ignite generates £12.1m in FY23 as per the maximum Original Earnout Consideration for that year and achieves the maximum Additional Contingent Consideration each year previously.

**H1 2027 on a 12m proforma basis.

*** Calculated from the total consideration which could be payable for Ignite and the maximum EBITDA before overheads as set out in the table.

Note: A table which sets out the details of the Original Earn-out Consideration, as already disclosed by the Company on 10 July 2020, and includes the current payment status, is set out in the appendix to this announcement.

Management have agreed with the Vendors that the Additional Contingent Consideration calculation excludes any EBITDA (before deduction of central overheads) contribution from a major public sector optimisation customer (the "Specific Optimisation Customer"), who impacted the Group's aged trade receivables position in FY21 and FY22.

Noting that the Deed contains an acknowledgement between the parties that no Original Earn Out Consideration is due in relation to FY21, which was in part due to the Specific Optimisation Customer being an aged debtor, the Company has agreed a separate incentivisation with the Vendors in relation to this customer. The Vendors will have the opportunity to recover up to £2.75 million of the earn out consideration foregone in relation to cash collected and generated (rather than profit generation) from the Specific Optimisation Customer from FY23 and up to an additional £2.75 million in relation to additional revenue and cash collected from FY24 to FY26.

Related Party Transaction

The Vendors are directors of Ignite which is a wholly owned subsidiary of the Company and therefore are deemed to be related parties of the Company under the AIM Rules for Companies ("AIM Rules"). Accordingly, the entering into the Deed by the Company with the Vendors constitutes a related party transaction under the AIM Rules (the "Related Party Transaction"). The directors of the Company consider, having consulted with Shore Capital and Corporate Limited ("Shore Capital"), the Company's nominated adviser, that the terms of the Related Party Transaction are fair and reasonable insofar as shareholders of the Company are concerned.

Enquiries please contact:

Inspired PLC Mark Dickinson, Chief Executive Officer Paul Connor, Chief Financial Officer David Cockshott, Chief Commercial Officer	www.inspiredplc.co.uk [phone]
Shore Capital (Nominated Adviser and Joint Broker) Patrick Castle James Thomas Rachel Goldstein	[phone]
Liberum (Joint Broker) Edward Mansfield Will Hall	[phone]
Alma PR Justine James Hannah Campbell Will Ellis Hancock	[phone] [e-mail]

Appendix - Original Earn-Out Consideration schedule in accordance with the SPA

Tranche	Earn-out Consideration
	Cash	Contingent Consideration Shares*	Test Period	Criteria	Current status
Tranche 1	£3,400,000	Nil	From Completion to Financial Year ending 31 December 2023	Payable on delivery of £5.22m of EBITDA before deduction for central overheads.	Paid in FY2022
Tranche 2	Up to £2,600,000	Up to £2,600,000	Financial Year ending 31 December 2021	£1.50 consideration for every £1.00 growth in EBITDA before deduction of central overheads FY21 over FY19. Therefore, full earn out payable on delivery of £8.9m of EBITDA before deduction of central overheads.	Nothing paid due to Covid impact and reflecting an outstanding aged debtor who is a major public sector Optimisation client.
Tranche 3	Up to £2,600,000	Up to £2,600,000	Financial Year ending 31 December 2022	£1.50 consideration for every £1.00 growth in EBITDA before deduction of central overheads of FY22 over FY21.	Cash element paid in respect of FY22.Share element to be issued imminently.
Tranche 4	Up to £2,600,000	Up to £2,600,000	Financial Year ending 31 December 2023	£1.50 consideration for every £1.00 growth in EBITDA before deduction of central overheads of FY23 over FY22.	To be determined
Total	Up to £11,200,000	Up to £7,800,000

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[1] Assumes that Ignite generates £12.1m of EBITDA (before deduction of central overheads) in FY23 as per the maximum Original Earn-Out Consideration for that year and achieves the minimum EBITDA (before deduction of central overheads) to secure the maximum Additional Contingent Consideration between FY24 and H127 as per the criteria in Table 1.

[2] Consisting of: (1) Up to £9.25m of Additional Contingent Consideration (on the terms as set out in Table 1); (2)  the £2.6m of shares in respect of FY22, which are due to be issued shortly; (3)  Up to £5.2m in respect of FY23 from the Original Earn Out Consideration; and (4) Up to c.£5.5m in respect of the Specific Optimisation Customer (as set out below).

 

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