Interim Results

RNS Number : 6897V

Redcentric PLC

17 December 2013

 

17 December 2013

Redcentric plc

 ("Redcentric", "the Company" or "the Group")

Unaudited Interim Results for the eight months ending 30 September 2013

Redcentric plc (AIM:RCN), a leading UK IT managed services provider, today announces its interim results for the eight months ended 30 September 2013, being the first published results for the company since incorporation on 11 February 2013, and subsequent admission to AIM on 24 April 2013.

Operating Highlights

§ Results comprise six months trading of the managed services business demerged from Redstone plc on 8 April 2013. There was no trading activity prior to the demerger

§ Revenue of £21.0 million, in line with management expectation as disclosed in the Admission Document indication dated 18 November 2013

§ Adjusted EBITDA* £3.6 million, ahead of management expectation of £3.5 million

§ Adjusted EBITDA* return on revenue 17.1%

§ Gross profit margin 48.7%

§ Net Debt £12.1 million, lower than £12.3 million management expectation

§ Contracts comprising approximately £12 million of managed service revenue over 3 years won or extended in the first period of trading commencing 8 April 2013

§ Post period acquisition of InTechnology Managed Services Limited ("IMS") for cash consideration of £65.0 million

Richard Ramsay, Chairman of Redcentric commented:

"The Board is excited about the prospects of Redcentric as an independent business; early signs are that the company is successfully winning further business from its existing customer base and new customers. Following the successful acquisition of IMS, the company has a stronger competitive position in the market, with increased scale and capability, and is well placed to benefit from increasing demand for outsourced managed services."

Tony Weaver, Chief Executive of Redcentric commented:

"These are exciting times in the development of Redcentric, which has been significantly accelerated by the acquisition of IMS. I look forward to integrating the two businesses and demonstrating their combined potential for delivering shareholder value."

*Before net finance costs, tax, depreciation, amortisation, integration & strategy costs and share based payments

Enquiries:

Redcentric plc Tony Weaver, Chief Executive Fraser Fisher, Chief Operating Officer	Tel. [phone]
N+1 Singer - NOMAD & Joint Broker Jonny Franklin-Adams / Jenny Wyllie finnCap - Joint Broker Charlotte Stranner/Stuart Andrews MXC Capital Advisory LLP - Financial Advisor Marc Young	Tel. [phone] Tel. [phone] Tel. [phone]
Newgate Threadneedle Josh Royston / Hilary Millar	Tel. [phone]

Chairman's Statement

Dear Shareholder

General

I am pleased to report the results of the Group for the eight months ended 30 September 2013, being the first published results since incorporation on 11 February 2013, and admission to AIM on 24 April 2013. Whilst the period covered by this interim statement is eight months, the trading results of the business comprise the six month period of ownership since the managed services business was effectively demerged from Redstone plc ("Redstone") on 8^th April 2013

The acquisition of the former Redstone managed service business via demerger constitutes a "business combination under common control" and as such the acquired entity's results and balance sheet are incorporated into the consolidated accounts from the date on which the businesses combination of entities under common control occurred (in Redcentric's case this was the effective demerger date of 8^th April 2013). Consequently, the consolidated financial statements do not reflect the results of the acquired entity for the period before the transaction occurred and comparatives are not reflected. 

Results

The results for the period under review compare favourably with the indication I provided to shareholders in the Admission Document issued on 18^th November 2013, in respect of the 80 million placing shares which were issued to fund the acquisition of InTechnology Managed Solutions Limited ("IMS").

Revenue for the period was £21.0 million, as indicated in the Admission Document, and adjusted EBITDA* £3.6 million, 2.2% above the £3.5 million indicated in the Admission Document. Profit before taxation was £0.8 million.

Net debt was £12.1 million, compared to £12.3 million indicated in the Admission Document

The results for the period are in line with the expectations of the Board at the time of the demerger, and we are encouraged by the Group's ability to win further business by up-selling the wider product set to existing and new customers. Since admission to AIM in April 2013, Redcentric has won some £13.7 million of new revenue contracts from a mix of new and existing customers.

The demerger required a major integration of the three component businesses that comprised the former managed services business of Redstone plc ("Redstone"), including a consolidation of the reporting systems. I would like to thank all our staff for their application and dedication in managing this major change.

Acquisition of IMS

On 18 November 2013 the company announced it had entered into a share purchase agreement to acquire the entire issued share capital of IMS, for a cash consideration of £65.0 million on a cash and debt free basis, adjusted to reflect normalised working capital requirements of IMS and certain capital expenditure.

Under the AIM Rules, the transaction was classified as a reverse takeover and therefore required the approval of shareholders which was provided in general meeting on 5^th December 2013.

The consideration was funded by an equity placing of 80 million new ordinary shares at a price of 80 pence per share, raising £64 million before expenses, and new banking facilities of £10 million.

The acquisition is transformational for Redcentric, creating one of the largest independent mid-market managed services businesses in the UK, and will deliver the following key benefits to the Enlarged Group:

·      Enhancement of the Group's scale of operations and provisions of a broader product offering

·      The Enlarged Group will manage a data centre estate of 867 racks with capacity to add a further 388 racks within its existing facilities and scope to further extend its estate

·      Significant up-selling opportunities are likely to arise between the Redcentric and IMS respective client bases

·      IMS's proprietary data centres will provide the Enlarged Group with an increased number of modern, resilient and efficient data centres to facilitate further growth

·      The ability to achieve material cost synergies by rationalising currently duplicated network and data centre assets. Three smaller and less efficient data centres will be consolidated and two offices will be closed

·      The acquisition is expected to be accretive to the Group's earnings per share in the first full financial year following completion of the transaction

We believe IMS is a good strategic fit with Redcentric. It has a broad suite of services which will strengthen the Group's market proposition. As one of the largest mid-market managed services providers in the UK, The Board believes the Enlarged Group's prospects are good.

Bank Financing

On 8 April 2013, the Group negotiated senior revolving facility with Barclays Bank PLC of £14.2 million, comprising a revolving credit facility of £11.2 million and a committed ancillary overdraft facility of £3.0 million

The facility termination date was 1 July 2015 with a reduction instalment profile of varying amounts on a semi-annual basis, culminating in a terminal payment of £8.0 million at the termination date

On 8 April £11.2 million was drawn down on the revolving credit to provide funds for the agreed prepayment of equivalent Redstone debt, through the agreed demerger mechanism and terms. The overdraft facility of £3.0 million was used to provide working capital for the demerged business.

On 5 December 2013 the Group restructured its existing senior debt facilities with Barclays Bank PLC and effected the following key changes:

·      A £10 million increase in facility to £23.2 million, comprising a revolving credit facility of £18.2 million and a committed overdraft facility of £5 million

·      Extension of the facility termination date to 6^th December 2016.

·      Restructuring of the facility reduction instalment profile to comprise semi-annual reductions of varying amounts commencing 30 June 2014, and culminating in a terminal reduction of £9.45 million at the termination date

·      Revised quarterly covenants, with commencement of testing scheduled for 31 March 2014

The additional finance provided has been utilised in the financing of IMS and will provide working capital for the enlarged group.

Employees and the Board

We thank all employees for their co-operation and fortitude during this period, and acknowledge and thank them for their efforts.

On 28 June 2013, following successful completion of the demerger, Peter Hallett, Chief Financial Officer of Redcentric gave notice of his resignation in order to pursue new professional challenges. Peter has a twelve month notice period and will remain a Director until a successor has been recruited.

Outlook

Redcentric has traded strongly in line with expectations in this first reporting period. The Board has moved quickly to add scale to the managed services capability through the acquisition of IMS in December, which we believe will provide additional momentum to the growth of the business and will only enhance the prospect of mid-market clients entrusting their mission critical systems to our care.

The Board remain convinced that the advent of Cloud computing and the increasing demand from customers to be able to access data and applications remotely from a wide variety of devices from third party providers offers a significant market opportunity. Redcentric is well placed to benefit from increasing demand for outsourced managed services.

We look forward with confidence to returning value to all our shareholders.

Richard Ramsay

Non-Executive Chairman

17 December 2013

*Before net finance costs, tax, depreciation, amortisation, integration & strategy costs and share based payments

Chief Executive's Review

Business Development

Redcentric has continued to develop its position as a leading UK IT managed services business delivering innovative technology to improve business productivity and efficiency tailored to clients' needs; its offering is differentiated by its proprietary networks and data centres, creating a genuine end to end client service proposition. Redcentric already benefits from an established reputation for delivering robust and reliable mid-market managed services and solutions while focusing on maintaining flexibility to meet customer requirements.

Following the demerger of the managed services business of Redstone on 8 April, we have continued to focus on maximising cross and up-sell opportunities afforded by the integration of the three former Redstone managed service entities which now comprise Redcentric:

·      The former Maxima Managed Services business (acquired by Redstone in November 2012)

·      The former Redstone Managed Solutions business

·      The managed service contracts which were formerly part of Redstone Converged Solutions business

The demerged businesses had already announced the following multi-year contract wins and renewals, worth approximately £12.3 million of total revenue over three years, in the period from 30th September to 31st March 2013 whilst under Redstone plc ownership including:

·      a new business contract to provide a managed WAN for a major services company. Delivered over the Company's 10Gb MPLS core, the contract covers over 70 sites and is worth approximately £1.8m over the contract's three year term

·      a new £6.2 million contract to deliver managed WAN set-up and connectivity over a three year period for over 1,900 sites for a leading charitable organisation. This follows a successful pilot programme and Redstone previously being nominated as preferred bidder (announced on 13 October 2011)

·      a new three year managed services contract to provide to provide a complex line of business web support services for a world leading confectionary manufacturer. The contract is valued at £1.8m over three years, and sees the Company extending the range of services delivered to this long term customer

·      a three year "Infrastructure as a Service" contract with a leading blue chip consultancy company. The deal is worth approximately £550,000 over the course of the three year contract, with scope to increase in value within the next two years as more end users come on line to utilise this cloud based service

Since demerger on 8^th April 2013 the Company has announced the following contract wins, worth approximately £13.7 million of total revenue over five years:

·      a managed Wide Area Network ("WAN") contract with a leading UK mobile and broadband services provider. The deal will cover the monitoring and support of the WAN, managed security services and technology enhancement and management, and is worth approximately £1 million over the next 12 months, and comes after the Redcentric was awarded a managed service contract renewal in December 2012 from the same customer

·      a three year managed network and cloud contract with a top automotive company worth approximately £1.1m over the course of the contract, of which approximately £600k is net new business. The agreement is the renewal and expansion of a previous long term network contract, and will see Redcentric provide additional datacentre and network management services to support the client's ambitious growth plans. This contract has grown significantly in scope as a direct result of the successful business transformation that created Redcentric

·      a five year cloud based managed services agreement with a charitable organisation worth approximately £1.1m over the course of the contract. Using its highly resilient cloud infrastructure, Redcentric will provide and manage for the charity a complete hosted virtual infrastructure as well as deliver application layer services. This contract win is testament to Redcentric's compelling, client tailored, cloud offering, and demonstrates success in delivering services aligned to customer needs

·      a managed services, networking and connectivity to a property developer in a new five year contract.  The deal is worth approximately £7.7m in revenue over the course of the contract. Redcentric's consultancy services will form a key part of transitioning the new customer to its services. While most of this revenue will fall outside the current financial year this type of contract will contribute significantly to Redcentric's annuity base and validates the quality and breadth of its end-to-end services.

·      an existing governmental customer extended its managed services contract with Redcentric. The Company will continue to provide support and professional services for an additional year in a contract extension worth £1.2m.  The Company also signed a further managed service contract with the same customer for £300k to support additional elements of their environment including troubleshooting support and hardware maintenance

·      an ICT and maintenance contract with a leading media firm. The deal will see Redcentric provide hardware installation and consultancy as well as support in a three maintenance agreement in a deal worth approximately £0.94m over the course of the contract.

Operational Capability & IMS

The operational capability of Redcentric and IMS has been documented in detail in the Admission Document sent to shareholders on 18^th November 2013.

The breadth of services we can now offer as Redcentric is comprehensive and market leading

The Enlarged Group will differentiate itself around three distinct pillars:

Innovation            in the design and delivery of services

Reliability             the right technical skills, organised in the right way, to provide predictable and high quality results

Value                     service offerings that are designed to offer value for money to mid-market customers by leveraging the Enlarged Group's wholly owned, hybrid on/off shore capability

Both Redcentric and IMS are competitively positioned between the large network operators and system integrators whose solutions are often expensive and inflexible, and smaller competitors that may lack delivery structure, reputation and reliability. Combined, the Enlarged Group will have a stronger competitive position in the market, retaining the opportunity to deliver the flexibility customers desire while benefitting from its increased scale, breadth of expertise, reputation and financial strength.

Trading & Profitability

Whilst the financial highlights are covered in detail in the CFO's Financial Review, I am particularly pleased to report an adjusted EBITDA* of £3.6 million. Adjusted EBITDA* pre central costs was £4.0 million representing a 19.3% return on revenue of £21.0 million.

Annuity and consultancy operations comprised 83.6% of total revenue and the £4.0 million of pre central cost adjusted EBITDA pre central costs, with product sales breaking even on a fully allocated cost basis. The high proportion of annuity and consultancy revenue is a key strength of the business.

Gross margin was 48.7% in the period, in line with expectations

Net debt was £12.1 million, slightly less than the £12.3 million indicated in the Admission Document dated 18 November 2013. As a newly formed company currently unable to show a public track record, and prior to any results announcement, we have found it difficult to secure credit terms from suppliers commensurate with our size and standing. This has had an adverse impact on cash flow as the expected lines of credit have been restricted, especially from the suppliers of product, and particularly in the light of the corporate failure of 2e2 earlier in the year.

This situation is expected to improve on the publication of these first results for Redcentric and the company's strong balance sheet becomes evident to the market.

Outlook

The business has performed well considering that we undertook a major systems and management integration in the period.

The acquisition of IMS will provide the Group with immediate critical mass in the provision of managed services, expanding the scope and range of current capability and providing to both Redcentric and IMS a high quality contracted client base for cross selling of complementary services not currently provided by the respective businesses. The combined business will represent a powerful presence in the provision of cloud based services, which will be almost unique within the targeted mid-market.

These are exciting times in the development of Redcentric, which has been significantly accelerated by the acquisition of IMS. I look forward to integrating the two businesses, and demonstrating their combined potential for delivering shareholder value.

Tony Weaver

Chief Executive

17 December 2013

CFO Financial Review

Basis of Consolidation

Whilst the period covered by this interim statement is eight months, the trading results of the business comprise the six month period of ownership following the demerger of the managed services business from Redstone on 8^th April 2013

The acquisition of the former Redstone managed service business via demerger constitutes a "business combination under common control" and as such the acquired entity's results and balance sheet are incorporated into the consolidated accounts from the date on which the businesses combination of entities under common control occurred (in Redcentric's case this was the effective demerger date of 8^th April 2013). Consequently, the consolidated financial statements do not reflect the results of the acquired entity for the period before the transaction occurred and comparatives are not reflected. 

As a business combination under common control the company has opted to apply the predecessor values accounting method which requires that acquired assets and liabilities are shown at their historic carrying values. As a result there is no requirement to undertake a costly and lengthy attribution of fair valuation to the assets and liabilities of the acquired business.

Income statement

Group revenue for the six months of trading following demerger on 8 April 2013 was £21.0 million, comprising annuity revenue of £14.1 million (67.1%), consultancy revenue of £3.5 million (16.5%) and product revenue of £3.4 million (16.4%). There were no trading activities in Redcentric prior to the acquisition via demerger of the managed services business of Redstone.

Gross profit was £10.2 million, 48.7% of revenue.

Selling and distribution expenses amounted to £1.6 million and £7.6 million respectively, resulting in an operating profit of £1.0 million.

Administrative expenses include depreciation and amortisation charges of £0.6 million and £0.7 million respectively, share based payments of £0.2 million and strategic and integration costs of a non-recurring nature of £1.1 million.

Adjusted EBITDA* for the period was £3.6 million, and £4.0 million before central costs of £0.4 million. The adjusted EBITDA* before central costs was almost entirely generated by the annuity and consultancy business, with product sales largely breaking even for the period. Therefore the adjusted EBITDA return on revenue before central costs was 19.3%, including product revenue and adjusted EBITDA*, and 23.3% excluding product revenue and adjusted EBITDA*.

Integration and strategic costs amounted to £1.1 million. Included within these costs is an exceptional non-cash charge of £0.3 million arising from a change in accounting policy for commission, required to harmonise commission recognition within the demerged business. In addition strategic and integration costs include professional fees of £0.1 million and £0.6 million of staff costs arising from redundancy and work required to complete the management and systems integration of the demerged business.

Net finance costs in the period amounted to £0.2 million.

The resulting profit before taxation was £0.8 million.

There was a taxation credit of £0.5 million, of which £0.3 million is attributable to the reduction in deferred taxation liabilities, in line with amortisation of intangible assets transferred on demerger, and a credit of £0.2 million arising from the impact on the deferred tax liability of the reduction in the corporation tax rate to 21% from 23%. There was no corporation tax provision made in respect of the profit for the period as the tax losses available to the Group exceed the estimated taxable income.

Overall Result for the Period

The resulting profit for the period is £1.3 million.

Basic and diluted earnings per share were 2.05p and 1.98p respectively. Basic and diluted earnings per share are sensitive to the level of adjustments to EBITDA, being depreciation, amortisation of intangibles, strategic & integration costs and share based payments, together with the tax charge, and especially those items which are non- recurring in nature.

Basic and diluted adjusted EBITDA* per share were 5.74p and 5.53p respectively.

Cash Flow

Cash generated in continuing operations was £0.2 million. This was made up of cash inflow from trading activity of £1.6 million offset by an increase in working capital of £1.4 million.

As a newly formed company with no public track record or first published results, it has been difficult to secure credit terms from suppliers commensurate with a company of Redcentric's size and financial standing. This has had an adverse impact on cash flow as the expected lines of credit have been restricted, especially from the suppliers of product, and particularly in the light of the corporate failure of 2e2 earlier in the year. This situation is expected to normalise on the publication of these first results for Redcentric and the company's strong balance sheet becomes evident to the trade credit insurers and rating agencies.

In addition, the integration of the demerged business onto a single consolidated financial system and automated billing platform has also contributed to an initial increase in working capital, as customers have had to become comfortable with unfamiliar invoicing processes. The benefits of the consolidated billing platform are beginning to materialise as efficiency and customer acceptance improves.

High levels of ICT project activity in August and September also increased working capital investment ahead of project completion.

Integration and strategic costs absorbed £0.7 million of cash, and largely comprises staff costs arising from redundancy and work required to complete the management and systems integration of the demerged business.

£0.2 million of cash was consumed by net finance charges.

Cash flows from investing activities amounted to an outflow of £0.2 million comprising the purchase of tangible assets.

Cash flows from financing activities comprise a facility reduction instalment of £0.5 million. The facility draw down of £11.2 million has been treated as debt acquired through demerger, reflecting the terms of the Demerger Agreement with Redstone.

The proceeds of shares issued in the period relate to the issue of partly paid redeemable preference shares.

The resulting net decrease in cash and cash equivalents amounted to £1.4 million, reflecting the balance of the bank overdraft at 30 September.

Borrowings and Bank Facilities

Total borrowings amounted to £12.1 million.

Resultant gearing based on enterprise value (the aggregate of total equity and total borrowings) is 32.6% arising from borrowings of £12.1 million and total equity of £25.1 million.

As referred to above, on 8 April 2013, the Group negotiated senior revolving facility with Barclays Bank PLC of £14.2 million, comprising a revolving credit facility of £11.2 million and a committed ancillary overdraft facility of £3.0 million

The facility termination date was 1 July 2015 with a reduction instalment profile of varying amounts on a semi-annual basis, culminating in a terminal payment of £8.0 million at the termination date

On 8 April £11.2 million was drawn down on the revolving credit to provide funds for the agreed prepayment of equivalent Redstone debt, through the agreed demerger mechanism and terms. Borrowing under the new facility has been treated as acquired on demerger. The overdraft facility of £3.0 million was used to provide working capital for the demerged business.

On 5 December 2013 the Group restructured its existing senior debt facilities with Barclays Bank PLC and effected the following key changes:

·      A £10 million increase in facility to £23.2 million, comprising a revolving credit facility of £18.2 million and a committed overdraft facility of £5 million

·      Extended the facility termination date to 6^th December 2016.

·      Restructure the facility reduction instalment profile to comprise semi-annual reductions of varying amounts commencing 30 June 2014, and culminating in a terminal reduction of £9.45 million at the termination date

·      Revised quarterly covenants, with commencement of testing scheduled for 31 March 2014

The additional finance provided has been utilised in the financing of IMS and will provide working capital for the enlarged group.

Equity

Total equity comprises equity of £0.1 million predominantly reflecting the shares issued to Redstone shareholders in consideration for the acquisition of the demerged managed services business on 8 April 2013. The shares were originally issued at a nominal value of 51pence per share and subsequently reduced to 0.1 pence via application to the Court in April 2013.

The effect of the reduction was to transfer the resulting share premium of £31.8 million to distributable reserves as retained earnings, as permitted by the provisions contained in S12008/1915 Companies (Reduction of Share Capital) Order 2008.

Other movements in equity comprise (£8.3) million in respect of the common control reserve, net profit for the period of £1.3 million, and share based payments in the period of £0.2 million.

Peter J Hallett

Chief Financial Officer

17 December 2013

Consolidated Income Statement

				Unaudited eight months ended 30 September 2013
			Note	£000
Continuing operations
Revenue			3	20,981
Cost of sales				(10,757)
Gross profit				10,224
Selling and distribution costs				(1,581)
Administrative expenses				(7,611)
Adjusted EBITDA*				3,578
Depreciation				(596)
Amortisation of intangibles				(704)
Integration and strategic costs included within administrative expenses			4	(1,061)
Share-based payments				(185)
Operating Profit				1,032
Net finance costs				(220)
Profit on ordinary activities before taxation				812
Tax on profit on ordinary activities			5	468
Profit for the period (attributable to shareholders of the parent Company)				1,280
Earnings per share
Basic earnings per share			6	2.05 p
Diluted earnings per share			6	1.98 p

*Earnings from continuing operations before interest, tax, depreciation, amortisation, integration and strategic costs and share-based payments. 

The above consolidated income statement should be read in conjunction with the accompanying notes.

Consolidated statement of comprehensive income

	Unaudited eight months ended 30 September 2013 £000
Profit for the period	1,280
Total comprehensive income	1,280

Consolidated Statement of Changes in Equity

		Called up share capital	Share premium account	Common control reserve	Retained earnings	Total equity
		£000	£000	£000	£000	£000
Total comprehensive income		-	-	-	1,280	1,280
Transactions with owners:
Share based payments		-	-	-	185	185
Share issue less costs		62	31,795	-	-	31,857
Business combination (note a)				(8,261)		(8,261)
Capital reduction (note b)			(31,795)		31,795	-
At 30 September 2013		62	-	(8,261)	32,921	25,061

Notes

(a)  Business Combinations under Common Control

Where an acquisition represents a business combination under common control, the difference between the consideration paid for the acquisition and the amounts at which the acquired entity's assets and liabilities are recorded, is recognised as a common control reserve (see accounting policy note 1). The reserve of (£8,261) arises on the acquisition of Redcentric Holdings Limited, which was demerged from Redstone plc on 8 April 2013.

(b) Capital Reduction

In April 2013 the company reduced its capital by way of a Court approved capital reduction. Under SI2008/1915 Companies (Reduction of Share Capital) Order 2008 the profit created on a reduction of capital is distributable.

Consolidated Balance Sheet

			Unaudited 30 September 2013
		Note	£000
Assets
Non-current assets
Intangible assets		7	30,297
Property, plant and equipment			9,308
			39,605
Current assets
Inventories			675
Trade and other receivables		8	17,027
Deferred tax asset			1,403
			19,105
Total assets			58,710
Equity and liabilities
Equity
Called up share capital			62
Other reserves			(8,261)
Retained earnings			33,260
Total equity			25,061
Current liabilities
Trade and other payables		9	18,755
Borrowings		10	12,121
			30,876
Non-current liabilities
Deferred tax liability			2,773
Total liabilities			33,649
Total equity and liabilities			58,710

Consolidated Cash Flow Statement

				Unaudited eight months ended 30 September 2013
		Note		£000
Cash flows from continuing operating activities
Cash generated in operations		11		235
Cash flow (absorbed) by integration and strategy costs				(721)
Cash flows (absorbed) by continuing operating activities				(486)
Net Finance charges paid				(220)
Net cash flows (absorbed) by continuing operating activities					(706)
Cash flows from investing activities
Purchase of property, plant and equipment				(227)
Net cash flows used in investing activities				(227)
Cash flows from financing activities
Proceeds of issue of shares				12
Repayment of bank loans				(500)
Net cash flows generated from financing activities				(488)
Net decrease in cash and cash equivalents				(1,421)
Cash and cash equivalents at end of period		10		(1,421)

Notes to the Interim Financial Information

1 Basis of preparation and general information

The interim financial information is unaudited. The company was incorporated on 11 February and acquired the managed services business from Redstone via demerger on 8^th April. The period covered by these financial statements is therefore eight months to 30 September 2013, and incorporates the trading for the demerged businesses for the six months to 30 September 2013. There was no trading activity prior to the demerger.

The Company is a limited liability company incorporated and domiciled in England. The registered office is located at Newton House, Cambridge Business Park, Cowley Road, Cambridge CB4 0WZ. The Company is listed on the London Stock Exchange AIM.

Redcentric plc ("Redcentric") was formed following a demerger from Redstone plc ("Redstone"), the details of which are fully disclosed in the annual financial statements of Redstone plc for the year ended 31 March 2013. These are the published interim financial results of Redcentric and the consolidated financial information should be read in conjunction with the annual financial statements for the year ended 31 March 2013 of Redstone plc, which have been prepared in accordance with IFRSs as adopted by the European Union.

This condensed, consolidated financial information for the eight months ended 30 September 2013 has been prepared in accordance with IAS 34, 'Interim financial reporting' as adopted by the European Union and does not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for Redstone plc, from which the trading businesses that comprise Redcentric were demerged on 8 April 2013, the year ended 31 March 2013 were approved by the Board of directors on 17 September 2013 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under sections 498 (2) or (3) of the Companies Act 2006.

This condensed consolidated interim report and financial information was approved by the Board on 17 December 2013.

Accounting policies

The accounting policies adopted are consistent with those adopted by Redstone plc in the Annual Report for the year ended 31 March 2013, except for a change to the policy for sales commissions. The accounting policy for business combinations under common control is explained below.

Business Combinations under Common Control

Business combinations under common control are accounted for in the consolidated accounts from the date the group obtains the ownership interest. Assets and liabilities are recognised upon consolidation at their historic carrying amount in the consolidated financial statements of the ultimate parent entity, Redcentric. Any difference between the fair value of the consideration paid and the amounts at which the assets and liabilities are recorded is recognised directly as a common control reserve.

Commission

In order to ensure consistency between group companies the group standardised its accounting policy relating to the accrual of commissions on contract sales. Commissions on qualifying contract sale transactions are charged to profit, in total, at the point at which the sale is concluded.

The application of this policy resulted in a charge to profit of £340,000 in respect of commission that had previously been deferred, and charged to profit over the life of the associated contract period. As this represented an adjustment arising from a change in accounting policy, the charge has been taken as an exceptional charge.

Integration and strategic costs

Strategic costs include the costs incurred in sourcing new acquisitions, identifying disposal opportunities which did not take place, related restructuring and refinancing.

Integration costs are incurred by the Group when integrating one trading business into another. The type of costs include employment related costs of staff made redundant as a consequence of integration, due  diligence costs, property costs such as lease termination penalties and vacant property provisions, third party advisor fees and rebranding costs.

Integration and strategic costs are disclosed on the face of the income statement as management believe that they need to be considered separately to gain an understanding of the underlying profitability of the continuing trading businesses.

For further detail refer to note 4.

Going Concern

The consolidated interim financial information of Redcentric has been prepared on a going concern basis and in accordance with EU adopted International Financial Reporting Standards (IFRS), IFRIC interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated interim financial information has been prepared under the historical cost convention, as modified by the revaluation of financial assets and financial liabilities at fair value through profit or loss.

The Directors are required to be satisfied that the Group has adequate resources to continue in business for the foreseeable future. The validity of this assumption depends on the ability of the Group to meet its cash flow forecasts and the continuing support of its bankers by providing adequate overdraft facilities and of its debt providers and shareholders.

Subsequent to 30 September 2013 the Group has amended the terms of its existing senior debt facilities as set out in note 12.

Whereas in the current economic environment there can be no absolute certainty that the Group will achieve its EBITDA forecasts, the present cash flow forecasts indicate that the Group will be able to operate within the present overdraft facilities for at least 12 months from the date of approval of these interim financial statements. For these reasons the Directors believe the going concern basis to be appropriate.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies.

2 Business combinations

On 8 April 2013 the group acquired 100% of the share capital of Redcentric Holdings Limited ("RCH") a UK IT managed services business. The business combination resulted from the demerger of the managed services business from Redstone. The Redstone Board did not believe that the market fully appreciated the attributes of the managed services business while it was combined with the infrastructure solutions business in Redstone.

This acquisition of RCH via demerger from Redstone represents a "Business Combination under Common Control", and accordingly its' assets and liabilities have been recognised upon consolidation at their consolidated historic carrying amounts in the IFRS financial statements of Redcentric.

The difference between the consideration for the acquisition (represented by the fair value of the demerger dividend paid to the Redstone shareholders) and the amounts at which the assets and liabilities have been recorded is recognised in the common control reserve.

The information in the following table summarises the consideration paid for RCH and the amounts of assets acquired and liabilities assumed that were recognised at the acquisition date.

	£000	£000
Consideration - fair value of demerger dividend shares issued		31,808
Intangible assets	14,089
Goodwill	16,912
Property plant and equipment	9,676
Deferred tax asset	1,403
Inventories	675
Trade and other receivables	11,179
Income tax receivables	162
Trade and other payments	(17,810)
Obligations to former parent	(11,200)
Deferred tax liability	(3,241)
Total net assets		23,547
Difference taken to common control reserve		8,261

The acquired business contributed all of the revenue and profits in the period.

3 Segment reporting

Operating segments are reported in a manner consistent with the internal reporting to the Chief Operating Decision Maker ('CODM'). The CODM has been identified as the Group Chief Executive and the Chief Financial Officer. The Group Chief Executive and the Chief Financial Officer are jointly responsible for resources allocation and assessing the performance of the operating segments. The operating segments are defined by distinctly separate product offerings or markets.

Unaudited results for the eight months ended 30 September 2013

Continuing Operations	Consultancy	Product	Annuity	Central	Total
	£000	£000	£000	£000	£000
Total segment revenue	3,462	3,449	14,070	-	20,981
Adjusted operating costs*	(2,980)	(3,482)	(10,474)	(467)	17,403
Adjusted EBITDA*	482	(33)	3,596	(467)	3,578
Depreciation	-	-	(596)	-	(596)
Share based payments	-	-	-	(185)	(185)
Amortisation of intangible assets	(164)	(65)	(475)	-	(704)
Integration and strategic costs	-	-	-	(1,061)	(1,061)
Segment result	318	(98)	2,525	(1,713)	1,032
Net finance costs	-	-	-	(220)	(220)
Tax	109	43	316	-	468
Profit for the period from continuing operations	427	(55)	2,841	(1,933)	1,280
Assets and liabilities
Segment assets	11,382	4,830	42,498	-	58,710
Segment liabilities	7,860	3,085	22,704	-	33,649
Other segment information
Capital expenditure
Property, plant and equipment	-	-	227	-	227

* Earnings from continuing operations before interest, tax, depreciation, amortisation, integration and strategic costs and share-based payments.

4    Integration and strategic costs

In accordance with the Group's policy of integration and strategic costs the following charges/ (credits) were incurred:

			Unaudited eight months ended 30 September  2013
			£000
Change in accounting policy (Note a)			340
Costs of integration: Staff redundancy costs and compromise agreements			98
Staff costs incurred in integration process			532
Professional fees			91
			1,061

(a) Change in Accounting Policy

In order to ensure consistency between group companies the group standardised its accounting policy relating to the accrual of commissions on contract sales. Commissions on qualifying contract sale transactions are charged to profit, in total, at the point at which the contract is concluded. This resulted in a charge of £340,000 in respect of previously deferred commission, which were formerly charged to profit over the life of the associated contract period.

5   Income tax

Tax on Profit on ordinary activities

	Unaudited eight months ended 30 September 2013 £000
Current income tax:
Total current income tax	-
Deferred tax:
Origination and reversal of  timing differences- Deferred  tax on acquired Intangibles	(184)
Effect of tax rate changes	(284)
Total deferred income tax credit reported in the income statement	(468)

The tax credit arises from the reversal of the deferred tax liability following the amortisation of the related Intangible assets, together with the impact of the reduction in the tax rate from 23% to 21%. There was no current corporation tax provision as the tax losses available to the Group exceed the estimated taxable income.

Unrecognised deferred tax asset

The Group has estimated unrecognised deferred tax assets of £4.0 million that are available indefinitely for offset against future tax profits of the companies in which the losses arose. The composition of these deferred tax assets is as follows: property, plant and equipment differences £1.7million, and tax losses of £2.3 million. Deferred tax assets have not been recognised in respect of losses where it is the view of the Directors that it is not probable that future taxable profits will be available to offset against any deferred tax asset.

6   Profit per share 

Basic profit per share of 2.05 pence per share is calculated using a profit from continuing operations of £1,280,417 and a weighted average number of shares of 62,373,325. The fully diluted profit was 1.98 pence per share, the dilutive effect of share options at 30 September 2013 increased the weighted average number of shares to 64,739,488.

In addition, adjusted EBITDA* per share has been shown on the grounds that it is a common metric used by the market in monitoring similar businesses.  This measure is derived as follows:

		Unaudited eight months ended 30 September  2013
		£000
Profit from continuing operations for the period		1,280
Net finance expense		220
Tax credit		(468)
Depreciation		596
Amortisation of intangibles		704
Share based payments		185
Integration and strategic costs		1,061
Adjusted EBITDA*		3,578

Basic adjusted EBITDA* per share                                                                                                                                   5.74p

Diluted adjusted EBITDA* per share                                                                                                                                5.53p

*earnings from continuing operations before interest, tax, depreciation, amortisation, integration and strategy costs and share based payments. 

7   Intangible Assets

					Total
					£000
Intangible assets net carrying amount 30 September 2013					30,297

Intangible assets (including goodwill) are reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Goodwill was allocated for impairment testing purposes to a cash generating units.

The recoverable amount of  the continuing CGU was based on a value in use calculation using forecast cash flow projections for the period to 31 March 2016 extrapolated for a further 2.5 years by growth rates applicable to the unit. An appropriate terminal value based on a perpetuity calculation using 2% real growth was then added. Discount rates were then applied to these projections reflecting management's expected risk profile for the CGU.

In addition to revenue growth, the key assumptions used in the impairment testing were as follows:

·      Gross margin percentage;

·      Discount rate; and

·      Rates of growth in the cash generating unit beyond the budget period, and in determining the terminal value.

The assumption of margins remaining flat after the forecast period is based on the assumption that a mix of cost savings in service delivery will be offset by competitive market influences.

A discount rate of 12% was applied to the CGU which reflects management's estimate of ROCE required. The CGU has an element of recurring revenue through maintenance contracts and this reduces the risk inherent in the business.

After the initial period of 2.5 years covered by the latest forecasts, revenues are projected to grow at 3% for the following 2.5 years. Cost growth after the forecast period was projected at 2%. Cost growth assumptions were linked to the revenue growth assumptions with an allowance for the decline in gross margins as set out above. Capital expenditure growth after the forecast period is projected at 3%.

8 Trade and other receivables

Total £000 Trade receivables 8,633    Less: provision for impairment of trade receivables (341)    Trade receivables - net 8,292    Other receivables 1,365    Prepayments 2,073    Accrued income Deferred Costs 2,237    3,060    17,027

9 Trade and other payables

	Total £000
Trade payables	5,237
Other payables	1,177
Taxation and social security	1,759
Accruals Deferred income	3,301 7,281
	18,755

10   Borrowings

                                                                                                                                                                                                 Total

                                                                                                                                                                                                 £000

Bank loan		10.700
Overdrafts		1,421
Total Borrowings as at 30 September		12,121

At 30 September 2013 the Group held a total facility with Barclays Bank PLC of £13.7 million, comprising a revolving credit facility of £10.7 million and an overdraft facility of £3.0 million.

11   Net Cash flows from continuing operating activities

	Unaudited eight months ended 30 September  2013
	£000
Profit on ordinary activities before tax	812
Adjustments for:
Cash absorbed by integration and strategic costs	1,061
Net finance costs	220
Depreciation of property, plant and equipment	596
Amortisation of intangible assets	704
Equity-settled share based payments	185
Increase in Deferred maintenance	(1,998)
Movements in working capital :
Increase in trade and other receivables	(2,900)
Increase in trade and other payables	1,555
Cash generated by continuing operations	235

12   Subsequent events

Acquisition

On 18 November 2012 Redcentric plc announced it had agreed subject to Shareholder approval at the General Meeting, to acquire the entire issued share capital of InTechnology Managed Services Limited, the wholly owned subsidiary of InTechnology plc, for £65 million payable in cash at Completion.

The consideration was funded by an equity placing of 80 million new ordinary shares at a price of 80 pence per share, to raise £64.0 million (before expenses), and new debt facilities of £10.0 million.

In view of the size of the transaction, the acquisition is classified as a reverse takeover under the AIM Rules and therefore conditional on the approval of Redcentric shareholders. Approval was received in a general meeting held on 5 December 2013.

Bank Facility

On 5th December 2013 the Group restructured its existing senior debt facilities with Barclays Bank PLC and effected the following key changes:

·      A £10 million increase in facility to £23.2 million, comprising a revolving credit facility of £18.2 million and a committed overdraft facility of £5 million

·      Extended the facility termination date to 6^th December 2016.

·      Restructure the facility reduction instalment profile to comprise semi-annual reductions of varying amounts commencing 30 June 2014, and culminating in a terminal reduction of £9.45 million at the termination date

·      Revised quarterly covenants, with commencement of testing scheduled for 31 March 2014

The additional finance provided has been utilised in the financing of IMS and will provide working capital for the enlarged group.

13   Contingent liabilities

The Group's subsidiaries and the Company are currently, and may be from time to time, involved in a number of legal proceedings. Whilst the outcome of current outstanding actions and claims remains uncertain, it is expected that they will be resolved without a material impact on the Group's financial position.

Banking facilities are secured through fixed and floating debenture over all property and assets of the Redcentric Group.

Statement of Directors' Responsibilities

The Directors confirm that this condensed interim financial statement has been prepared in accordance with IAS 34 as adopted by the European Union.

The Directors are responsible for the maintenance and integrity of the Company's website.  Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. A copy of the interim results can be found on the Company's website www.redcentric.com.

By order of the Board 

Advisers

Nominated Adviser and Joint Broker

N+1 Singer, 1 Bartholomew lane, London, EC2N 1AX

Joint Broker

FinnCap, 60 New Broad Street London, EC2M 1JJ

Financial Advisor

MXC Capital Advisory LLP, 15 Buckingham Gate, London, SW1E 6LB

Auditors

PricewaterhouseCoopers LLP, 1 Harefield Road, Uxbridge, UB8 1EX

Solicitors

DAC Beechcroft LLP, 100 Fetter Lane, London, EC4A 1BN

Registrars

Capita IRG Plc, The Registry, 34 Beckenham Road, Beckenham, Kent, BR3 4TU

Principal Bankers

Barclays Bank plc, 54 Lombard Street, London, EC3V 9EX

Company Number

8397584

Further details can be found on the Redcentric website at the following address: www.redcentricplc.com

 

END

 

 

IR EAAAKFFNDFAF