Final Results
30 June 2020
SysGroup plc
("SysGroup" or the "Company" or the "Group")
Final Results for the year ended 31 March 2020
SysGroup PLC (AIM:SYS), the multi award-winning managed IT services and cloud hosting provider is pleased to announce its audited final results for the year ended 31 March 2020.
HIGHLIGHTS
Financial
|
|
2020 |
2019 |
Change % |
|
Revenue |
£19.49m |
£12.77m |
+53% |
|
Recurring revenue as a % of total revenue |
77% |
74% |
+3% |
|
Gross profit |
£11.20m |
£7.78m |
+44% |
|
Adjusted EBITDA 1 |
£2.81m |
£1.41m |
+99% |
|
Adjusted EBITDA 1 margin % |
14% |
11% |
+3% |
|
Adjusted PBT 2 |
£1.76m |
£0.75m |
+135% |
|
Adjusted Basic EPS 3 |
3.4p |
3.1p |
+10% |
|
Loss before tax |
£(0.23)m |
£(0.83)m |
- |
|
Basic EPS |
(0.2)p |
(2.8)p |
- |
|
Operational cashflows |
£1.93m |
£0.60m |
+222% |
|
Net cash 4 |
£0.45m |
£0.47m |
-4% |
Operational
· Successful COVID-19 response and transition of all employees to home working with continuation of services to customers
· Acquisition of Hub Network Services Limited for £1.45m in cash; integration completed in under three months
· New Executive Operational Board and Senior Leadership Team following the integration of Certus IT Limited
· Introduction of Customer Engagement plan demonstrating >97% satisfaction
· Increased investment in sales and demand generation training
· Planned closure of legacy Coventry office and datacentre complete
Post period-end developments
· Business continuity plans successfully implemented and remote working facilitated across the business in response to the COVID-19 pandemic, with minimal impact to operations
· Strategic sales engagement relating to digital transformation with both new and existing customers has increased although the Group is seeing some major asset refreshes and contract renewal decisions being delayed
· Strong balance sheet with a cash balance of £3.0m and a net cash 4 balance of £0.45m at 31 March 2020. The Group has facilities of £5m expiring in 2024, consisting of a £1.75m term loan which has £0.35m of headroom at 31 March 2020 and an undrawn £3.25m acquisition revolving credit facility, providing the Group with additional available liquidity to execute on acquisition opportunities.
1. Adjusted EBITDA is earnings before interest, taxation, depreciation, amortisation of intangible assets, exceptional items, and share based payments.
2. Adjusted profit before tax ("Adjusted PBT") is profit before tax after adding back amortisation of intangible assets, exceptional items, and share based payments.
3. Adjusted Basic EPS is profit after tax after adding back amortisation of intangible assets, exceptional items, share based payments and associated tax, divided by the number of shares in issue
4. Net cash represents cash balances less bank loans, lease liabilities and contingent consideration, and excludes IFRS16 lease liabilities.
Adam Binks, Chief Executive Officer, commented:
"FY20 has been another year of considerable growth, in which we delivered increased revenues and EBITDA, whilst integrating our largest acquisition to date. Despite COVID-19 dominating the end of the financial year, I have been impressed with how the team have continued to support and service our customers during these challenging circumstances.
While there is still uncertainty around the impact of COVID-19, we believe it has presented us with significant opportunities. We have seen an accelerated shift towards flexible and remote working practices, with investment in the appropriate technology becoming ever more mission critical. Businesses are now seeing, more than ever before, the value of outsourced managed IT services and are looking to trusted providers to help them navigate the complexities of the technological landscape. I am confident we are well positioned to support our customers through this period of change which will be further underpinned by our buy-and-build strategy.
As we look ahead, I remain optimistic for continued growth, supported by a robust balance sheet, a diverse customer base and the growing relevance of our solutions. I am pleased to be able to report that, underpinned by our strong levels of recurring revenue, momentum in the first months of FY21 trading has continued."
|
For further information please contact:
SysGroup Plc
|
Tel: 0151 559 1777 |
|
Shore Capital
(Nomad and Broker) |
Tel: 020 7408 4090 |
|
Alma PR (Financial PR)
|
Tel: 07780 901979 |
About SysGroup
SysGroup is a leading provider of Managed IT Services, Cloud Hosting, and expert IT Consultancy. The Group delivers solutions that enable clients to understand and benefit from industry leading technologies and advanced hosting capabilities. SysGroup focuses on a customer's strategic and operational requirements - enabling clients to free up resources, grow their core business and avoid the distractions and complexity of delivering IT services.
The Group has offices in Liverpool, London, Newport, Bristol and Telford.
For more information, visit http://www.sysgroupplc.com
STRATEGIC REPORT
Chairman's statement
The year ended 31 March 2020 saw the Company progress against each of its priorities and continue to build high levels of recurring revenue. Top line growth of over 50% and doubling of Adjusted EBITDA validates the success of management's buy and build strategy, further underpinned by the increase in Adjusted EBITDA margin to 14.4% (FY19: 11.1%).
In the first half of the year we acquired Hub Network Services Limited ("HNS") for £1.45m and have been pleased with its contribution since. We will continue to consider further acquisitions which fit our strict criteria and help us to meet our goals and believe that the current environment will present further opportunities.
The end of the financial year was clearly dominated by the impact of the COVID-19 pandemic and, as a business, we have been well served by the strength and stability of the senior management team assembled during recent years, including Martin Audcent who joined as Chief Financial Officer ("CFO") in July 2018, and led by Adam Binks, our Chief Executive Officer ("CEO"). The Group's 'people first' mentality saw us adopt safe working practices ahead of government guidance and our continued priority remains the health and wellbeing of our employees. This has undoubtedly been reflected in their professionalism and commitment to serve our customers at a time when our services are even more critical to their own business needs. On behalf of the Board, I would like to offer them all sincere thanks.
SysGroup's services are designed to provide customers with the greatest levels of flexibility and are tailor made to meet the requirements of each and every individual business. As companies come to terms with the current environment and adapt their working practices for both the short and long term, we are ideally placed to support them along the way.
The material economic impact of COVID-19 is already beginning to become clear with recent government statistics and undoubtedly some of our customers will be affected, either directly or through their end market. However, with a cash generative business underpinned by a robust balance sheet, alongside contracted revenues from a diverse and well balanced customer base, combined with the growing relevance of our services and solutions, the Board's confidence in the future of SysGroup remains undiminished.
Michael Edelson
Chairman
30 June 2020
STRATEGIC REPORT
Chief Executive Officer's report
Introduction
I am pleased to report on another successful year for the Group, in which we continued to make significant strides towards becoming the leading provider of Managed IT Services to businesses in the UK. The team effort which has been demonstrated throughout the course of the period is unparalleled and I am delighted that we continue to work towards the same common goal of being the best in class.
The Company delivered revenue growth of 53% to £19.49m and Adjusted EBITDA growth of 99% to £2.81m, with Managed IT Services recurring revenues now representing 77% of the Group's total revenue (FY19: 74%).
In line with our well known acquisition strategy, we are continuing to engage and nurture relationships with potential target companies, with business models that either complement or significantly enhance our existing solution offering. The acquisition of HNS in June last year enabled the Group to effectively compete in the managed connectivity market space, supplementing our datacentre and cloud offerings and further enhancing the offering of Certus IT Limited ("Certus"), which the Group acquired in the previous financial year. Both acquisitions have been pivotal to our future success and continue to make a great contribution. Through the enlarged business, we are now able to offer our customer base a large and growing suite of managed IT service solutions, positioning us well against the competition and enabling the way for further growth. Additionally, the growth of the business is allowing the benefits of economies of scale and dilution of central costs to come to the fore.
During the year, we invested a considerable amount of time and resources preparing for the integration of the systems of the newly acquired businesses with our own. As a result, the Group is now well on the way to having the benefit of a consolidated platform across its operations for day to day management, providing fast and accurate access to business intelligence across the entire Group. Additionally, the re-branding of the enlarged Group has begun with great momentum - this will bring both Certus and HNS into the SysGroup brand, which aligns with our single go-to-market offering.
Throughout the course of the year, in recognition of SysGroup's growth, to adequately resource the Group for the next stage in its development the Board has elected to invest in a broader senior leadership team to increase managements' bandwidth. In addition to the PLC Board, the Group has introduced an Executive Operational Board that reports to the PLC Board. The Operational Board consists of the CEO, CFO and three new roles: Chief Sales Officer, Chief Marketing Officer and a Chief Technology Officer. Each post holder was recruited during the last financial year, into the Group by way of a rigorous selection process and brings with them a number of years of industry experience. The benefits of this newly formed team are already being felt across the Group as a whole.
COVID-19
As announced in the April trading update, the Group was quick to implement its business continuity plan in response to the global outbreak of COVID-19. After internally publishing our first COVID-19 policy to the team in February 2020, we continued to monitor the unfolding situation and in mid-March successfully executed a transition to remote working across all of our operations. We have continued providing uninterrupted service and support to our customers throughout this challenging period. I would like to thank our entire team for their cooperation as well as for adapting to a new way of working both quickly and seamlessly.
Whilst we have started to see delays to both existing and new sales cycles, with some customers unable to commit to major asset refreshes and contract renewals until they have established the full impact of COVID-19 on their own businesses, we have seen minimal impact to our operational performance. We are not only well placed to benefit from our strong levels of recurring revenue and solid cash position, but owing to the very nature of the services that we provide, we have been able to operate remotely and adapt quickly allowing our sales teams to stay engaged and our technical teams continue to provide the same levels of quality service to which our customers are accustomed. Looking ahead, we will continue to build upon our own internal IT strategy as well as our working practices to further promote flexible and secure working habits that are scalable to meet future growth and that will ultimately benefit our customers.
We believe COVID-19 has dramatically accelerated the trend towards flexible and remote working practices and that this new way of working will only intensify over the coming year as more businesses realise the benefits not only to their existing teams but also by opening up to a wider talent pool that is less geographically focused. In preparation, we have ensured we maintain regular dialogue with our customers in order to help them rethink their own IT strategy to support their enablement for seamless remote working and so that we are in a position to offer them the appropriate solutions when they are ready and able to commit. We have invested significantly in additional coaching and training for our sales team as well as our newly formed demand generation team so they can confidently engage with our customers and offer the advice on the best solutions for their business.
Market
The market opportunity for SysGroup is substantial and continues to grow rapidly underpinned by the evermore visible need for digital transformation. Now, more so than ever, businesses are relying on proven technology to ensure the smooth running of their operations and business continuity as a result of COVID-19 whilst adjusting to remote working and social distancing measures in the workplace. Businesses are now seeing the value of outsourced managed IT services and are looking to trusted providers to help them navigate the complexities of the technological landscape. We are well positioned to support our customers through this period of global change which will be further underpinned by our buy-and-build strategy.
Strategy
The Group's strategy remains consistent: to expand its position to be the leading provider of Managed IT Services to businesses in the UK. The Board believes that a business focused on the provision of Managed IT Services offers the highest growth opportunity and the potential for increased margins and longer-term contracts, thereby providing greater revenue visibility.
In pursuit of this strategy, the Group has positioned itself as an extension of a customer's existing IT department, with an emphasis on consultative-led sales to guide customers through the complexities and developments in the managed IT services and cloud hosting marketplace. Our primary purpose is to remain abreast of developments in technology and advise our customers accordingly. This leading role is supplemented by exceptional customer service and support resulting in strong client engagement embedding SysGroup into their organisation. The Group continues to invest in R&D to ensure its clients are making use of the latest and best solutions available to them whilst maintaining its vendor agnostic approach.
The Company's route to execute this strategy is through a combination of organic and acquisitive growth whilst ensuring cross-selling opportunities are created throughout the acquired customer bases, providing a single go-to-market offering under the SysGroup brand.
Acquisitions
At the start of the financial year the Group acquired HNS, for a cash consideration of £1.45m on a cash free debt free basis. HNS is a well-established B2B managed services provider with a primary focus on delivering superfast, low latency network connectivity and datacentre solutions. HNS supplements the acquisition of Certus IT, which was acquired in FY19 and provides a complementary service offering, geographical reach and customer base to SysGroup.
Both acquisitions reinforce the Group's growth strategy and the Board will continue to assess strategic acquisition opportunities going forward. Management are open to the potential impact of COVID-19 on its peers and the opportunities this may bring to undertake further consolidation within the sector.
Sales, Marketing and Operations
The investments we are making in sales and marketing are integral to the successful running of our operations, and we are pleased with the progress that has been made during the year. We completed the integration of the Certus and HNS sales teams into our wider sales organisation and we have already started to see encouraging results, including strengthened relationships with existing customers coupled with opportunities to cross-sell the Group's enhanced portfolio of services into the enlarged customer base. We will continue to align our sales, marketing and operational functions in order to further integrate all parts of the business over the course of FY21. Alongside this, towards the end of the period we commenced the re-brand of the enlarged business to reflect our operating model of a single brand across the Group.
In the final month of the period, we formed a new "Demand Generation" team as part of our graduate programme which has been created to actively pursue new business opportunity. The programme has been designed to train and develop graduates with a passion for a career in sales and whilst this function is in its infancy, we remain confident that our investment will bear fruit in the future. The demand generation process will be aided by our newly integrated CRM and marketing platforms supported by both our existing marketing team and our digital marketing strategy.
Our customer engagement strategy launched earlier in the financial year was designed to help us better identify customer motivations and preferences to ensure we maintain our excellent customer retention rates, and we are pleased to report our customer satisfaction rate for the year was 97%. Throughout the course of the FY21 period we intend to build upon this and dig deeper with our existing customer base to determine the levels of customer satisfaction from all touch points across the business which we expect will highlight areas for improvement to enable even further future success.
In the first half of the year we commenced a project to consolidate all of our legacy network assets onto a single platform that will interconnect at each of our key datacentre locations, providing further scalability and redundancy to our hyper-scale hosting platforms. We expect completion of this project in calendar year 2021. The project is expected to drive further operational cost synergies and will therefore remain a priority for the Group.
During the period we closed our Coventry office and data centre, migrating customers to other facilities within our existing footprint, which was enhanced following the acquisition of Certus. This has provided us with operational cost savings and we will continue focusing on consolidating our data centre and network footprint in order to provide a resilient, secure and scalable infrastructure to service our customers throughout the UK.
Summary & Outlook
The performance in FY20 from our team has been outstanding, with the Group integrating its largest acquisition to date as well as doubling its Adjusted EBITDA whilst improving margins. The outset of FY21 has been impacted by the interruption caused by COVID-19 however despite this, our people have continued to support and service our customers under the extremely challenging circumstances. I am pleased to be able to report that, underpinned by our strong levels of recurring revenue, momentum in the first months of FY21 trading has continued.
The world has undergone material change and SysGroup is continuing to innovate. We have adapted to a very new style of working and we are using our own experiences to strategically advise our customers to enable their own future success.
Technology has been the enabler for many businesses to continue to operate during this global crisis and whilst some have already accelerated their digital transformation projects, many are yet to make the necessary long term changes required to allow their businesses to continue operating in the future. Consequently, the market opportunity for the Group remains substantial as investment in the appropriate technology is becoming ever more mission critical for businesses to survive and thrive.
Despite the opportunity that lies ahead, there still remains much near term uncertainty as to the impact on the wider UK economy and we are prepared to face delays to our sales cycles whilst businesses assess the impact of COVID-19 and are once again ready to commit to long term contracts and enhanced IT spend. At this stage therefore it remains too early to provide guidance for the current financial year.
I would like to take this opportunity to give my thanks to our entire team, not only for their sterling performance over the course of FY20 but also for their continued dedication, commitment and effort during the COVID-19 pandemic which has created a situation that has never been experienced like this in modern history.
Adam Binks
Chief Executive Officer
30 June 2020
Chief Financial Officer's report
Group Statement of Comprehensive Income
Group revenue for the year grew by 53% to £19.49m (FY19: £12.77m) with acquisition led growth from a full year's trading of Certus and part year trading from HNS which we acquired in June 2019.
Managed IT Services revenue increased by 60% to £15.1m compared to FY19 and comprised 77% of the overall Group revenue (FY19: 74%) which was slightly ahead of our expectations. Value Added Resale revenue of £4.4m was an increase of 32% compared to FY19 but still below planned levels due to the political uncertainty leading to delays in customers making capex expenditure decisions. Our business model and internal forecasts are targeted at maintaining an approximate 75%:25% split of Managed IT Services to Value Added Resale revenue.
|
Revenue by Operating Segment |
2020 |
2020 |
2019 |
2019 |
|
£'000 |
% |
£'000 |
% |
|
|
Managed IT Services |
15,092 |
77% |
9,448 |
74% |
|
Value Added Resale |
4,400 |
23% |
3,325 |
26% |
|
Total |
19,492 |
100% |
12,773 |
100% |
Gross profit for the year was £11.2m (FY19: £7.8m) with a gross margin percentage of 57% (FY19: 61%). Managed IT Services gross profit increased to £10.3m (FY19: £7.0m) with a gross margin of 68% (FY19: 74%). Value Added Resale gross profit increased to £0.9m (FY19: £0.8m) with a gross margin of 21% (FY19: 25%). These movements in gross margin percentages were anticipated as the Certus and HNS business models have a higher proportion of direct costs than SysGroup historically and this has had a dilutive impact on the Group's overall gross margin.
Operating expenses were controlled well throughout the year and the Group is beginning to see the benefits of economies of scale with savings made from the closure of the Coventry office and streamlining of the team as part of the wider Group integration. Operating expenses before depreciation, amortisation, exceptional items and share based payments of £8.4m were 43% of revenue in FY20 which compares to £6.4m and 50% of revenue in FY19. The reduction of 7% reflects the scale we are now achieving. The overall increase in operating expenses arises from the addition of the overhead bases from the Certus and HNS acquisitions.
Adjusted EBITDA was £2.81m for the twelve months to 31 March 2020, an increase of £1.4m (+99%) compared to £1.41m in FY19. The Adjusted EBITDA margin was 14.4% in FY20 compared to 11.1% in FY19 which is a progressive improvement as the Group continues on its scale-up strategy.
The reconciliation of operating profit to Adjusted EBITDA is shown below. The Directors consider that Adjusted EBITDA is the most appropriate measure to assess the business performance since this reflects the underlying trading performance of the Group. Adjusted EBITDA is not a defined term and is calculated differently by each Company.
|
Reconciliation of Operating profit to Adjusted EBITDA |
2020 |
2019 |
|
£'000 |
£'000 |
|
|
Operating loss |
(28) |
(659) |
|
Depreciation |
847 |
494 |
|
Amortisation of intangible assets |
1,321 |
723 |
|
EBITDA |
2,140 |
558 |
|
Exceptional items |
475 |
736 |
|
Share based payments |
199 |
119 |
|
Adjusted EBITDA |
2,814 |
1,413 |
The Group incurred exceptional costs during the year of £0.48m (FY19: £0.74m) comprising £0.09m of professional fees for the acquisition of HNS and £0.39m for integration and restructuring costs. The costs for integration and restructuring relate to the closure of the Coventry office and planned exits of employees following the acquisitions or as part of the Leadership Team restructure. Amortisation of intangible assets was £1.32m (FY19: £0.72m), of which £1.27m (FY19: £0.66m) relates to the amortisation of acquired intangible assets from acquisitions.
The share-based payments charge has increased to £0.20m in FY20 (FY19: £0.12m). The increase in the charge results from a grant of share options to the Executive Directors in July 2019.
The adjusted profit before tax for the year was £1.76m (FY19: £0.75m) and the loss before tax for the year was £0.23m (FY19: £0.83m).
IFRS16 - Leases
The Group has adopted IFRS 16 - Leases for the financial year ended 31 March 2020 and has chosen to use the modified retrospective approach to adoption which means there are no restatements to the prior year figures.
Within the consolidated income statement, operating lease charges which previously sat in administrative expenses have been replaced by depreciation and interest expenses. The adoption of IFRS16 resulted in a right of use asset of £0.51m, with a corresponding liability of £0.58m, being recognised as at 1 April 2019. Within the consolidated income statement, the operating lease charge has been replaced by depreciation and interest expenses. This has resulted in a decrease in operating expenses and an increase in finance costs. Further information is disclosed in the notes to the consolidated financial statements.
Net cash and cashflow
The Group had a net cash balance excluding IFRS16 lease liabilities of £0.45m at 31 March 2020 (FY19: £0.47m).
|
|
2020 |
2019 |
|
|
Net cash excluding IFRS16 Lease liabilities |
£'000 |
£'000 |
|
|
Cash balances |
3,036 |
3,376 |
|
|
Bank loans - current |
(251) |
(224) |
|
|
Bank loans - non-current |
(1,146) |
(1,397) |
|
|
Lease liabilities excl IFRS16 |
(186) |
(285) |
|
|
Contingent consideration |
(1,000) |
(1,000) |
|
|
Net cash |
453 |
470 |
|
The Group's net cash inflow from operations increased to £1.93m (FY19: £0.60m). This includes payments for interest and taxation and £0.49m of exceptional cash costs (FY19: £0.61m). The underlying operational cash conversion, which excludes the exceptional cashflows for acquisitions, integration and restructuring, was 86% and within our target range. This was a similar result to last year (FY19: 86%).
|
Cash conversion |
2020 |
2019 |
|
£'000 |
£'000 |
|
|
Operational cashflows |
1,930 |
601 |
|
Adjustments: |
|
|
|
Acquisition, integration and restructuring cashflows |
492 |
611 |
|
Cash generated from operations |
2,422 |
1,212 |
|
Adjusted EBITDA |
2,814 |
1,413 |
|
Cash conversion |
86% |
86% |
Net cash/(debt) is considered to be a KPI of the business since the level of financial indebtedness of the Group is relevant for Board level strategic decisions and a key financial measure for the Group's shareholders and potential investors.
Consolidated Statement of Financial Position
The Group's net assets of £20.1m at 31 March 2020 have remained at a similar level to the prior year (FY19: £20.1m).
Non-current assets have increased by £0.47m which is a net movement of capital expenditure and the period charges for depreciation and intangible amortisation. Intangible asset additions included £1.47m for the intangible assets and goodwill relating to the acquisition of HNS and £0.19m for the capitalised Project Fusion development costs. The Group invested £0.35m (FY19: £0.30m) in property, plant and equipment and the adoption of IFRS16 - Leases led to £0.51m of property related assets being recognised as non-current assets for the first time on 1 April 2019.
Working capital was managed well throughout the year and the gross trade debtor balance of £1.6m was lower than the £1.8m balance in the previous year. However, the 31 March 2020 year end landed at the beginning of the COVID-19 lockdown period and we are mindful that cash collections carry a higher risk as businesses contend with the wider economic impact. For this reason, we have increased our doubtful debt provision to £0.21m at 31 March 2020 (FY19: £0.07m), which is 13% of the gross trade debtor balance at 31 March 2020 (FY19: 4%). In a small number of cases, customers have requested financial support from us and where this has been the case, we have assessed their particular situation and longer-term viability and taken a supportive approach where practically possible. Financial support, where it has been offered, has typically been in the form of extended settlement terms for a temporary period. We believe this is the right thing to do in the face of the disruption to the economy and in support of the wider business community.
The bank loan at 31 March 2020 was £1.40m (FY19: £1.62m), there have been no further drawdowns of the facilities during the year and the bank loan covenants have been met throughout the year. The acquisition of HNS was funded from the Group's existing cash balances.
Current liabilities includes contingent consideration of £1.0m which relates to the acquisition of Certus in February 2019 and is recognised at the full value of the consideration. In February 2020 the earn-out period was completed and Certus successfully achieved the EBITDA upper target. Following the 31 March 2020 year end, SysGroup paid £0.975m contingent consideration to the vendors of Certus in full settlement of the earn-out.
Project Fusion
During the year, the Group launched Project Fusion, a project to deliver a unified platform of systems across the Group to enable more efficient working practices and higher quality operating and reporting information. The Project has multiple workstreams for systems covering Customer Relationship Management ("CRM"), Service Desk, Financial Accounts, Marketing and Risk Management.
Substantial progress has been achieved under the co-ordination of both the Executive and Senior Leadership Team. The project is a substantial one and a huge step forward for the Group not only providing for enhanced business intelligence but also making the integration of future acquisitions simpler and easier. Project Fusion is expected to continue through the course of FY21.
During FY20, £0.19m of development costs were capitalised as an intangible asset comprising employee and contractor costs.
Grants under the Long Term Incentive Plan
In July 2019, the Group announced the grant of 250,000 and 150,000 performance shares with an exercise price of £0.01 (the "Awards") under the 2018 Long Term Incentive Plan ("LTIP") to Adam Binks, CEO and Martin Audcent, CFO respectively.
The LTIP was established in June 2018 to incentivise management to deliver long-term value creation for shareholders and ensure alignment with shareholder interests. The Awards are subject to the same performance conditions as those set out in the announcement of 29 June 2018 and 50 per cent. of the Awards will vest following the announcement of the Group's financial results for the financial year ending 31 March 2022, with the residual 50 per cent. vesting following the announcement of the Group's financial results for the year ending 31 March 2023.
The Award represents 0.81% of the current issued share capital of the Company.
The Award is also subject to continued employment, malus and clawback provisions and will vest in full on a takeover of the Company.
Summary
The Group has made good strategic progress and delivered on its financial initiatives over the course of the period. The Group benefits from a diverse customer base underpinned by contracted revenue. In addition, the Group has a strong balance sheet with a net cash position, meaning the Group is well placed to endure the economic uncertainty generated by COVID-19.
Martin Audcent
Chief Financial Officer
30 June 2020
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 2020
|
| 2020 | 2019 |
|
| Group | Group |
| Notes | £'000 | £'000 |
Revenue | 3 | 19,492 | 12,773 |
Cost of sales |
| (8,291) | (4,994) |
Gross profit |
| 11,201 | 7,779 |
Operating expenses before depreciation, amortisation, exceptional items and share based payments |
| (8,387) | (6,366) |
Adjusted EBITDA |
| 2,814 | 1,413 |
Depreciation |
| (847) | (494) |
Amortisation of intangibles | 11 | (1,321) | (723) |
Exceptional items | 7 | (475) | (736) |
Share based payments |
| (199) | (119) |
Administrative expenses |
| (11,229) | (8,438) |
Operating loss |
| (28) | (659) |
Finance costs | 5 | (206) | (167) |
Loss before taxation |
| (234) | (826) |
Taxation | 10 | 112 | 104 |
Total comprehensive loss attributable to the equity holders of the company |
| (122) | (722) |
Basic loss per share (EPS) | 9 | (0.2p) | (2.8p) |
Diluted loss per share (EPS) | 9 | (0.2p) | (2.8p) |
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 MARCH 2020
|
| 2020 | 2019 |
|
| Group | Group |
| Notes | £'000 | £'000 |
Assets |
|
|
|
Non-current assets |
|
|
|
Goodwill | 11 | 15,554 | 15,508 |
Intangible assets | 11 | 6,188 | 6,173 |
Property, plant and equipment |
| 1,824 | 1,420 |
|
| 23,566 | 23,101 |
Current assets |
|
|
|
Trade and other receivables | 12 | 2,726 | 2,856 |
Cash and cash equivalents |
| 3,036 | 3,376 |
|
| 5,762 | 6,232 |
Total Assets |
| 29,328 | 29,333 |
Equity and Liabilities |
|
|
|
Equity attributable to the equity shareholders of the parent |
|
|
|
Called up share capital |
| 494 | 494 |
Share premium reserve |
| 9,080 | 9,080 |
Other reserve |
| 2,328 | 2,129 |
Translation reserve |
| 4 | 4 |
Retained earnings |
| 8,163 | 8,370 |
|
| 20,069 | 20,077 |
Non-current liabilities |
|
|
|
Lease liabilities | 14 | 441 | 81 |
Contingent consideration | 8 | - | 1,000 |
Bank loan | 14 | 1,146 | 1,397 |
Deferred taxation |
| 1,200 | 1,120 |
|
| 2,787 | 3,598 |
Current liabilities |
|
|
|
Trade and other payables | 13 | 3,488 | 3,992 |
Contingent consideration | 8 | 1,000 | - |
Contract liabilities |
| 1,465 | 1,238 |
Bank loan | 14 | 251 | 224 |
Lease liabilities | 14 | 268 | 204 |
|
| 6,472 | 5,658 |
Total Equity and Liabilities |
| 29,328 | 29,333 |
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 MARCH 2020
| Attributable to equity holders of the parent |
| ||||||
| Share capital | Share premium reserve | Other reserve | Translation reserve | Retained earnings | Total | ||
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | ||
At 31 March 2018 | 231 | - | 2,010 | 4 | 9,092 | 11,337 | ||
Comprehensive income |
|
|
|
|
|
| ||
Loss for the period | - | - | - | - | (722) | (722) | ||
Total Comprehensive income | - | - | - | - | (722) | (722) | ||
Distributions to owners |
|
|
|
|
|
| ||
Share Options granted | - | - | 119 | - | - | 119 | ||
Issue of share capital - fees | - | (657) | - | - | - | (657) | ||
Issue of share capital - placing | 263 | 9,737 | - | - | - | 10,000 | ||
Total Distributions to owners | 263 | 9,080 | 119 | - | - | 9,462 | ||
At 31 March 2019 | 494 | 9,080 | 2,129 | 4 | 8,370 | 20,077 | ||
|
|
|
|
|
|
| ||
Balance as at 31 March 2019 (as previously stated) | 494 | 9,080 | 2,129 | 4 | 8,370 | 20,077 | ||
Adjustment on adoption of IFRS16 | - | - | - | - | (85) | (85) | ||
As at 1 April 2019 (restated) | 494 | 9,080 | 2,129 | 4 | 8,285 | 19,992 | ||
Comprehensive income |
|
|
|
|
|
| ||
Loss for the period | - | - | - | - | (122) | (122) | ||
Total Comprehensive income | - | - | - | - | (122) | (122) | ||
Distributions to owners |
|
|
|
|
|
| ||
Share Options granted | - | - | 199 | - | - | 199 | ||
Total Distributions to owners | - | - | 199 | - | - | 199 | ||
At 31 March 2020 | 494 | 9,080 | 2,328 | 4 | 8,163 | 20,069 | ||
| ||||||||
CONSOLIDATED STATEMENT OF CASHFLOWS
FOR THE YEAR ENDED 31 MARCH 2020
|
| 2020 | 2019 |
|
| Group | Group |
| Notes | £'000 | £'000 |
Cashflows used in operating activities |
|
|
|
Loss after tax |
| (122) | (722) |
Adjustments for: |
|
|
|
Depreciation and amortisation |
| 2,168 | 1,226 |
Finance costs | 5 | 206 | 167 |
Share based payments |
| 199 | 119 |
Taxation |
| (112) | (104) |
Operating cashflows before movement in working capital |
| 2,339 | 686 |
Decrease / (increase) in trade and other receivables |
| 501 | (188) |
(Decrease) / increase in trade and other payables |
| (533) | 275 |
Operating cashflows before interest and tax |
| 2,307 | 773 |
Interest paid |
| (205) | (123) |
Taxation paid |
| (172) | (49) |
Operational cashflows |
| 1,930 | 601 |
Cashflows from investing activities |
|
|
|
Payments to acquire property, plant & equipment |
| (353) | (296) |
Payments to acquire intangible assets | 11 | (190) | - |
Acquisition of subsidiary companies | 8 | (1,911) | (7,956) |
Amounts received in respect of previous acquisitions | 8 | 252 | - |
Cash acquired with acquisitions | 8 | 609 | 949 |
Net cash used in investing activities |
| (1,593) | (7,303) |
Cashflows from financing activities |
|
|
|
Net proceeds from issue of ordinary share capital |
| - | 9,343 |
Repayment of loan facility including fees |
| (224) | (383) |
Capital/principal paid on lease liabilities |
| (453) | (197) |
Net cash from financing activities |
| (677) | 8,763 |
Net (decrease) / increase in cash and cash equivalents |
| (340) | 2,061 |
Cash and cash equivalents at the beginning of the year |
| 3,376 | 1,315 |
Cash and cash equivalents at the end of the year |
| 3,036 | 3,376 |
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION
FOR THE YEAR ENDED 31 MARCH 2020
1. Accounting policies
SysGroup Plc (the 'Company') is a Company incorporated and domiciled in the United Kingdom. The Company's registered office is at Walker House, Exchange Flags, Liverpool, L2 3YL. This consolidated financial information comprises the Company and its subsidiaries (together referred to as the 'Group').
Statement of compliance
The Group financial information has been prepared in accordance with International Financial Reporting Standards (IFRSs and IFRIC interpretations) as endorsed by the European Union ("endorsed IFRS") and with those parts of the Companies Act 2006 applicable to companies preparing their accounts under endorsed IFRS.
This consolidated financial information does not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. The comparative figures for the financial year ended 31 March 2019 are an extract of the Company's statutory accounts for the year ended 31 March 2019, prepared in accordance with International Financial Reporting Standards (IFRS), approved by the Board of Directors on 26 June 2019 and delivered to the Registrar of Companies. The report of the auditor on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 (2) or (3) of the Companies Act 2006.
The statutory accounts for the year ended 31 March 2020 will be delivered to the Registrar of Companies following the Company's Annual General Meeting. The Auditors have reported on those accounts; their report was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 (2) or (3) of the Companies Act 2006.
Basis of preparation
The principal accounting policies adopted in the preparation of the Financial Statements are set out below. The policies have been consistently applied to all the years presented, unless otherwise stated. The consolidated financial statements have been prepared under the historical cost basis, except for the revaluation of certain financial liabilities which have been valued in accordance with IFRS9. This is the first set of Group's financial statements in which IFRS16 has been applied.
The preparation of financial statements in compliance with adopted IFRS requires the use of certain critical accounting estimates. It also requires Group management to exercise judgement in applying the Group's accounting policies. The areas where significant judgements and estimates have been made in preparing the financial statements and their effect are disclosed in note 2. The financial statements are presented in pounds sterling, rounded to the nearest thousand, unless otherwise stated.
Going concern
The Directors have prepared the financial statements on a going concern basis which assumes that the Group and the Company will continue to meet liabilities as they fall due.
The Board recognises that the Group is trading in an economy that has suffered a significant downturn following the onset of the COVID-19 pandemic and there is considerable uncertainty in the timing and rate of recovery. The Group has an operational model with circa 75% of revenue deriving from contracted managed IT services which is a continuous service supply to customers and largely uninterrupted by the impact of COVID-19. The Group has a resilient financial position with a cash balance of £3.04m and a net cash position of £0.45m at 31 March 2020. Net cash includes a £1.4m Senior Term loan with Santander at 31 March 2020 which is subject to quarterly loan covenant tests which are calculated on a 12-month rolling basis for interest cover, net debt to Adjusted EBITDA leverage and debt service cover.
The Directors have reviewed the Group financial forecasts and a Reverse Stress Test model. The Reverse Stress Test model has allowed the Board to assess a significant downside view set to the point where the bank loan covenants would breach. The projected trading forecasts and resultant cashflows, together with the confirmed loan facilities and other sources of finance, taking account of reasonably possible changes in trading performance, show that the Group can continue to operate within the current facilities available to it.
The Directors therefore have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future and thus they continue to adopt the going concern basis of accounting in preparing the financial statements.
New standards and interpretations
A number of new standards and amendments to standards and interpretations have been issued during the year ended 31 March 2020. The Group has adopted all of the new and revised standards and interpretations issued by the IASB and the International Financial Reporting Interpretations Committee (IFRIC) of the IASB, as they have been adopted by the European Union, that are relevant to its operations and effective for accounting years beginning on 1 January 2019. Other new amended standards and interpretations issued by the IASB that apply to the financial statements do not impact the Group as they are either not relevant to the Group's activities or require accounting which is consistent with the Group's current accounting policies.
New standards not yet effective
There are a number of standards and amendments to standards, and interpretations which have been issued by the IASB that are effective in future accounting periods that the Group has decided not to adopt early. SysGroup plc is currently assessing the impact of these new standard and amendments. The Group does not expect any other standards issued by the IASB, but not yet effective, to have a material outcome on the Group.
IFRS16 - Leases
IFRS16 has replaced IAS17 Leases and the new standard became effective for the period commencing after 1 January 2019. The Group has adopted IFRS16 using the modified retrospective basis with recognition of a transitional adjustment on the date of initial application being 1 April 2019 and therefore comparatives have not been restated. IFRS 16 introduces a single lessee accounting model, where the Group now recognises a lease liability and a right of use asset for all leases. The group has no significant leasing activities acting as a lessor. On adoption of IFRS16 the group recognised a right of use asset in relation to the lease of motor vehicles, office space and equipment.
| Land & Buildings | Plant & Machinery | Motor Vehicles | Total |
| £'000 | £'000 | £'000 | £'000 |
At 1 April 2019 | - | 247 | 38 | 285 |
Recognition of lease liabilities on initial application of IFRS16 | 578 | - | - | 578 |
Additions | 204 | 130 | - | 334 |
Disposals | (80) | - | - | (80) |
Interest expense | 28 | 14 | 3 | 45 |
Lease payments | (207) | (232) | (14) | (453) |
At 31 March 2020 | 523 | 159 | 27 | 709 |
|
|
|
|
|
Repayment of lease liabilities are analysed as follows: |
|
|
|
|
|
|
|
| 2020 |
|
|
|
| £'000 |
Due within 1 year |
|
|
| 268 |
Instalments due after 1 year but no more than 5 years |
|
|
| 441 |
Instalments due after 5 years |
|
|
| - |
The weighted average incremental borrowing rate applied to lease liabilities on 1 April 2019 was 4%. |
|
| ||
|
|
|
|
|
Reconciliation to operating lease commitment |
|
|
|
|
The aggregate lease liability recognised in the statement of financial position at 1 April 2019 and the Group's operating lease commitment at 31 March 2019 can be reconciled as follows: | ||||
|
|
|
| 2020 |
|
|
|
| £'000 |
Operating lease commitment at 31 March 2019 |
|
|
| 268 |
Effect of estimating for the purpose of IFRS 16 that lease break clause will not be exercised (i.e. present value of lease payments to be made after the transition date) |
| 349 | ||
Discounting |
| (39) | ||
Aggregate lease liability at 1 April 2019 |
|
|
| 578 |
IFRS16 provided for certain optional practical expedients, including those in relation to the initial adoption of the standard. The group applied the following practical expedients:
· The group did not reassess any contracts not previously identified as a lease under IAS17 or IFRIC4 prior to the transition date of 1 April 2019.
· A single discount rate was applied to a portfolio of leases with reasonably similar characteristics, which was deemed to be the inherent interest rate at the date of initial application.
· Applied the exemption not to recognise a right-of-use asset and liability for leases with less than 12 months of lease term remaining as at the date of initial application.
Lease liabilities are measured at the present value of the contractual payments due to the lessor over the lease term, with the discount rate determined by reference to the rate inherent in the lease unless (as is typically the case) this is not readily determinable, in which case the group's incremental borrowing rate on commencement of the lease is used. Variable lease payments are only included in the measurement of the lease liability if they depend on an index or rate. In such cases, the initial measurement of the lease liability assumes the variable element will remain unchanged throughout the lease term. Other variable lease payments are expensed in the period to which they relate.
Right of use assets have been calculated as if the standard had been applied from the lease commencement date subject to the practical expedients noted above.
| Land & Buildings | Plant & Machinery | Motor Vehicles | Total |
| £'000 | £'000 | £'000 | £'000 |
At 1 April 2019 | - | 427 | 33 | 460 |
Recognition of lease liabilities on initial application of IFRS16 | 512 | - | - | 512 |
Additions | 204 | 107 | - | 311 |
Disposals | (51) | - | - | (51) |
Depreciation | (171) | (206) | (15) | (392) |
At 31 March 2020 | 494 | 328 | 18 | 840 |
Within the income statement, operating lease charges, which previously sat in administrative expenses, have been replaced by depreciation and interest expenses. The adoption of IFRS 16 resulted in a right of use asset of £0.51m, with a corresponding liability of £0.58m, being recognised at 1 April 2019. Within the consolidated income statement, the operating lease charge has been replaced by depreciation and interest expense. This has resulted in a £0.2m decrease in operating expenses and corresponding increase to Adjusted EBITDA, and a £0.05m increase in finance costs. Cashflows in respect of lease liabilities are included in operating cashflows in the Group and Company statement of cashflows.
| 2020 | 2019 |
| £'000 | £'000 |
Gross profit - consistent with 2019 presentation and accounting policy | 11,201 | 7,779 |
Changes due to new accounting policy - IFRS 16 | - | - |
Gross profit - consistent with 2020 presentation and accounting policy | 11,201 | 7,779 |
Adjusted EBITDA* - consistent with 2019 presentation and accounting policy | 2,617 | 1,413 |
Changes due to new accounting policy - IFRS 16 | 197 | - |
Adjusted EBITDA* - consistent with 2020 presentation and accounting policy | 2,814 | 1,413 |
* Adjusted EBITDA is earnings before interest, taxation, depreciation, amortisation of intangible assets, exceptional items, and share based payments.
Basis of consolidation
Where the Company has control over an investee, it is classified as a subsidiary. The Company controls an investee if all three of the following elements are present: power over the investee; exposure to variable returns from the investee; and the ability of the investor to use its power to affect those variable returns. Control is re-assessed whenever facts and circumstances indicate that there may be a change in any of these elements of control.
The consolidated financial statements present the results of the Company and its subsidiaries ("the Group") as if they formed a single entity. Intercompany transactions and balances between Group companies are therefore eliminated in full.
The consolidated financial statements incorporate the results of business combinations using the acquisition method. In the statement of financial position, the acquirer's identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of acquired operations are included in the consolidated statement of comprehensive income from the date on which control is obtained. They are deconsolidated from the date on which control ceases.
Revenue
Revenue is recognised to the extent that it is probable that the economic benefits associated with the transaction will flow into the Group and revenue represents the fair value of amounts received or receivable for goods and services provided net of trade discounts and VAT.
The Group has three principal categories of performance obligation: managed IT services, professional services and value added resale. All customer sales are signed as contracts or orders which separately specify the services and products to be delivered and these are mapped to one of the three revenue recognition categories. The contracts or orders specify, by service and product, the sales price and the contracted term of the services. As such, the separate performance obligations and allocation of transaction price can be identified clearly from the customer sales contracts.
The revenue recognition policies can be summarised as follows:
Revenue category | Performance delivery | Revenue recognition | ||
Managed services | Contracted managed IT services are delivered from an agreed commencement date and for a contracted time period, typically three years with a twelve-month automatic extension. Managed services is comprised of different streams including hosting and support but due to the nature of this revenue the streams are considered inter-dependant. The services are delivered uniformly over the duration of the contract and invoiced either quarterly or monthly in advance of the service delivery period. | Revenue is recognised evenly over the duration of the contract period based on the sales price as specified in the customer sales contract. This is on the basis that the customer receives and consumes the services evenly over the term of the contract. Amounts invoiced in advance of service delivery periods are accounted for as contract liabilities and recognised as revenue in the Consolidated Statement of Comprehensive Income to match the period in which the services are delivered. | ||
Professional services | Professional services are delivered by a team of technical consultants based on a scope of work agreed and signed with a customer. The scope of work includes a specification of the work to be delivered, an estimation of the number of consultancy days required, and a sales value based on a day rate. Professional services are invoiced either in advance of work performed, in arrears after the service is delivered or as part of a larger project contract milestone. | Revenue is recognised based on chargeable days delivered using the sales day rate specified in the customer contract. Revenue recognition is therefore matched to the timing of when the customer receives the benefit of the consultancy services which is in line with the day the work is performed. The relevant details of customer engagements and the time delivered by consultants is recorded on the Group's financial systems. Professional services are either invoiced in arrears for the actual days delivered or invoiced in advance. When invoiced in advance, the sales value is treated as contract liabilities and recognised as revenue in the Consolidated Statement of Comprehensive Income in the period in which the consultancy days are delivered. | ||
Value added resale | Value added resale ("VAR") comprises sales of IT hardware, licences and warranties ("products") where the Group satisfies its performance obligation by procuring the products from suppliers for delivery to the customer. There are no further or ongoing obligations to the Group after delivery. The sales price for each product is separately specified in the customer sales contract. VAR sales are either invoiced in full in advance of delivery or invoiced according to an agreed contract milestone if part of a larger contract. | Revenue is recognised on delivery of the products from the supplier. Invoices are typically raised in advance of delivery and treated as contract liabilities until delivery has been fulfilled. At this point the revenue and associated purchase cost is recognised in the Consolidated Statement of Comprehensive Income. | ||
|
|
| ||
For managed services and professional services revenue, these are recognised over time as the entity's performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date.
Segmental reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker has been identified as the Board of Directors.
Alternative profit measures
In reporting its results, the Directors have presented various alternative profit measures (APMs) of financial performance, position or cashflows, which are not defined or specified under the requirements of IFRS. On the basis that these measures are not defined by IFRS, they may not be directly comparable with other companies. The key APMs that the group uses include recurring revenue as a percentage of revenue, Adjusted EBITDA, Adjusted PBT, Adjusted EPS and Net cash.
The Group makes certain adjustments to the statutory profit in order to derive many of these APMs. These include exceptional items and share based payments. The group presents as exceptional items on the face of the Statement of Comprehensive Income those material items of income and expense which the Directors consider, because of their size or nature and expected non-recurrence, merit separate presentation to facilitate financial comparison with prior periods and to assess trends in financial performance. Exceptional items are included in Administration expenses in the Consolidated Statement of Comprehensive Income but excluded from Adjusted EBITDA as management believe they should be considered separately to gain an understanding of the underlying profitability of the trading businesses on a consistent basis from year to year.
Research and development
Research expenditure is written off to the consolidated statement of comprehensive income in the year in which the expenditure occurs. Development expenditure is treated in the same way unless the Directors are satisfied as to the technical, commercial and financial viability of individual projects, there is an intention to complete and sell the product and the costs can be easily measurable. In this situation, the expenditure is capitalised, and the amortised expense is included in administrative expenses in the Consolidated Statement of Comprehensive Income over the years during which the Group is to benefit.
Intangible assets
Intangible assets are recognised on business combinations if they are separable from the acquired entity or give rise to other contractual/legal rights. The amounts ascribed to such intangibles are arrived at by using appropriate valuation techniques (see section related to critical estimates and judgements below).
The significant intangibles recognised by the Group, their estimated useful economic lives and the methods used to determine the cost of intangibles acquired in business combinations are as follows:
Intangible asset Estimated UEL Valuation method
Customer relationships 5-7 years Estimated discounted cash flow
Software 3-5 years Cost less amortisation
System development 5 years Cost less amortisation
2. Significant accounting estimates and judgements
The preparation of this financial information requires management to make estimates and judgements that affect the amounts reported for assets and liabilities at the period end date and the amounts reported for revenues and expenses during each period. The nature of the estimation or judgement means that actual outcomes could differ from the estimates and judgements taken in the preparation of the financial statements.
Significant accounting estimates
Impairment of goodwill and other intangibles
The Group tests goodwill for impairment on an annual basis in line with the accounting policy noted above. This involves judgement regarding the future development of the business and the estimation of the level of future profitability and cash flows to support the carrying value of goodwill. An impairment review has been performed at the reporting date taking into account sensitivities around future business performance, covering a range of outcomes and risks over levels of revenue, cost and cash generation. No impairment has been identified. More details including carrying values are included in note 11.
Valuation of intangible assets acquired in business combinations
Determining the fair value of customer relationships acquired in business combinations requires estimation of the value of the cash flows related to those relationships and a suitable discount rate in order to calculate the present value. More details including carrying values are included in note 8.
Valuation of contingent consideration
The Group has contingent consideration payable which is based on the future performance of acquired companies. When valuing the contingent consideration still payable on acquisitions, the Group considers various factors including the performance of the acquired entity since acquisition together with an estimate of the expected future trading performance for the period to the expiry of the earn-out period. Contingent consideration is recognised at, and carried thereafter at, fair value. All changes in fair value (other than measurement period adjustments) are reflected in the income statement.
Significant accounting judgements
Going concern
The Board recognises that the Group is trading in an economy that has suffered a significant downturn following the onset of the COVID-19 pandemic and there is considerable uncertainty in the timing and rate of economic recovery. Management have to exercise judgement in the preparation of financial forecasts particularly on the level of future sales, customer contract uplifts and cancellations, and working capital assumptions. The Directors have reviewed the Group's financial forecasts and a Reverse Stress Test model in order to assess the Group's business viability and to form a judgement on going concern. Having reviewed the forecasts the Board were satisfied that the Group remains a going concern.
Revenue
Management make judgements in determining the appropriate application of revenue recognition policies to the sale of services and products. An explanation of the Group's revenue recognition policy is shown in note 1.
Assessment of CGU's and carrying value of intangible assets
A CGU is the smallest identifiable Group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or Groups of assets and the Board of Directors use judgement to identify the CGUs of the Group. The Board have reviewed the Group's CGU's this year and the only change this year is to include the new acquisition in the year, Hub Network Services Limited, as a separate CGU (note 11).
Useful economic lives of intangible assets
Intangible assets are amortised over their useful economic lives. Useful lives are based on management's estimates of the period over which the assets will generate revenue, which are periodically reviewed for continued appropriateness. Changes to estimates can result in changes in the carrying values and hence amounts charged to the income statement in particular periods which could be significant.
IFR16 - Leases
Management make judgements in their assessment of lease contract agreements to ensure the appropriate lease accounting recognition under IFRS16 - Leases. The main elements of judgement are:
· Determining the inherent rate of interest which applies to each lease or family of leases with similar characteristics;
· Establishing whether or not it is reasonably certain that an extension option will be exercised; and
Considering whether or not it is reasonably certain that a termination option will not be exercised.
3. Segmental analysis
The chief operating decision maker for the Group is the Board of Directors. The Group reports in two segments:
· Managed IT Services - this segment provides all forms of managed services to customers and includes professional services.
· Value Added Resale (VAR) - this segment provides all forms of VAR sales where the business sells products and licences from supplier partners.
The monthly management accounts reported to the Board of Directors are reviewed at a consolidated level with the operating segments representative of the business model for growth of recurring contract income in Managed IT Services and VAR sales as a complementary business activity. The Board review the results of the operating segments at a revenue and gross profit level since the Group's management and operational structure supports both operational segments as Group functions. In this respect, assets and liabilities are also not reviewed on a segmental basis. All assets are within the UK other than a low value of property, plant & equipment in the USA.
All segments are continuing operations and there are no transactions between segments.
| 2020 | 2020 | 2019 | 2019 | |
Revenue by operating segment | £'000 | % | £'000 | % | |
Managed IT Services | 15,092 | 77% | 9,448 | 74% | |
Value Added Resale | 4,400 | 23% | 3,325 | 26% | |
Total | 19,492 | 100% | 12,773 | 100% | |
|
|
|
|
| |
No individual customer account for more than 5% of the Group's revenue. |
| ||||
|
|
|
|
| |
The revenue by geographic location for where services are delivered to customers is shown below. | |||||
| 2020 | 2020 | 2019 | 2019 | |
| £'000 | % | £'000 | % | |
UK | 19,310 | 99% | 12,526 | 98% | |
Rest of World | 182 | 1% | 247 | 2% | |
| 19,492 | 100% | 12,773 | 100% | |
|
|
|
|
| |
|
|
| 2020 | 2019 | |
|
|
| £'000 | £'000 | |
Revenue |
|
|
|
| |
Managed IT Services |
|
| 15,092 | 9,448 | |
Value Added Resale |
|
| 4,400 | 3,325 | |
Total |
|
| 19,492 | 12,773 | |
Gross Profit |
|
|
|
| |
Managed IT Services |
|
| 10,281 | 6,959 | |
Value Added Resale |
|
| 920 | 820 | |
Total |
|
| 11,201 | 7,779 | |
| |||||
The Group has recognised the following assets and liabilities related to contracts with customers.
| |||||
| 2020 | 2019 | |||
| £'000 | £'000 | |||
Current contract liabilities relating to deposits from customers | 1,465 | 1,238 | |||
Release of contract liability recognised in revenue which was included in the contract liability balance at the beginning of the year | 1,238 | 425 | |||
The Group expect to recognise all such revenue within twelve months of the balance sheet date.
4. Operating loss
|
|
| 2020 | 2019 |
|
|
| £'000 | £'000 |
Operating loss is after charging the following: |
|
| ||
Auditor's remuneration: |
|
| ||
Group: |
|
|
| |
Audit |
| 68 | 60 | |
Interim review |
| 16 | - | |
Company: |
|
|
| |
Audit |
| 4 | 4 | |
Depreciation of tangible fixed assets | 847 | 503 | ||
Amortisation of Intangible assets | 1,321 | 723 | ||
Staff costs | 6,544 | 4,710 | ||
Share based payments | 199 | 119 | ||
Short term lease costs | 55 | 168 | ||
Exceptional items (note 7) | 475 | 736 | ||
5. Finance expense
| 2020 | 2019 |
| £'000 | £'000 |
Interest payable on lease liabilities | 45 | 13 |
Interest payable on bank loan | 134 | 108 |
Arrangement fee amortisation on bank loan | 27 | 46 |
| 206 | 167 |
6. Staff numbers and costs
The average monthly number of full-time persons employed by the Group, including Executive Directors during the year was: | ||
| 2020 | 2019 |
Technical Support | 84 | 55 |
Sales and Marketing | 22 | 17 |
Administration | 14 | 15 |
Total | 120 | 87 |
|
|
|
The aggregate payroll costs including Executive Directors and excluding Non-Executive Directors were as follows: | ||
| 2020 | 2019 |
| £'000 | £'000 |
Wages and salaries | 5,757 | 4,154 |
Social security costs | 627 | 441 |
Benefits in kind | 59 | 26 |
Pension benefits | 101 | 89 |
Share based payment expense | 199 | 119 |
Total | 6,743 | 4,829 |
| 2020 | 2019 |
Directors | £'000 | £'000 |
Fees and salaries | 520 | 525 |
Social security costs | 48 | 43 |
Benefits in kind | 3 | 3 |
Pension benefits contributions | 14 | 14 |
Compensation for loss of office | - | 23 |
Share based payment expense | 186 | 110 |
Total | 771 | 718 |
7. Exceptional items
| 2020 | 2019 |
| £'000 | £'000 |
Acquisitions | 85 | 554 |
Integration and restructuring | 390 | 182 |
Total | 475 | 736 |
The Group has incurred exceptional costs during the year of £475,000 (FY19: £736,000) comprising £390,000 costs for integration and restructuring and £85,000 of professional fees for the acquisition of Hub Network Services Limited. The costs for integration and restructuring are for the exit of the Coventry office and anticipated employee exits following acquisitions or as part of the Leadership Team restructure.
8. Acquisitions
In June 2019, the Company acquired 100% of the issued share capital of HNS, a managed services provider registered in England & Wales with a head office in Bristol. HNS is a well-established B2B managed services provider with a primary focus on delivering superfast, low latency network connectivity and datacentre solutions.
HNS was acquired for £1.45m cash paid on completion, cash free debt free, with a further £0.45m cash payment following the agreement of the completion accounts for the cash balance acquired, debt items and working capital adjustment. The company incurred £85,000 of professional fees and other acquisition costs in relation to this acquisition. These costs are included as Exceptional items in the consolidated statement of comprehensive income.
The Directors have considered the intangible assets acquired with HNS and have recognised an intangible asset in respect of customer relationships. The asset value has been calculated using a discounted cashflow method, based on the estimated level of profit to be generated from the customers acquired. A post tax discount rate of 11.0% was used in the valuation and the customer relationships are amortised over an estimated useful life of seven years. The goodwill arising on this acquisition is attributable to the technical skills of the workforce and cross-selling opportunities achievable from combining the acquired customer bases and trade with the existing Group.
The goodwill and intangible asset has been allocated to a new CGU, "HNS", since the Company has its own operational structure, cash generation and financial reporting processes. The Directors consider that HNS does not form a separate operating segment and instead the revenue and gross profit is included in the Managed IT services and VAR segments.
Recognised amounts of net assets acquired and liabilities assumed | Book Values £'000 | Fair Value Adj £'000 | Fair Values £'000 |
Cash and cash equivalents | 609 | - | 609 |
Trade and other receivables | 341 | 2 | 343 |
Property, plant and equipment | 111 | (8) | 103 |
Intangible assets | - | 1,146 | 1,146 |
Trade and other payables | (338) | (53) | (391) |
Current income tax liability | (8) | - | (8) |
Deferred tax liability | (19) | (195) | (214) |
Identifiable net assets |
|
| 1,588 |
Goodwill |
|
| 323 |
Total |
|
| 1,911 |
Satisfied by: |
|
|
|
Cash consideration - paid on acquisition |
|
| 1,457 |
Cash paid - consideration adjustment |
|
| 454 |
Total consideration |
|
| 1,911 |
Since the acquisition date to 31 March 2020, Hub Network Services Limited contributed £1.7m to Group revenue and £0.4m to Group EBITDA. Had the acquisition taken place on 1 April 2019, the contribution would have been £2.2m to Group revenue and £0.4m to Group EBITDA.
In the prior financial year, the Company acquired 100% of the share capital of Certus IT Limited ("Certus"), a Managed IT Services Company registered in England & Wales with a head office in Newport, South Wales. Certus provides managed services, cloud hosting, value added resale, and consultancy.
Certus was acquired for an initial £7,956,000 cash consideration paid on completion, with a consideration adjustment of £252,000 paid by the Sellers to SysGroup on the finalization of the completion accounts in June 2019. The parties agreed an earn-out mechanism for a period of twelve months post-acquisition with the potential for the Sellers to receive up to £1,000,000 additional consideration for achieving performance criteria based on EBITDA targets. The mechanism was for the SysGroup to pay £2.50 additional consideration for every £1 of EBITDA achieved by Certus over and above a floor of £1.2m and up to a maximum of £1.6m EBITDA. In February 2020 the earn-out period was completed and Certus successfully achieved the maximum EBITDA target. Following the 31 March 2020 year end, the company has paid £975,000 to the Sellers in full settlement of the contingent consideration.
9. Earnings per share
| 2020 | 2019 |
Loss for the financial year attributable to shareholders | (£122,050) | (£722,000) |
Weighted number of issued equity shares | 49,419,690 | 25,843,624 |
Weighted number of equity shares for diluted EPS calculation | 51,734,950 | 26,999,313 |
Adjusted basic earnings per share (pence) | 3.4p | 3.1p |
Basic earnings per share (pence) | (0.2p) | (2.8p) |
Diluted earnings per share (pence) | (0.2p) | (2.8p) |
|
|
|
| 2020 | 2019 |
| £'000 | £'000 |
Loss after tax used for basic earnings per share | (122) | (722) |
Amortisation of intangible assets | 1,321 | 723 |
Exceptional items | 475 | 736 |
Share based payments | 199 | 119 |
Tax adjustments | (216) | (47) |
Adjusted profit used for Adjusted Earnings per Share | 1,657 | 809 |
The inclusion of share options in the weighted number of equity shares is anti-dilutive to the EPS calculation and accordingly diluted earnings per share is presented at the same value as Basic earnings per share.
10. Taxation
| 2020 | 2019 |
| |||
Current tax | £'000 | £'000 |
| |||
Current tax - current year | 128 | 105 |
| |||
Adjustments in respect of prior years | (107) | 55 |
| |||
Tax refund | - | (12) |
| |||
Current tax charge | 21 | 148 |
| |||
Deferred tax |
|
|
| |||
Deferred tax - temporary differences | (133) | (252) |
| |||
Deferred tax credit | (133) | (252) |
| |||
Total tax credit | (112) | (104) |
| |||
|
|
|
| |||
The effective tax rate for the year to 31 March 2020 is lower (2019: higher) than the standard rate of corporation tax in the UK. The differences are explained below: |
| |||||
| 2020 | 2019 |
| |||
| £'000 | £'000 |
| |||
Loss on ordinary activities before tax | (234) | (826) |
| |||
|
|
|
| |||
Loss on ordinary activities before taxation multiplied by the standard rate of UK corporation tax of 19% (2019:19%) | (44) | (157) |
| |||
|
|
|
| |||
Effects of: |
|
|
| |||
Expenses not deductible | 25 | 10 |
| |||
Income not taxable | - | (24) |
| |||
Prior year adjustment | (107) | 55 |
| |||
Re-measurement of deferred tax due to change in UK rate | 85 | - |
| |||
Use of brought forward losses | (71) | - |
| |||
Tax refund | - | 12 |
| |||
Total tax credit | (112) | (104) |
| |||
|
| |||||
Factors affecting future tax charges: |
|
|
| |||
Deferred tax balances are recognised at 19% (2019 - 17%) due to the cancellation of the planned reduction in tax rate to 17%. |
|
|
| |||
11. Intangible assets
Group | Systems development | Software licences | Customer relationships | Positive goodwill | Total |
Cost | £'000 | £'000 | £'000 | £'000 | £'000 |
At 1 April 2018 | 223 | 173 | 4,233 | 9,727 | 14,356 |
Additions | - | 9 | - | - | 9 |
Acquisitions | - | 16 | 3,777 | 5,781 | 9,574 |
At 31 March 2019 | 223 | 198 | 8,010 | 15,508 | 23,939 |
At 1 April 2019 | 223 | 198 | 8,010 | 15,508 | 23,939 |
Additions | 190 | - | - | (277) | (87) |
Acquisitions | - | - | 1,146 | 323 | 1,469 |
At 31 March 2020 | 413 | 198 | 9,156 | 15,554 | 25,321 |
|
|
|
|
|
|
Accumulated amortisation and impairment | |||||
At 1 April 2018 | 198 | 77 | 1,260 | - | 1,535 |
Charge for the year | 8 | 59 | 656 | - | 723 |
At 31 March 2019 | 206 | 136 | 1,916 | - | 2,258 |
At 1 April 2019 | 206 | 136 | 1,916 | - | 2,258 |
Charge for the year | 9 | 45 | 1,267 | - | 1,321 |
At 31 March 2020 | 215 | 181 | 3,183 | - | 3,579 |
|
|
|
|
|
|
Net book value |
|
|
|
|
|
At 31 March 2019 | 17 | 62 | 6,094 | 15,508 | 21,681 |
At 31 March 2020 | 198 | 17 | 5,973 | 15,554 | 21,742 |
The addition to goodwill is a consideration adjustment following the settlement of the completion accounts which resulted in a net repayment from the Sellers to the Company.
All amortisation and impairment charges are included in the depreciation, amortisation and impairment of non-financial assets classification, which is disclosed as administrative expenses in the statement of comprehensive income. Customer relationships have a remaining amortisation period of between 2 and 7 years.
Cash-generating units
Goodwill and intangible assets are allocated to CGUs in order to be assessed for potential impairment. There have been no changes to the CGU's since 31 March 2019 other than the addition of Hub Network Services Limited ("HNS") which is a separate business that SysGroup acquired in June 2019.
The allocation of goodwill and carrying amounts of assets for each CGU is as follows:
| Allocation of goodwill | Carrying value of assets | ||
| 2020 | 2019 | 2020 | 2019 |
| £'000 | £'000 | £'000 | £'000 |
Managed IT Services | 9,727 | 9,727 | 10,892 | 11,894 |
Certus IT | 5,504 | 5,781 | 8,341 | 8,698 |
HNS | 323 | - | 1,378 | - |
Total | 15,554 | 15,508 | 20,611 | 20,592 |
Impairment review
When assessing impairment, the recoverable amount of each CGU is based on value-in-use calculations (VIU). VIU calculations are an area of material management estimate as set out in note 2. These calculations require the use of estimates, specifically: pre-tax cash flow projections; long-term growth rates; and a pre-tax discount rate. Cash flow projections are based on the Group's detailed annual operating plan for the forthcoming financial year which has been approved by the Board.
The VIU calculation is determined based on a discounted cash flow basis and is allocated to individual cash generating units. Cash flows beyond the forthcoming financial year use estimated growth rates which are stated below. The assumptions for growth rates and margins are based on management's experience of growth and knowledge of the industry sector, markets and our own internal opportunities for growth. The projections beyond five years use an estimated long-term growth rate of 2.5% (2019: 2.5%) for revenue. This represents management's best estimate of a long-term annual growth rate aligned to an assessment of long-term GDP growth rates. A higher sector-specific growth rate would be a valid alternative estimate. A different set of assumptions may be more appropriate in future years dependent on changes in the macroeconomic environment.
The discount rates used are based on management's calculation of the WACC using the capital asset pricing model to calculate the cost of equity. The same rate is used for each CGU in the VIU calculation and the rates reflect management's assessment on the level of relative risk in each respective CGU. Discount rates can change relatively quickly for reasons both inside and outside management control. Those outside management direct control or influence include changes in the Group's Beta, changes in risk free rates of return and changes in Equity Risk Premia. Matters inside management control are the delivery of performance in line with plans or budgets and the production of high or low risk plans.
At the year end reporting date, goodwill was reviewed for impairment in accordance with IAS 36 "Impairment of Assets" and no impairment charges arose as a result of this review.
The assumptions used for the impairment reviews are detailed below. All CGU's have over 45% headroom of VIU compared to the carrying value of assets. For this headroom to reduce to nil, the discount rates would have to increase to 16.3% for Managed IT Services, 16.7% Certus and 17.8% for HNS, or future CGU profits would have to be significantly below current forecast levels. All CGU's have been tested for profit sensitivity and would remain with VIU headroom in the event of zero revenue growth being achieved in years 2-5.
| Managed IT Services | Certus IT | HNS | |
2020 | ||||
Discount rate | 11.00% | 11.00% | 11.00% | |
Revenue growth rate year 2 to year 5 | 5.00% | 5.00% | 5.00% | |
Terminal growth rate |
| 2.50% | 2.50% | 2.50% |
2019 |
|
|
| |
Discount rate | 10.45% | 10.45% | - | |
Revenue growth rate year 2 to year 5 | 5.00% | 5.00% | - | |
Terminal growth rate |
| 2.50% | 2.50% | - |
12. Trade and other receivables
| Group | Group |
| 2020 | 2019 |
Amounts due within one year | £'000 | £'000 |
Trade debtors | 1,427 | 1,744 |
Other debtors | - | - |
Amounts due from subsidiaries | - | - |
Prepayments | 1,299 | 1,112 |
Total | 2,726 | 2,856 |
The carrying value of trade and other receivables approximates to their fair value.
| Group | Group |
| 2020 | 2019 |
Debtor impairment disclosure | £'000 | £'000 |
Trade debtors | 1,640 | 1,814 |
Impairment provision | (213) | (70) |
Total | 1,427 | 1,744 |
Group |
| |||
| Up to 1 month past due | Over 1 month past due | Total | |
| £'000 | £'000 | £'000 | |
Trade debtors | 443 | 1,197 | 1,640 | |
Expected credit loss | (1) | (212) | (213) | |
Net carrying amount | 442 | 985 | 1,427 | |
13. Trade and other payables
| Group | Group |
| 2020 | 2019 |
Amounts due within one year | £'000 | £'000 |
Trade payables | 1,847 | 1,885 |
Amounts due to subsidiaries | - | - |
Accruals | 931 | 979 |
Total financial liabilities, excluding loans and borrowings measured at amortised cost | 2,778 | 2,864 |
Corporation tax | 158 | 311 |
Other taxes and social security costs | 552 | 817 |
Total creditors | 3,488 | 3,992 |
|
|
|
| Group | Group |
| 2020 | 2019 |
Contingent consideration | £'000 | £'000 |
Certus IT Limited | 1,000 | 1,000 |
The fair value of contingent consideration is in relation to the acquisition of Certus IT Limited (note 8) and is recognised at the full value of the consideration. In February 2020 the earn-out period was completed and Certus successfully achieved the EBITDA maximum target. Following the 31 March 2020 year end, the company paid £975,000 to the Sellers in full settlement of the contingent consideration.
To the extent trade payables and other payables are not carried at fair value in the consolidated balance sheet, book value approximates to fair value at 31 March 2020 and 31 March 2019.
14. Loans and borrowings
| Group | Group |
| 2020 | 2019 |
Non- current | £'000 | £'000 |
Lease liabilities | 441 | 81 |
Bank loan | 1,146 | 1,397 |
Total | 1,587 | 1,478 |
|
|
|
| Group | Group |
| 2020 | 2019 |
Current | £'000 | £'000 |
Lease liabilities | 268 | 204 |
Bank loan | 251 | 224 |
Total | 519 | 428 |
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