TIDMAD4
RNS Number : 9599T
adept4 plc
12 January 2017
12 January 2017
Adept4 plc
("Adept4", the "Company" or the "Group")
Preliminary results for the year ended 30 September 2016
Adept4 plc (AD4) the AIM quoted provider of IT as a Service is
pleased to announce preliminary results for the year ended 30
September 2016.
Highlights
Financial
-- Revenues from continuing operations of GBP4.9m, including only part-year contributions from
companies acquired during the year, of which 66% are recurring(1)
-- Gross profit margin of 62%
-- Recurring gross profit covers 96% of trading overheads
-- Trading Group EBITDA(2) of GBP0.9m from continuing operations
-- Profit from the legacy operations of Pinnacle (treated as discontinued operations) was GBP0.7m(3)
-- Loss for the period of GBP0.6m (2015: GBP1.3m)
-- Total of GBP9.8m new capital raised during the year for acquisitions, working capital and
future growth:
-- GBP4.8m from a placing and open offer in February 2016; and
-- GBP5.0m from the issue of loan notes to the Business Growth Fund.
-- GBP4.3m cash at bank at 30 September 2016 (2015: GBP0.6m)
Operational
-- Transformational period with the disposal of legacy loss-making businesses and acquisition
of three profitable businesses
-- Established a seasoned and incentivised management team
-- Integration of acquisitions going well:
-- single operating structure implemented;
-- consolidated into two main offices: Warrington and Leeds;
-- roll-out of consolidated systems including a single service desk, accounting, CRM and scheduling
system almost complete; and
-- integration plans have also included a focus on consolidated policies and processes
-- New single value proposition and brand well advanced and widely adopted
-- Over 100 full-time employees (FTEs) in the business of whom 70% are in a technical customer-facing
role
-- In less than six months established a scalable platform for delivering IT as a Service
1 Recurring refers to revenues and gross profit from
the provision of continuing IT services which have
an ongoing billing and support element.
2 Trading Group EBITDA represents earnings before interest,
tax, depreciation and amortisation, share based payment
costs, separately identifiable costs and head office
costs of GBP0.8m.
3 Profit from the legacy operations of Pinnacle includes
the consideration of GBP2.8m received for the trade
and assets of this business, trading losses in the
period from this source prior to disposal and costs
associated with reorganising and selling this business.
Gavin Lyons, Executive Chairman of Adept4, commented:
"Over the last 12 months we have fundamentally changed the shape
of the business through a series of acquisitions, disposals and
fundraisings. We exit the year with the turnaround activity
complete and a solid platform to continue to build on. We have
substantially improved our operating position, have high levels of
recurring revenue, cash in the bank and a team of people that have
worked incredibly hard and diligently to deliver against our plans.
I would like to thank everyone for their contribution during the
period and look forward to building on our solid foundations to
ultimately deliver further shareholder value."
For further information please contact:
Adept4 plc
Gavin Lyons, Executive Chairman
Ian Winn, Finance Director and Chief Operating Officer 01925 204 844
N+1 Singer (Nominated Adviser and Broker)
Shaun Dobson
Liz Yong 020 7496 3000
MXC Capital Markets LLP
Marc Young
Charlotte Stranner 020 7965 8149
About Adept4
Adept4 delivers IT as a service to small and medium sized
businesses across the UK. IT as a Service (ITaaS) provides you with
exactly the amount of technology and support you need in accordance
with business requirements, billed on a monthly basis, based on
what is consumed.
Critically we underpin this delivery method with a 24 x 7 UK
response team, strategic consulting, professional services and
software development to provide exactly what organisations need
from IT at any given time. Whether an infrastructure is based on
legacy or emerging technologies we will ensure organisations have
the flexibility, agility and cost efficiencies required to run
their business effectively, all through a single trusted
provider.
Adept4 is a public company quoted on the AIM market of the
London Stock Exchange. The company is headquartered in Warrington,
with offices in Leeds, Aberdeen, and Brighton.
Chairman's Statement
Introduction
I am pleased to report upon my first, and the Group's first, set
of annual results as Adept4 Plc. It would be something of an
understatement to describe the last twelve months as one of
considerable change. We have fundamentally transformed the shape of
the business through a series of acquisitions, disposals and
fundraisings and consequently exited the year with the business in
a substantially improved operating position with potential for
further development.
Throughout a period of such significant change it would be
remiss of me not to once again acknowledge the service of the
former employees of the business who, because of the disposals, are
no longer with the Group. Their efforts in the face of challenging
circumstances were very much appreciated and ensured that we
managed to effect these changes with minimal impact.
Results
For the period under review the legacy operations of Pinnacle
have been treated as discontinued and therefore the results for the
year contain the following:
-- Ancar-B Technologies Limited ("Ancar-B") and Weston
Communications Limited ("Weston") results from February
2016 (eight months' contribution);
-- Adept4 Limited results from June 2016 (four months'
contribution); and
-- Plc costs for the whole of the financial year - albeit
with an increase in costs since December following
the changes in composition of the Board and the level
of activity undertaken.
Our key performance indicators for the year under review do not
provide complete clarity due to the significant changes undertaken
in the year. However, these will remain the same moving forward and
therefore they do provide a useful summary of performance:
-- recurring revenues of GBP3.2m, which represent 66%
of Group revenues. We are targeting this to be in
excess of 65% in the future as it is imperative that
our business has good visibility of future revenues
and is not hugely dependent upon one-off sales (whether
they be Product or Professional Services), which
can be more unpredictable;
-- gross profit margin of 62%. We are targeting this
to be in excess of 60% as we need to focus on providing
added value through our value proposition, which
in turn generates longer-term profitable relationships;
-- recurring gross profit of GBP2.0m, which represents
67% of Group gross profit. We are targeting this
to be over 65% of Group gross profit;
-- trading Group EBITDA of GBP0.9m. We believe trading
Group EBITDA is a more appropriate measure of the
success of the business in the early years. At this
stage we recognise Plc costs are not aligned with
the size of our trading business, but whilst we establish
scale this is required for our continued M&A activities
and building brand presence; and
-- cash balances at 30 September 2016 of GBP4.3m.
Summary and outlook
My first hope is that the next twelve months, whilst subject to
change, will not produce anything like the same level of upheaval
we have experienced in the last financial year.
As I have explained, we now have a sound platform created
through the hard work and diligence of our people, who remain our
biggest asset. We have a clear strategy for delivering success
which I have articulated.
I look forward to building on these foundations and delivering
against our plans in the current financial year and beyond to
deliver shareholder value.
Gavin Lyons
Executive Chairman
12 January 2017
Business overview
Our customers
What is our customers' problem?
Fundamentally, every customer we deal with has the same problem
- they are dependent on IT to run their business but do not have
the time, specialist knowledge or in-house skills to do so
effectively or efficiently. Every customer wants to focus on their
core business rather than IT and therefore turns to a specialist
and trusted adviser to help them.
Although the main customer problem is the same, the customer
"use cases" that we see are different as it depends on the
customer's approach to and desires from IT. We have therefore
developed four strategies to deal with the IT issues faced by our
customers, depending upon an assessment of their IT maturity. We
believe that being a single provider able to address four distinct
phases of our customers' development is something which
differentiates us from our competitors. This is explained more
fully in "Our Approach" below.
What are the market dynamics?
Provision of IT as a Service to small and medium-sized
enterprises (SMEs) in the UK is a sizeable market characterised by
both large and small providers. Even allowing for the large
providers it is a fragmented and regionalised but nonetheless
sizeable market which has been estimated at GBP53bn per annum in
recent research by Santander, with Gartner predicting that the pace
of growth of IT spend of SMEs in 2016 will outpace that of the
Enterprise sector.
There are also many structural changes afoot, a key one being
the growth and move to the cloud, all of which drive the need for a
"trusted partner". This is evidenced by the growth in Microsoft
Azure and Office 365 revenues, which have been growing at over 70%
quarter on quarter. A recent survey by a leading IT service
provider (Daisy Group) in the UK provides further clear evidence of
this shift, reporting that 48% of SMEs would be increasing their
use of cloud computing and over 10% of SMEs now use cloud computing
for more than 25% of their IT requirements.
Likewise, the market for managed services is also growing, with
the same survey indicating that by 2020 over a third of UK
businesses aim to have outsourced the management of their IT
environment, with the most likely services to be outsourced being
application management, service desk and network management.
Clearly with an appropriate "go-to-market strategy" there
continue to exist opportunities to build a successful and growing
business in this sector.
Who are our target customers?
We have focused, in identifying the market opportunity, on
looking at the dynamics of the SME sector (typically organisations
employing up to 250 employees). However, our target customer base
is a little broader in that we focus on two groups: small/medium
businesses (SMB) which are organisations with up to 150 employees;
and medium-sized businesses, which are ones with between 150 and
1,000 employees (Enterprise).
We have no real vertical market concentrations. Our customers
are UK based and, certainly within the SMB group, more likely to be
located within a 40-mile radius of our offices. However, we do
provide services to organisations which sit outside of this
geographical range; these are more likely to be within our
Enterprise customers.
A typical SMB customer may take up to four or five products from
us, ranging from telephony, hardware support, connectivity, hosting
and software. A typical contract value will range from GBP600 to
GBP12,000 per annum of recurring revenues.
Our Enterprise customers will take more services from us, as
typically they are looking for a fuller service and will take more
of our range of services - particularly consulting services,
transition services and Service Desk and Disaster Recovery as a
Service. The typical contract value will range from GBP50,000 to
GBP500,000 per annum, depending upon the number of employees and
range of services taken.
Our approach
Our approach to our customers' needs can be broken down into 4
key components.
Stabilise
This is all about putting out some of the "fires", making good
the IT environment and de-risking IT and can involve, amongst other
things:
-- remedial patch management;
-- licence "normalisation" (i.e. ensuring that customers
are fully compliant with software licensing requirements);
-- fixing security risks to the IT environment;
-- provision of service desk/support to complement or
replace existing capabilities; and
-- implementation of a first disaster recovery (DR)
plan.
Leverage
This is all about "sweating" the IT assets the customer has, and
naturally follows on once the customer has an element of control
over their environment and is in a steady state. It typically
involves identifying opportunities for streamlining and
efficiencies, mitigating risk and establishing good governance.
Transform
This is all about aligning the customers' IT strategy and their
business strategy to ensure that they can scale for growth. We help
customers select the right technologies at the right time, which
ensures they achieve their business objectives and drive value.
Innovate
This is all about adding extra value. By using our knowledge of
the current technology landscape and our customers' businesses we
believe we can deliver an innovative approach to using and
consuming technology.
We can adopt these approaches with confidence as over 70% of our
employees are engaged in technical roles within our business.
Within this group we have a dedicated team of experienced, well
qualified consultants who have been advising businesses for many
years - in many cases acting as proxy IT directors. In fact, we are
currently providing one of our senior managers as an interim IT
Director for an Enterprise customer in the healthcare sector.
Our commercial proposition is very clear to our customers. In
very simple terms we want to provide ITaaS on a consumptive basis -
we can charge customers for exactly the quantity of IT they consume
and this can be turned up or down depending upon their needs.
Our businesses
Organic growth
In bringing the three businesses together (Ancar-B, Weston and
Adept4 Limited), we have created in a short time a business which
has over 800 customer relationships. We are currently able to offer
15 discrete service and solutions lines and our average penetration
of services into these customers is a little over two services per
customer. A key priority for our sales and account management teams
is therefore to increase the level of customer penetration. We have
already enjoyed some success in cross-selling telephony services
into our customer base and we expect this to continue.
As indicated earlier we do not have any significant market
vertical concentrations; however, there are industry sectors and
services which we believe we have a developing capability in. This
is evidenced by the willingness of such customers to allow us to
use them as case studies or references. We will therefore look to
utilise these strengths and connections to sell into similar
businesses. Areas in which we believe we possess such qualities
include: hosted accounting system provider, telephony (including
Skype for Business) expertise for the further education sector and
Disaster Recovery as a Service (DRaaS).
We have 16 people currently focused on these activities, which
represents 16% of our employee base. We have recently put the sales
team through an extensive training programme which has educated and
informed them on our value proposition and "whiteboard" selling
tactics (a proven strategy for improving sales performance). We
believe that we will begin to see the benefits of this in the
coming financial year.
Keeping our portfolio of solutions current
Our operating model is a balance of reselling other companies'
technology products and our own service wrapper. We need to remain
relevant in terms of technology and therefore it is vital that we
continue to keep up to date with technology developments. In the
business, we have a dedicated team of experienced professionals,
headed up by our Chief Technology Officer, who are responsible for
constantly monitoring our value proposition and the technologies
which underpin its delivery. We are an asset-light IT service
provider (to enable the consumptive commercial model for our
customers) and therefore it is important that this mindset is
maintained and we do not get drawn into large capital expenditure
plans. It is also important to remain "leading edge" not "bleeding
edge".
We are currently further building out our cloud capabilities as
a Microsoft Azure reseller, particularly around the areas of DRaaS
and Office 365/Skype for Business and the Enterprise Mobility
Suite. We also understand the ever-increasing demands for IT
Security in any business, whether larger or small, and therefore we
are significantly enhancing our security offering as we believe
that this is a clear growth area.
Acquisitions
During the last year, we have been clear that there remain
substantial opportunities for us to acquire businesses that
complement our overall value proposition and can be integrated
easily for added financial, intellectual and customer value. We
have discussed earlier how this remains a fragmented industry with
ample opportunity for consolidation at all levels. However, we need
to remain focused on ensuring we make the appropriate acquisitions.
Our selection criteria are as follows:
-- clear strategic fit with our overall value proposition,
which is aligned to our customer-focused IT service
proposition;
-- healthy gross profit margins of 50% plus;
-- a high level of recurring revenues - usually in excess
of 60%;
-- access to complementary skill sets or people;
-- complementary customer base for cross-selling opportunities;
-- service delivery model which lends itself to being
centralised on the existing primary locations of
Warrington and Leeds; and
-- culture and values alignment.
We acknowledge that there are inherent execution risks in any
acquisition activity; the legacy businesses disposed of during the
year are evidence of those risks. However, these can be
significantly mitigated if you start from a stable platform. Since
the summer we have been engaged in a significant project to fully
integrate the three businesses we acquired this year. This has
focused on the following areas:
-- consolidation onto two main sites: Leeds and Warrington;
-- alignment of employee terms and conditions across
the business;
-- introduction of a single management and operating
structure focused on four main disciplines - customer
value proposition, sales, operations and corporate
and commercial services;
-- adoption of a single brand and value proposition;
-- a single operational and accounting system (including
ticketing, CRM, expense and time sheets and scheduling);
and
-- adoption of a single set of values and cultures.
We have substantially completed these tasks and the speed with
which we have been able to execute these is a testament to the
engagement and dedication of the employees on the project teams. We
believe this leaves us well positioned to execute on our strategy
and ready for the task of integrating the next acquisition.
Our people
We are a service based business which is heavily reliant upon
its people to deliver its service and retain its customers. In the
acquired businesses over 10% of the people have over ten years'
service, and our average staff tenure is over five years,
demonstrating the wealth of experience available to us and the
relative stability in the employee base.
We fully acknowledge and understand that any period of
significant change, such as the one we have just gone through, is
likely to create uncertainty, speculation and concerns, with
possible knock-on effects to productivity and staff retention. We
are therefore extremely thankful that our people have borne with us
through the integration process and have dealt with this change in
a very positive way. In return for this we have taken additional
steps to engage and return this commitment, which has included a
staff away day in October at which we presented our business plan
and invited questions, the roll-out of a new set of values and
Company culture and the implementation of new commission plans and
bonus arrangements for rewarding shared success. We have also
increased our spending on training and restated our commitment to
promoting from within - which is now eminently more achievable
given our varied service portfolio and headcount in excess of one
hundred.
We will never become complacent about our need to continually
engage, develop and provide a positive working environment for our
people to work in.
Financial review
As already flagged the year under review has been one of
considerable change and therefore for clarity I have split my
report into three sections: "new" Adept4 business, legacy business
and Plc and reorganisation costs.
New Adept4 business
As previously discussed this business comprises the results of
Weston and Ancar-B for the eight-month period ended 30 September
2016 and the results of Adept4 Limited for the four-month period
ended 30 September 2016.
As a consequence of this we have taken the opportunity to
reassess our reporting segments to more closely align with the way
in which we manage the business.
This means we have reported the results under three reporting
segments:
-- Product - resale of hardware and software IT solutions
from leading technology vendors across our product
portfolio;
-- Recurring Services - provision of ongoing, recurring
ITaaS across our range of solutions under a contractual
commitment or repeating monthly billing; and
-- Professional Services - provision of highly skilled
consultants and project managers to consult, design,
install, configure and integrate IT technologies
and service desk provision. This will also include
an element of software development.
Revenue and gross margin
Group revenue for the new Adept4 business was GBP4,939,000 with
Group gross profit of GBP3,042,000, representing a healthy blended
gross profit margin of 62%. Importantly the revenue from Recurring
Services was GBP3,236,000, representing 66% of Group revenues and
gross profit of GBP2,041,000, representing 67% of Group gross
profit.
The business is primarily focused on gross profit and trading
group EBITDA, rather than revenue, so whilst revenue is a
"performance indicator" it is not viewed as a key performance
indicator.
There is limited seasonality in the business model due to the
spread and nature of the customer bases and the split of revenues.
Due to differing year ends and the fact that one of the
acquisitions, Ancar-B, did not produce monthly management accounts
it is more difficult to accurately measure the organic growth in
the business. However, looking at the periods consolidated for each
of the businesses against the comparative period in the previous
years this shows the following organic growth rates in gross
profit: Ancar-B - 18%; Adept4 Limited - 12%; and Weston - 3% (which
is more sensitive to Product sales), with a blended growth rate of
11%.
More importantly the monthly recurring gross profit (from the
new Adept4 business) grew from a monthly run rate of GBP391,000 in
February 2016 to GBP409,000 in September 2016.
Segment highlights
Product
Gross profit from this source was GBP456,000, representing a
gross margin of 40%. Key deals or significant pieces of business
delivered in the period included:
-- a telephony upgrade for a large southern based university;
and
-- investment in infrastructure for a manufacturer and
distributor of durable medical products following
its acquisition of a competitor.
Recurring Services
Gross profit from this source was GBP2,041,000, representing a
gross margin of 63%. Key deals or significant pieces of business
delivered in the period included:
-- on-boarding of a large IT service contract for a
technology based privately owned group worth GBP200,000
per year in service revenues;
-- re-contracted with an existing customer for a ten-year
service contract worth a minimum of GBP6m; and
-- continued expansion of the services provided to a
motor group in the North - increasing sites covered
by 21% and annual recurring revenue by 60%.
Professional Services
Gross profit from this source was GBP545,000, representing a
gross margin of 97% (as permanent employee costs are included in
overheads). Key deals or significant pieces of business delivered
in the period included:
-- on-boarding of a large IT service contract for a
technology based privately owned group worth over
GBP100,000 in set-up fees;
-- development of an HR system for a customer's specific
needs, worth GBP25,000. The customer is currently
looking at the potential commercial exploitation
of this software; and
-- provision of an interim IT Director to a customer
to assist them in establishing and rolling out a
new IT strategy across their organisation and to
kick-start a large system deployment.
Operating results - costs and EBITDA
Overheads for the trading Group were GBP2,124,000.
Staff costs represented 78% of these costs demonstrating our
dependence upon people. At the year end we employed 101 FTEs in the
trading business spread across two main sites and two secondary
satellite offices.
During the financial period, we consolidated Ancar-B and Weston
onto a single site, and we will enjoy the savings from this during
the current financial year. However, in the main we have focused on
bringing the operations together as a single operating structure.
Whilst this has generated some small cost savings these were more
than outweighed by equalising employee terms and conditions to a
common base.
As we exit our financial year, our annual trading overhead run
rate (excluding head office costs) was GBP382,000 per month, which
includes the addition of a senior sales professional to add
capability and experience for our Enterprise customers.
As we operate across a common operating system during the
current financial year we expect to be able to make better resource
judgements and allocate our people more effectively.
Trading Group EBITDA for the period was GBP918,000.
One of our key targets as a business is to ensure that our
trading Group overhead base is covered by Recurring Services gross
profit - in the financial period we achieved coverage of 96%.
Legacy business
The legacy business represents the business of the Group on 1
October 2015 and comprised the resale of IT Security solutions (RMS
Managed ICT Security Limited (RMS)) and the resale of data,
telecommunications and fixed line services (Pinnacle CDT Limited
(CDT)).
Following a strategic review a decision was taken to divest the
Group of these assets. There were a number of factors which drove
this decision: lack of scale, mix of revenues and margin, lack of
unique selling point or real differentiation and the
unprofitability of the business. At an operating level the business
generated a loss in the year of GBP264,000 (2015: GBP878,000).
In order to make these businesses more saleable, considerable
restructuring work was required to deal with legacy structure
issues which had not previously been addressed. These included the
following:
-- agreement with two of the legacy business' joint
ventures to acquire 100% of the rights to the gross
profit originated by them. The initial cash cost
of this was GBP400,000 with a further GBP260,000
payable in March 2017;
-- disposal of a 40% investment in Stripe 21 Limited,
a VOIP software provider, for GBP385,000 payable
in March 2017; and
-- "hive up" of the trade and assets from a number of
Group operating companies into Pinnacle CDT Limited
on 31 March 2016 to ensure this trade was being carried
out under the banner of one legal entity, an essential
prerequisite for any sale of this business.
We disposed of RMS on 3 May 2016 for a nominal GBP1; however,
the business at this point had net liabilities of GBP45,000 and,
immediately prior to sale, intercompany indebtedness of
GBP2,150,000.
We disposed of the trade and assets of CDT (including the right
to receive the deferred consideration for Stripe 21 Limited,
subject to successful assignment of this debt) on 16 May 2016 to
Chess ICT Limited for GBP2,800,000.
After the final write off of intangibles associated with these
businesses, legal, professional and reorganisation costs and
taxation the net profit from discontinued operations is GBP725,000
(2015: GBP775,000 loss).
Plc and separately identifiable costs
We believe it is important to separate the costs associated with
the trading business and those that result as a consequence of the
wider investment strategy of the Group in acquiring and disposing
of businesses and in choosing an AIM-listed Plc as the vehicle for
doing this.
Plc costs in the year were GBP804,000 (2015: GBP451,000). The
increase during the period is attributable to the following
factors: changes in the composition and remuneration of the Board
following the appointment of an Executive Chairman to effect a
turnaround of the business; marketing costs due to investing in the
creation of a new brand and value proposition; and higher audit and
professional costs because of the activities undertaken.
We also separately identify costs relating to the acquisition
activity and subsequent integration costs which have been incurred.
The main components of these balances are:
-- legal and professional fees on acquisitions of Ancar-B
and Weston of GBP161,000;
-- legal and professional fees on acquisition of Adept4
Limited and raising of funding with the Business
Growth Fund of GBP214,000;
-- deal fees in the year of GBP263,000;
-- integration costs, including reorganisation costs
and one-off audit and accounting costs associated
with acquisitions, of GBP194,000; and
-- legal and professional fees on share schemes and
Group structure of GBP42,000.
Loss for the year
Loss for the year from continuing operations was GBP1,324,000,
which produces a diluted and undiluted loss per share of 0.80p
(2015: 0.95p).
Loss for the year after continuing and discontinued activities
was GBP599,000 (2015: GBP1,252,000).
Statement of Financial Position and cash
On 10 February 2016, we acquired the entire share capital of
Ancar-B and Weston for gross consideration of GBP5,000,000 and
GBP1,500,000, and GBP3,374,000 and GBP1,325,000 net of cash in the
businesses at completion respectively. The Weston consideration was
settled entirely in the issue of new Ordinary Shares, whilst
GBP750,000 of the Ancar-B consideration was settled in Ordinary
Shares with the remainder settled in cash.
Therefore, on 10 February 2016, following the acquisition of
Ancar-B and Weston, we issued 53,571,429 new Ordinary Shares, at a
price of 4.2p, to the sellers of these businesses.
The provisional fair value of these acquisitions was
GBP4,388,000, which included GBP3,735,000 of intangible assets
recognised as a fair value adjustment. This resulted in the
recognition of goodwill of GBP2,112,000.
On 10 February 2016, following a successful placing and open
offer, we issued 114,311,113 new Ordinary Shares at 4.2p per share,
which raised GBP4,640,000 net of costs.
On 26 May 2016, we acquired the entire share capital of Adept4
Limited for GBP5,999,000 gross cash consideration (GBP5,450,000 net
of cash in the business at completion), of which GBP1,000,000 was
deferred and payable in January 2018. Further contingent
consideration of up to GBP1,500,000 in cash is payable in March
2018, subject to performance criteria for the year ended 31
December 2017. The fair value of deferred and contingent
consideration was assessed as GBP1,725,000.
The provisional fair value of this acquisition was GBP4,524,000,
which included GBP4,924,000 of intangible assets recognised as a
fair value adjustment. This resulted in the recognition of goodwill
of GBP2,200,000.
In order to fund the acquisition of Adept4 Limited the Company
issued GBP5,000,000 loan notes to the Business Growth Fund in May
2016, with an associated GBP3,000,000 option to subscribe for
shares in the Company at 6.0p. The loan notes have a seven-year
term and carry an 8% coupon, with redemption permissible from the
third anniversary and required from the fifth anniversary.
As the investment by the Business Growth Fund comprises both a
loan and equity element the fair value of each component has been
assessed. This has resulted in the recognition of long-term
borrowings of GBP3,673,000 and equity of GBP1,327,000.
During the year 11,323,333 share options were granted and
1,868,922 lapsed. At 30 September 2016 we had 11,797,691 shares
under option in both approved and unapproved schemes, of which
1,397,692 were actually in the money at 12 January 2017. Share
options have been recognised in accordance with IFRS 2 Share Based
Payments.
At the year end we had GBP4,266,000 in cash and cash
equivalents. Total debt at 30 September 2016 was GBP5,885,000,
which comprised GBP3,673,000 to the Business Growth Fund and
GBP2,131,000 in deferred consideration payable on acquisitions made
in the year. Trading operations(1) generated a positive cash inflow
of GBP1,006,000 representing a trading EBITDA to cash conversion
ratio of 110%. The other main components of the Group's cash flow
were:
-- cash outflow from head office and separately identifiable
costs and expenses of GBP1,419,000;
-- cash inflow from share issues net of costs of GBP4,640,000;
-- cash cost of acquisitions of GBP6,892,000;
-- cash proceeds from disposal (including trading) of
GBP1,641,000;
-- cash inflow from the BGF loan notes of GBP5,000,000;
-- corporation tax paid of GBP151,000; and
-- interest expense of GBP147,000.
Ian Winn
Finance Director and COO
12 January 2017
1 Measured as cashflow from operating activities before
Plc costs, separately identifiable costs and taxation.
Consolidated income statement
for the year ended 30 September 2016
2016 2015
Note GBP'000 GBP'000
---------------------------------------------------------------------------------- -------- --------
Revenue 3 4,939 -
Cost of sales (1,897) -
---------------------------------------------------------------------------------- -------- --------
Gross profit 3,042 -
Other operating expenses (2,928) (451)
---------------------------------------------------------------------------------- -------- --------
Profit/(loss) from continuing operations before amortisation, depreciation, share
based payment costs and separately identifiable costs 114 (451)
Amortisation of intangible assets 7 (413) -
Depreciation (74) -
Separately identifiable costs 4 (615) -
Share based payments (61) (19)
--------------------------------------------------------------------------------- -------- --------
Operating loss from continuing operations (1,049) (470)
---------------------------------------------------------------------------------- -------- --------
Interest receivable 2 -
Interest payable (360) (7)
---------------------------------------------------------------------------------- -------- --------
Net finance expense 5 (358) (7)
--------------------------------------------------------------------------------- -------- --------
Loss before tax (1,407) (477)
Taxation 83 -
--------------------------------------------------------------------------------- -------- --------
Loss for the period and total comprehensive loss from continuing operations
attributable to the equity holders of the parent (1,324) (477)
---------------------------------------------------------------------------------- -------- --------
Discontinued operations
Profit/(loss) for the period from discontinued operations 3 725 (775)
--------------------------------------------------------------------------------- -------- --------
Loss for the period (599) (1,252)
---------------------------------------------------------------------------------- -------- --------
Loss per share
- Basic and fully diluted - continuing operations 6 (0.80)p (0.95)p
- Basic and fully diluted - discontinued operations 6 0.44p (1.56)p
- Basic and fully diluted 6 (0.36)p (2.51)p
--------------------------------------------------------------------------------- -------- --------
Consolidated statement of financial position
as at 30 September 2016
30 September 30 September
2016 2015
Note GBP'000 GBP'000
---------------------------------------- ------------ ------------
Non-current assets
Intangible assets 7 12,636 491
Investments in associates 8 - 100
Property, plant and equipment 255 126
------------------------------------ ------------ ------------
Total non-current assets 12,891 717
---------------------------------------- ------------ ------------
Current assets
Inventories 22 7
Trade and other receivables 10 1,568 1,461
Cash and cash equivalents 4,266 641
------------------------------------ ------------ ------------
Total current assets 5,856 2,109
---------------------------------------- ------------ ------------
Total assets 18,747 2,826
---------------------------------------- ------------ ------------
Current liabilities
Short-term borrowings (298) (66)
Trade and other payables (862) (1,486)
Other taxes and social security costs (649) (159)
Accruals and deferred income (1,539) (605)
---------------------------------------- ------------ ------------
Total current liabilities 11 (3,348) (2,316)
------------------------------------ ------------ ------------
Non-current liabilities
Long-term borrowings 11 (5,587) (10)
Deferred tax liability (1,664) (98)
------------------------------------ ------------ ------------
Total non-current liabilities (7,251) (108)
---------------------------------------- ------------ ------------
Total liabilities (10,599) (2,424)
---------------------------------------- ------------ ------------
Net assets 8,148 402
---------------------------------------- ------------ ------------
Equity
Share capital 2,271 592
Share premium account 11,337 7,840
Capital redemption reserve 6,489 6,489
Merger reserve 1,997 283
Other reserve 1,439 51
Fair value adjustment - (1,064)
Retained earnings (15,385) (13,789)
------------------------------------ ------------ ------------
Total equity 8,148 402
---------------------------------------- ------------ ------------
Consolidated statement of changes in equity
for the year ended 30 September 2016
Capital Fair
Share Share redemption Merger Other value Retained
capital premium reserve reserve reserve adjustment earnings Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
----------------------------------------- -------- ----------- -------- -------- ----------- --------- --------
At 1 October 2014 6,862 6,775 - 283 32 (1,064) (12,537) 351
Loss and total comprehensive
loss for the period - - - - - - (1,252) (1,252)
Transactions with owners
Share issue 219 1,202 - - - - - 1,421
Cancellation of Deferred Shares (6,489) - 6,489 - - - - -
Share based payments - - - - 19 - - 19
Expenses on share issue - (137) - - - - - (137)
------------------------------- -------- -------- ----------- -------- -------- ----------- --------- --------
Total transactions with owners (6,270) 1,065 6,489 - 19 - - 1,303
------------------------------- -------- -------- ----------- -------- -------- ----------- --------- --------
Total movements (6,270) 1,065 6,489 - 19 - (1,252) 51
------------------------------- -------- -------- ----------- -------- -------- ----------- --------- --------
Equity at 30 September 2015 592 7,840 6,489 283 51 (1,064) (13,789) 402
------------------------------- -------- -------- ----------- -------- -------- ----------- --------- --------
Capital Fair
Share Share redemption Merger Other value Retained
capital premium reserve reserve reserve adjustment earnings Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
----------------------------------------- -------- ----------- -------- -------- ----------- --------- --------
At 1 October 2015 592 7,840 6,489 283 51 (1,064) (13,789) 402
Loss and total comprehensive loss
for the period - - - - - - (599) (599)
Transactions with owners
Share issue 1,679 3,657 - 1,714 - - - 7,050
Share based payments - - - - 61 - - 61
Fair value of equity in the BGF
loan - - - - 1,394 - - 1,394
Fair value of interest in the BGF
loan - - - - (67) - 67 -
Reclassification of reserves - - - - - 1,064 (1,064) -
Expenses on share issue - (160) - - - - - (160)
---------------------------------- ----- -------- ----------- -------- -------- ----------- --------- --------
Total transactions with owners 1,679 3,497 - 1,714 1,388 1,064 (997) 8,345
---------------------------------- ----- -------- ----------- -------- -------- ----------- --------- --------
Total movements 1,679 3,497 - 1,714 1,388 1,064 (1,596) 7,746
---------------------------------- ----- -------- ----------- -------- -------- ----------- --------- --------
Equity at 30 September 2016 2,271 11,337 6,489 1,997 1,439 - (15,385) 8,148
---------------------------------- ----- -------- ----------- -------- -------- ----------- --------- --------
Consolidated statement of cash flows
for the year ended 30 September 2016
2016 2015
GBP'000 GBP'000
---------------------------------------------------------------------------- --------
Cash flows from operating activities
Loss before taxation (1,407) (477)
Adjustments for:
Depreciation 74 -
Amortisation 413 -
Impairment of intangible assets - -
Share option charge 61 19
Interest expense 358 -
(Increase)/decrease in trade and other receivables (98) 37
Taxation (151) -
Decrease in inventories 1 -
Increase/(decrease) in trade payables, accruals and deferred income 185 (79)
------------------------------------------------------------------- ------- --------
Net cash used in operating activities (564) (500)
------------------------------------------------------------------- ------- --------
Cash flows from investing activities
Purchase of property, plant and equipment (42) (120)
Acquisition of subsidiaries, net of cash acquired (6,892) -
Interest received 2 -
------------------------------------------------------------------- ------- --------
Net cash used in investing activities (6,932) (120)
------------------------------------------------------------------- ------- --------
Cash flows from financing activities
Issue of shares 4,801 1,420
Receipt of loan funds 5,000 -
Receipt of invoice discount finance during the year - 1,358
Repayment of invoice discount finance during the year - (1,400)
Receipt of finance lease 51 -
Repayment of bank loans - (5)
Payment of finance lease liabilities (16) (11)
Interest paid (147) (7)
Expenses paid in connection with share issue (161) (137)
------------------------------------------------------------------- ------- --------
Net cash from financing activities 9,528 1,218
------------------------------------------------------------------- ------- --------
Cash flows from discontinued operations
Cash outflow from operations of disposal group (832) (62)
Sale of discontinued operations 2,800 -
Acquisition of remaining shares in Accent Telecom North Limited (327) -
------------------------------------------------------------------- ------- --------
Net cash flows from/(used in) discontinued operations 1,641 (62)
------------------------------------------------------------------- ------- --------
Net increase in cash 3,673 536
Cash at bank and in hand at beginning of period 593 57
------------------------------------------------------------------- ------- --------
Cash at bank and in hand at end of period 4,266 593
------------------------------------------------------------------- ------- --------
Comprising:
Cash at bank and in hand 4,266 641
Bank overdrafts - (48)
------------------------------------------------------------------- ------- --------
4,266 593
---------------------------------------------------------------------------- --------
Notes to the consolidated financial information
1. General information
Adept4 plc is a company incorporated in the United Kingdom under
the Companies Act 2006. The address of the registered office is 5
Fleet Place, London, EC4M 7RD.
The Board of Directors approved this preliminary announcement on
12 January 2016. Whilst the financial information included in the
preliminary announcement has been prepared in accordance with the
recognition and measurement criteria of International Financial
Reporting Standards ("IFRS") as endorsed by the European Union,
this announcement does not itself contain sufficient information to
comply with all the disclosure requirements of IFRS and does not
constitute statutory accounts of the Company for the years ended
September 2015 and September 2016.
The financial information set out in this preliminary
announcement does not constitute the Group's financial statement
for the periods ended 30 September 2015 and 2016. The financial
information for the period ended 30 September 2015 is derived from
the statutory accounts for that year which have been delivered to
the Registrar of Companies. The statutory accounts for the year
ended 30 September 2016 will be delivered to the Registrar of
Companies following the Company's annual general meeting. The
auditors have reported on those accounts; their reports were
unqualified and did not contain a statement under s498(2) or
s498(3) of the Companies Act 2006.
2. Basis of Preparation
This financial information has been prepared in accordance with
the principles of International Financial Reporting Standards
("IFRS") as adopted by the European Union and International
Financial Reporting Interpretations Committee ("IFRIC")
recommendations and with those parts of the Companies Act 2006
applicable to companies reporting under IFRS. For the purposes of
the preparation of the consolidated financial information, the
Group has applied all standards and interpretations that are
effective for accounting periods beginning on or after 1 October
2015. There have been no changes in accounting policies during the
year. The financial information has been prepared under the
historical cost convention unless otherwise stated
3. Segment reporting
The chief operating decision maker has been identified as the
Executive Chairman of the Company, who reviews the Group's internal
reporting in order to assess performance and to allocate resources.
Following the restructure of the business in 2016, the reportable
operating segments were assessed and amended to reflect the key
products and services that unite to deliver "IT as a Service". The
Directors present below the results for 2016 and 2015 comparisons,
based on these revised reportable operating segments, which have
changed from the prior year.
Product - This segment comprises the resale of solutions (hardware and software) from leading
technology
vendors.
Recurring Services ("Service") - This segment comprises the provision of continuing IT services which have an
ongoing billing
and support element.
Professional Services ("PS") - This segment comprises the provision of highly skilled resource to consult, design,
install,
configure and integrate IT technologies.
Plc costs ("PLC") - This comprises the costs of running the Plc, incorporating the cost of the Board,
listing
costs and other professional service costs such as audit, tax, legal and Group
insurance.
------------------------------ -----------------------------------------------------------------------------------
Information regarding the operation of the reportable segments
is included below. Performance of the operating segments is
assessed based on revenue and a measure of earnings before
interest, depreciation and amortisation (EBITDA) before any
allocation of Group overheads or charges for share based payments.
Segments are measured below on this basis.
The Group's EBITDA for the year has been calculated after
deducting Group overheads from the EBITDA of the three segments as
reported internally. The Group overheads include the cost of the
Board, the costs of maintaining a listing on AIM, legal and
professional fees, and the costs of shareholder communications
including the costs of retaining a nominated adviser and a broker.
The segment information is prepared using accounting policies
consistent with those of the Group as a whole. The performance of
the Group is reviewed by the Executive Chairman on a segmental
basis as has been disclosed. All segments are continuing
operations. No customer accounts for more than 10% of external
revenues. Inter-segment transactions are accounted for using an
arm's length commercial basis.
The majority of assets and liabilities of the Group are pooled
centrally and are shared across all operating segments as required,
based on demand over time. For this reason, apportionment of assets
and liabilities cannot be measured accurately across segments and
is therefore not disclosed.
3.1 Analysis of revenue
By operating segment
2016 2015
---------------- ------------------------------------------------ ------------------------------------------------
Product Service PS PLC Total Product Service PS PLC Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
---------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total segment
revenue 1,143 3,245 560 - 4,948 - - - - -
Inter-segment
revenue - (9) - - (9) - - - - -
---------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
External revenue
from continuing
operations 1,143 3,236 560 - 4,939 - - - - -
---------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total segment
gross profit
from continuing
operations 456 2,041 545 - 3,042 - - - - -
---------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Trading Group
EBITDA from
continuing
operations 138 616 164 - 918 - - - - -
Plc costs - - - (804) (804) - - - (451) (451)
Amortisation (61) (277) (75) - (413) - - - - -
Depreciation (12) (48) (14) - (74) - - - - -
Share based
payment costs - - - (61) (61) - - - (19) (19)
---------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Operating
profit/(loss)
from continuing
operations
before
separately
identifiable
costs/(income) 65 291 75 (865) (434) - - - (470) (470)
Separately
identifiable
costs - - - (615) (615) - - - - -
---------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Operating
profit/(loss)
from continuing
operations 65 291 75 (1,480) (1,049) - - - (470) (470)
Interest
receivable - - - 2 2 - - - - -
Interest payable - - - (360) (360) - - - (7) (7)
---------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Profit/(loss)
before tax from
continuing
operations 65 291 75 (1,838) (1,407) - - - (477) (477)
---------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net assets 669 1,800 252 5,427 8,148 - - - 402 402
---------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
3.2 The following table analyses the profit from discontinued
operations
On 30 April 2016, the Group disposed of the entire share capital
of RMS Managed ICT Security Limited (and its dormant subsidiary
Aware Distribution Limited) to Intronovo Limited, for a
consideration of GBP1. On 13 May 2016, the Group also sold the
entire trade and assets of Pinnacle CDT Limited to Chess ICT
Limited for GBP2,800,000 in cash.
These transactions allowed the Group to exit the highly
competitive IT security reseller and fixed line markets and as such
represent an exit from these major business lines.
The decision and process to dispose of these businesses were
initiated prior to 31 March 2016 and, in accordance with IFRS 5,
all trade and assets relating to these disposals have been
classified as discontinued operations in the Consolidated Income
Statement of the Group.
2016 2015
GBP'000 GBP'000
-------------------------------------------------------------------------------- --------
Revenue 4,427 7,884
Gross profit 1,409 2,318
----------------------------------------------------------------------- ------- --------
Administrative expenses (1,486) (2,432)
Amortisation and impairment of intangible assets (71) (501)
Depreciation (34) (198)
Separately identifiable costs (82) (65)
----------------------------------------------------------------------- ------- --------
Operating expenses (1,673) (3,196)
----------------------------------------------------------------------- ------- --------
Operating loss from discontinued operations (264) (878)
Interest payable (3) (7)
----------------------------------------------------------------------- ------- --------
Consideration received from acquirers of:
RMS Managed ICT Security Limited - -
Pinnacle CDT Limited trade and assets 2,800 -
Legal, professional and reorganisation costs (283) -
----------------------------------------------------------------------- ------- --------
Net consideration received from acquirers after fees 2,517 -
----------------------------------------------------------------------- ------- --------
Unamortised intangible assets:
RMS Managed ICT Security Limited (60) -
Pinnacle CDT Limited trade and assets (945) -
----------------------------------------------------------------------- ------- --------
Net book value of trade and assets of Pinnacle CDT Limited disposed of (420) -
----------------------------------------------------------------------- ------- --------
Taxation (99) 110
----------------------------------------------------------------------- ------- --------
Net profit from discontinued operations 725 (775)
----------------------------------------------------------------------- ------- --------
4. Operating loss
2016 2015
GBP'000 GBP'000
------------------------------------------------------------ --------
Loss from continuing operations is stated after charging:
Depreciation of owned assets (74) -
Amortisation to intangibles (413) -
Research and development costs recognised as expense (22) -
Other operating lease rentals:
- Buildings (81) -
Auditor's remuneration:
- Audit of parent company (14) (17)
- Audit of subsidiary companies (45) (48)
- Non-audit-related services (23) (2)
----------------------------------------------------- ----- --------
Separately identifiable costs
Items that are material and non-recurring in nature are
presented as separately identifiable costs in the Consolidated
Income Statement, within the relevant account heading.
2016 2015
GBP'000 GBP'000
--------------------------------------------------------------------------------------- --------
Gain on sale of share in associate company (Stripe 21 Limited) 259 -
Professional fees, broker fees and due diligence costs relating to acquisitions (677) -
Restructure costs relating to head office and acquisitions (197) -
-------------------------------------------------------------------------------- ----- --------
Separately identifiable costs (615) -
-------------------------------------------------------------------------------- ----- --------
5. Finance income and finance costs
Finance cost includes all interest-related income and expenses.
The following amounts have been included in the Consolidated Income
Statement line for the reporting periods presented:
2016 2015
GBP'000 GBP'000
------------------------------------------------------------------------------------ --------
Interest income resulting from short-term bank deposits 2 -
------------------------------------------------------------------------------- --- --------
Finance income 2 -
------------------------------------------------------------------------------- --- --------
Interest expense resulting from:
Finance leases 2 4
Bank overdrafts - 3
The BGF loans 145 -
Effective interest on equity element of the BGF loan notes 67 -
Effective interest on deferred consideration relating to Adept4 Managed IT Ltd 146 -
------------------------------------------------------------------------------- --- --------
Finance costs 360 7
------------------------------------------------------------------------------- --- --------
In accordance with IAS 32, the BGF loan note and share option
elements are linked and are treated as a single financial
instrument and shown at fair value. The fair value of the loan
amount was calculated at GBP3.6m using a discounted cash flow model
over the seven-year term of the instrument and an effective
borrowing rate of 15%, deemed to be an appropriate market rate,
reflecting the 8% coupon interest payments and the capital
repayment profile of the loan notes. This resulted in an additional
effective interest charge on the BGF loan notes of GBP67,000 during
the year (2015: GBPnil).
In accordance with IFRS 3, business combinations are accounted
for using the acquisition method, which requires assets acquired
and liabilities assumed to be measured at their fair values at the
acquisition date. The acquisition of Adept4 Managed IT Ltd on 26
May 2016, for a total consideration of up to GBP7m, contains GBP1m
of deferred consideration payable in January 2018 and GBP1.5m of
contingent consideration payable in March 2018, based on the
financial performance of the Group in the calendar year to December
2017. The fair value of the deferred and contingent consideration
calculated at acquisition, using a discount rate of 16%, was
GBP1.73m. During the year, GBP145,000 (2015: GBPnil) of effective
interest was charged to the income statement resulting in a fair
value of the deferred and contingent consideration payable at 30
September 2016 of GBP1.87m.
6. Total and continuing loss per share
2016 2015
GBP'000 GBP'000
---------------------------------------------------- --------
Loss on continuing operations (1,324) (477)
Profit/(loss) on discontinued operations 725 (775)
Loss attributable to ordinary shareholders (599) (1,252)
------------------------------------------- ------- --------
Number Number
--------------------------------------------------------------------------------------- ----------
Weighted average number of Ordinary Shares in issue, basic and diluted 165,891,459 49,924,907
Basic and fully diluted loss per share - continuing operations (0.80)p (0.95)p
Basic and fully diluted profit/(loss) per share - discontinued operations 0.44p (1.56)p
Basic and diluted loss per share (0.36)p (2.51)p
-------------------------------------------------------------------------- ----------- ----------
Both the basic and diluted earnings per share have been
calculated using the net profit/(loss) after taxation attributable
to the shareholders of Adept4 Plc as the numerator.
7. Intangible assets
Maintenance IT and billing Customer
Goodwill contracts systems Brand lists Total
Intangible assets GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------------- -------- ----------- -------------- -------- -------- --------
Cost
At 1 October 2014 206 100 280 - 4,281 4,867
Additions - - - - - -
--------------------- -------- ----------- -------------- -------- -------- --------
At 1 October 2015 206 100 280 - 4,281 4,867
Additions 4,312 - - 1,157 8,166 13,635
Disposals (206) (100) (280) - (4,867) (5,453)
--------------------- -------- ----------- -------------- -------- -------- --------
At 30 September 2016 4,312 - - 1,157 7,580 13,049
--------------------- -------- ----------- -------------- -------- -------- --------
Accumulated amortisation
-------------------------------------------------------------------------------------
At 1 October 2014 -(100) (219) - (1,992) (2,311)
Charge for the year - - (13) - (297) (310)
---------------------------------------------- ----- ----- ---- ------- -------
At 1 October 2015 -(100) (232) - (2,289) (2,621)
Disposals - 100 232 - 2,360 2,692
Charge for the year - discontinued operations - - - - (71) (71)
Charge for the year - continuing operations - - - (35) (378) (413)
---------------------------------------------- ----- ----- ---- ------- -------
At 30 September 2016 - - - (35) (378) (413)
---------------------------------------------- ----- ----- ---- ------- -------
Impairment
------------------------------------------------------
At 1 October 2014 (206) - - -(1,358) (1,564)
Charge for the year - -(48) - (143) (191)
--------------------- ----- ---- ------- -------
At 1 October 2015 (206) -(48) -(1,501) (1,755)
Disposals 206 - 48 - 1,501 1,755
--------------------- ----- ---- ------- -------
At 30 September 2016 - - - - - -
--------------------- ----- ---- ------- -------
Impairment
--------------------------------------------------------------------------------
Carrying amount
At 30 September 2015 - -- - 491 491
-------------------------------------- ----- --------- --------- ---------
At 30 September 2016 4,312 -- 1,122 7,202 12,636
-------------------------------------- ----- --------- --------- ---------
Average remaining amortisation period - --9.8 years 9.8 years 9.8 years
-------------------------------------- ----- --------- --------- ---------
8. Associate company
At 30 September 2016, the Group had no associate companies.
On 14 March 2016, the Group sold its stake in Stripe21 to its
largest shareholder for GBP385,000 payable on 31 March 2017
("Stripe21 Consideration"). The deferred consideration is secured
by way of personal guarantee from the buyer. On 16 May 2016 the
Group disposed of the trade and assets of Pinnacle CDT Limited to
Chess ICT Limited for GBP2,800,000. The assets disposed of included
the right to receive the Stripe21 Consideration.
2016 2015
GBP'000 GBP'000
------------------------------------------------------------------------- --------
Fair value of investment in associated company - Stripe21 Limited 100 165
Impairment of investment in associated company - Stripe21 Limited - (65)
Sale of shares in Stripe21 Limited (100) -
------------------------------------------------------------------ ----- --------
Investment in associated company at 30 September - 100
------------------------------------------------------------------ ----- --------
8.1 Business partner arrangements
On 14 March 2016 the Group acquired the entire Ordinary A Shares
of Accent Telecom North Limited for gross consideration of
GBP586,000, GBP326,000 was paid on completion (GBP66,000 of this
relating to accrued commission not yet paid) and GBP260,000 is
payable on 1 March 2017. This was done to enable a disposal of the
trade and assets of Pinnacle CDT Limited. The fair value of assets
acquired was zero as the material transactions for Accent Telecom
North had already been recorded in the accounts of the Group. As
previously explained the Group acted as principal to Accent Telecom
North's customers and it also believed that in practice the value
of the contract relationship was already held by the Group, with
Accent Telecom North simply acting in a sales management capacity.
Therefore the entire consideration was treated as goodwill required
to buy out the future right to the commission stream - and
recoverable through the subsequent sale to Chess ICT Limited.
9. Financial instrument
On 26 May 2016, the Company issued GBP5m unsecured loan notes
("Loan Notes") to the BGF with a seven-year term (although
redemption is permissible from the third anniversary) with
repayment between the fifth and seventh anniversaries in equal
semi-annual repayments that carry interest at 8% per annum
("Coupon"). Assuming that the Loan Notes are held for seven years
and are not redeemed early, the maximum credit exposure at 30
September 2016, including interest, is GBP7.2m of which GBP2.2m
relates to interest. The Directors are satisfied that the capital
and loan repayments over the seven-year period will be covered by
working capital and profits from trading performance over the term.
As previously described, the Company also agreed to grant the BGF
an option to subscribe for 50,000,000 Ordinary Shares of 1p at a
subscription price of 6p any time before 26 May 2031. As the Loan
Notes are unsecured, no collateral was offered to the BGF as
security. The Loan Notes are not exposed to market interest rate
increases over the term. The Group did not have any financial
instruments at 30 September 2015.
In accordance with IAS 32, the BGF Loan Note and share warrant
elements are linked and are treated as a single financial
instrument and shown at fair value.
The fair value of the share options at 26 May 2016 (date of
grant) has been calculated using the Black Scholes pricing model
incorporating the following key assumptions:
-- share price volatility of 40%;
-- spot price of 6p per share;
-- risk-free rate of 0.9%; and
-- option period, aligned with the maximum amount of
time the loan can remain outstanding.
Based on the assumptions above, the Black Scholes pricing model
provides a fair value for the share option of 2.89p per share,
which implies a total fair value for the share option of GBP1.4m.
Based on the expected Coupon payments and repayment profile under
the Loan Notes, this implies an effective borrowing rate of 15%.
This results in a fair value of the loan amount at 26 May of
GBP3.6m. The difference between the Coupon rate and the effective
interest charge at 15% is charged through the Consolidated
Statement of Financial Position over the life of the Loan Notes,
and increases the outstanding Loan Note balance over time to match
actual Coupon and capital cash repayments relating to the Loan
Notes.
The fair value of the share option is credited to other reserves
and an amount equal and opposite to the difference between Coupon
rate and effective interest rate is transferred from other reserves
to retained earnings in the Consolidated Statement of Change in
Equity.
Loan 8% Fair Fair
Note interest value value
balance payable Loan Notes options
------------------------------------------------------------------------------------ --------- ----------- --------
Cash received from the BGF on 26 May 2016 for Loan Notes at 8% per annum
interest 5,000 - - -
Fair value of GBP5,000,000 Loan Notes repayable over seven years from 26 May
2016 - - (3,606) -
Fair value of 50,000,000 share options at 6p per share issued on 26 May 2016 - - - (1,394)
Interest on Loan Notes at 8% per annum from 26 May 2016 to
20 September 2016 - (133) - -
Effective interest on equity element of the BGF Loan Notes to
30 September 2016 - - (67) 67
----------------------------------------------------------------------------- ----- --------- ----------- --------
Fair value of the BGF financial instrument at 30 September 2016 (3,673) (1,327)
----------------------------------------------------------------------------------------------- ----------- --------
10. Trade and other receivables
2016 2015
GBP'000 GBP'000
------------------------------------- --------
Trade receivables 1,127 686
Prepayments and accrued income 441 775
------------------------------ ----- --------
1,568 1,461
------------------------------------- --------
11. Trade and other payables
11.1 Current
2016 2015
GBP'000 GBP'000
------------------------------------------------------------------------------------------- --------
Bank overdrafts - 48
BGF loan notes repayable to the BGF between three and seven years 5,000 6
Deferred consideration for Accent Telecom North Limited - payable March 2017 260 -
Deferred consideration for Adept4 Managed IT Limited - payable January 2018 1,000 -
Contingent consideration for Adept4 Managed IT Limited - payable March 2018 1,500 -
Finance lease liability 81 22
---------------------------------------------------------------------------------- ------- --------
7,841 76
Less fair value adjustment relating to the BGF loan notes (1,326) -
Less fair value adjustment relating to deferred and contingent consideration above (630) -
Less non-current portion of liabilities (5,587) (10)
---------------------------------------------------------------------------------- ------- --------
Short-term borrowings 298 66
Trade payables 862 1,486
Invoice finance - 76
Accruals and deferred income 1,539 529
Other taxes and social security costs 649 159
Total current liabilities 3,348 2,316
---------------------------------------------------------------------------------- ------- --------
11.2 Non-current
2016 2015
GBP'000 GBP'000
--------------------------------------------------------------------- --------
Finance leasing liability - long-term element 43 8
Commercial loan - long-term element - 2
-------------------------------------------------------------- ----- --------
Unsecured loan from the BGF 3,673 -
-------------------------------------------------------------- ----- --------
Long-term financial liabilities - 10
-------------------------------------------------------------- ----- --------
Deferred and contingent consideration payable on acquisitions 1,871 -
-------------------------------------------------------------- ----- --------
12. Acquisition of subsidiaries during the financial year
12.1 Ancar-B Technologies Limited ("Ancar-B")
On 10 February 2016 the Group acquired the entire issued share
capital of Ancar-B for a total consideration of GBP5.0m, which
includes a cash for cash payment of GBP1.5m. The consideration was
satisfied as to GBP2.75m in cash and GBP0.75m in new Ordinary
Shares at 4.2p per share.
The provisional fair values and calculation of goodwill for the
acquisition of Ancar-B are detailed below:
Fair value
Book value adjustment Fair value
GBP'000 GBP'000 GBP'000
--------------------------------------------- ----------- ----------
Non-current assets
Intangible assets - 2,409 2,409
Property, plant and equipment 154 (116) 38
Investments 35 (35) -
-------------------------------------- ----- ----------- ----------
Total non-current assets 189 2,258 2,447
-------------------------------------- ----- ----------- ----------
Current assets
Inventories 9 (9) -
Trade and other receivables 326 (12) 314
Cash at bank 1,626 - 1,626
-------------------------------------- ----- ----------- ----------
Total current assets 1,961 (21) 1,940
-------------------------------------- ----- ----------- ----------
Total assets 2,150 2,237 4,387
-------------------------------------- ----- ----------- ----------
Current liabilities
Trade and other payables (191) - (191)
Other taxes and social security costs (227) - (227)
Deferred income and accruals (274) 31 (243)
-------------------------------------- ----- ----------- ----------
Total current liabilities (692) 31 (661)
-------------------------------------- ----- ----------- ----------
Non-current liabilities
Long-term borrowings (14) - (14)
Deferred tax liability - (482) (482)
-------------------------------------- ----- ----------- ----------
Total non-current liabilities (14) (482) (496)
-------------------------------------- ----- ----------- ----------
Total liabilities (706) (451) (1,157)
-------------------------------------- ----- ----------- ----------
Net assets 1,444 1,786 3,230
-------------------------------------- ----- ----------- ----------
Satisfied by:
- Consideration in cash (4,250)
- Consideration in shares (750)
---------------------------------------------------------- ----------
Fair value of cost of acquisition (5,000)
Goodwill 1,770
---------------------------------------------------------- ----------
The goodwill arising on this acquisition is attributable to
cross-selling opportunities that are expected to be achieved from
marketing Adept4's portfolio of solutions and services across
Ancar-B's existing customer base.
Direct acquisition costs amounting to GBP161,000 have been
written off to the income statement within separately identifiable
costs.
Subsidiary trading
Ancar-B contributed GBP1.8m revenue, GBP0.5m EBITDA and GBP0.4m
profit after tax during the year.
If Ancar-B had been acquired on 1 October 2015, revenue of the
Group would have been GBP5.8m, and the loss for the year would have
been GBP0.2m lower.
These numbers exclude the amortisation charge associated with
the intangible assets identified at acquisition.
12.2 Weston Communications Limited ("Weston")
On 10 February 2016, the Group acquired the entire issued share
capital of Weston for a total consideration of GBP1.5m satisfied by
the issue of 35,714,285 new Ordinary Shares at 4.2p per share.
The provisional fair values and calculation of goodwill for the
acquisition of Weston are detailed below:
Fair value
Book value adjustment Fair value
GBP'000 GBP'000 GBP'000
--------------------------------------------- ----------- ----------
Non-current assets
Intangible assets 4 1,322 1,326
Property, plant and equipment 49 (35) 14
-------------------------------------- ----- ----------- ----------
Total non-current assets 53 1,287 1,340
-------------------------------------- ----- ----------- ----------
Current assets
Inventories 51 (29) 22
Trade and other receivables 250 (8) 242
Cash at bank 175 - 175
-------------------------------------- ----- ----------- ----------
Total current assets 476 (37) 439
-------------------------------------- ----- ----------- ----------
Total assets 529 1,250 1,779
-------------------------------------- ----- ----------- ----------
Current liabilities
Trade and other payables (134) - (134)
Other taxes and social security costs (33) - (33)
Deferred income and accruals (165) (24) (189)
-------------------------------------- ----- ----------- ----------
Total current liabilities (332) (24) (356)
-------------------------------------- ----- ----------- ----------
Non-current liabilities
Deferred tax liability - (265) (265)
-------------------------------------- ----- ----------- ----------
Total non-liabilities - (265) (265)
-------------------------------------- ----- ----------- ----------
Total liabilities (332) (289) (621)
-------------------------------------- ----- ----------- ----------
Net assets 197 961 1,158
-------------------------------------- ----- ----------- ----------
Satisfied by:
- Consideration in shares (1,500)
---------------------------------------------------------- ----------
Fair value of cost of acquisition (1,500)
---------------------------------------------------------- ----------
Goodwill 342
---------------------------------------------------------- ----------
The goodwill arising on this acquisition is attributable to
cross-selling opportunities that are expected to be achieved from
marketing Adept4's portfolio of solutions and services across
Weston's existing customer base.
Direct acquisition costs amounting to GBP125,000 have been
written off to the income statement within separately identifiable
costs.
Subsidiary trading
Weston contributed GBP1.5m revenue, GBP0.1m EBITDA and GBP0.1m
profit after tax during the year.
If Weston had been acquired on 1 October 2015, revenue of the
Group would have been GBP5.7m, and the loss for the year would have
been GBP0.1m lower.
These numbers exclude the amortisation charge associated with
the intangible assets identified at acquisition.
12.3 Adept4 Managed IT Limited ("Adept4")
On 26 May 2016 the Group acquired the entire issued share
capital of Adept4 Managed IT Limited ("Adept4") for initial
consideration of GBP4.99m satisfied in cash (including a cash for
cash payment of GBP499,000) plus deferred consideration of GBP1m in
cash, payable in January 2018. Further contingent consideration of
up to GBP1.5m in cash is payable in March 2018, subject to
achievement of performance criteria for the year to 31 December
2017.
In accordance with IFRS 3, business combinations are accounted
for using the "acquisition method", which requires assets acquired
and liabilities assumed to be measured at their fair values at the
acquisition date. The range of possible outcomes for contingent
consideration are GBPnil for results below a threshold finance
performance at between GBP1.1m and GBP1.5m once the threshold has
been achieved. The fair value of the deferred and contingent
consideration calculated at acquisition and using a discount rate
of 16% was GBP1.73m.
The provisional fair values and calculation of goodwill for the
acquisition of Adept4 Managed IT Limited are detailed below:
Fair value
Book value adjustment Fair value
GBP'000 GBP'000 GBP'000
------------------------------------------------------ ------------- ----------
Non-current assets
Intangible assets 78 4,924 5,002
Property, plant and equipment 161 - 161
---------------------------------------------- ------ ------------- ----------
Total non-current assets 239 4,924 5,163
---------------------------------------------- ------ ------------- ----------
Current assets
Trade and other receivables 511 - 511
Cash at bank 549 - 549
---------------------------------------------- ------ ------------- ----------
Total current assets 1,060 - 1,060
---------------------------------------------- ------ ------------- ----------
Total assets 1,299 4,924 6,223
---------------------------------------------- ------ ------------- ----------
Current liabilities
Trade and other payables (354) - (354)
Other taxes and social security costs (220) - (220)
Deferred income and accruals (169) 44 (125)
---------------------------------------------- ------ ------------- ----------
Total current liabilities (743) 44 (699)
---------------------------------------------- ------ ------------- ----------
Non-current liabilities
Deferred tax liability (6) (994) (1,000)
---------------------------------------------- ------ ------------- ----------
Total non-current liabilities (6) (994) (1,000)
---------------------------------------------- ------ ------------- ----------
Total liabilities (749) (950) (1,699)
---------------------------------------------- ------ ------------- ----------
Net assets 550 3,974 4,524
---------------------------------------------- ------ ------------- ----------
Satisfied by:
- Initial cash consideration paid 4,999
- Fair value of deferred cash consideration payable January 2018 690
--------------------------------------------------------------------- ----------
- Fair value of contingent cash consideration payable March 2018 1,035
Fair value of cost of acquisition 6,724
--------------------------------------------------------------------- ----------
Goodwill 2,200
--------------------------------------------------------------------- ----------
The goodwill arising on this acquisition is attributable to
cross-selling opportunities that are expected to be achieved from
marketing the Group's portfolio of solutions and services across
Adept4's existing customer base.
Direct acquisition costs amounting to GBP314,000 have been
written off to the income statement within separately identifiable
costs.
Subsidiary trading
Adept4 contributed GBP1.7m revenue, GBP0.3m EBITDA and GBP0.2m
profit after tax during the year.
If Adept4 had been acquired on 1 October 2015, revenue of the
Group would have been GBP8.3m, and the loss for the year would have
been GBP0.5m lower.
These numbers exclude the amortisation charge associated with
the intangible assets identified at acquisition.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR EAFFFFDXXEAF
(END) Dow Jones Newswires
January 12, 2017 02:00 ET (07:00 GMT)
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