TIDMSYS
RNS Number : 4435R
SysGroup PLC
30 June 2020
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 GBP19.49m GBP12.77m +53%
----------- ----------- -------
Recurring revenue as a % of total
revenue 77% 74% +3%
----------- ----------- -------
Gross profit GBP11.20m GBP7.78m +44%
----------- ----------- -------
Adjusted EBITDA (1) GBP2.81m GBP1.41m +99%
----------- ----------- -------
Adjusted EBITDA (1) margin % 14% 11% +3%
----------- ----------- -------
Adjusted PBT (2) GBP1.76m GBP0.75m +135%
----------- ----------- -------
Adjusted Basic EPS (3) 3.4p 3.1p +10%
----------- ----------- -------
Loss before tax GBP(0.23)m GBP(0.83)m -
----------- ----------- -------
Basic EPS (0.2)p (2.8)p -
----------- ----------- -------
Operational cashflows GBP1.93m GBP0.60m +222%
----------- ----------- -------
Net cash (4) GBP0.45m GBP0.47m -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 GBP1.45m 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 GBP3.0m and a net
cash (4) balance of GBP0.45m at 31 March 2020. The Group has
facilities of GBP5m expiring in 2024, consisting of a GBP1.75m term
loan which has GBP0.35m of headroom at 31 March 2020 and an undrawn
GBP3.25m 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: Tel: 0151 559
SysGroup Plc 1777
Adam Binks, Chief Executive
Officer
Martin Audcent, Chief Financial
Officer
Shore Capital (Nomad and Tel: 020 7408
Broker) 4090
Corporate Finance:
Edward Mansfield / Daniel
Bush
Corporate Broking:
Fiona Conroy
Alma PR (Financial PR) Tel: 07780
Josh Royston / Helena Bogle 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 GBP1.45m 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 GBP19.49m and
Adjusted EBITDA growth of 99% to GBP2.81m, 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 GBP1.45m 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 GBP19.49m (FY19:
GBP12.77m) 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 GBP15.1m
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 GBP4.4m 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 2020 2020 2019 2019
Segment
----------------------
GBP'000 % GBP'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 GBP11.2m (FY19: GBP7.8m) with a
gross margin percentage of 57% (FY19: 61%). Managed IT Services
gross profit increased to GBP10.3m (FY19: GBP7.0m) with a gross
margin of 68% (FY19: 74%). Value Added Resale gross profit
increased to GBP0.9m (FY19: GBP0.8m) 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 GBP8.4m were 43% of revenue in
FY20 which compares to GBP6.4m 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 GBP2.81m for the twelve months to 31 March
2020, an increase of GBP1.4m (+99%) compared to GBP1.41m 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.
2020 2019
------------------------------------------------
Reconciliation of Operating profit to Adjusted
EBITDA GBP'000 GBP'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 GBP0.48m
(FY19: GBP0.74m) comprising GBP0.09m of professional fees for the
acquisition of HNS and GBP0.39m 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 GBP1.32m (FY19:
GBP0.72m), of which GBP1.27m (FY19: GBP0.66m) relates to the
amortisation of acquired intangible assets from acquisitions.
The share-based payments charge has increased to GBP0.20m in
FY20 (FY19: GBP0.12m). 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 GBP1.76m (FY19:
GBP0.75m) and the loss before tax for the year was GBP0.23m (FY19:
GBP0.83m).
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 GBP0.51m, with a
corresponding liability of GBP0.58m, 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 GBP0.45m at 31 March 2020 (FY19: GBP0.47m).
2020 2019
Net cash excluding IFRS16 Lease liabilities GBP'000 GBP'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
GBP1.93m (FY19: GBP0.60m). This includes payments for interest and
taxation and GBP0.49m of exceptional cash costs (FY19: GBP0.61m).
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%).
2020 2019
--------------------------------------------
Cash conversion GBP'000 GBP'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 GBP20.1m at 31 March 2020 have
remained at a similar level to the prior year (FY19: GBP20.1m).
Non-current assets have increased by GBP0.47m which is a net
movement of capital expenditure and the period charges for
depreciation and intangible amortisation. Intangible asset
additions included GBP1.47m for the intangible assets and goodwill
relating to the acquisition of HNS and GBP0.19m for the capitalised
Project Fusion development costs. The Group invested GBP0.35m
(FY19: GBP0.30m) in property, plant and equipment and the adoption
of IFRS16 - Leases led to GBP0.51m 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 GBP1.6m was lower than the GBP1.8m
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 GBP0.21m at 31 March 2020
(FY19: GBP0.07m), 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 GBP1.40m (FY19: GBP1.62m),
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 GBP1.0m
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 GBP0.975m 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, GBP0.19m 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 GBP0.01 (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 YEARED 31 MARCH 2020
2020 2019
Group Group
Notes GBP'000 GBP'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 GBP'000 GBP'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 YEARED 31 MARCH 2020
Attributable to equity holders of the parent
--------
Share capital Share Other Translation Retained Total
premium reserve reserve earnings
reserve
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'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 YEARED 31 MARCH 2020
2020 2019
Group Group
Notes GBP'000 GBP'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 YEARED 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 GBP3.04m and a
net cash position of GBP0.45m at 31 March 2020. Net cash includes a
GBP1.4m 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 Plant Motor Total
& Buildings & Machinery Vehicles
GBP'000 GBP'000 GBP'000 GBP'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
GBP'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
GBP'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 Plant & Motor Total
& Buildings Machinery Vehicles
GBP'000 GBP'000 GBP'000 GBP'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 GBP0.51m, with a corresponding
liability of GBP0.58m, 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 GBP0.2m decrease in operating expenses and corresponding increase
to Adjusted EBITDA, and a GBP0.05m 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
GBP'000 GBP'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 197 -
16
-------------------------------------------------- -------- --------
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 Revenue is recognised
services are delivered evenly over the duration
from an agreed commencement of the contract period
date and for a contracted based on the sales price
time period, typically as specified in the customer
three years with a twelve-month sales contract. This
automatic extension. is on the basis that
Managed services is comprised the customer receives
of different streams and consumes the services
including hosting and evenly over the term
support but due to the of the contract. Amounts
nature of this revenue invoiced in advance of
the streams are considered service delivery periods
inter-dependant. The are accounted for as
services are delivered contract liabilities
uniformly over the duration and recognised as revenue
of the contract and invoiced in the Consolidated Statement
either quarterly or monthly of Comprehensive Income
in advance of the service to match the period in
delivery period. which the services are
delivered.
----------------- ------------------------------------ -----------------------------------
Professional Professional services Revenue is recognised
services are delivered by a team based on chargeable days
of technical consultants delivered using the sales
based on a scope of work day rate specified in
agreed and signed with the customer contract.
a customer. The scope Revenue recognition is
of work includes a specification therefore matched to
of the work to be delivered, the timing of when the
an estimation of the customer receives the
number of consultancy benefit of the consultancy
days required, and a services which is in
sales value based on line with the day the
a day rate. Professional work is performed. The
services are invoiced relevant details of customer
either in advance of engagements and the time
work performed, in arrears delivered by consultants
after the service is is recorded on the Group's
delivered or as part financial systems. Professional
of a larger project contract services are either invoiced
milestone. 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 Value added resale ("VAR") Revenue is recognised
resale comprises sales of IT on delivery of the products
hardware, licences and from the supplier. Invoices
warranties ("products") are typically raised
where the Group satisfies in advance of delivery
its performance obligation and treated as contract
by procuring the products liabilities until delivery
from suppliers for delivery has been fulfilled. At
to the customer. There this point the revenue
are no further or ongoing and associated purchase
obligations to the Group cost is recognised in
after delivery. The sales the Consolidated Statement
price for each product of Comprehensive Income.
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.
----------------- ------------------------------------ -----------------------------------
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 GBP'000 % GBP'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
GBP'000 % GBP'000 %
---------------------------------------- ---------- ------ -------- --------
UK 19,310 99% 12,526 98%
Rest of World 182 1% 247 2%
======================================== ========== ====== ======== ========
19,492 100% 12,773 100%
---------------------------------------- ---------- ------ -------- --------
2020 2019
GBP'000 GBP'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
---------------------------------------- ---------- ------ -------- --------
There were no sales between the two business segments,
and all revenue is earned from external customers. The business
segments' gross profit is reconciled to profit before taxation
as per the consolidated income statement. The Group's overheads
are managed centrally by the Board and consequently there
is no reconciliation to profit before tax at a segmental
level.
The Group has recognised the following assets and liabilities
related to contracts with customers.
2020 2019
GBP'000 GBP'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
GBP'000 GBP'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
GBP'000 GBP'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
GBP'000 GBP'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 GBP'000 GBP'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
GBP'000 GBP'000
------------------------------- -------- --------
Acquisitions 85 554
Integration and restructuring 390 182
Total 475 736
------------------------------- -------- --------
The Group has incurred exceptional costs during the year of
GBP475,000 (FY19: GBP736,000) comprising GBP390,000 costs for
integration and restructuring and GBP85,000 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 GBP1.45m cash paid on completion, cash free
debt free, with a further GBP0.45m cash payment following the
agreement of the completion accounts for the cash balance acquired,
debt items and working capital adjustment. The company incurred
GBP85,000 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 Book Fair Value Fair
and liabilities assumed Values Adj Values
GBP'000 GBP'000 GBP'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 GBP1.7m to Group revenue and GBP0.4m
to Group EBITDA. Had the acquisition taken place on 1 April 2019,
the contribution would have been GBP2.2m to Group revenue and
GBP0.4m 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 GBP7,956,000 cash
consideration paid on completion, with a consideration adjustment
of GBP252,000 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 GBP1,000,000
additional consideration for achieving performance criteria based
on EBITDA targets. The mechanism was for the SysGroup to pay
GBP2.50 additional consideration for every GBP1 of EBITDA achieved
by Certus over and above a floor of GBP1.2m and up to a maximum of
GBP1.6m 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
GBP975,000 to the Sellers in full settlement of the contingent
consideration.
9. Earnings per share
2020 2019
-------------------------------------------- --------------------- ----------------------
Loss for the financial year attributable (GBP122,050) (GBP722,000)
to shareholders
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
GBP'000 GBP'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 GBP'000 GBP'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
GBP'000 GBP'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 85 -
in UK rate
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 Software Customer Positive Total
development licences relationships goodwill
Cost GBP'000 GBP'000 GBP'000 GBP'000 GBP'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
GBP'000 GBP'000 GBP'000 GBP'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.
2020 Managed Certus IT HNS
IT Services
------------------------------------- ------------- ---------- -------
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 GBP'000 GBP'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 GBP'000 GBP'000
------------------------------ -------- --------
Trade debtors 1,640 1,814
Impairment provision (213) (70)
Total 1,427 1,744
------------------------------ -------- --------
Group
Up to 1 month Over 1 month Total
past due past due
GBP'000 GBP'000 GBP'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 GBP'000 GBP'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 GBP'000 GBP'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 GBP975,000 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 GBP'000 GBP'000
------------------- -------- --------
Lease liabilities 441 81
Bank loan 1,146 1,397
Total 1,587 1,478
------------------- -------- --------
Group Group
2020 2019
Current GBP'000 GBP'000
------------------- -------- --------
Lease liabilities 268 204
Bank loan 251 224
Total 519 428
------------------- -------- --------
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR VKLFLBQLBBBV
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