TIDMYU.
RNS Number : 0464L
Yu Group PLC
20 December 2018
Yü Group PLC
(the "Group" or the "Company")
Findings from the Accounting Review
Yü Group PLC (AIM: YU.) provides an update following the
announcement on 24 October 2018 regarding several areas of
significant concern in relation to the Group's performance. These
concerns led to a combined reduction to profitability of around
GBP10 million when compared with market expectations. As announced
on 5 November 2018, the Board subsequently appointed DLA Piper LLP
and PwC LLP to conduct an independent forensic investigation (the
"Review").
The findings from the Review have recently been presented to the
Group's Board and Audit Committee. After assessing the outcome of
the Review, and after performing additional internal analysis of
its trading performance and balance sheet, the Board believe a
further reduction in profitability is anticipated of between
GBP2.75 million and GBP3.25 million.
Consequently, the Group forecasts an Adjusted Loss Before Tax of
between GBP7.35 million and GBP7.85 million(1) for the year ended
31 December 2018.
The Group held GBP11.0 million of cash at 30 November 2018 and
continues to have no debt outstanding.
Ralph Cohen, non-Executive Chairman, said "The events of recent
weeks have been deeply distressing for the shareholders, directors
and for all of the Company's stakeholders. The Review has confirmed
serious historic failures in the systems and processes within the
Group's finance function. These are now being addressed by our new
Chief Financial Officer, who is implementing all necessary
improvements. It will take time for these measures to produce their
full results and for unsatisfactory sales contracts to time-expire.
While the task ahead is daunting, I have every confidence that the
entire Yu Group team will face it with a determination to achieve
the desired results and to restore the fortunes of the
Company."
[1] The Adjusted Loss Before Tax excludes charges for Share
Based Payments, gains or losses on derivatives contracts, and, for
Financial Year 2018, exceptional restructuring costs, provisions
made on first adoption of IFRS 9, and the costs of the Review. It
is also is based on a working assumption that the corrections will
not result in a restatement of prior year accounts.
Overview
The following key findings and assumptions are noted from the
Review and the Board's further internal analysis:
-- The Review confirmed that the assessment of the level of
corrections to the 30 September 2018 balance sheet were
appropriate;
-- The Review identified the underlying cause for the level of
corrections is centred around material weaknesses in key internal
systems and controls across the customer to invoicing and cash
cycle;
-- A further reduction in profitability of between GBP2.75
million and GBP3.25 million is now expected due to:
o additional decline in gross margin achieved across the Group's
contract portfolio; and
o additional balance sheet corrections following the detailed
external and internal forensic investigations;
-- The Board is focussed on ensuring the Group can achieve
profitability as soon as possible, and is continuing to work on
detailed budgets taking in to account current trading performance
and the findings from the Review; and
-- The Group expects to release a trading update at the end of
January 2019 to provide further guidance.
The Review & Internal Analysis
The issues and concerns announced on 24 October 2018 had been
identified following an internal review of the Group's balance
sheet as at 30 September 2018. Due to the materiality of the
corrections, the Board appointed DLA Piper LLP and PwC LLP to
conduct an independent forensic review, during which the advisers
had full access to the Group's records as they required.
The Review centred around the following key areas:
-- a reconstruction of the trade debtors' ledgers of the Group
to validate the account balances held, and to analyse invoicing and
cash receipts at a transactional level;
-- a calculation of potential accrued income, and its
recoverability, compared to the balance held;
-- an assessment of material risks and the effectiveness of internal controls;
-- an assessment of new internal controls and accounting
processes now being utilised by the Group in relation to bad debt
provisioning and accrued income recognition; and
-- a review of other accounting processes and policies, and of
data integrity, to identify any other adjustments required.
Trade debtors and billing data was reviewed by PwC from 2014 to
the end of November 2018, with significant analysis performed under
a variety of methodologies in order to assess a range of positions
and areas for additional investigation.
In addition to the Review, the Board have investigated:
-- the gross margin achievable on the contract book of the business; and
-- other balance sheet and accounting processes and balances.
The Findings
The Review concluded that:
-- the Board's assessment of the adjustment of the 30 September
2018 balance sheet was appropriate;
-- The Group's internal controls were inadequate, including a
failure to perform certain key financial reconciliations, incorrect
management of systems, and poor data quality resulting from complex
and manual ledger processes;
-- Where controls were in place they tended to be informal and
therefore applied inconsistently; and
-- New accounting processes have now been implemented in
relation to estimating levels of accrued income and bad debt
provisioning. These processes are more in line with industry norms
but do require embedding, monitoring and revision over time to
evaluate their appropriateness.
Following the Review findings and further internal analysis, the
Board have concluded that a further reduction in the gross margin
of the business is anticipated, and that certain other balance
sheet corrections are appropriate, which are described below.
Financial Impact
Based on the findings of the Review and the Board's own internal
analysis, the 2018 Adjusted Loss Before Tax(2) of the Group
includes the following impacts:
-- a GBP6.4 million impairment of the 30 September 2018 balances of trade debtors (due to ledger reconciliation issues) and accrued income (due to a reassessment of the amount billable to customers);
-- a GBP1.3 million increase, from the GBP0.1 million held at 31
December 2017, in the bad debt provision which is required at 30
September 2018, based on newly adopted internal accounting
processes; and
-- a further GBP1.0 million related to accruals and fixed assets.
(2) It is the current working assumption of the Board that all
adjustments required will be treated as losses to be reported in
the year ended 31 December 2018. If the year ended 31 December 2017
requires a restatement to reduce profitability, losses declared for
the year ended 31 December 2018 would decrease by a corresponding
amount.
As a consequence of the corrections to the position at 30
September 2018, and based on new financial analysis, the Board has
reassessed the Group's underlying profitability based on the
contracts it has secured. As a result of this reassessment, the
margins achieved across the contract book are significantly below
the level which was previously expected. The Board note:
-- the gross margin now being recognised on existing contracts
is leading to a greater dilution of the gross margin achieved
across the contract book than previously anticipated;
-- in view of the contracted nature of the Group's activities,
such business will continue to dilute the gross margin percentage
achievable in 2019 and, to a lesser extent, 2020; and
-- a reassessment of the Group's growth strategy, in the context
of the wider competitive environment and market conditions, is
ongoing, with a renewed focus on the underlying profitability of
new business.
Corrective & other actions
Since the issues were identified, the Board and the Audit
Committee have implemented urgent measures to enhance financial
controls, including:
-- new policies and procedures in relation to governance, internal controls and risk management;
-- management led reviews of risks and internal controls, with a
Board approved mandate to implement improvements in a timely
manner;
-- revised accounting processes in relation to bad debt
provisioning and estimation of accrued income;
-- enhancement of data integrity and system interfaces, particularly in accounting ledgers and reconciliations; and
-- ongoing analysis and internal reporting of the profitability
of bookings, and detailed budget modelling, to reforecast the
underlying expectation of profitability of the Group.
The Review indicates that the issues arose due to a combination
of factors. The Audit Committee is continuing to investigate the
failings leading to the corrections, including via key stakeholders
and with the external auditors, to ensure all appropriate lessons
are learnt and actions are taken accordingly.
The Audit Committee have also requested PwC to follow up on the
Review to ensure the appropriate actions have been implemented in
relation to their key findings. It is intended that they will
undertake an initial follow up in Q1 2019 with a further exercise
undertaken in Q2 2019.
Cash Position
Whilst recognising that future cash generation will be impacted
as a result of lower than expected profitability, the Board wish to
clarify that the adjustments noted have largely been reflected in
the cash position of the Group at 30 November 2018.
The Board confirms that the Group held GBP11.0 million of cash
at 30 November 2018. The reduction in cash from 30 June 2018 to 30
November 2018 was in line with expectations, being primarily due to
a scheduled annual industry payment, and an advanced payment
against the next year's annual industry payments otherwise due in
Q3 2019.
The Group has remained in a cash positive position throughout
2018 and continues to have no debt outstanding.
Summary
The Board are working to take all necessary and proper actions
to ensure the issues highlighted in the findings are thoroughly
investigated, and that all requisite actions are implemented.
For further information, please contact:
Yü Group PLC
Bobby Kalar
Paul Rawson +44 (0) 115 975 8258
Shore Capital
Edward Mansfield
Anita Ghanekar
James Thomas +44 (0) 20 7408 4090
Alma PR
John Coles
Josh Royston
Robyn Fisher +44 (0) 20 8004 4218
Ends
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END
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