TIDMADT
RNS Number : 8768S
AdEPT Technology Group PLC
14 July 2020
AdEPT Technology Group plc
("AdEPT", the "Company" or together with its subsidiaries the
"Group" )
COVID-19 update and final results for the year ended 31 March
2020
AdEPT (AIM: ADT), a leading UK independent provider of
award-winning managed services for IT, unified communications,
connectivity and voice solutions, announces a COVID-19 update
alongside its results for the year ended 31 March 2020.
COVID-19 update
Today we are pleased to announce our full year results to 31
March 2020. However, before we go into this detail, we thought it
would be helpful to give you an update on what has been happening
over the first quarter (April-June), a period entirely in
lockdown.
In order to protect the health and safety of its team, clients
and the communities it operates in, the entire AdEPT team
transitioned to remote working immediately following the lockdown
announcement. Business continuity has been unaffected with the
Group continuing to provide a full service to clients. Over recent
weeks the team have been gradually returning to the office however
our policy is one of 'flexible working' and we plan to continue
this adapted working practice for the foreseeable future.
Commenting upon the COVID-19 situation, Chairman Ian Fishwick
said: " In our trading update on 2 April 2020 I explained that we
had been conducting financial stress tests and that we had
identified key factors that may influence our results. I will give
you an update on each.
SALES ORDER INTAKE
In the trading statement we modelled new order volumes falling
to c.25 per cent. of the norm for a Q1 period (April to June). This
was based on the assumption that the sales team could no longer
meet clients face-to-face and that buyer appetite would be
curtailed. We are pleased to report that new order volumes have
proven to be significantly more resilient than we had initially
modelled in respect of both recurring services and one-off
projects, which is an encouraging start to the year given the
COVID-19 challenges. This performance reflects well on the public /
private split of the AdEPT business and our role in the market.
This achievement is underpinned by some notable wins including an
Avaya Contact Centre contract for the Royal Borough of Greenwich
and a wide-area-network for Worcestershire NHS.
INSTALLATION DELAYS
We predicted a drop in project revenues given our inability to
visit many customer sites for project related work. Indeed, it has
been difficult to turn new orders into revenue in the first
quarter, a situation compounded by the fact that Openreach ceased
installing any circuits except those for critical infrastructure.
This backlog of work in progress is temporary and will unwind as
lockdown eases, although it will inevitably have a short-term
impact.
However, this shortfall in on-site project work has been
counterbalanced, in part, by the AdEPT success with cloud
migrations in Education. During lockdown the Department for
Education announced additional funding to assist schools in moving
to the cloud in support of remote working.
AdEPT is playing a major role in this initiative - and to date
is helping over 250 schools with cloud migrations to either Google
G-Suite or Microsoft 365. We anticipate further success over the
coming months as AdEPT is one of only five approved companies who
can migrate schools to both Google and Microsoft cloud
platforms.
DEBTORS
We anticipated pressure on credit at the commencement of
lockdown and sensibly drew down our revolving credit facility by an
additional GBP7.2m. We are pleased to report that we have been
successful in collecting debt with debtor days at the end of
Quarter 1 standing at 42 days; compared to 48 days at 31 March
2020.
As a result, we have repaid GBP8m of the revolving credit
facility, whilst also paying the full value of the ACS earn out (a
successful acquisition) - a cash outflow of GBP1.8m, whilst still
leaving AdEPT with a healthy cash position. The cash generative
business model of the Group has continued throughout the lockdown
period.
Whilst our expectation of customers delaying payments has
largely remained unsubstantiated so far, we must recognise that
there remains a hidden potential risk at the point the Government
ceases furlough payments and rents and VAT payments recommence. We
therefore continue to monitor cash collection very closely.
CHURN
In the first quarter we have not seen any material change to
normal customer churn levels. As noted above, the next six months
is still difficult to predict.
GOVERNMENT SCHEMES
AdEPT has been utilising the Government Job Retention Scheme
("furlough") to optimise the business during this pandemic. We
elected to top up salaries for all of those on furlough to 100 per
cent. of their base salary as we felt employees should not be
penalised through the onset of COVID-19. This has been well
received by staff and has made the furloughing process a simple
one. The proportion of our staff placed on furlough has reduced
from 20 per cent. of our workforce to 5 per cent. of the workforce,
a clear sign of things returning to some form of normality.
BANKING AGREEMENTS
Finally, in terms of banking covenants, we indicated that we
would be prudent and adjust our banking covenants to reflect our
worst-case scenarios. We are pleased to report that our banking
partners, Barclays Bank plc and Royal Bank of Scotland plc, have
supported the adjustment of covenants at no cost. This adjustment
now gives us more than 20% headroom against the covenant
profile.
OUTLOOK
In conclusion, the Board believes that COVID-19 will have a
modest impact on the business in the medium to long term due to the
fundamental need for its customers to communicate and use ICT for
operating their businesses. AdEPT's client base is well diversified
across both public and private sectors and the long-term
consequences may in fact expand the demand for its services if,
subsequently, there is an acceleration in digital transformation
initiatives.
Whilst it is still too early to provide guidance for the year
considering the constantly changing landscape of the pandemic we
are heartened by the excellent performance of the AdEPT team, as
reflected in these key indicators, during these challenging
times."
Final results for the year ended 31 March 2020
Financial highlights
-- Revenue increased by 20% to GBP61.7m (2019: GBP51.3m)
-- Underlying EBITDA increased by 9% to GBP11.7m (2019: GBP10.8m)(1)
-- Underlying EBITDA margin % of 19% (2019: 21%)
-- Adjusted fully diluted earnings per share of 28.1p (2019: 29.5p)
-- Cash generation from operating activities before tax GBP9.6m (2019: GBP7.5m)
-- Conversion of reported EBITDA to operating cash flow before tax of 82% (2019: 70%)
-- Cash at year end GBP11.85m (2019: GBP7.65m)
-- Year-end net senior debt of GBP27.9m (2019: GBP27.1m)(2)
-- Capital expenditure 2% of revenue (2019: 1%)
Operational highlights
-- Managed services revenue increased 30% year on year
-- Managed services accounted for 81% of total revenue and EBITDA (2019: 75%)
-- Acquisition of entire issued share capital of Advanced
Computer Systems UK Limited in April 2019
1 Defined as operating profit after adding back depreciation,
amortisation, acquisition fees, restructuring costs, adjustment to
deferred consideration and share-based payment charges
2 Net senior debt is defined as cash and cash equivalents less
short-term and long-term senior bank borrowings and prepaid bank
fees
For further information on AdEPT please visit www.adept.co.uk or
contact:
AdEPT Technology Group plc
Ian Fishwick, Chairman 07720 555 050
Phil Race, Chief Executive 07798 575 338
John Swaite, Finance Director 01892 550 243
N+1 Singer
Nominated Adviser & Broker
Shaun Dobson/Iqra Amin 020 7496 3000
This announcement has been released by John Swaite, Finance
Director, on behalf of the Company.
About AdEPT Technology Group plc:
AdEPT Technology Group plc is one of the UK's leading
independent providers of managed services for IT, unified
communications, connectivity and voice solutions. AdEPT's tailored
services are used by thousands of customers across the UK and are
brought together through the strategic relationships with tier-1
suppliers such as Openreach, BT Wholesale, Virgin Media, Avaya,
Microsoft, Dell and Apple.
AdEPT is quoted on AIM, operated by the London Stock Exchange
(Ticker: ADT). For further information please visit:
www.adept.co.uk
Chairman's statement
AdEPT continues to make considerable progress in its strategy of
expanding its managed service and IT capability, continuing
geographical expansion and unifying the Company around a mission of
'unifying technology, inspiring people'.
There are two distinct aspects to the AdEPT business, one
relates to the provision of call minutes and telephone lines
('calls & lines'), the focus of the business during the early
years of AdEPT's life. The other relates to the provision of
Managed Services and IT expertise. All combining to deliver a
unifying Information Communications and Technology platform for
customers across both public and private sectors.
As individuals find alternative ways to communicate via web chat
and texting, the calls & lines revenues are declining in line
with the industry at large, to mitigate this headwind AdEPT is
focusing on migrating these customers to alternative solutions.
However, this declining part of the AdEPT business is reducing in
significance and counterbalanced by the clear strategy to build
Managed Services and IT expertise to deliver a truly unified
platform for customers. A strategy that has accelerated over recent
years by multiple acquisitions in this space.
The organic decline in calls & lines was 13% per annum
whilst the organic growth in Managed Service and IT has been 7% per
annum demonstrating continued progress against our strategy. As
managed services represent 81% of our total revenue (note: this
figure includes acquisitions), overall organic growth was a net
2%.
ACS acquisition - strengthening a territory and a market
sector
A key strategy of AdEPT is to consolidate the market to build
scale and capability. The most recent acquisition in the Managed
Service and IT space was ACS, announced in April 2019. ACS is an
independent IT service provider, with a strong public sector
presence, including managing and supporting the IT function of
approximately 200 schools and academy trusts. The highly skilled
team, together with the well-matched customer base and product set
at ACS complements AdEPT's existing IT managed services and
education offering where AdEPT provides services to thousands of
schools and academy trusts.
ACS also provides a geographical extension to the existing
education centre of excellence of AdEPT based in Orpington and
offers an opportunity to cross-sell the AdEPT Education suite of
software applications developed by the in-house software team at
AdEPT together with the capabilities of AdEPT Nebula.
ACS is our second acquisition in Yorkshire, following the
acquisition of ETS Communications Limited (ETS) in November 2018.
The IT skills of ACS are highly complementary to the unified
communications expertise of ETS and they are now working closely
together and operating out of the same offices in Doncaster as an
AdEPT 'northern hub'.
The integration of ACS into the AdEPT group has been completed,
with the finance function being integrated into the Orpington
office of AdEPT. As this acquisition was made at the start of the
current financial year, it has made a full twelve month
contribution to the financial results.
Public sector and healthcare
We have continued to have success in the Public Sector. In March
2020 45% of total Group revenue was generated from public sector
and healthcare customers (2019: 42%). AdEPT now has as customers
over 100 councils, more than 30 NHS Trusts, more than 30 private
hospitals, over 500 GP surgeries and clinical commissioning groups,
over 20 universities, hundreds of colleges and over 4,000 schools.
AdEPT also provides critical services to a number of central
government departments.
Following the successful award of Health and Social Care Network
(HSCN) Compliance to AdEPT Tunbridge Wells the Group is authorised
to sell data networks to the NHS. During the year ended 31 March
2019 the Group successfully won the contract to design and
implement a super-fast network infrastructure across all
departments of Kent NHS, impacting more than 400 sites across Kent
including hospitals, hospices and GP surgeries. This highly complex
project encompassed a variety of services as part of a wide area
network solution, including managed firewalls, to provide a fully
secure and resilient solution for Kent NHS. It was successfully
rolled out for Kent NHS during the year ended 31 March 2020,
improving the speed of the network whilst at the same time
achieving a more economic price point at a critical time for the
NHS during the COVID-19 crisis.
Dividends
Based on dividends paid in the year ended 31 March 2020, being
9.8p, dividend cover was 2.87x. In early April 2020, considering
the potential COVID-19 disruption, the Board took the decision to
cancel the interim dividend that had been declared with the
September 2019 interim results. The Board will continue to monitor
the changing economic environment and adopt an appropriate dividend
policy for future periods, with a further update alongside the
September 2020 interim results.
Employees
As a result of the acquisition completed in the year ended 31
March 2020, the Group now has more than 300 full-time employees.
The progress of the Group this year was made possible by the
continued hard work and focus of all employees at AdEPT. As a Group
we are immensely proud of the track record we have created over the
last 16 years and, on behalf of the Board, I would like to take
this opportunity to thank all our employees for their continued
hard work.
Director changes
The Board of directors recognises the importance of, and is
committed to, ensuring that proper standards of effective corporate
governance operate throughout the Company. Accordingly, the Group
is continuing to strengthen the Board with industry professionals
whilst acknowledging the provisions of the QCA Corporate Code
published by the Quoted Companies Alliance.
In June 2019, Richard Bligh was appointed to the Board as a
non-executive director. Richard was formerly chief operating
officer of Gamma Communications plc and was instrumental in
building that company to over GBP1 billion market capitalisation.
Richard's knowledge of the UK technology market, and how to grow
businesses, will be an invaluable asset to AdEPT.
In October 2019, the Company announced the appointment of Craig
Wilson as a non-executive director. Craig has extensive experience
in Business Process Outsourcing (BPO), IT Services and Software,
running businesses with up to GBP3 billion annual revenue and
14,000 staff. Given that AdEPT has 45% of revenues related to the
Public Sector, Craig's expertise in this arena is highly relevant
with experience spanning; Department for Work and Pensions, HMRC,
Ministry of Defence and Ministry of Justice.
As a further consequence of the review, AdEPT announced on 29
October 2019 the retirement of Dusko Lukic as a non-executive
director from the Board. Dusko has been a valued member of the
AdEPT Board for 13 years as the senior independent non-executive
director.
In April 2020, the Company announced the appointment of Andy
Lovett (Chief Operating Officer) to the Board. Andy has significant
experience in running the operational side of businesses spanning;
software development, IT out-source, and mission critical client
projects. Andy has a wealth of highly relevant skills having
previously worked in senior roles for banking software company DPR
Group and global outsourcer Xchanging plc.
COVID-19
The COVID-19 situation has created a significant uncertainty for
all businesses. We did experience some marginal benefit in late
March 2020 assisting customers with the move to remote working and
critical projects to enable our key NHS and private healthcare
customer base to maintain their services. However, since this
initial burst of activity, we have seen a large number of customers
placing major projects on hold mainly due to lack of site-access. A
small number of customers have requested temporary financial
support as customers themselves try to manage the economic
uncertainty within their businesses. At the year-end we increased
our bad debt provision accordingly.
AdEPT has the diversity and core strength to weather the COVID
challenge with a strong core of revenue from recurring products and
services (at 75% of revenue) providing revenue visibility and a
balance of public and private sector customers (with 45% public
sector and healthcare revenues). Whilst we are facing unprecedented
times the Board is confident the Company is well prepared for the
challenges ahead.
From mid-March 2020 we put in place measures to protect our
staff (designated 'key workers' by the Government) and ensure the
continuity of service for all our valued customers. AdEPT was able
to seamlessly transition to remote working, with virtually all
staff working from home from late March 2020. This ability to pivot
the business was achievable in large part due to the completed
rollout of the Group-wide telephony, Microsoft 365 and email system
as part of Project Fusion
We have also taken advantage of the available Government
schemes, such as the Coronavirus Job Retention Scheme (Furlough),
for cost-mitigation during the disruption and we instigated cash
preservation measures including the cancellation of the interim
dividend.
Due to COVID-19 related uncertainty, the financial results
guidance from the analysts for the year ending March 2021 is
suspended.
Outlook
Despite this uncertainty, the Board remains confident that the
continued strong cash conversion of operating profit will support
the Company through the COVID-19 disruption and will leave the
Company well positioned to take advantage of future opportunities
for growth.
The focus for the coming year remains on:
-- developing organic sales by taking our entire portfolio to
our customers to address their ICT needs;
-- delivering an excellent service utilising our unified service platform;
-- deepening our relationships with partners to ensure their
innovation reaches our customers; and
-- capitalising on our public sector expertise by leveraging
AdEPT's approved supplier status on the various public sector
frameworks
This focus will ensure we maintain profitability and cash flow
conversion, which will be used to either reduce net borrowings,
return value to shareholders through dividends and/or fund suitable
earnings-enhancing acquisitions.
At this stage, we are unable to confirm the process for the 2020
AGM. We very much hope to hold this meeting in person, should the
lockdown restriction easing allow us to be confident that it is
safe to do so, but if not, then the meeting will be held in a
virtual environment.
Ian Fishwick
Chairman
CEO's statement
Reporting on my first full year as CEO I am pleased to report
that AdEPT has made considerable progress against our strategic
ambitions.
The business is now unified behind one brand - AdEPT Technology
- a vision brought to life in December 2019 when we held our first
Group conference and exhibition titled 'Tech United' at The Drum,
Wembley. This event showcased our capability in the telecoms,
connectivity and IT services arenas with case studies across the
education, healthcare and the wider public sector markets. This was
only possible with the help of our strategic partners such as
Avaya, Gamma, Microsoft, Dell, BT, Virtual 1 and Pragma, amongst
others. As part of this brand unification we released a new look
Group-wide AdEPT website ( www.adept.co.uk ) which is live and
already generating opportunities.
We have made substantial progress in creating a unified
operating platform - an initiative titled Project Fusion. Over the
past twelve months we have been deploying across AdEPT a platform
impacting sales, marketing, the services team and business
operations, with five of the eight AdEPT locations now live on the
platform with the balance targeted for live running during the
remainder of 2020. As a result, Project Fusion is already improving
customer service and operational effectiveness. Project Fusion
encompassed the implementation of Microsoft 365, Microsoft Teams
and the Avaya IX telephony solution. This Group-wide infrastructure
enabled AdEPT to pivot to home-working seamlessly when the COVID-19
lockdown commenced.
We have continued to have success with our strategic platform -
AdEPT Nebula - which now underpins over 240 customer projects. At
its core, AdEPT Nebula is a highly resilient MPLS network (Nebula
Network) and hosting capability centred on the Group's owned data
centre in Orpington. AdEPT Nebula empowers the Group to provide
clients with a seamless cloud hosting capability (Nebula Cloud),
hybrid cloud platforms (Nebula Apps), unified communications
(Nebula Voice) and secure managed services (Nebula Back Up and
Nebula Security).
Furthermore, our focus on key strategic partnerships is bearing
fruit with AdEPT now a Diamond Partner of Avaya, a Platinum Partner
of Gamma and an award-winning partner of Virtual 1 and Pragma.
It is vital that AdEPT delivers on its promises, so I am
particularly pleased to report that we have delivered on our
commitments to the health service with significant project success
across the Kent NHS and for Doctor's surgeries across the UK. The
AdEPT Education vertical goes from strength to strength, with over
4,000 schools now supported by AdEPT, whilst in the commercial
sector, AdEPT has maintained a continuous flow of new customer
wins.
This success is only possible with a great team that now numbers
over 300 talented individuals across the UK following the
successful acquisition and integration of ACS into AdEPT. I was
also pleased to welcome Andy Lovett to the team, joining as Chief
Operating Officer and subsequently appointed to the full Board in
2020. I would like to take this opportunity to thank the entire
AdEPT team who have stepped up to the plate during challenging
times. We have received numerous commendations for the team over
recent weeks which is a testament to their commitment and
professionalism.
This was all in a year where we experienced economic and
political uncertainty caused by Brexit coupled with the arrival of
COVID-19 to UK shores in March 2020, a true 'Black Swan' event for
the entire economy. Throughout these significant challenges AdEPT
has proven to be a resilient business able to adapt rapidly to the
changing landscape. Evidenced by our rapid ability to transition to
'working from home' whilst at the same time empowering thousands of
schools, Doctor's surgeries and hundreds of commercial businesses
to do the same.
Whilst the General Election brought some closure to the Brexit
uncertainty, the COVID-19 situation has prevented the anticipated
flow of new opportunities from public sector frameworks whilst also
introducing uncertainty into the coming year. As a result we have
had to withdraw our guidance and the cancellation of the interim
dividend previously announced.
However, we remain confident that the long-term future will be
bright for AdEPT. The lockdown experienced by the UK has only
served to highlight the importance of technology to businesses. It
brings to the forefront the critical need for resilient networks,
readily accessible information systems, unified collaboration and
communication solutions and experienced teams in consulting and
support. As a leading provider of advice and solutions in the
unified technology and communications arena AdEPT will remain
focused on bringing the best solutions from great partners to our
customers in a cost effective and pragmatic manner.
Our mission remains 'uniting technology, inspiring people' and
we look forward to delivering against this mission in the coming
year.
Phil Race
Chief Executive Officer
Strategic report
Principal activities and review of business
The principal activity of the Group is the provision of unified
communication and IT services to both domestic and business
customers. A review of the business is contained in the Chairman's
and CEO's statements and the highlights are summarised in this
strategic report.
Summary of three year financial performance
Year ended March
2020 2019 2018
GBP'000 Year on year GBP'000 Year on year GBP'000
% %
------------------- --------- --------------- --------- --------------- ---------
Revenue 61,688 20.3% 51,294 10.5% 46,434
Gross profit 29,391 16.0% 25,328 10.5% 22,919
Underlying EBITDA 11,709 8.6% 10,781 10.3% 9,771
Net senior debt 27,938 27,113 17,622
------------------- --------- --------------- --------- --------------- ---------
Revenue
The revenue breakdown is viewed through three lenses; managed
services versus fixed line revenues, recurring revenue versus
one-off revenues and organic versus inorganic revenues.
Managed services versus fixed line revenues
In respect of managed services versus fixed line revenues,
during the year AdEPT has continued to grow its managed services
business through a combination of organic contract wins and company
acquisition. Total revenue increased by 20.3% to GBP61.7m (2019:
GBP51.3m):
-- Managed services product revenues increased more than 30%
year on year, increasing by GBP11.7m to GBP50.2m (2019: GBP38.5m).
This reflects the impact of the twelve month contribution from the
acquisition of ACS, combined with an increased level of organic
contract wins and a lower relative churn rate within the managed
service customer base. The Kent NHS contract commenced billing at
the end of the prior year and therefore the 2020 results
incorporate a full year's revenue. Total revenue generated from
managed services represented 81.4% of total revenue in the year
ended 31 March 2020 (2019: 75.0%). Excluding the impact of
acquisitions, total managed services revenue (recurring and
one-off) showed 7.2% organic growth in the year.
-- Traditional fixed line revenues were reduced to GBP11.5m
(2019: GBP12.8m). The 10.2% (net) reduction in the fixed line
revenues reflects the organic sales focus of the Group on managed
services and IT combined with the substitution impact of existing
customers transitioning to new technologies, such as SIP and hosted
services. Excluding the impact of acquisitions, fixed line revenues
showed organic decline of 13.3%. The Group's reliance on
fluctuating call revenues continues to reduce, with call revenue
providing only 5.4% of total revenue in the year ended 31 March
2020 (2019: 7.8%).
Recurring revenues versus one off revenues
In respect of recurring revenues versus one off revenues, the
proportion of AdEPT revenue being generated from recurring products
and services (being all revenue excluding one-off projects,
hardware and software) remains high at 75.0% of total revenue
(2019: 78.6%). All of the managed service product sets include an
element of hardware supply and installation services, which, by
their nature, are project based and not fixed recurring revenue
streams; however, a high proportion of hardware supply and
installations are further products and services being supplied to
the existing customer base.
-- Excluding the revenue from acquisitions, total recurring
revenue showed organic growth of 2.7% in the year ended 31 March
2020, this was achieved through 10.4% growth in managed service
recurring revenue more than offsetting the 13.3% reduction in fixed
line recurring revenue in absolute terms.
-- One-off revenues (from hardware, software and professional
services), excluding the impact of acquisitions, were virtually
flat with only a marginal reduction of 0.6% year on year.
Market sector analysis
AdEPT continued to be successful in gaining further traction in
the public sector space during the last year through leveraging its
approved status on various frameworks. AdEPT is an approved
supplier to the Crown Commercial Service under the following
frameworks RM3808 Network Services, RM3825 HSCN Access Services,
RM1557 G-Cloud, RM6103 Education Technology and RM3804 Technology
Services 2. The Group has been successful in winning further new
business through a number of these frameworks.
The proportion of total revenue generated from public sector and
healthcare customers has increased to 44.7% at March 2020 (2019:
41.5%) which partly arises due to the contribution from the ACS
acquisition as some of the acquired revenue stream is generated
from its education sector customer base but mainly from the organic
customer contract awards particularly under the various frameworks
on which AdEPT is accredited.
The Group is continuing to focus its organic sales efforts on
selling a wider portfolio to existing customers, adding and
retaining larger customers whilst complementing this with an
acquisitive strategy. AdEPT is managing the customer risk with a
wide spread of business sectors and low customer concentration,
with the top ten customers accounting for 17.1% of total revenue
(2019: 24.6%) and no customer accounting for more than 10% of the
total.
Gross margin
Gross margin percentage was 47.6% during the year (2019: 49.4%).
The decrease over the prior year largely arises due to a greater
proportion of revenue from relative lower margin one-off supply of
hardware and software.
Recurring gross margin improved to 54.1% (2019: 53.8%) which
reflects the increased proportion of managed support services.
Gross margins for managed services and IT, such as installations,
support and maintenance, are higher than fixed line as the
headcount costs of supporting the project installations, helpdesk
support and maintenance services are being included within
operating expenditure. The full year revenue impact of some
significant public sector tender contract wins, such as Kent NHS,
which are at a lower average gross margin has diluted the blended
recurring gross margin percentage.
Revenues from one-off products and services increased by 39.7%
above the prior year, however a large proportion of the growth was
in lower margin audio visual and other hardware and software
supply, particularly to the education sector, resulting in lower
growth of 14.6% gross profit from one-off products and services. As
a result, gross margin percentage from one-off products and
services was 38.1% (2019: 46.5%).
Underlying EBITDA
Underlying EBITDA is defined as operating profit after adding
back depreciation, amortisation, acquisition fees, restructuring
costs, adjustment to deferred consideration and share-based payment
charges. The Group uses underlying EBITDA as a measure of
performance in line with the telecommunications sector's general
approach to relative performance measurement. As the Group operates
a capex-light model, the Board considers that a good indication of
the underlying cash generation of the business for comparison
against operating cash flow before tax is underlying EBITDA. Below
is a reconciliation of underlying EBITDA to the reported profit
before tax:
2020 2019
GBP'000 GBP'000
------------------------------------- -------- --------
Underlying EBITDA 11,709 10,781
Acquisition fees (267) (495)
Restructuring costs (288) (105)
Share option charges (29) (68)
Adjustment to deferred consideration 654 (586)
Depreciation (1,513) (632)
Amortisation (5,772) (4,568)
Interest (2,523) (1,902)
Profit before tax 1,971 2,425
In accordance with the requirements of IFRS 3 the adjustment to
deferred consideration payable in respect of acquisitions has been
recognised in the statement of comprehensive income. In the year
ended 31 March 2020 the value of deferred consideration paid was
lower than the estimated value at acquisition, resulting in a
credit to the income statement. This value does not form part of
the trading results of the Group and has therefore been added back
for the purpose of demonstrating the underlying trading
profitability of the Group.
At the year end the Group increased the provision for
uncollectable debts under IFRS 9 by GBP0.15m. This prudent decision
was made after careful consideration of the potential impact of
financial distress from COVID-19 on the underlying customer base.
The Board considered that there was an increased likelihood of
business failures as a result of the disruption to the economic
environment from the COVID-19 lockdown, although at this stage it
is too early to determine the actual level of impact.
Depreciation
From 1 April 2019 the Group has applied the requirements of IFRS
16 Leased Assets, which results in the costs in relation to
operating leases being reclassified. The Group has chosen to apply
the cumulative effect method with an opening adjustment to equity.
The net present value of the future cash flows as set out in the
operating leases are capitalised and included within fixed asset
under the heading 'Leased Assets' with a corresponding liability
included within creditors for the future operating lease payments
which are due. The cost of the operating lease in respect of these
assets is released through the depreciation charge and the net
present value discount is charged to interest payable. This is an
accounting adjustment which is reclassifying GBP0.83m of costs
which were previously included in operating expenses and has
therefore resulted in an increase to underlying EBITDA. The cash
cost in respect of the operating leases has not changed, which is
included within the cash flow statement under the heading 'Payment
of lease liabilities'.
Finance costs
Total interest costs have increased to GBP2.52m (2019:
GBP1.90m). Cash interest increased by GBP0.45m to GBP1.87m largely
from the increase in the average level of net borrowings, which was
used to fund the acquisition consideration for ACS, combined with
the deferred consideration payable in respect of the ETS
acquisition. Treasury management of surplus cash balances to
minimise the amount of drawn funds has been used during the year to
minimise interest costs.
Included within interest costs in the income statement is a
GBP0.21m charge, which is non-cash, in relation to the discounted
cash flow impact of the contingent deferred consideration payable
in relation to the Shift F7, ETS and ACS acquisitions. A further
GBP0.19m of non-cash interest from the application of IAS 32 and
IFRS 9 has been recognised in interest costs in relation to the
discounting of the convertible loan liability. The impact of the
first-time adoption of IFRS 16 has increased interest charges by
GBP0.08m.
Profit before tax
This year reported profit before tax reduced by GBP0.46m to
GBP1.97m (2019: GBP2.43m). Operating profit increased to GBP4.49m
(2019: GBP4.33m), however this increase was absorbed by non-cash
items including; GBP1.20m increase in amortisation arising from the
full year impact of acquisitions undertaken during the current and
prior years, the adjustment to deferred consideration under IFRS 3
of GBP0.65m (profit) and GBP0.10m increase in notional interest
charge for discounting of deferred consideration. Profit before tax
is for the year is also impacted by the following cash items;
GBP0.45m increase in cash finance costs, the acquisition and
restructuring costs of GBP0.56m and GBP0.88m depreciation increase,
which is largely driven by the application of IFRS 16.
Profit after tax and earnings per share
On a like-for-like basis profit after tax reduced from GBP1.85m
to GBP1.58m during the year ended 31 March 2020. However, a change
in Government policy with regard to future corporation tax rates
gave rise to a one-off increase to the deferred tax liability of
GBP0.76m, which is a non-cash item. The impact of this reduced
reported profit after tax for the year to GBP0.99m (2019:
GBP1.85m).
The Company issued 1.33m shares in a placing at the end of
February 2020. Due to the proximity of the placing to year end,
there is only a one month dilution impact from the share placing as
the number of shares in issue is calculated on a weighted average
basis across the twelve month period.
Basic earnings per share was 4.14p (2019: 7.82p). Adjusted fully
diluted earnings per share, based on the profit for the year
attributable to equity holders adding back amortisation, share
option charges, adjustment to deferred consideration, restructuring
and acquisition costs, was 28.05p per share (2019: 29.51p).
Dividends
Based on dividend paid in the year ended 31 March 2020, being
9.8p, dividend cover was 2.87x.
Our historical policy has been to distribute roughly one-third
of free cash flow as dividends and to reinvest the remaining
two-thirds in the business. On 25 September 2019, the directors
announced their intention to declare an interim dividend of 5.10p
per ordinary share in respect of the September 2019 interim
results, an increase of 4.1% over the interim dividend for the
comparative period (September 2018: 4.90p). This interim dividend
was due to be paid in April 2020 and would have absorbed
approximately GBP1.28m of cash and shareholders' funds. However, in
early April 2020, considering the potential COVID-19 disruption,
the Board resolved to cancel the interim dividend that had been
declared with the September 2019 interim results.
The Board will continue to monitor the changing economic
environment and adopt an appropriate dividend for future periods,
with a further update alongside the September 2020 interim
results.
Cash flow
The Group benefits from an excellent cash-generating operating
model. Low capital expenditure results in a high proportion of
underlying EBITDA turning into cash. The proportion of reported
EBITDA which turned into net cash from operating activities before
income tax was 81.7% (2019: 70.5%).
Working capital was extended at year end with a GBP1.47m net
cash outflow impact in payables and receivables. Part of the
working capital absorption was anticipated with the continued
transition of the Group towards a growing proportion of data
connectivity services increasing the level of working capital, with
a further GBP0.21m absorbed by the advanced charging structure of
wholesale data connectivity rentals, which are typically quarterly
in advance compared to monthly in advance for the end customer. As
in prior periods, this is an ongoing increase to the working
capital requirement of the Group.
Reported year end trade receivables were 47 days at year end
(2019: 42 days). The increase is partly a reflection of increased
annual services billing in advance for the education sector
customer base. However, the Group also had a reduction in year-end
direct debit receipts and extended collection timescales following
the decision by many businesses to retain control of their cash
outflows during the early period of COVID-19. In addition, despite
the governments specific instruction to public sector customers at
the outset of COVID-19 to continue to pay suppliers on time for
services at year end there was GBP0.56m of valid invoices that were
beyond contracted payment terms with public sector customers. It is
evident that the purchase ledger function of public sector
organisations results in a general increase in working capital
absorption from the increased processing time of customer payments
when compared to commercial customers.
The March 2020 inventory value was increased by GBP0.05m due to
advance purchasing of equipment required for successful contract
wins and Avaya handsets for post-year-end projects.
Income taxes paid in cash during the year have increased to
GBP2.02m (2019: GBP0.81m). The 2019 comparative period included the
receipt of GBP0.51m of cash in respect of research and development
tax claims for the software and app development work and the
capital and operational costs for the development of AdEPT Nebula
plus with a tax refund in respect of the tax deduction for share
options exercised in Atomwide on acquisition. At year end HMRC
still had not processed the cash refund to the Company of GBP0.11m
in respect of corporation tax overpaid in the year ended 31 March
2019. In addition, Centrix Limited transitioned to 'very large'
status for corporation tax which accelerated GBP0.15m of cash
payment to HMRC.
Cash interest paid has increased during the year to GBP1.87m
(2019: GBP1.41m), which arises from the increase in average net
borrowings against the prior year to fund the acquisition of ACS
and the deferred consideration paid in respect of the ETS
acquisition.
Cash outflows in the year ended 31 March 2020 in relation to
acquisitions amounted to GBP6.29m (net of cash acquired). The
contingent consideration in respect of the acquisition of ETS of
GBP0.64m was paid in two instalments with the synergy payment paid
in May 2019 and the earnout paid in December 2019 with no further
amounts due in relation to this acquisition. The initial cash
consideration for the acquisition of ACS of GBP5.19m was paid in
April 2019 and GBP0.45m for the ACS synergy payment paid in January
2020. At the year end the deferred consideration of GBP1.80m in
respect of ACS remained outstanding, which was paid in May 2020
with no further amounts due.
In February 2020 the Company completed a share placing, issuing
1,328,125 ordinary shares of 10p each at a price of 320p raising
GBP4.25m gross funds. Fundraising costs of GBP0.22m in respect of
the share placing were incurred, giving net proceeds of GBP4.03m.
It was the Boards intention to use these funds to reduce senior
debt, provide acquisition funding and acceleration of the 'One
AdEPT' Project Fusion initiative. In light of the uncertain trading
conditions arising from COVID-19, the Board has prudently decided
to place on hold acquisition activity and so the fundraising
proceeds have been used to provide a small amount of investment
(circa GBP0.2m) to accelerate Project Fusion with the majority of
funds reducing the senior debt.
Dividends paid during the year ended 31 March 2020 absorbed
GBP2.32m of cash (2019: GBP2.07m). This increase over the prior
period arises from the application of the progressive dividend
policy.
There was an increase to cash and cash equivalents during the
year of GBP4.20m to year-end cash of GBP11.85m. This arises from a
net increase in the drawn element of the revolving credit facility
at March 2020 which was a prudent measure taken during the early
period of disruption from COVID-19 to ensure sufficient access to
cash facilities.
Capital expenditure
The Group continues to operate an asset-light strategy and has
low capital requirements; therefore, expenditure on fixed assets is
low at 1.8% of revenue (2019: 1.1%). The capital expenditure in the
current year arises partly from GBP0.07m for the refurbishment of
the premises in St Neots but also from AdEPT investing a further
GBP0.33m in the development of a network connecting three data
centres (which, combined with other capabilities and services, is
known as 'AdEPT Nebula'). AdEPT Nebula is built around the core
data centre in Orpington, which is owned by AdEPT. The network
allows AdEPT to provide its own cloud hosting capability.
AdEPT Nebula is live and already delivering benefits to more
than 250 customers by providing Avaya IP cloud telephony services,
hosted IT services and a range of data connectivity services. The
network underpinning AdEPT Nebula has been developed using the
in-house skills and capabilities of the AdEPT technical team. The
Company will continue to review development opportunities for the
addition of new products and services to AdEPT Nebula as customer
demand dictates.
Over the last twelve months the AdEPT team has been working hard
on the 'One AdEPT' project, christened 'Project Fusion', including
initiatives in relation to sales, marketing, systems, finance and
branding. Total investment of GBP0.34m has been made over the last
twelve months, which includes the cost of third-party consultancy
and some capitalisation of the internal development teams time
spent dedicated to the project. This project includes the release
of the new look Group-wide AdEPT website (www.adept.co.uk) which is
live and already generating opportunities. The progress on the roll
out of a Group-wide CRM system is underway with the system live in
five of the eight Group operating sites, with the remaining sites
expected to go live before the end of the 2020 calendar year, which
is anticipated to enable the Group to leverage greater operating
efficiency from its highly skilled team. In addition, the Group is
transitioning to a centralised finance platform which is hosted in
the AdEPT Nebula network, with three business units already live
and the remaining business units expected to transition before the
end of 2020.
Payments of lease liabilities
As required under IFRS 16, the balance sheet value of tangible
fixed assets includes the discounted value of the remaining
operating lease rentals for any material agreements which have a
lease term greater than twelve months. The net present value of any
new operating leases is included in tangible fixed assets. These
are not upfront cash purchases as the rentals are paid on a monthly
or quarterly basis and therefore the cost is not included within
capital expenditure, instead the cash outflows from the operating
lease agreements are included in the cash flow statement under the
heading 'Payments of lease liabilities'.
Business combinations
On 26 April 2019 the Company acquired the entire issued share
capital of ACS. ACS, founded in 1999, is a well-established
UK-based specialist provider of IT services focused on the
education sector based in Doncaster with 20 years' experience. ACS
Group is focused on providing IT services and has a strong public
sector presence, including managing and supporting the IT function
of approximately 200 schools and academy trusts. All services
provided by ACS Group are supported by a highly experienced team of
IT professionals based at ACS Group's premises in Doncaster, which
have been retained post-acquisition. The vendors and the senior
management team responsible for the strategic direction, technical
development and the day-to-day operations of ACS Group have been
retained within the business post-acquisition. Initial
consideration of GBP5.19m was paid in cash at completion. Further
contingent deferred consideration of between GBPNil and GBP2.26m is
payable, also in cash, dependent upon the performance of ACS Group
post-acquisition. The earnout period for ACS ended on 31 March 2020
and the deferred consideration was paid in May 2020 with no further
amounts due. Total consideration is GBP7.50m (including acquired
debts and tax liabilities).
A fair value of GBP7.27m in relation to the customer contracts
for the acquired business has been recognised as intangible asset
additions in the year ended 31 March 2020.
Further details on the acquisition during the year are described
in Note 21.
Net debt and bank facilities
A key strength of AdEPT is its consistent, proven ability to
generate strong free cash flow and therefore support net
borrowings. As a result of the Group's focus on underlying
profitability and cash conversion, net operating cash flow after
taxes but before bank interest paid of GBP7.63m was generated
during the year ended 31 March 2020 (2019: GBP6.72m). The current
period includes GBP0.56m of costs in relation to acquisition fees
and restructuring costs.
in April 2019, the Company signed a further extension of its
existing bank facility to GBP40m. The enlarged facility is provided
by Barclays Bank plc and The Royal Bank of Scotland plc on an equal
basis. The facility has been provided to AdEPT to fund acquisition
of businesses that extend the AdEPT product set and, by being part
of the AdEPT Group, will benefit from economies of scale. This
facility extension was used to fund the acquisition of ACS in April
2019. The commercial terms of the enlarged facility are the same as
the previous existing facility.
Opening cash plus the free cash flow generated in the year and
borrowing drawdowns from the senior debt facility have been used to
fund GBP6.29m acquisition consideration, GBP2.33m dividends paid
and GBP1.12m of capital expenditure on tangible and intangible
assets. Net senior debt, which comprises cash balances and senior
bank borrowings (excluding IFRS 16 liabilities), has increased to
GBP27.94m at the year-end (2019: GBP27.11m) as a result of the
acquisition consideration outflows.
Segmental key performance indicators (KPIs)
The segmental KPIs outlined below are intended to provide useful
information when interpreting the accounts. 81% of revenue and
EBITDA is generated from Managed Services (2019: 75% revenue and
74% EBITDA).
Fixed
line Managed
services services Total
GBP'000 GBP'000 GBP'000
-------------------------- --------- --------- --------
Year ended 31 March 2020
Revenue 11,463 50,225 61,688
Gross profit 4,541 24,850 29,391
Gross margin % 39.6% 49.5% 47.6%
Underlying EBITDA 2,277 9,432 11,709
Underlying EBITDA% 19.9% 18.8% 19.0%
Year ended 31 March 2019
Revenue 12,814 38,480 51,294
Gross profit 5,279 20,049 25,329
Gross margin % 41.2% 52.1% 49.4%
Underlying EBITDA 2,784 7,997 10,781
Underlying EBITDA% 21.7% 20.8% 21.0%
There are no non-financial KPIs which are reviewed regularly by
the senior management team.
Section 172 requirements of the Companies Act
The section 172 requirements of the Companies Act in respect of
the directors' duty to promote the success of the Company is
covered in the Corporate Governance Statement included in these
accounts.
Principal risks and uncertainties
There are a number of potential risks and uncertainties which
could have a material impact on the Group's long-term performance
and could cause actual results to differ materially from expected
results.
Customer loss risk
The impact of this is partially mitigated with no customer
accounting for more than 10% of the Group revenue. The top ten
customers account for approximately 24.6% of revenues. The customer
base of the Company is also spread across a wide geographical area
and across a wide range of business sectors. We continue to monitor
customer churn, develop our customer offering and service delivery.
We acknowledge that some of our customers may come under increased
financial pressure as a result of COVID-19 disruption. To manage
this risk, we maintain regular contact with our customers to
identify and respond to any risks as early as possible.
Catastrophic event risk
All employees are able to work remotely, and the Group's
operational and administrative servers are located and managed such
that damage from an outage is minimised. A business continuity plan
is in place which is reviewed regularly and enhanced from the
results of testing. The Group is increasingly moving to cloud based
systems, which are more readily available for a timely response to
a catastrophic event. A testimony of the Group's ability to deal
with a catastrophic event is the response to the COVID-19 pandemic
which saw virtually all of the Group's workforce transition to
remote working in the space of a couple of days.
Credit risk
The Group extends credit of various durations to customers
depending on customer credit worthiness and industry custom and
practice for the product or service. In the event that a customer
proves unable to meet payments when they fall due, the Group will
suffer adverse consequences. To manage this, the Group continually
monitors credit terms to ensure that no single customer is granted
credit inappropriate to its credit risk. Additionally, a large
proportion of our customer receipts are collected by monthly direct
debit. The risk is further reduced by the customer base being
spread across a wide variety of industry and service sectors.
Liquidity risk
The Group seeks to manage financial risk by ensuring sufficient
liquidity is available to meet foreseeable needs and to invest cash
assets safely and profitably. External funding facilities are
managed to ensure that both short-term and longer-term funding is
available to provide short-term flexibility whilst providing
sufficient funding to the Group's forecast working capital
requirements.
Competitor risk
The Group operates in a highly competitive market with rapidly
changing product and pricing innovations. We are subject to the
threat of our competitors launching new products in our markets
(including updating product lines) before we make corresponding
updates and developments to our own product range. This could
render our products and services out of date and could result in
loss of market share. To reduce this risk, we undertake new product
development and maintain strong supplier relationships to ensure
that we have products at various stages of the life cycle.
Competitor risk also manifests itself in price pressures which
are usually experienced in more mature markets. This results not
only in downward pressure on our gross margins but also in the risk
that our products are not considered to represent value for money.
The Group therefore monitors market prices on an ongoing basis.
Cyber-attack on Company, customer or supplier systems
The Group has extensive experience in cyber security and
continues to invest of training, systems and tools to protect the
Company and its customers. Customer networks are securely
segregated from those of the Company and systems are
replicated/backed up in more than one location. AdEPT holds several
security accreditations including ISO27001, Cyber Essentials and
PCI DSS. The Company's security systems and processes are subject
to extensive third-party external auditing. In addition, the
Company has in place a cyber insurance protection.
Acquisition integration execution
The Group has set out that its strategy includes the acquisition
of businesses where they are earnings enhancing. The Board
acknowledges that there is a risk of operational disturbance in the
course of integrating the acquired businesses with existing
operations. The Group mitigates this risk by careful planning and
rigorous due diligence.
John Swaite
Finance director
Consolidated statement of comprehensive income
For the year ended 31 March 2020
Restated
2020 2019
Note GBP'000 GBP'000
----------------------------------------- ---- -------- --------
Revenue 4 61,688 51,294
Cost of sales (32,297) (25,966)
----------------------------------------- ---- -------- --------
Gross profit 29,391 25,328
Administrative expenses (24,897) (21,002)
----------------------------------------- ---- -------- --------
Operating profit 4,494 4,326
----------------------------------------- ---- -------- --------
Total operating profit - analysed:
Underlying EBITDA 11,709 10,781
Share-based payments (29) (68)
Depreciation of tangible fixed assets (1,513) (633)
Amortisation of intangible fixed assets (5,772) (4,568)
Adjustment to deferred consideration 654 (586)
Acquisition fees (267) (495)
Restructuring costs (288) (105)
Total operating profit 4,494 4,326
---- --------
Finance costs 6 (2,523) (1,901)
----------------------------------------- ---- -------- --------
Profit before income tax 1,971 2,425
Income tax expense 7 (986) (571)
----------------------------------------- ---- -------- --------
Profit for the year 985 1,854
Other comprehensive income - -
----------------------------------------- ---- -------- --------
Total comprehensive income 985 1,854
----------------------------------------- ---- -------- --------
Restated
Note 2020 2019
-------------------- ---- ----- --------
Earnings per share
Basic earnings 19 4.14p 7.82p
Diluted earnings 19 4.12p 7.77p
-------------------- ---- ----- --------
All amounts relate to continuing operations.
Consolidated statement of financial position
As at 31 March 2020
Restated
31 March 31 March
2020 2019
Note GBP'000 GBP'000
-------------------------------------- ---- -------- ---------
Assets
Non-current assets
Goodwill 9 17,408 16,024
Intangible assets 10 41,952 39,999
Property, plant and equipment 11 2,700 1,472
Deferred tax asset 12 - 43
-------------------------------------- ---- -------- ---------
62,060 57,538
-------------------------------------- ---- -------- ---------
Current assets
Inventories 13 612 543
Contract assets 4 1,379 953
Trade and other receivables 14 14,695 10,349
Cash and cash equivalents 11,849 7,650
-------------------------------------- ---- -------- ---------
28,535 19,495
-------------------------------------- ---- -------- ---------
Total assets 90,595 77,033
-------------------------------------- ---- -------- ---------
Current liabilities
Trade and other payables 15 14,979 11,149
Contract liabilities 4 2,502 1,976
Income tax 156 831
Short-term borrowings 54 33
-------------------------------------- ---- -------- ---------
17,691 13,989
-------------------------------------- ---- -------- ---------
Non-current liabilities
Deferred tax 12 7,738 6,405
Convertible loan instrument 16 6,340 6,174
Long-term borrowings 16 40,444 34,730
-------------------------------------- ---- -------- ---------
Total liabilities 72,213 61,298
-------------------------------------- ---- -------- ---------
Net assets 18,382 15,735
-------------------------------------- ---- -------- ---------
Equity attributable to equity holders
Share capital 18 2,503 2,370
Share premium 4,378 479
Share option reserve 1,108 1,079
Capital redemption reserve 18 18
Retained earnings 10,375 11,789
-------------------------------------- ---- -------- ---------
Total equity 18,382 15,735
-------------------------------------- ---- -------- ---------
Consolidated statement of changes in equity
For the year ended 31 March 2020
Attributable to equity holders
------------------------------- ------------------------------------------------------------------
Share Capital
Share Share option redemption Retained Total
capital premium reserve reserve earnings equity
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------- --------- --------- -------- ----------- ---------- ---------
Equity at 1 April 2018 2,370 479 1,012 18 12,067 15,946
------------------------------- --------- --------- -------- ----------- ---------- ---------
Prior year adjustment (Note
1) - - - - (70) (70)
Adjusted equity at 1 April
2018 2,370 479 1,012 18 11,997 15,876
------------------------------- --------- --------- -------- ----------- ---------- ---------
Profit for the year - - - - 1,853 1,853
Other comprehensive income - - - - - -
------------------------------- --------- --------- -------- ----------- ---------- ---------
Total comprehensive income - - - - 1,853 1,853
Deferred tax asset adjustment - - - - 12 12
Dividends - - - - (2,073) (2,073)
Share-based payments - - 67 - - 67
Equity at 1 April 2019 2,370 479 1,079 18 11,789 15,735
------------------------------- --------- --------- -------- ----------- ---------- ---------
Impact of change in accounting
policy (Note 2) - - - - (36) (36)
------------------------------- --------- --------- -------- ----------- ---------- ---------
Adjusted equity at 1 April
2019 2,370 479 1,079 18 11,753 15,699
------------------------------- --------- --------- -------- ----------- ---------- ---------
Profit for the year - - - - 986 986
Other comprehensive income - - - - - -
------------------------------- --------- --------- -------- ----------- ---------- ---------
Total comprehensive income - - - - 986 986
Deferred tax on share options - - - - (41) (41)
Dividends - - - - (2,323) (2,323)
Share-based payments - - 29 - - 29
Issue of new equity 133 3,899 - - - 4,032
------------------------------- --------- --------- -------- ----------- ---------- ---------
Equity at 31 March 2020 2,503 4,378 1,108 18 10,375 18,382
------------------------------- --------- --------- -------- ----------- ---------- ---------
The Group adopted IFRS 16 in the year ended 31 March 2020 and
chose to apply the cumulative effect method with an opening
adjustment to equity
Consolidated statement of cash flows
For the year ended 31 March 2020
2020 2019
GBP'000 GBP'000
--------------------------------------------------------- -------- --------
Cash flows from operating activities
Profit before income tax 1,971 2,438
Depreciation and amortisation 7,285 5,201
Adjustment to deferred consideration (653) 586
Profit on sale of fixed assets (17) -
Share-based payments 29 68
Net finance costs 2,523 1,902
--------------------------------------------------------- -------- --------
Operating cash flows before movements in working capital 11,138 10,195
Decrease/(increase) in inventories (45) (171)
Decrease/(increase) in trade and other receivables (4,072) (3,609)
(Decrease)/increase in trade and other payables 2,604 1,118
--------------------------------------------------------- -------- --------
Cash generated from operations 9,625 7,533
Income taxes paid (2,018) (809)
--------------------------------------------------------- -------- --------
Net cash from operating activities 7,607 6,724
--------------------------------------------------------- -------- --------
Cash flows from investing activities
Interest paid (1,861) (1,414)
Acquisition of subsidiaries net of cash acquired (6,285) (11,034)
Purchase of intangible assets (419) (63)
Purchase of property, plant and equipment (706) (564)
--------------------------------------------------------- -------- --------
Net cash used in investing activities (9,271) (13,075)
--------------------------------------------------------- -------- --------
Cash flows from financing activities
Dividends paid (2,323) (2,074)
Increase in bank loan 5,000 10,000
Repayment of borrowings (9) (1,052)
Payments of lease liabilities (837) -
Issue of new equity 4,032 -
--------------------------------------------------------- -------- --------
Net cash from financing activities 5,863 6,874
--------------------------------------------------------- -------- --------
Net (decrease)/increase in cash and cash equivalents 4,199 523
Cash and cash equivalents at beginning of year 7,650 7,127
--------------------------------------------------------- -------- --------
Cash and cash equivalents at end of year 11,849 7,650
--------------------------------------------------------- -------- --------
Cash and cash equivalents
Cash at bank and in hand 11,849 7,650
Cash and cash equivalents 11,849 7,650
--------------------------------------------------------- -------- --------
Note to the Preliminary Results announcement of Adept Technology
Group Plc for the year ended 31 March 2020
The financial information set out below does not constitute the
Group's financial statements for the years ended 31 March 2020 or
2019, but is derived from those financial statements. Statutory
financial statements for 2019 have been delivered to the Registrar
of Companies and those for 2020 will be delivered following the
Group's annual general meeting. The auditors have reported on the
2019 financial statements which carried an unqualified audit
report, did not include a reference to any matters to which the
auditor drew attention by way of emphasis and did not contain a
statement under section 498(2) or 498(3) of the Companies Act 2006.
The audit report on the 2020 financial statements is not yet
signed, however an unqualified opinion is expected.
Whilst the financial information included in this preliminary
announcement has been computed in accordance with International
Financial Reporting Standards (IFRS), this announcement does not in
itself contain sufficient information to comply with IFRS. The
accounting policies used in preparation of this preliminary
announcement are consistent with those in the full financial
statements that have yet to be published.
Availability of Financial Statements
The annual report containing the full financial statements for
the year to 31 March 2019 is expected to be posted to shareholders
in August 2020, a soft copy of which will be available to download
from the Company's website www.adept.co.uk.
1. Accounting policies
Basis of preparation of financial statements
The financial statements have been prepared in accordance with
applicable IFRSs as adopted by the EU.
Accounting standards require the directors to consider the
appropriateness of the going concern basis when preparing the
financial statements. The directors confirm that they consider that
the going concern basis remains appropriate. The Group's available
banking facilities are described in Note 20. The Group has adequate
financing arrangements which can be utilised by the Group as
required. Thus, they continue to adopt the going concern basis of
accounting in preparing the annual financial statements.
At the date of authorisation of these financial statements, the
directors have considered the standards and interpretations which
have not been applied in these financial statements that were in
issue but not yet effective (and in some cases had not yet been
adopted by the EU) and none were considered to be materially
relevant.
Adoption of the other standards and interpretations is not
expected to have a material impact on the results of the Group.
Application of these standards may result in some changes in the
presentation of information within the Group's financial
statements.
The financial statements are presented in sterling, which is the
Group's functional and presentation currency. The figures shown in
the financial statements are rounded to the nearest thousand
pounds.
Prior year adjustment
The Group's policy in respect of revenue recognition requires
that revenue is only recognised when the obligations associated
with the revenue have been completed, therefore invoiced amounts in
respect of charges in advance are recognised in the deferred
revenue liability in the balance sheet. A prior year adjustment has
been recognised in respect of deferred income which was incorrectly
reported at the March 2018 and 2019 year ends. In accordance with
IAS 8 the opening balance sheet position at 1 April 2018 has been
restated to account correctly for the deferred income balance at
that date resulting in the recognition of an additional liability
of GBP70,172 at 1 April 2018. The movement on the deferred income
liability has been adjusted for the year ended 31 March 2019
resulting in a decrease to revenue of GBP13,974.
2. Changes in accounting policy
Except for the changes below, the Group has consistently applied
the accounting policies in these consolidated financial
statements.
The details and quantitative impact of the changes in accounting
policies are disclosed below:
IFRS 16 'Leased assets'
The Group has applied IFRS 16 with a date of initial application
of 1 April 2019 using the modified retrospective approach and
therefore the comparative information has not been restated and
continues to be reported under IAS 17 and IFRIC 4. The cumulative
effect of initial application is recognised in retained earnings at
1 April 2019. The details of the change in accounting policy are
disclosed below.
Previously, the Group determined at contract inception whether
and arrangement is or contains a lease under IFRIC 4. Under IFRS
16, the Group assesses whether a contract is or contains a lease
based on the definition of a lease.
On transition to IFRS 16, the Group elected to reassess whether
there is a lease for all contracts in place on or after 1 April
2019. Contracts that were not identified as leases under IAS 17 and
IFRIC 4 were reassessed for whether there is a lease. Therefore,
the definition of a lease under IFRS 16 was applied to contracts in
place or entered into on or after 1 April 2019.
As lessee, the Group previously classified leases as operating
or finance leases based on its assessment of whether the lease
transferred significantly all of the risks and remains incidental
to ownership of the underlying asset to the Group. Under IFRS 16,
the Group recognises rights-of-use assets and liabilities for most
leases - i.e. these leases are included on the balance sheet.
The policy applies to leased properties, motor vehicles and
certain data connectivity agreements where the underlying services
are being used by the Group. The Group decided to apply recognition
exemptions to short-term leases of equipment and services.
At transition, lease liabilities were measured at the present
value of the remaining lease payments, discounted at a cost of
capital of 5.0%, being an approximation of the Group's finance rate
on finance leases prior to the application of IFRS 16.
Rights-of-use assets are measured at their carrying amount as if
IFRS 16 had been applied since the commencement date, discounted at
a cost of capital of 5.0%.
At inception of a contract, the Group assesses whether a
contract is, or contains, a lease. A contract is, or contains, a
lease if the contract conveys the right to control the use of an
identified asset for a period of time in exchange for
consideration. To assess whether a contract conveys the right to
control the use of an identified asset, the Group assesses
whether:
-- The contract involves the use of an identified assets - this
may be specified explicitly or implicitly, and should be physically
distinct or represent substantially all of the capacity of a
physically distinct asset;
-- The Group has the right to obtain substantially all of the
economic benefits from use of the assets throughout the period of
use; and
-- The Group has the right to direct the use of the asset. The
Group has this right when it has the decision-making rights that
are most relevant to changing how and for what purpose the asset is
used. In rare cases where the decision about how and for what
purpose the asset is used is predetermined, the Group has the right
to direct the use of the asset if the Group has the right to
operate the asset.
On transition to IFRS 16, the Group recognised the cumulative
effect of initially applying IFRS 16 with an additional
GBP1,824,820 of right-of-use assets and GBP1,872,092 of lease
liabilities, recognising the difference of GBP47,272 as an opening
adjustment to equity at 1 April 2019.
The following table summarises the impact of adopting IFRS 16 on
the Group's financial statements for the year ended 31 March
2020:
Balances
without
Adjustments adoption
of IFRS
GBP'000 As reported 16
-------------------------------------- ----------- ------------- ---------
Non-current assets
Goodwill 17,408 17,408
Intangibles 41,952 - 41,952
Property, plant and equipment 2,700 1,263 1,437
Total non-current assets 62,060 1,263 60,797
-------------------------------------- ----------- ------------- ---------
Current assets 28,535 - 28,535
-------------------------------------- ----------- ------------- ---------
Total assets 90,595 1,263 89,332
Current liabilities
Trade and other payables 17,481 1,315 16,166
Income tax 156 - 156
Short term borrowings 54 - 54
-------------------------------------- ----------- ------------- ---------
17,691 1,315 16,376
Long term liabilities 54,522 - 54,522
-------------------------------------- ----------- ------------- ---------
Total liabilities 72,213 1,315 70,898
-------------------------------------- ----------- ------------- ---------
Net assets 18,382 (52) 18,434
-------------------------------------- ----------- ------------- ---------
Equity attributable to equity holders
Share capital 2,503 - 2,503
Share premium 4,378 - 4,378
Capital redemption reserve 18 - 18
Share capital to be issued 1,108 - 1,108
Retained earnings 10,375 (52) 10,427
-------------------------------------- ----------- ------------- ---------
Total equity 18,382 (52) 18,434
-------------------------------------- ----------- ------------- ---------
The net impact on profit before tax of applying IFRS 16 in the
year ended 31 March 2020 was (GBP5,130), resulting in a net
adjustment to retained earnings at 31 March 2020 of (GBP52,402).
The impact of the adoption of IFRS 16 on basic and adjusted
earnings per share is not material.
3. Segmental information
IFRS 8 'Operating Segments' requires identification on the basis
of internal reporting about components of the Group that are
regularly reviewed by the chief operating decision maker to
allocate resources to the segments and to assess their
performance.
The chief operating decision maker has been identified as the
Board. The Board reviews the Group's internal reporting in order to
assess performance and allocate resources. The operating segments
are fixed line services (being calls and line rental services) and
managed services (which are data connectivity, hardware, IP
telephony, support and maintenance services), which are reported in
a manner consistent with the internal reporting to the Board. The
Board assesses the performance of the operating segments based on
revenue, gross profit and underlying EBITDA.
Year ended 31 March 2020 Year ended 31 March 2019
------------------------ --------------------------------------- ---------------------------------------
Fixed Fixed
line Managed Central line Managed Central
GBP'000 services services costs Total services services costs Total
------------------------ --------- --------- ------- -------- --------- --------- ------- --------
Revenue 11,463 50,225 - 61,688 12,814 38,480 - 51,294
Gross profit 4,541 24,850 - 29,391 5,279 20,049 - 25,328
Gross margin % 39.6% 49.5% - 47.6% 41.2% 52.1% - 49.4%
------------------------ --------- --------- ------- -------- --------- --------- ------- --------
Administrative expenses (2,264) (15,418) - (17,682) (2,495) (12,052) - (14,547)
------------------------ --------- --------- ------- -------- --------- --------- ------- --------
Underlying EBITDA 2,277 9,432 - 11,709 2,784 7,997 - 10,781
Underlying EBITDA % 19.9% 18.8% - 19.0% 21.7% 20.8% - 21.0%
------------------------ --------- --------- ------- -------- --------- --------- ------- --------
Amortisation (1,573) (4,199) - (5,772) (1,509) (3,059) - (4,568)
Depreciation - - (1,513) (1,513) - - (633) (633)
Adjustment to deferred
consideration - - 654 654 - - (586) (586)
Acquisition costs - - (267) (267) - - (495) (495)
Restructuring costs - - (288) (288) - - (105) (105)
Share-based payments - - (29) (29) - - (68) (68)
------------------------ --------- --------- ------- -------- --------- --------- ------- --------
Operating profit/(loss) 704 5,233 (1,443) 4,494 1,275 4,938 (1,887) 4,326
------------------------ --------- --------- ------- -------- --------- --------- ------- --------
Finance costs - - (2,523) (2,523) - - (1,902) (1,902)
Income tax - - (986) (986) - - (571) (571)
------------------------ --------- --------- ------- -------- --------- --------- ------- --------
Profit/(loss) after tax 704 5,233 (4,952) 985 1,275 4,938 (4,360) 1,853
------------------------ --------- --------- ------- -------- --------- --------- ------- --------
The assets and liabilities relating to the above segments have
not been disclosed as they are not separately identifiable and are
not used by the chief operating decision maker to allocate
resources. All segments are in the UK and all revenue relates to
the UK.
Transactions with the largest customer of the Group are less
than 10% of total turnover and do not require disclosure for either
2019 or 2020.
4. Revenue
In the following table, revenue is disaggregated by major
product/service lines and timing of revenue recognition. All
revenue is derived from the UK.
2020 2019
GBP'000 GBP'000
-------------------------------------------- -------- --------
Sale of goods 15,555 10,969
Provision of services:
- calls and line rental 11,876 12,814
- data networks 13,976 11,901
- support services 16,293 11,967
- other services 3,988 3,643
-------------------------------------------- -------- --------
61,688 51,294
-------------------------------------------- -------- --------
Timing of revenue recognition
Products transferred at a point in time 15,555 10,969
Products and services transferred over time 46,133 40,325
-------------------------------------------- -------- --------
61,688 51,294
-------------------------------------------- -------- --------
The following table provides information about receivables,
contract assets and contract liabilities with customers:
2020 2019
GBP'000 GBP'000
----------------------------------------------------------------- -------- --------
Receivables, which are included in 'Trade and other receivables' 9,984 7,018
Contract assets 1,379 953
Contract liabilities (2,502) (1,976)
----------------------------------------------------------------- -------- --------
Contract assets relate to the deferred direct costs in respect
of data circuit installations which have been completed and are
being recognised across the customer's contractual term to which
the installation relates. The contract liabilities relate to the
deferred revenue in respect of data installations which have been
completed and the revenue is being recognised across the term of
the customer contract.
Significant changes in the contract assets and contract
liabilities balances during the period are as follows:
2020 2019
GBP'000 GBP'000
----------------------------------------------- -------- --------
Revenue deferred into future periods (2,502) (1,976)
Deferred revenue recognised in the period 2,201 1,582
Direct costs deferred into future periods 1,379 953
Deferred direct costs recognised in the period 724 921
----------------------------------------------- -------- --------
The performance obligations of the underlying contracts to which
the contract assets relate are expected to be met over periods of
up to five years. However, the performance obligations for all
revenues and costs that have been deferred into future periods have
been satisfied at the year end, as these relate to the installation
and equipment of data networks which have been completed and the
service is being used by the customer.
There are no impairment losses in relation to the contract
assets recognised under IFRS 15.
5. Operating profit
The operating profit is stated after charging/(crediting):
2020 2019
GBP'000 GBP'000
---------------------------------------------------------- -------- --------
Amortisation of customer base, billing system and licence 5,772 4,568
Depreciation of tangible fixed assets:
- owned by the Group 711 633
- right to use assets 801 -
Share option expense/(credit) 29 68
Minimum operating lease payments:
- land and buildings - 556
- motor vehicles and other equipment - 70
Acquisition costs 267 495
Restructuring costs 289 105
---------------------------------------------------------- -------- --------
Acquisition costs relate to the legal and professional fees
incurred as a direct result of acquisitions completed during the
year. Restructuring costs relate to the acquisition operating costs
(from the date of acquisition) which have been either terminated or
notice to terminate has been served and therefore these items will
not form part of the future operating costs of the Group.
6. Finance costs
2020 2019
GBP'000 GBP'000
----------------------------------------- -------- --------
On bank loans and overdrafts 1,870 1,514
Bank fees 357 306
IFRS 16 lease liability interest 81 -
Finance cost on contingent consideration 215 82
----------------------------------------- -------- --------
2,523 1,902
----------------------------------------- -------- --------
The finance costs on contingent consideration arise from the
release of the discounted contingent consideration liability evenly
across the term of the deferred consideration period in relation to
each acquisition. This is a non-cash item.
7. Income tax expense
2020 2019
GBP'000 GBP'000
---------------------------------------------------- -------- --------
Current tax
UK corporation tax on profit for the year 1,129 1,372
Adjustments in respect of prior periods (91) (60)
---------------------------------------------------- -------- --------
Total current tax 1,038 1,312
---------------------------------------------------- -------- --------
Deferred tax
Origination and reversal of temporary differences:
- fixed assets and short-term temporary differences 67 (53)
- share options 14 (4)
- intangibles on business combinations (968) (668)
Effect of tax rate change on opening balance 763 (28)
Adjustments in respect of prior periods 72 12
---------------------------------------------------- -------- --------
Total deferred tax (see Note 12) (52) (741)
---------------------------------------------------- -------- --------
Total income tax expense 986 571
---------------------------------------------------- -------- --------
Factors affecting tax charge for the year
The relationship between expected tax expense based on the
effective tax rate of AdEPT at 19% (2019: 19%) and the tax expense
actually recognised in the income statement can be reconciled as
follows:
2020 2019
GBP'000 GBP'000
------------------------------------------------------------------ -------- --------
Profit before income tax 1,971 2,438
Tax rate 19% 19%
Expected tax charge 374 463
Expenses not deductible for tax purposes (40) 241
Adjustments to tax charge in respect of prior periods (19) (48)
Depreciation/amortisation on non-qualifying assets 12 8
Difference due to deferred tax rate being lower than the standard
tax rate - 58
Movement on share option deferred tax assets taken to equity 20 -
R&D enhanced tax deduction (45) (137)
RDEC credit taxed (30) (16)
Effect of tax rate change on deferred tax opening balance 763 -
Other (49) 2
------------------------------------------------------------------ -------- --------
Actual tax expense net 986 571
------------------------------------------------------------------ -------- --------
8. Dividends
On 8 April 2019 the Company paid dividends of GBP1,161,390 in
relation to the interim dividend declared in September 2018. On 10
October 2019 the Company paid dividends of GBP1,161,390 in relation
to the final dividend declared in March 2019. Total dividends paid
in the year ended 31 March 2020 absorbed GBP2,322,780 of cash
(2019: GBP2,073,910).
9. Goodwill
Total
GBP'000
------------------ --------
Cost
At 1 April 2018 16,614
Additions 1,494
------------------ --------
At 1 April 2019 18,108
Additions 1,384
------------------ --------
At 31 March 2020 19,492
------------------ --------
Impairment
At 1 April 2018 2,084
Impairment charge -
------------------ --------
At 1 April 2019 2,084
Impairment charge -
------------------ --------
At 31 March 2020 2,084
------------------ --------
Net book value
At 31 March 2020 17,408
------------------ --------
At 31 March 2019 16,024
------------------ --------
We perform an annual goodwill impairment review and we tested
our goodwill for impairment as at 31 March 2020.
Goodwill is recognised when a business combination does not
generate cash flows independently of other assets or groups of
assets. As a result, the recoverable amount, being the value in
use, is determined at a cash-generating unit (CGU) level. These
CGUs represent the smallest identifiable group of assets that
generate cash flows. Our CGUs are deemed to be the assets within
the operating units. Each CGU to which goodwill is allocated
represents the lowest level within the Group at which the goodwill
is monitored for internal management purposes.
The total intangible value in use for each CGU, incorporating
goodwill and the intangible asset value, is determined using
discounted cash flow projections derived from the total historical
revenue profile of each identifiable CGU. The assumptions which are
applied to each CGU in respect of churn rate, discount rate, margin
and useful economic life are set out in Note 10.
The goodwill is split by CGU as follows:
March March
2020 2019
GBP'000 GBP'000
------------------------------------- -------- --------
Centrix Limited 3,614 3,614
Comms Group UK Limited 2,672 2,672
CAT Communications Limited 248 248
Our IT Department Limited 4,683 4,683
Atomwide Limited 3,313 3,313
Shift F7 Limited 879 879
ETS Communications Limited 615 615
Advanced Computer Systems UK Limited 1,384 -
------------------------------------- -------- --------
The net present value of the future cash flows for the CGUs is
sensitive to the weighted average cost of capital. The rate used to
discount the future cash flows is the Group's pre-tax weighted
average cost of capital of 8.50%. An increase in the Group's
weighted average cost of capital to above 11.3% would materially
impair the carrying value of the Group's goodwill by more than
GBP400,000. Further details of the sensitivity of the variables
used in the impairment testing are included in Note 10.
10. Intangible fixed assets
Computer Customer Software
Licence software base apps Website Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------- -------- --------- -------- -------- -------- --------
Cost
At 1 April 2018 41 1,339 55,562 3,535 1,744 62,221
Additions 56 6 5,873 - 1 5,936
Acquired with subsidiary 57 - 2,908 - - 2,965
------------------------- -------- --------- -------- -------- -------- --------
At 1 April 2019 154 1,345 64,3443 3,535 1,745 71,122
Additions 108 343 7,292 - - 7,743
At 31 March 2020 262 1,688 71,616 3,535 1,745 78,846
------------------------- -------- --------- -------- -------- -------- --------
Amortisation
At 1 April 2018 28 1,283 24,759 236 249 26,555
Charge for the year 29 37 3,778 350 374 4,568
At 1 April 2019 57 1,320 28,537 586 623 31,123
Charge for the year 63 22 4,961 350 375 5,771
At 31 March 2020 120 1,342 33,498 936 998 36,894
------------------------- -------- --------- -------- -------- -------- --------
Net book value
At 31 March 2020 142 346 38,118 2,599 747 41,952
------------------------- -------- --------- -------- -------- -------- --------
At 31 March 2019 97 25 35,806 2,949 1,122 39,999
------------------------- -------- --------- -------- -------- -------- --------
Included within the Group's intangible assets is:
March March
2020 2019
Useful life GBP'000 GBP'000
---------------------------------------------------------- ------------ -------- --------
Centrix Limited 17 years 6,575 7,119
Comms Group UK Limited 17 years 3,544 3,952
Our IT Department Limited 17 years 2,232 2,610
CAT Communications Limited 10 years 845 1,008
Atomwide Limited - customer base 16 years 5,308 6,024
Atomwide Limited - software/apps 5 years 2,599 2,949
Shift F7 Limited 10 years 4,304 4,813
ETS Communications Limited 10 years 3,110 3,472
Advanced Computer Systems UK Limited 10 years 6,563 -
Other customer bases - AdEPT Technology Group plc trading
business 10-16 years 6,356 7,930
---------------------------------------------------------- ------------ -------- --------
Critical accounting estimates and key judgements made in
reviewing intangible assets and goodwill for impairment
The key assumptions concerning the future and other key sources
of estimation and uncertainty at the reporting date, which have a
significant risk of causing a material adjustment to the carrying
amounts of intangible assets and goodwill, are discussed below.
Measuring the fair value of intangible assets on acquisition
The main estimates used to measure the fair value of the
intangible assets on acquisition are:
-- churn rate;
-- discount rate; and
-- gross margins.
Intangible assets are reviewed annually or more frequently if
events or changes in circumstances indicate that the carrying value
may be impaired. The net present value of cash flows for each
cash-generating unit is reviewed against the carrying value at the
balance sheet date. At the final reporting date of 31 March 2020
the net present value of future cash flows of certain
cash-generating units was above the carrying value and an
impairment charge of GBPNil (2019: GBPNil) has been recorded.
We tested our intangible assets and goodwill for impairment as
at 31 March 2020. The carrying value of the intangible assets and
the key assumptions used in performing the annual impairment
assessment and sensitives are disclosed below:
Book value
of Estimated
cash-generating value in
unit use
GBP'000 GBP'000
------------------------------------- ---------------- ---------
Centrix Limited 6,575 19,879
Comms Group UK Limited 3,575 6,882
Our IT Department Limited 2,232 5,447
CAT Communications Limited 861 3,382
Atomwide Limited 7,907 18,693
Shift F7 Limited 4,304 4,517
ETS Communications Limited 2,362 3,775
Advanced Computer Systems UK Limited 6,668 13,044
------------------------------------- ---------------- ---------
What discount rate have we used?
The rate used to discount the future cash flows is the Group's
pre-tax weighted average cost of capital (WACC) of 8.50% (2019:
7.8%). The directors have chosen to use WACC as it is a calculated
figure using actual input variables where available and applying
estimates for those which are not, such as the equity market
premium. An increase in the Group's weighted average cost of
capital to above 11.3% would materially impair the carrying value
of the Group's intangible assets by more than GBP400,000.
What churn rate have we used?
For the customer bases which have been fully integrated into the
AdEPT Technology Group plc trading business in Tunbridge Wells, the
churn rate of 5.9% per annum is based upon the actual historical
churn rate of the revenue stream from the customer bases.
For Centrix, Comms Group, Our IT Department, CAT Communications,
Atomwide, Shift F7, ETS Communications and ACS the net present
value of the discounted future cash flows is based on the actual
revenues of the acquired customer bases. The actual historical
churn rates for the acquired customer bases vary between nil and
11.5% per annum. Where an acquired customer base has shown growth,
a default churn assumption of 3% per annum has been applied.
For the software and apps which have been developed by Atomwide
the net present value of the discounted future cash flows is based
on the actual revenues being derived from the customer base to
which the software licences and charges relate. The actual
historical churn rates for the software and app revenue stream is
nil% per annum, but a default churn rate of 3% per annum has been
applied for the purpose of impairment testing.
What margin have we used?
Gross margins applied are based upon actual margins achieved by
the customer bases in the current and previous years. A proportion
of overheads are applied to the gross margin to represent the
actual operating cost required to support the acquired customer
revenue stream, resulting in a net margin which is used for the
discounted net present valuation.
What is the estimated useful life of customer bases?
The method used to estimate the useful life of each customer
base to conduct the impairment review is the revenue churn rate.
The average useful economic life of all the customer bases has been
estimated at 14 years (2019: 15 years) with a range of 10 to 17
years.
What sensitivities have we applied?
The calculations are sensitive to movements in the discount
rate, margin or churn rate and may therefore result in an
impairment charge to the income statement. A 1% change to the
discount rate and, gross margin would result in no additional
impairment charges. A 1% increase to the churn rate would result in
an additional impairment of GBP0.02m.
11. Property, plant and equipment
Right of Short-term Fixtures
Motor use leasehold and Office
vehicles Assets improvements fittings equipment Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------- --------- ---------- ------------- --------- ---------- --------
Cost
At 1 April 2018 148 - 263 447 1,242 2,100
Acquired with subsidiary 93 - - 103 252 448
Additions - - 31 21 512 564
Disposals (132) - - (2) (65) (199)
------------------------- --------- ---------- ------------- --------- ---------- --------
At 1 April 2019 109 - 294 569 1,941 2,913
Adjustment from adoption
of IFRS 16 - 1,848 - - - 1,848
Additions 87 324 1 48 570 1,030
Disposals (50) (183) - (14) (625) (872)
------------------------- --------- ---------- ------------- --------- ---------- --------
At 31 March 2020 146 1,989 295 603 1,886 4,919
------------------------- --------- ---------- ------------- --------- ---------- --------
Depreciation
At 1 April 2018 68 - 21 278 619 986
Charge for the year 72 - 23 94 444 633
Disposals (113) - - (1) (64) (178)
------------------------- --------- ---------- ------------- --------- ---------- --------
At 1 April 2019 27 - 44 371 999 1,441
Charge for the year 66 825 19 88 530 1,528
Disposals (38) (100) - (7) (605) (750)
At 31 March 2020 55 725 63 452 924 2,219
------------------------- --------- ---------- ------------- --------- ---------- --------
Net book value
At 31 March 2020 91 1,264 232 151 962 2,700
------------------------- --------- ---------- ------------- --------- ---------- --------
At 31 March 2019 82 - 250 198 942 1,472
------------------------- --------- ---------- ------------- --------- ---------- --------
The right of use asset is made up as follows:
2020 2019
GBP'000 GBP'000
--------------- -------- --------
Property 924 -
Motor vehicles 183 -
Other 157 -
--------------- -------- --------
1,264 -
--------------- -------- --------
The depreciation charge for right of use assets is as
follows:
2020 2019
GBP'000 GBP'000
--------------- -------- --------
Property 506 -
Motor vehicles 72 -
Other 247 -
--------------- -------- --------
825 -
--------------- -------- --------
12. Deferred taxation
2020 2019
GBP'000 GBP'000
---------------------------------------------------------- -------- --------
At 1 April 2019 (6,362) (5,590)
Income statement credit/(charge) 52 741
Movement in deferred tax on share options taken to equity (43) 11
Deferred tax provision on convertible loan note taken
to equity - -
Deferred tax acquired - (32)
Deferred tax on business combination (1,385) (1,492)
---------------------------------------------------------- -------- --------
At 31 March 2020 (7,738) (6,362)
---------------------------------------------------------- -------- --------
The deferred tax (liability)/asset is made up as follows:
2020 2019
GBP'000 GBP'000
-------------------------------------- -------- --------
Accelerated capital allowances (213) (73)
Short-term temporary differences 18 49
Convertible loan note equity element (158) (164)
Deferred tax on business combinations (7,385) (6,232)
Share options - 58
-------------------------------------- -------- --------
(7,738) (6,362)
-------------------------------------- -------- --------
13. Inventories
2020 2019
GBP'000 GBP'000
------------ -------- --------
Consumables 612 543
------------ -------- --------
As at 31 March 2020, inventories of GBP60,407 (2019: GBP157,468)
were fully provided for. During the year GBP3,891,041 has been
recognised as an expense in the statement of comprehensive
income.
There is no material difference between the replacement cost of
inventories and the amount stated above.
14. Trade and other receivables
We initially recognise trade and other receivables at fair
value, which is usually the original invoiced amount. They are
subsequently carried at amortised cost using the effective interest
method. The carrying amount of these balances approximates to fair
value due to the short maturity of amounts receivable.
We provide services to consumer and business customers, mainly
on credit terms. We know that certain debts due to us will not be
paid through the default of a small number of our customers.
Because of this, we recognise an allowance for doubtful debts on
initial recognition of receivables, which is deducted from the
gross carrying amount of the receivable. The allowance is
calculated by reference to credit losses expected to be incurred
over the lifetime of the receivable. In estimating a loss allowance
we consider historical experience and informed credit assessment
alongside other factors such as the current state of the economy
and particular industry issues. We consider reasonable and
supportable information that is relevant and available without
undue cost or effort.
Once recognised, trade receivables are continuously monitored
and updated. Allowances are based on our historical loss
experiences for the relevant aged category as well as
forward-looking information and general economic conditions.
Allowances are calculated by individual customer-facing units in
order to reflect the specific nature of the customers relevant to
that customer-generating unit.
2020 2019
GBP'000 GBP'000
----------------------------------- -------- --------
Trade receivables 9,842 6,949
Other receivables 119 70
Amounts owed by Group undertakings - -
Income tax - -
Prepayments 3,917 2,844
Accrued income 817 486
----------------------------------- -------- --------
14,695 10,349
----------------------------------- -------- --------
The Group has one type of financial assets that are subject to
IFRS 9's expected credit loss model:
-- trade receivables for sales of inventory and from the provisions of consulting services.
Trade receivables and contract assets
The Group applies the IFRS 9 simplified approach to measuring
expected credit losses which uses a lifetime expected loss
allowance for all trade receivables and contract assets. As at 31
March 2020, trade receivables of GBP492,577 (2019: GBP391,255) were
fully provided for.
All debts which are older than 90 days relate to interim amounts
in respect of large customer projects which have not yet fully
completed and are considered to be fully recoverable on completion.
The movement of the provision for impairment of trade receivables
is as follows:
GBP'000
--------------------------------------------------------------------- -------
At 1 April 2018 240
Receivables provided for during the year as uncollectable 86
Receivables collected during the year which were previously provided -
--------------------------------------------------------------------- -------
At 1 April 2019 326
Receivables provided for during the year as uncollectable 231
Receivables collected during the year which were previously provided (15)
Receivables written off in the year which were previously provided
for (64)
Acquired through acquisition 15
--------------------------------------------------------------------- -------
At 31 March 2020 493
--------------------------------------------------------------------- -------
The creation and release of a provision for impaired receivables
have been included in administration expenses in the income
statement. Amounts charged to the allowance account are generally
written off when there is no expectation of recovering cash.
Management regularly reviews the outstanding receivables and does
not consider that any further impairment is required. The other
asset classes within trade and other receivables do not contain
impaired assets.
15. Trade and other payables
2020 2019
GBP'000 GBP'000
-------------------------------------- -------- --------
Trade payables 4,494 3,632
Other taxes and social security costs 1,982 1,593
Other payables 829 148
Amounts owed to Group undertakings - -
Accruals and deferred income 5,876 4,527
Contingent consideration 1,798 1,249
-------------------------------------- -------- --------
14,979 11,149
-------------------------------------- -------- --------
The contingent consideration liability of GBP1,797,738 (2019:
GBP1,249,205) represents the year-end fair value of the contingent
consideration liabilities arising on the acquisitions made during
the year. The fair value of the contingent consideration liability
was initially determined by reference to the forecast growth rate
for the customer base and applying the contingent consideration
matrix as specified in the share purchase agreement.
16. Long-term borrowings
2020 2019
GBP'000 GBP'000
--------------------------- -------- --------
Between one and two years - -
Between two and five years 40,444 34,730
More than five years 6,340 6,174
--------------------------- -------- --------
46,784 40,904
--------------------------- -------- --------
The bank loan of GBP39,788,072 is secured by a debenture
incorporating a fixed and floating charge over the undertaking and
all property and assets present and future, including goodwill,
book debts, uncalled capital, buildings, fixtures and fixed plant
and machinery.
Included in long-term borrowings is an amount of GBP6,340,326
which is the debt component of the convertible loan instrument from
BGF. This loan instrument is subordinated and ranks behind the bank
loan.
Details of the interest rates applicable to the borrowings are
included in Note 20.
Included within bank loans are arrangement fees amounting to
GBP211,928 (2019: GBP272,203) which are being released over the
term of the loan in accordance with IFRS 9.
17. Lease liability
Included within long-term borrowings (Note 16 between two and
five years is an amount of GBP655,001 which relates to IFRS 16
lease liability.
2020 2019
GBP'000 GBP'000
--------------------------- -------- --------
Between one and two years 674 -
Between two and five years 655 -
More than five years - -
--------------------------- -------- --------
1,329 -
--------------------------- -------- --------
Total cash payments in respect of IFRS 16 lease agreements
during the year was GBP836,580.
18. Share capital
2020 2019
GBP'000 GBP'000
---------------------------------------------------------- -------- --------
Authorised
65,000,000 ordinary shares of 10p each 6,500 6,500
---------------------------------------------------------- -------- --------
Allotted, called up and fully paid
25,029,957 (2019: 23,701,832) ordinary shares of 10p each 2,503 2,370
---------------------------------------------------------- -------- --------
Share issues
In February 2020 the Company completed a share placing, issuing
1,328,125 ordinary shares of 10p each at a price of 320p raising
GBP4.25m. Costs of GBP217,880 in respect of the share placing have
been charged to the share premium account in the year ended 31
March 2020.
19. Earnings per share
Earnings per share is calculated on the basis of a profit of
GBP985,637 (2019: GBP1,853,958) divided by the weighted average
number of shares in issue for the year of 23,812,509 (2019:
23,701,832). The diluted earnings per share is calculated on the
treasury stock method and the assumption that the weighted average
unapproved and EMI share options outstanding during the period are
exercised. This would give rise to a total weighted average number
of ordinary shares in issue for the period of 23,945,655 (2019:
23,852,410).
Adjusted earnings per share is used to reflect the non-cash
nature of certain items which are charged to the income statement
and the non-trading items, such as acquisition costs, to give a
better indicator of the underlying cash generation of the Group.
Adjusted earnings per share is calculated by adding back
amortisation of intangible assets, impairment of goodwill, the
taxation deduction on purchased customer contracts, deferred tax
credits on amortisation charges, share option charges, adjustment
to deferred consideration and acquisition costs and excluding
compensation credits from retained earnings, giving GBP6,716,948
(2019: GBP7,038,838). This is divided by the same weighted average
number of shares as above.
2020 2019
GBP'000 GBP'000
------------------------------------------------------------------ ---------- ----------
Earnings for the purposes of basic and diluted earnings per share
Profit for the period attributable to equity holders 985 1,854
Add: amortisation 5,772 4,568
Less: taxation on amortisation of purchased customer contracts (117) (117)
Less: deferred tax credit on amortisation charges (235) (669)
Add: share option charges 29 68
Add/(less): adjustment to deferred consideration (654) 586
Add: acquisition fees and restructuring costs 555 600
Add: interest unwind on loan note 381 149
------------------------------------------------------------------ ---------- ----------
Adjusted profit attributable to equity holders 6,717 7,039
------------------------------------------------------------------ ---------- ----------
Number of shares
Weighted average number of shares used for earnings per share 23,812,509 23,701,832
Weighted average dilutive effect of share plans 133,146 150,578
------------------------------------------------------------------ ---------- ----------
Diluted weighted average number of shares 23,945,655 23,852,410
------------------------------------------------------------------ ---------- ----------
Earnings per share
Basic earnings per share 4.14p 7.82p
Diluted earnings per share 4.12p 7.77p
Adjusted earnings per share
Adjusted basic earnings per share 28.21p 29.70p
Adjusted diluted earnings per share 28.05p 29.51p
------------------------------------------------------------------ ---------- ----------
Earnings per share is calculated by dividing the retained
earnings attributable to the equity holders by the weighted average
number of ordinary shares in issue.
Adjusted earnings per share is calculated by dividing the
retained earnings attributable to the equity holders (after adding
back amortisation, the taxation deduction on purchased customer
contracts, deferred tax credits on amortisation charges, share
option charges, adjustment to deferred consideration and
acquisition costs and excluding compensation credits) by the
weighted average number of ordinary shares in issue.
20. Financial instruments
Set out below are the Group's financial instruments. The
directors consider there to be no difference between the carrying
value and fair value of the Group's financial instruments.
2020 2019
GBP'000 GBP'000
---------------------------------------- -------- --------
Loans and receivables at amortised cost
Cash and cash equivalents 11,849 7,650
Loans and receivables 9,961 9,718
---------------------------------------- -------- --------
21,810 17,368
---------------------------------------- -------- --------
Financial liabilities at amortised cost
Liabilities at amortised cost 53,083 51,863
Financial liabilities at fair value
Contingent consideration 1,798 1,249
---------------------------------------- -------- --------
54,881 53,112
---------------------------------------- -------- --------
Amounts due for settlement
Within twelve months 6,965 4,882
After twelve months 47,916 48,230
---------------------------------------- -------- --------
54,881 53,112
---------------------------------------- -------- --------
The Company has a five year GBP40m revolving credit facility
agreement with Barclays Bank plc and Royal Bank of Scotland plc.
The revolving credit facility bears interest at 1.85-3.25% over
LIBOR on drawn funds, dependent upon the net debt to EBITDA
ratchet. The facility is repayable in full on the final repayment
date in February 2022.
The financial assets of the Group are cash and cash equivalents
and trade and other receivables, which are offset against
borrowings under the facility, and there is no separate interest
rate exposure.
Barclays Bank plc and Royal Bank of Scotland plc have a cross
guarantee and debenture incorporating a fixed and floating charge
over the undertaking and all property and assets present and
future, including goodwill, book debts, uncalled capital,
buildings, fixtures and fixed plant and machinery.
The banks also hold a charge over the life assurance policy of
Ian Fishwick, director of the Company, for GBP1,500,000.
In August 2017 the Group raised GBP7,293,726 in the form of a
convertible loan instrument from BGF to part fund the acquisition
of Atomwide. The convertible loan instrument is excluded from the
leverage calculations by the senior debt partners, Barclays and
RBS. The Group has applied the principles of IAS 32 and IFRS 9 in
the recognition and measurement of the convertible loan. The net
present value of the loan of GBP7,090,201 has been split between
the debt and equity components and an amount of GBP1,158,317 has
been recorded in equity, with GBP5,931,884 being included within
long-term debt at the initial date of recognition.
BGF has the right to convert the loan to 1,855,910 ordinary
shares at a share price of GBP3.93 per share at any time. The loan
instrument can be redeemed by the Company from the third
anniversary. The convertible loan instrument bears an interest rate
of 7%. In addition, the transaction costs with a net present value
of GBP203,525 are being recognised in the interest charge in the
income statement across the term of the convertible instrument. The
equity component of the convertible loan is included in the share
option reserve in the statement of changes in equity and statement
of financial position.
21. Business combinations
On 26 April 2019 the Company acquired the entire issued share
capital of Advanced Computers Systems Group Limited and its trading
subsidiary Advanced Computer Systems Limited (ACS), (together
referred to as 'ACS Group') for an initial consideration of
GBP5.24m in cash less net debt and tax liabilities at completion.
Further contingent deferred consideration of between GBPNil and
GBP2.26m was payable, also in cash, dependent upon the performance
of ACS Group post-acquisition.
The contingent deferred consideration will be determined by
reference to the gross margin of the acquired business and applying
the contingent deferred consideration calculation as specified in
the share purchase agreement. The fair value of contingent deferred
consideration has been determined by reference to the expected
growth rate for the gross margin of the acquired business and
applying the contingent deferred consideration calculation as
specified in the share purchase agreement. The contingent
consideration liability of GBP1.80m has been discounted at the
Group's weighted average cost of capital with the value of the
discount of GBP0.17m being included within finance costs over the
deferred consideration period as an interest charge. At 31 March
2020 the estimated deferred consideration was GBP1.80m. The earnout
period for ACS ended on 31 March 2020 and the deferred
consideration was paid in May 2020 with no further amounts due.
Total consideration is GBP7.50m (including acquired debts and tax
liabilities).
ACS Group, founded in 1999, is a well-established UK-based
specialist provider of IT services focused on the education sector
based in Doncaster with 20 years' experience. ACS Group is focused
on providing IT services and has a strong public sector presence,
including managing and supporting the IT function of approximately
200 schools and academy trusts.
All services provided by ACS Group are supported by a highly
experienced team of IT professionals based at ACS Group's premises
in Doncaster, which have been retained post-acquisition. The
vendors and the senior management team responsible for the
strategic direction, technical development and the day-to-day
operations of ACS Group have been retained within the business
post-acquisition.
ACS Group contributed revenue and profit after tax of GBP6.16m
and GBP1.61m respectively for the year ended 31 March 2020 and
represents a twelve month contribution. Acquisition related costs
of GBP0.26m have been recognised as an expense in the statement of
comprehensive income for the year ended 31 March 2020.
22. Subsequent events
In May 2020 the earnout payment in respect of the acquisition of
ACS Group of GBP1.80m was settled in full, with no further amounts
due.
In July 2020, in light of the potential impact of COVID-19, the
Company signed an agreement with Barclays Bank plc and Royal Bank
of Scotland plc for the deferral of the GBP5m reduction to the RCF
facility, which was originally due in July 2020, until the facility
end date of February 2022 to provide additional cash headroom. In
addition, the agreement contains an extension to the leverage and
interest cover covenants included in the original bank facility to
provide additional headroom through to the facility end date of
February 2022. No fees were payable to Barclays Bank plc or Royal
Bank of Scotland plc in respect of this agreement.
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 FLFFDDVIVLII
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