REG - K3 Bus Tech Grp PLC - Final Results
30/03/2023 07:00
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RNS Number : 6962U K3 Business Technology Group PLC 30 March 2023
AIM: KBT
K3 BUSINESS TECHNOLOGY GROUP PLC
("K3" or "the Group" or "the Company")
Provider of business-critical software solutions focused on fashion and
apparel brands.
Final results for the 12 months to 30 November 2022
Key Points
12 months to 30 Nov 2022 12 months to 30 Nov 2021 Change
Revenue from continuing operations £47.5m £45.3m +5%
Recurring or predictable revenue(1) £37.6m £33.9m +11%
- as a percentage of total revenue 79% 76% +300bps
Gross margin 59.2% 59.3% -0.1%-
Adjusted EBITDA(1) £5.1m £4.4m +16%
Loss before tax from continuing operations, including exceptionals(2)
£(3.8)m £(7.8)m +£4.0m
Net cash(1) £7.1m £9.0m -£1.9m
Reported gain / (loss) per share (9.0)p 8.0p -17.0p
Adjusted (loss) / earnings per share for continuing operations(1) (2.6)p (13.6)p +11.0p
(1) Refer to note 12 for definitions
(2) Exceptionals include an impairment charge of £1.6m (2021: £1.4m) and
reorganisation costs of £0.70m (2021: £1.5m)
Financial
· Revenue increase driven by strong growth in Third-party Solutions
division and higher contribution from strategic products in K3 Products
division
· Recurring and predictable income now accounts for 79% of Group
revenue (2021: 76%)
o Group Annualised Recurring Contracts ("ARC") at year-end up 11% to £22.9m
(2021: £20.7m)
o Strategic products ARC at year-end up 32% to £5.7m (2021: £4.3m), with
the K3 fashion Enterprise product up 55%
· Adjusted EBITDA from continuing activities up 16% to £5.1m (2021:
£4.4m)
· Healthy net cash of £7.1m (2021: £9.0m), and Group is expected to
generate net cash in FY 2023
Operational
· K3 Products division - encouraging underlying performance; good
progress across our fashion and apparel offering (strategic products) masked
by managed run-off of legacy products
o Divisional revenue decreased by £1.3m to £13.5m (2021: 14.8m); adjusted
EBITDA at £0.7m (2021: £1.1m)
o Gross profit margin up to 78.3% (2021: 75.3%)
o Managed run-off of legacy products customer base in line with management
expectations
o Strategic products' ARC up 32% to £5.7m, with new customer wins and
existing customers increasing contracted software licences
o Viji acquisition is integrating well and has enhanced sustainability
offering
o Largest software licence contract for flagship strategic product (K3
fashion) signed post period.
· Third-party Solutions division - strong growth and highly cash
generative
o Divisional revenue up 11% to £34.0m (2021: 30.5m) and adjusted EBITDA up
12% to £12.8m (2021: £11.4m)
o Gross profit margin constant at 51.6%
o Aggregate ARC growth of 8.4%
o NexSys software licence and maintenance contract renewals remained high at
98% (2021: 98%)
Prospects
· Encouraging start to trading in FY 2023 with good fashion product
ARC growth
· Board expects continued improvement across both divisions
Marco Vergani, Chief Executive Officer of K3 Business Technology Group plc,
said:
"K3 has made very encouraging progress in its first full year of executing its
new growth plan. Against a challenging trading backdrop, we have delivered
good growth in revenue, recurring income and profitability, and cash
generation is on an upward trend.
"Our focus on driving the growth of our strategic fashion products is yielding
very encouraging results and we have enhanced our sustainability offering.
This is an increasingly important area for the fashion and apparel sector,
with legislation also driving the adoption of sustainability solutions. Our
Third-party Solutions division grew strongly and continues to generate high
cash flows.
"The new financial year has started encouragingly, with our largest ever
software licence contract for our flagship fashion product. The Board is
confident that this progress will continue and expects the Group to become
cash generative this year."
Enquiries:
K3 Business Technology Group plc Marco Vergani (CEO)
www.k3btg.com (http://www.k3btg.com) Tom Crawford (Chairman) T: 0161 876 4498
finnCap Limited Julian Blunt/ Milesh Hindocha T: 020 7220 0500
(NOMAD & Broker) (Corporate Finance)
Richard Chambers, Sunila De Silva
(Corporate Broking)
KTZ Communications Katie Tzouliadis/ Robert Morton T: 020 3178 6378
CHAIRMAN'S STATEMENT
Overview
In the previous financial year, the Board reviewed market opportunities for
the Group and established a new growth plan for the business. This has
sharpened our focus on our products for the fashion and apparel sectors. At
the same time, we have identified new growth opportunities for our Third-party
Solutions business. We also restructured significantly by selling two
businesses, reallocated investment and made organisational changes. We
therefore started the financial year under review with a strengthened balance
sheet, reduced costs and a better focus on our core strengths.
The trading backdrop continued to be challenging, nonetheless I am pleased to
report that the Group has made encouraging progress over the year,
strategically, financially, and operationally. Revenue from continuing
operations is up by 5% to £47.5m (2021: £45.3m), with recurring and
predictable revenue up 9% to £37.6m (2021: £34.5m). Adjusted EBITDA from
continuing activities has increased by 16% to £5.1m (2021: £4.3m). The
Group's net cash position at the year-end stood at £7.1m (2021: £9.0m),
after making strategic investments. Underlying cash generation improved and
this trend is expected to continue.
The Third-party Solutions division continues to generate high levels of
recurring and predictable revenue, as well as strong levels of cash, from its
large customer base. This includes IKEA Concept franchisees globally and UK
manufacturers and distributors. Software licence and support and maintenance
contract renewals generated by our UK manufacturing customer base, which drive
the division's significant cash generation, remained very high at 98% (2021:
98%). The division's gross margin was steady at 51.6% (2021: 51.5%).
The K3 Products division, which includes both our strategic and legacy
products, continues to focus on building recurring cash flows. Recurring
contracted revenue from our strategic products, which serve the fashion and
apparel markets, grew strongly, with the annualised contract value up by 32%
to £5.7m year-on-year. This reflected increased uptake of software licences
by existing customers and new customer wins. We expect strategic products to
continue to grow strongly in the new financial year. At the same time, the
division is managing the ongoing decline in the legacy product customer base.
This managed run-off mainly accounted for the reduction in the division's
revenue, though gross margin increased significantly to 78.5% (2021: 75.3%).
The improvement in gross margin reflected increased income from strategic
products, price increases and cost reduction. The division's EBITDA continued
to improve, moving to £(0.7)m (2021: £(1.7)m) with significantly less cash
spend on capitalised development. The acquisition in January 2022 of Viji, a
software developer with proven sustainability software solutions for fashion
retailers, has added valuable new IP in an important area for us. This new IP
now operates alongside our fashion products and will be more deeply integrated
in 2023.
Financial Results
Total revenue from continuing operations for the 12 months ended 30 November
2022 increased by 5% to £47.5m (2021: £45.3m). On a constant currency basis,
revenue was up by 6%. Recurring and predictable revenue rose by 9% to £37.6m
(2021: £34.5m), and accounted for 79% of Group revenue (2021: 76%).
Third-party Products continued to generate a significant proportion of
recurring and predictable revenue at £28.0m (2021: £25.4m). Recurring and
predictable income from strategic products (in the K3 Products division) is
growing fast, with annualised recurring contracts ("ARC") up 32% to £5.7m.
The Group generated a gross profit for the financial year of £28.1m (2021:
£26.8m), and Group gross margin was constant at 59.2% (2021: 59.3%). This
reflected the balance of contributions from lower-margin Third-party Products
and higher-margin K3 products.
Support/administrative expenses rose to £23.0m (2021: £22.3m), with a
further of £1.7m of capitalised development costs, reduced by £1.1m as a
result of streamlining operations. Adjusted EBITDA(1) from continuing
activities rose by 16% to £5.1m (2021: £4.3m), with the main driver being
Third-party Solutions gross profit. The loss before tax from continuing
activities reduced by £4.0m to £3.8m, (2021: loss of £7.8m) and adjusted
loss per share from continuing operations reduced by 10.8p per share to 2.6p
(2021: loss of 13.6p).
Net cash at 30 November 2022 stood at £7.1m (2021: £9.0m). This is after
Viji acquisition costs and software and systems investment. Operating cashflow
from continuing operations normalised for Government coronavirus support was
£3.0m (2021: £3.2m).
Growth Strategy
Third-party Solutions contributes significantly to the Group's recurring
income and cash flows. The division has a well-established track record in
SYSPRO ERP solutions for manufacturers and distributors in the UK, and our
objective is to secure higher-value projects and to address adjacent
verticals. The Global Accounts business remains a critical partner in the
support and ongoing international expansion of the Inter IKEA Concept via its
franchisees.
The K3 Products division offers significantly higher-margin growth potential.
This reflects the fact that its solutions are based on K3 intellectual
property ("IP"). We believe that there are substantial growth prospects for
the Group's core strategic fashion products, which offer a powerful set of
solutions for fashion and apparel brands. We have further enhanced these
products with the introduction of Viji IP for supply chain traceability, which
supports customers' sustainability objectives. Sustainability and
environmental considerations have become greater priorities for customers, and
EU and national legislation is also driving this trend. However, the area
remains underserved, and we believe there is a significant opportunity for us
to assist brands in addressing their sustainability issues.
Legacy solutions, which are also part of the K3 Products division, are mostly
point-of-sale ("POS") products. Our focus is on providing key accounts with a
migration pathway to other K3 products, while managing the ongoing decrease in
revenue from these POS solutions.
People
Jonathan Manley, Non-Executive Director, retired from the Group at the AGM in
May 2022, and we take this opportunity to thank him again for his contribution
to K3 during his six years on the Board. In July 2022, we were delighted to
appoint Pernille Fabricius, ACA, as Jonathan's successor. She also now heads
the Company's Audit Committee. Pernille has extensive board and senior-level
financial and commercial experience across a number of sectors, including IT
services. She is currently Chief Financial Officer and Executive Vice
President of NNIT A/S, one of Denmark's leading IT and consulting services
providers, and Non-executive director of Gabriel Holding A/S, the fabrics
manufacturer, and of Brødrene Hartmann A/S, the packaging manufacturer.
Summary and Outlook
We have made encouraging progress under the new growth plan. Contracted
revenue from strategic fashion products is growing strongly and contributing
to the overall increase in recurring or predictable income. The new financial
year has started well with strategic fashion products significantly expanding
software licence income, which further increases ARC growth. Third-party
Solutions has a solid order book from existing clients and is focused on
margin improvement for new projects and upgrades.
The Group had net cash balances of £7.1m at the financial year-end and the
first quarter of the new financial year shows a further material improvement
in cash generation. We expects the business to generate net cash in the
current financial year.
The Board remains confident that the Group will make further progress over the
current financial year and beyond.
T Crawford
Chairman
CHIEF EXECUTIVE OFFICER'S Review
Introduction
Last year's review of Group strategy and addressable markets identified growth
opportunities across all core activities. Our Third-party Solutions division
is an important engine of recurring income and generates high levels of cash,
and we are now focusing on enhancing margins. However, there is even greater
scope to drive the quality of the Group's income by leveraging the growth of
K3 Products. The opportunities for K3's high-margin products in fashion and
apparel brands are extremely attractive, and their growth will drive recurring
revenues, profitability and cash flows.
We have made very encouraging progress with our strategy and growth plans
although the financial benefits are not yet fully apparent in these results.
At the same time, over the course of the financial year, we continued to
streamline operations and to invest in our central systems and software
products.
Strategic Direction
K3 Products - Focus on Fashion & Apparel
K3 has a well-established track record in the delivery of Enterprise Resource
Planning ("ERP") and Point of Sales ("POS") solutions for retail businesses.
Our expertise extends across all the core "concept-to-consumer" processes.
This includes product design, product manufacturing, and product supply and
returns. We also understand the challenges that our customers are contending
with, including new regulations, changing consumer behaviour and technological
innovation. The adoption of digital technology is driving the need for
solutions that support strong supply chain collaboration and smarter, more
integrated sales engagement with customers. New products are data-led and
cloud-based Software-as-a-Service ("SaaS") solutions.
Our focus is now on capitalising on our existing position and reputation in
the fashion and apparel and related large retail markets, which includes
brands that are developing their direct-to-consumer routes to market.
'Transforming retail for good' summarises the direction we are taking; that is
to provide solutions that support innovation and transformation of core
business processes, including in relation to environmental and ethical
priorities. The growth areas we are focusing on are:
• Sustainability - in particular supply chain traceability, which is now subject
to new legislation;
• Omni-channel and 'unified commerce' - which encompasses managing effectively
both B2B and B2C channels, supporting a unified view of inventory across all
channels, as well as creating a seamless shopping experience for consumers as
they engage digitally and physically with brands, from the discovery stage to
checkout and returns; and
• Business Insight - enabling brands to gather actionable intelligence from data
collected via our products to optimise inventory, maximise profitability,
reduce wastage and inefficiencies, and engage with consumers in a more
personalised way.
The addition of Viji, the sustainability-focused software developer, has
extended our existing sustainability offering with products that address
supply chain transparency. This is a growth area, which is now subject to
increasing regulation and consumer awareness.
Third-party Solutions
NexSys (previously called SYSPRO)
Customers in manufacturing and distribution are embracing digital
transformation, smart manufacturing and direct machine integration, and moving
away from first-generation, monolithic ERPs or legacy applications, which are
often not integrated. This shift provides us with significant growth
opportunities, and we are targeting larger-scale projects for customers in
growth sectors.
We continue to invest in our relationship with SYSPRO as well as in software
development to enrich the SYSPRO offering with our own modules, capabilities
and add-ons. We are also strongly focused on customer support and our
end-to-end support service remains unrivalled in the marketplace. In the
period, we rebranded this operation in order to position our capabilities more
effectively.
Global Accounts
The Global Accounts unit includes our relationship with Inter IKEA Systems
B.V. (the owner and franchisor of the IKEA concept) and the Inter IKEA Concept
franchisees. The backbone of our activity is the development, enhancement and
maintenance of the core IKEA solution for franchisees as well as integrations,
software customisation and support. This support encompasses the core
infrastructure behind IKEA franchisee stores and back-office solutions. We
also develop and implement complementary new solutions such as our 'Mobile
Goods Flow' and 'Self-ordering Kiosk' applications, to extend the core IKEA
solution.
The IKEA Concept and IKEA stores continued to expand rapidly in 2022, with new
store openings in Chile, Indonesia, Taiwan and other locations. We maintain a
solid backlog of enhancement projects although fewer new IKEA stores are
planned in 2023 than in 2022.
Organisational and operational changes
We continued to streamline the Group and to strengthen our sales approach. In
allocating investment, we have prioritised our strategic partnerships. These
include Microsoft and channel partners responsible for reselling our fashion
offerings. Our relationship with Microsoft remains close, and K3's inclusion
as part of Microsoft Retail Cloud is testimony to the strength of our products
in the fashion and apparel sector. Our K3 fashion product remains Microsoft's
recommended 'add-on' solution for the fashion and apparel sector globally.
During the financial year, we invested in enhancing channel partner sales
support, and in delivery and customer support as well as in knowledge
management practices We have also developed the new sales team in North
America, which is an important region for us, working in conjunction with
Microsoft.
Review of Performance
K3 Products
K3 Products provides software products and solutions that are powered by our
own IP. They comprise:
· strategic products focused on the fashion and apparel markets,
including K3 fashion and K3 pebblestone, K3 Viji and K3 Imagine;
· solutions for the visitor attraction market; and
· stand-alone point solutions, which are mainly our legacy
point-of-sale ("POS") products.
£m 2022 2021*
Revenue 13.5 14.8
Gross profit 10.5 11.1
Gross margin (%) 78.3% 75.3%
Adjusted EBITDA 0.7 (1.7)
*FY2021 restated to reflect latest segment reporting, in which Revenue and
Gross profit from "mobile goods flow" and "make tax digital" are reclassified
from K3 Products to Third-party Solutions.
Divisional revenue decreased by £1.3m to £13.5m (2021: £14.8m).
Approximately £1.1m of this reduction reflected continued managed run-off of
from legacy products, which was in line with management expectations. However,
it masks the very good progress made with strategic fashion products,
especially K3 fashion. By the financial year end, the annualised value of
recurring revenue (or Annualised Recurring Contracts ("ARC")) from strategic
product software licences had increased significantly, driven both by new
customer additions and increased software licence sales to existing customers.
ARC is a key measure of our strategic products (including K3 fashion and K3
pebblestone, which are focused on the fashion and apparel brands). This metric
does not use IFRS15's 'point-in-time' revenue recognition approach to term
contracts, but instead recognises revenue over the term of the contract. ARC
from our strategic products increased by 32% to £5.7m, with 25% of this
driven by existing customers taking up further software licences.
Importantly, ARC from our flagship product, K3 fashion, increased by 55%.
Legacy product managed run-off impacted the division's overall gross profit,
which was down by £0.6m to £10.5m. However, gross margin improved
significantly to 78.3%, from 75.3% in the prior year. This reflected the
change in revenue mix, increased pricing, as well as cost reductions.
A total of £2.1m of major new contracts were secured for K3 fashion and K3
pebblestone, with a strong close at the end of the financial year (2021:
£3.1m, which included a number of multi-year contracts). The £2.1m of new
contracts signed in 2022 were mostly one-year contracts, which typical roll-on
and expand significantly, driving growth in ARC. As an illustration, a major
new customer signed in 2020 implemented c. £0.02m of software in its first
year. Since then, its software contract value has grown more than ten-fold to
c. £0.25m per annum. New contracts included eight major new customer wins as
well as increased software licence sales to existing customers. The major new
customers included a premium outdoor-clothing company, a luxury Swiss watch
brand, a leading French youth-fashion brand, a Spanish fashion brand, a large
UK clothing & footwear brand and a major Nordics fashion and apparel
brand.
We were pleased with the expansion in revenues from existing clients, which
demonstrates the continuing success of our 'land and expand' strategy.
Typically customers use our fashion products for their centralised functions
(including purchasing, catalogue management, and pricing) and then adopt it
across the rest of their operations (particularly with increasing use of
hand-held devices in distribution centres and stores).
We initiated the migration of our K3 pebblestone clients from an existing
'on-premises' solution to a new cloud-based version, which is sold on a
subscription basis. This migration is underpinned by Microsoft's push to move
Dynamics Business Central clients to its cloud versions, and we expect the
migration to accelerate in 2023 and beyond.
The principal route to market for K3 fashion and K3 pebblestone remains via
selected Microsoft business partners. Microsoft's global endorsement of K3
fashion as its recommended 'add-on' solution for the fashion and apparel
vertical continues to underline the quality of our solution. Our channel
partner management team is working well with our business partners and will
continue to support channel sales, including opportunities for our fashion
products in the USA. Given the demand for our fashion solutions, we have
further expanded the number of our business partners and created a team of
experts to support them in initial engagements and showcase our thought
leadership and best practices.
Our solutions for visitor attractions delivered an improved performance. This
was driven by a combination of recovery in the UK visitor attractions segment
after the coronavirus pandemic, but also the improvements we made to our
offering over the last financial year. These included an enhanced reservation
engine, improved online ticketing capability, and an upgraded user interface,
all of which supported price increases to customers.
In January 2022, we made a strategic purchase of intellectual property,
acquiring Viji, an innovative French software developer. Viji is wholly
focused on enabling fashion retailers trace and authenticate more easily the
environmental and social credentials of their supply chains. It has been
developed as a fully-scalable software solution, covering the collection,
verification and renewal of supplier certifications. It also includes a
consumer-facing component, which enables fashion retailers to provide
consumers with ethical and environmental information on their products.
Viji's exciting new products complement our existing offering and have
accelerated the development of our sustainability offering, in particular for
supply chain transparency. We are in the process of integrating the IP with
our fashion products to create a market-exclusive and highly valuable,
end-to-end sustainability solution, which covers supply chain transparency,
the production of automated ESG reports, compliance documentation and
authenticated information on customers' products. We successfully deployed K3
Viji into a select number of customers and are taking advantage of their input
to prioritise new development. In parallel, we have created a substantial
pipeline of opportunities, which reflects the increasing prioritisation of
sustainability issues by customers, accelerated by a number of
fast-approaching legislative deadlines and targets in Europe and the USA.
Third-party Solutions
Third-party Solutions comprises NexSys (previously called SYSPRO) and Global
Accounts, which both resell Third-party Solutions. These are typically
'on-premise', and revenues are generated from implementation, software licence
renewals, and ongoing maintenance and support contracts.
£m 2022 2021*
Revenue 34.0 30.5
Gross profit 17.6 15.7
Gross margin % 51.6% 51.5%
Adjusted EBITDA 12.8 11.4
*FY2021 restated to reflect latest segment reporting, in which Revenue and
Gross profit from "mobile goods flow" and "make tax digital" are reclassified
from K3 Products to Third-party Solutions.
The division performed well, with total revenue increasing by 11% to £34.0m
(2021: £30.5m) and adjusted EBITDA 11% higher at £12.8m (2021: £11.4m).
Gross margin remained constant at 51.6% (2021: 51.5%)
Building on last year's progress, NexSys, the new name for our SYSPRO
operations, which is focused on business-critical ERP for the UK manufacturing
and distribution markets, delivered a good performance, implementing new
software installations for new customers and servicing the order book from
existing customers. Although a number of prospects delayed their purchasing
decisions, against the background of rising energy costs, we won several
important new customers. These included a distributor of diagnostics tools, a
well-known brand of home furniture, a leading European manufacturer of axles
and suspensions, and the Physics Department of a leading UK university. We
therefore entered the new financial year with a good pipeline of projects. We
have increased resource to support new business wins and to take advantage of
the opportunities ahead.
The NexSys customer base generates strong cash flows from software licence and
maintenance and support contract renewals. The majority of renewals takes
place in the final quarter of the financial year and remained very high at
c.98% (2021: 98%).
Global Accounts, which predominantly provides specialist software services to
the Inter IKEA Concept franchisee network, also performed well. Our specialist
services teams continued to support the roll-out of IKEA franchisee stores in
the Far East and in Central and South America. We added delivery resource
during the year, although the shortage of available skilled resource resulted
in some cost inflation. We also continued to deliver K3 Product applications
into IKEA franchisees, including 'Mobile Goods Flow'. We are focused on gross
margin improvement over 2023, which will be helped by an easing of resource
pressures and the good backlog of projects with franchisees. Revenue from
framework contracts closed the year strongly, up 18% on an annualised basis.
Central costs
Central Support costs include our central IT, finance, legal, HR, insurance,
marketing and PLC costs, which are not allocated to revenue generation. There
was a £0.4m increase in Central costs to £8.5m (2021: £8.1m), which
reflected our investments in upgrading our internal IT application landscape
by adopting and deploying new financial, CRM and customer support systems.
Summary
Over the financial year, we made very encouraging progress in line with our
new growth strategy. Our focus on and investment in our strategically
important business areas have improved our market position, reinforced our
thought leadership in key sectors, and enhanced our ability to drive strategic
product growth. Our products are mission-critical and help customers unlock
digital innovation thereby improving their ability to compete in the markets
they serve. We expect to deliver further growth in the new financial year
while also improving Group cash generation.
Marco Vergani
Chief Executive Officer
financial Review
Overview
It should be noted that the comparatives for the prior financial year
consolidated income statement have been restated. This followed the
classification of the certain Group-owned products that are sold exclusively
into the Third-party Solutions customer bases being reclassified into the
Third-party Solutions segment.
The Group's reported segments are 'K3 Products' and 'Third-party Solutions',
with central support costs reported separately, as previously. This aligns
segmental reporting with the Group's growth strategy.
The Directors consider the key performance indicators by which they measure
the performance of the Group by division to be:
• revenue;
• recurring or predictable revenue(*2);
• Group ARC(3 ;)
• strategic products ARC(3);
• gross profit;
• gross margin; and
• adjusted EBITDA.
The Group's results for the year end to 30 November 2022, together with
comparatives for the same period in 2021, are summarised in the tables below.
Continuing activities Revenue
£m 2022 2021*
Revenue 47.5 45.3
- recurring or predictable revenue(2) 22.8 20.3
ARC - Group 22.9 20.7
ARC - Strategic products 5.7 4.3
Gross profit 28.1 26.8
Gross margin percentage 59.2% 59.3%
Underlying support / admin costs (24.7) (25.2)
Capitalised development costs 1.7 2.8
Adjusted EBITDA 5.1 4.4
Overall Group revenue was up 5% to £47.5m (2021: £45.3m) being driven by
Third-party solutions. On a constant currency basis, underlying growth was
£2.5m higher year-on-year. Third-party Solutions revenue increased by 11% to
£34.0m (2021: £30.5m). K3 Products revenue was £13.5m (2021: £14.8m),
down 9% or £1.3m. This reflected legacy decline of £1.4m, which was in line
with expectations. Revenue from K3 Products' strategic products increased by
£0.1m to £4.7m, with total deal closure in line with the prior year.
Gross profit mirrored revenue growth and increased by 4.7% to £28.1m (2021:
£26.8m). Overall gross margin percentage was unchanged at 59.2% (2021: 59.3%)
with K3 Products gross margin percentage increasing to 78.3% (2021: 75.3%).
This was driven by an improving mix of higher-margin fashion products, more
operational leverage in K3 imagine and price increases. Third-party Solutions
margins remained constant at 51.6% (2021: 51.5%).
Group annualised recurring contracts ("ARC") grew by 11% to £22.9m from
£20.6m, driven by strategic products growth of 32% to £5.7m (2021: £4.3m).
Within strategic products, ARC for the enterprise product, K3 fashion,
increased by 55%, driven by both new customers and existing customer
expansion.
The key metric of adjusted earnings before interest, tax, depreciation,
amortisation and exceptional items ("EBITDA") increased by 16% to £5.1m
(2021: £4.1m), with lower capitalised development costs of £1.7m (2021:
£2.8m) meaning that underlying operating margins are expanding.
Administrative expenses
£m 2022 2021*
Support/ administration costs net of capitalised development costs 23.0 22.3
Depreciation & amortization 5.4 6.8
Amortization of acquired intangibles 0.0 0.5
Exceptional costs impairment & reorganisation 2.2 3.1
Share based payments 0.9 0.4
Total 31.5 33.1
Support/administration costs net of capitalised development costs (*7)
increased by £0.8m to £23.1m (2020: £22.3m), which reflected the investment
in additional customer-facing staff.
Depreciation and amortization costs decreased in line with the reduced level
of capitalised development in recent years. Exceptional costs in the year
related to the impairment of some Retail POS amounting to £1.6m, acquisitions
costs and restructuring costs of £0.6m. Exceptional costs in 2021 related to
redundancy costs and onerous contracts following the Starcom disposal.
Earnings per share
The Group's adjusted loss per share from Continuing operations(*6) reduced by
10.8p per share to 2.6p (2021: adjusted loss per share(*6) of 13.6p).
Reported loss per share was 9.0p (2021: earnings of 8.0p, which included
profit from disposals).
Dividends
No dividend will be declared for the year ended 30 November 2022 (2021: nil).
Taxation
The corporation tax charge for the financial year was £0.1m (2021: £0.8m
charge). This comprised a charge for current taxation of £0.1m (2021:
£0.6m) relating to the non-UK businesses and a charge for deferred taxation
of £nil (2021: £0.2m).
Balance sheet
Overall the Group balance sheet remains robust with net cash balances of
£7.1m (2021: £9.1m). The Group has a bank facility with Barclays, its
long-standing bankers, which provides for the draw down of up to £3.5m to
support seasonal cash movements. At the year-end, £nil was drawn down (2021:
£nil). After the financial year end, the Group's facility agreement was
extended for a further year, until March 2024.
Goodwill increased to £25.0m (2021: £24.8m) as a result of acquisitions and
FX charges. Development costs reduced to £3.0m (2021: £6.6m), reflecting the
reduction in capitalised development costs and the impairment of £1.6m. The
development cost balance of £3.0m is now heavily weighted, 80% to the
strategic vertical of fashion & apparel. Property, plant and equipment
decreased to £2.5m (2021: £3.3m) with depreciation exceeding additions.
Current assets increased in Contract Assets driven by multi-year longer term
deals and in Trade Debtors with increased Third-party Solution revenues. Trade
& Other Payables increased to £17.7m (2021: £14.5m), which reflected
deferred income and contingent acquisition consideration and higher year-end
commissions. Current leases obligations reduced to £0.8m (2021: £1.6m)
following the reduction of the office footprint and car fleet.
Cash flow
Net cash balances at the year-end stood at £7.1m (2021: £9.0m). The
underlying trend of cash generation is improving with an annualised £3.0m
cash outflow(1) as at 31 May 2022, reducing to £1.9m as at 30 November 2022
and with further material reduction in Q1 2023 on K3's path to cash
generation. Cash outflow(1) in the financial year amounted to £1.9m,
including £0.3m of costs relating to the acquisition of Viji and £1.0m of
investment in upgrading internal systems.
The comparison of cashflow in 2022 and 2021 is distorted by the disposals of
the Sage and Starcom business units. The table below normalises the impact of
the disposals and also the 2021 Government coronavirus support unwind on cash
generated from operations.
£m 2022 2021
Net cash from operating activities 2.4 (0.5)
Total
- Add back Sage outflows - 0.2
- Add back Starcom inflows - (1.1)
- Add back Dynamics (inflow)/ outflow (0.4) 1.6
Development expenditure capitalized (1.7) (3.0)
Purchase of property, plant and equipment (0.8) (0.6)
Government coronavirus tax support paid/ (deferred) - 2.7
Operating cash flow from Continuing Activities normalised for Government 2.6 (0.3)
coronavirus support and capital expenditures
Investing Activities included £0.3m for the consideration of the Viji
acquisition in addition to associated deal costs. 2021 Investing Activities
included the disposal proceeds of the Starcom and Sage businesses of £13.3m
and £1.5m respectively.
Development expenditure capitalised for products was £1.7m (2021: £2.3m)
with a further £1.0m invested in internal systems upgrade classified across
capitalised development and purchase of property, plant and equipment.
Development expenditure capitalised on product for external commercialisation
was spread evenly across the core strategic products of K3 fashion, K3
pebblestone and K3 Viji.
Within 2021 Financing Activities, following the high level of Starcom and Sage
disposal proceeds, these funds were used to pay down the bank facilities of
£6.8m. In addition, 2021 indebtedness was further reduced by the non-cash
debt-to-equity conversion of the £3m shareholder loan.
Finance expenses were higher in 2021 due to the charge for the conversion of
shareholder loan notes into equity. Repayments of lease liabilities continued
to decrease following the reduction of the office footprint and size of the
car fleet.
Robert Price
Chief Financial Officer
K3 Business Technology Group plc
Consolidated income statement
for the year ended 30 November 2022
Notes Year ended Year ended
30 November 30 November
2022 2021
£'000 £'000
Revenue 3 47,532 45,267
Cost of sales (19,382) (18,432)
Gross profit 28,150 26,835
Administrative expenses (31,518) (33,106)
Impairment losses on financial assets 3 (102) (118)
Adjusted EBITDA 12 5,064 4,357
Depreciation and amortisation (5,383) (6,797)
Amortisation of acquired intangibles - (518)
Exceptional impairment (1,603) (1,421)
Exceptional reorganisation costs 3 (693) (1,570)
Share-based payment charge (855) (440)
Loss from operations 3 (3,470) (6,389)
Finance expense (338) (1,433)
Loss before taxation from continuing operations (3,808) (7,822)
Tax expense 4 (278) (939)
Loss after taxation from continuing operations (4,086) (8,761)
Profit after taxation from discontinued operations 6 108 12,292
(Loss)/profit for the year (3,978) 3,531
All the (loss)/profit for the year is attributable to equity shareholders of
the parent.
Gain / (loss) per share Year ended Year ended
30 November 30 November
2022 2021
Basic and diluted (9.0)p 8.0p
Basic and undiluted from Continuing operations (9.3)p (19.9)p
Year ended Year ended
30 November 30 November
2022 2021
£'000 £'000
(Loss)/profit for the year (3,978) 3,531
Other comprehensive income/(expense)
Exchange differences on translation of foreign operations 69 (1,085)
Other comprehensive income/(loss) 69 (1,085)
Total comprehensive (expense) /income for the year (3,909) 2,446
Total comprehensive (expense)/income is attributable to equity holders of the
parent.
All the other comprehensive income will be reclassified subsequently to profit
or loss when specific conditions are met. None of the items within other
comprehensive income/(expense) had a tax impact.
K3 Business Technology Group plc
Consolidated statement of financial position
as at 30 November 2022
Notes 2022 2021
£'000 £'000
ASSETS
Non-current assets
Property, plant, and equipment 1,766 1,551
Right-of-use assets 801 1,709
Goodwill 7 25,022 24,772
Other intangible assets 3,394 6,648
Deferred tax assets 855 1,010
Total non-current assets 31,838 35,690
Current assets
Stock 484 467
Trade and other receivables 13,549 10,605
Forward currency contracts 110 -
Cash and short-term deposits 7,113 9,146
Total current assets 21,256 20,218
Total assets 53,094 55,908
LIABILITIES
Non-current liabilities
Lease liabilities 79 135
Provisions 179 1,129
Deferred tax liabilities 1,119 1,288
Total non-current liabilities 1,377 2,552
Current liabilities
Trade and other payables 16,882 14,456
Current tax liabilities 372 509
Lease liabilities 802 1,623
Borrowings 50 113
Provisions 968 854
Total current liabilities 19,074 17,555
Total liabilities 20,451 20,107
EQUITY
Share capital 11,183 11,183
Share premium account 31,451 31,451
Other reserves 11,151 11,151
Translation reserve 1,607 1,538
Retained earnings (22,749) (19,522)
Total equity attributable to equity holders of the parent 32,643 35,801
Total equity and liabilities 53,094 55,908
K3 Business Technology Group plc
Consolidated Cash Flow Statement
for the year ended 30 November 2022
Notes Year ended Year ended
30-Nov 2022 30-Nov 2021
£'000 £'000
Cash flows from operating activities
Profit/ (loss) for the period (3,978) 3,531
Adjustments for:
Finance expense 336 1,448
Tax expense 4 90 829
Depreciation of property, plant, and equipment 636 591
Depreciation of right-of-use assets 981 963
Amortisation of intangible assets and development expenditure 3,767 5,639
Impairment of intangible assets 1,603 1,421
Loss on sale of property, plant, and equipment 10 466
Share-based payments charge 751 440
(Profit) on disposal of discontinued operations - (11,893)
Net cash flow from provisions (717) 1,558
Net cash flow from trade and other receivables (3,037) (242)
Net cash flow from trade and other payables 2,380 (4,863)
Cash generated from operations 2,822 (112)
Income taxes paid (395) (395)
Net cash from operating activities 2,427 (507)
Cash flows from investing activities
Development expenditure capitalised (1,725) (3,024)
Acquisition of a subsidiary, net of cash acquired 5 (178) -
Proceeds from disposal of operations net of cash balances in disposal unit - 14,763
Purchase of property, plant, and equipment (845) (623)
Net cash from investing activities (2,748) 11,116
Cash flows from financing activities
Proceeds from loans and borrowings - 4,800
Repayment of loans and borrowings (111) (11,571)
Repayment of lease liabilities (1,073) (1,187)
Interest paid on lease liabilities (132) (202)
Finance expense paid (150) (673)
Net cash from financing activities (1,466) (8,833)
Net change in cash and cash equivalents (1,787) 1,776
Cash and cash equivalents at start of year 8 9,033 7,566
Exchange losses on cash and cash equivalents (133) (309)
Cash and cash equivalents at end of year 8 7,113 9,033
K3 Business Technology Group plc
Consolidated statement of Changes in Equity
for the year ended 30 November 2022 Share capital Share premium Other reserves Translation reserve Retained earnings Total equity
Note
£'000 £'000 £'000 £'000 £'000 £'000
At 30 November 2020 10,737 28,897 11,151 2,623 (23,493) 29,915
Changes in equity for year ended 30 November 2021
Profit for the year - - - - 3,531 3,531
Other comprehensive loss for the year - - - (1,085) - (1,085)
Total comprehensive income/(expense) - - - (1,085) 3,531 2,446
Share-based payment - - - - 440 440
Issue of shares 446 2,554 - - - 3,000
At 30 November 2021 11,183 31,451 11,151 1,538 (19,522) 35,801
Changes in equity for year ended 30 November 2022
Loss for the year - - - - (3,978) (3,978)
Other comprehensive income for the year - - - 69 - 69
Total comprehensive income/(expense) - - - 69 (3,978) (3,909)
Share-based payment - - - - 751 751
At 30 November 2022 11,183 31,451 11,151 1,607 (22,749) 32,643
NOTES
1 Basis of preparation
Statement of compliance
The Group financial statements from which this statement of Final Results is
extracted have been prepared in accordance with UK endorsed IFRS in conformity
with the requirements of the Companies Act 2006 ("IFRS"). The company
financial statements have been prepared in accordance with Financial Reporting
Standard 101, Reduced Disclosure Framework ("FRS101").
The financial information has been prepared under the historical cost
convention except for derivative financial instruments which are stated at
their fair value.
Whilst the financial information included in this statement of Final Results
has been prepared in accordance with the recognition and measurement criteria
of IFRS, this announcement does not itself contain sufficient information to
comply with IFRS.
The Group's statutory financial statements for the year ended 30 November
2022, from which the financial information presented in this announcement has
been extracted, were prepared using the accounting policies disclosed in the
principal accounting policies set out in the Group's Annual Report. These
policies have been consistently applied to all years presented.
The preparation of financial statements in conformity with IFRS requires the
use of estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Although these
estimates are based on management's best knowledge of the amount, event or
actions, actual results ultimately may differ from these estimates.
This statement of Final Results does not constitute the Company's statutory
accounts for the years ended 30 November 2022 and 30 November 2021 within the
meaning of Section 435 of the Companies Act 2006 but is derived from those
statutory accounts.
The Group's statutory accounts for the year ended 30 November 2021 have been
filed with the Registrar of Companies, and those for 2022 will be delivered
following the Company's Annual General Meeting. The Auditor has reported on
the statutory accounts for 2022 and 2021. Their report for 2022 was (i)
unqualified, (ii) did not contain any material uncertainties and (iii) did not
contain statements under Sections 498 (2) or 498 (3) of the Companies Act 2006
in relation to the financial statements.
Going Concern
The Group closely reviews its funding position throughout the year, including
monitoring compliance with covenants and available facilities to ensure it has
sufficient headroom to fund operations. The Group has extended its current
Banking Facilities arrangements with its long-term Bank, Barclays, for a
further year to 31 March 2024.
The capital structure of the Group has materially changed in the last two
years with the disposal of the Starcom and Sage businesses for a combined
£16.2m and the conversion of a £3.0m shareholder loans to equity. The Group
therefore ended the year ended 30 November 2022 with a Net Cash position of
£7.1m.
The Group has prepared cashflow forecast for a period of at least 12 months
from the date of approval of the financial statements which show that the
Group will have reasonably significant headroom and be in compliance with
covenants. The forecast has undergone sensitivity analysis and stress testing
and the Directors have concluded that there is no reasonable worst-case
scenario that is likely which would mean the group would run out of cash or
breach covenants.
The Directors therefore have a reasonable expectation that there are no
material uncertainties that cast significant doubt about the Group's ability
to continue in operation and meet its liabilities as they fall due for the
foreseeable future, being a period of at least 12 months from the date of
approval of the financial statements. For these reasons the financial
statements have been prepared on a going concern basis.
2 Key Accounting policies for the Group financial statements
Goodwill
Goodwill is initially recognised and measured as set out above.
Goodwill is not amortised but is reviewed for impairment at least annually.
For impairment testing, goodwill is allocated to each of the Group's
subsidiaries or cash-generating units (or groups of cash-generating units)
expected to benefit from the synergies of the combination. Cash-generating
units to which goodwill has been allocated are tested for impairment annually,
or more frequently when there is an indication that the unit may be impaired.
If the recoverable amount of the cash-generating unit is less than the
carrying amount of the unit, the impairment loss is allocated first to reduce
the carrying amount of any goodwill allocated to the unit and then to the
other assets of the unit pro-rata based on the carrying amount of each asset
in the unit. An impairment loss recognised for goodwill is not reversed in a
subsequent period.
On disposal of a subsidiary or cash-generating unit, the attributable net book
value of goodwill is included in the determination of the profit or loss on
disposal.
Revenue recognition
The Group contracts for products and services in a variety of contractual
forms and deployment methods which impact IFRS 15 revenue recognition. These
include:
· Reselling of 3rd party products for which following contracting the
Group has no continuing performance obligations for software and the customer
controls the software. These are usually perpetual licenses with customer on
premise installations. Since the Group is reselling these all already
functional products, services are unbundled. Customers can also choose to take
maintenance and support for these products or indeed obtain services, support,
and maintenance from different suppliers.
· K3 bolt on own software IP (Intellectual Property) that adds
incremental vertical functionality and bolts onto Microsoft Dynamics products
and that is either sold directly to customer or via a channel partner. K3 does
not control the software after the contract and issue of access code, which is
contemporaneous. There is an ongoing performance obligation to maintain the
product to ensure the functionality continues to bolt onto Microsoft Dynamics
products.
· K3 own products for which K3 controls and has ongoing performance
obligations. These products are typically SaaS (Software as a Service) based
subscription products which include a right to access as the customer
continuously consumes functionality. The product offer is a typical bundle of
software access, maintenance, and support. The contracts typically have a low
level of services.
Software license revenue:
Software licenses for 3rd party products are recognised at a point in time, on
contract and issue of the initial license key which is contemporaneous.
K3 bolt on own software IP is recognised at a point in time, on contract and
issue of the license key which is contemporaneous.
K3 own products which is SaaS based is recognised over time and not in
software but rather in maintenance and support for the purposes of revenue
disaggregation disclosures. Revenue is recognised over time as K3 controls the
product, the license is not distinct, and the customer continually receives
benefits.
Services revenues
Services are linked to implementation and set up of K3 own and 3rd party
products, rather than product functionality build. Services are contracted for
on a time and materials basis, the customer takes ownership of the work
delivered and revenue is recognised as it is performed.
Hardware:
Hardware is peripheral to a number of contract implementations; the revenue is
recognised when the customer takes control of the asset on delivery.
Maintenance and Support:
Maintenance refers to the maintenance of the products and ensuring a right to
upgrade whilst Support refers to ongoing customer support including for
example help desk access.
3rd party products maintenance is provided by the product's author K3 has no
performance obligation and this is sold through K3 for a margin. Revenue is
recognised for the term of the contract at a point in time when the contract
is signed. Support of 3rd party products is provided by K3 over time over the
term of the contract.
K3 bolt on own software IP is typically re-sold via channel partners who
provide support. K3 has an ongoing performance obligation for the maintenance
of the product and recognises a portion of revenue associated with that over
time.
K3 own SaaS / subscription products and usually hosted by K3 and typically a
bundled offer of maintenance and support is provided to customers which are
both performance obligations for K3 and revenue is recognised over time.
Allocation of transaction price:
Transaction price is measured based on the consideration specified in a
contract with a customer and, where applicable, the best estimate of any
consideration related to modifications to the contract which has yet to be
agreed. Any amounts expected to be paid to the customer, such as penalties for
late delivery, are deducted from the consideration. Where a transaction price
must be allocated between multiple performance obligations, this is generally
achieved through allocating a proportion of total price against each using
either standard list sales prices or an estimated cost methodology.
Critical accounting estimates and judgements
In applying the Group's accounting policies above the directors are required
to make judgements (other than those involving estimations) that have a
significant impact on the amounts recognised and to make estimates and
assumptions about the carrying amounts of assets and liabilities that are not
readily apparent from other sources. The estimates and associated assumptions
are based on historical experience and other factors that are considered to be
relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which the
estimate is revised if the revision affects only that period, or in the period
of the revision and future periods if the revision affects both current and
future periods.
The directors are of the opinion that there are no significant judgements to
be disclosed except those over going concern which are disclosed in detail in
the basis of preparation accounting policy in note 1. The key sources of
estimation that have a significant impact on the carrying value of assets and
liabilities are discussed below:
Impairment of goodwill and other intangibles
Determining whether goodwill is impaired requires an estimation of the value
in use of the cash generating units to which goodwill has been allocated.
The value in use calculation requires an entity to estimate the future cash
flows expected to arise from the cash generating unit. It also requires
judgement as to a suitable discount rate in order to calculate present value,
i.e., the directors' current best estimate of the weighted average cost of
capital ("WACC"). Other intangibles are assessed annually for impairment as
well as when triggers of impairment arise. An impairment review has been
performed at the reporting date.
Capitalised development expenditure and subsequent amortisation
Where such expenditure meets the relevant criteria, the Group is required to
capitalise development expenditure. In order to assess whether the criteria
are met the Board is required to make estimates in relation to likely income
generation and financial and technical viability of the relevant development
projects and the period over which the Group is likely to benefit from such
expenditure. Development projects are subject to an investment appraisal
process with the product managers to assess the status of the development and
the expected commercial opportunities. Development costs are assessed for
impairment which requires an estimation of the future expected revenues to be
generated from each product. This methodology, which is similar to that used
to assess any impairment of goodwill. Expenditure is only capitalised when
the investment appraisal process has assessed that the product is likely to
benefit the Group in the future.
Calculation of loss allowance
When measuring expected credit losses, the Group uses reasonable and
supportable forward-looking information, which is based on assumptions for the
future movement of different economic drivers and how these drivers will
affect each other.
Loss given default is an estimate of the loss arising on default. It is based
on the difference between the contractual cash flows due and those that the
lender would expect to receive, taking into account cash flows from collateral
and integral credit enhancements.
Probability of default constitutes a key input in measuring Expected Credit
Losses (ECL). Probability of default is an estimate of the likelihood of
default over a given time horizon, the calculation of which includes
historical data, assumptions and expectations of future conditions.
If the rates on trade receivables more than 90 days past due had been 50 per
cent higher as of November 2022, the loss allowance on trade receivables would
have been £9k (2021: £16k) higher.
If the ECL rates on trade receivables between 61 and 90 days past due had been
50 per cent higher as of November 2022, the loss allowance on trade
receivables would have been £7k (2021: £4k) higher.
Calculation of incremental borrowing rate and lease term in respect of IFRS 16
Lease liabilities are measured at the present value of the contractual
payments due to the lessor over the lease term, with the discount rate
determined by reference to the rate inherent in the lease unless (as is
typically the case) this is not readily determinable, in which case the
Group's incremental borrowing rate on commencement of the lease is used. The
Group's incremental borrowing rate is calculated by reference to borrowing
rates applicable to the Group's other borrowings/financial liabilities and
then adjusted for the specifics of the lease and asset. For every 0.5%
increase in the incremental borrowing rate the right of use asset and lease
liability recognised would increase by approximately £4k, conversely an
equivalent reduction in the incremental borrowing rate would decrease the
right of use asset and liability by approximately £4k.
Lease term is ordinarily calculated by reference to the contractual terms of
the Group's leases. Management may change their estimates in respect of the
term of any lease if the probability of an extension or termination option,
within the lease contract, being exercised changes. As a result of any change
in estimate of the lease term the Group adjusts the carrying amount of the
lease liability to reflect the payments to make over the revised term, which
are discounted using a revised discount rate. An equivalent adjustment is made
to the carrying value of the right-of-use asset, with the revised carrying
amount being amortised over the remaining (revised) lease term. If the
carrying amount of the right-of-use asset is adjusted to zero, any further
reduction is recognised in profit or loss.
3 Segment information
The Group operates a streamlined organisation with management resource and
central services focused on working across the Group in a more unified manner
to increase the strategic focus on the level of our own product sales.
Reporting is based on product split between K3 own products ('K3 Products')
and Third-party reseller activities ('Third-party Solutions') across revenue
and gross margin. Global Accounts and Third-party Products continue to be
merged into Third-party Solutions. Overheads and administrative expenses are
included as a central cost given resource works across these three segments.
The activities and products and services of the operating segments are
detailed in the Strategic Report.
Transactions between operating segments are on an arms-length basis.The CODM
(Chief Operating Decision Maker, the Board) primarily assesses the performance
of the operating segments based on product revenue, gross margin and Group
adjusted EBITDA. The segment results for the year ended 30 November 2022 and
for the year ended 30 November 2021, reconciled to loss for the year.
Year ended 30 November 2022
K3 Products Central Costs Total
Third-party Solutions
£'000 £'000 £'000 £'000
Software licence revenue 2,174 3,468 - 5,642
Services revenue 738 17,377 - 18,115
Maintenance & support 9,620 13,196 - 22,816
Hardware and other revenue 925 34 - 959
External revenue 13,457 34,075 - 47,532
Cost of sales (2,920) (16,462) - (19,382)
Gross profit 10,537 17,613 - 28,150
Gross margin 78.3% 51.7% - 59.2%
Underlying administrative expenses(*7) (11,243) (4,820) (8,722) (24,785)
EBITDA before Capitalised Development costs (706) 12,793 (8,722) 3,365
Capitalised Development costs 1,420 47 232 1,699
Adjusted EBITDA(*1) from continuing operations 714 12,840 (8,490) 5,064
Depreciation and amortisation - - (5,383) (5,383)
Amortisation of acquired intangibles - - - -
Exceptional impairment - - (1,603) (1,603)
Exceptional reorganisation costs - - (595) (595)
Acquisition costs - - (98) (98)
Share-based payment charge - - (855) (855)
(Loss)/profit from operations 714 12,840 (17,024) (3,470)
Finance expense - - (338) (338)
(Loss)/profit before tax and discontinued operations 714 12,840 (17,362) (3,808)
Tax expense - - (278) (278)
Profit from discontinued operations 6 - - 108 108
(Loss)/profit for the year 714 12,840 (17,532) (3,978)
Year ended 30 November 2021 (restated*)
K3 Products Central Costs Total
Third-party Solutions
£'000 £'000 £'000 £'000
Software licence revenue 3,309 2,898 - 6,207
Services revenue 1,048 16,283 - 17,331
Maintenance & support 9,091 11,204 - 20,295
Hardware and other revenue 1,331 103 - 1,434
External revenue 14,779 30,488 - 45,267
Cost of sales (3,660) (14,772) - (18,432)
Gross profit 11,119 15,716 - 26,835
Gross margin 75.2% 51.5% - 59.3%
Underlying administrative expenses(*7) (12,807) (4,344) (8,166) (25,317)
EBITDA before Capitalised Development costs (1,688) 11,372 (8,166) 1,518
Capitalised Development costs 2,747 45 47 2,839
Adjusted EBITDA from continuing operations 1,059 11,417 (8,119) 4,357
Depreciation and amortisation - - (6,797) (6,797)
Amortisation of acquired intangibles - - (518) (518)
Exceptional impairment - - (1,421) (1,421)
Exceptional reorganisation costs - - (1,605) (1,605)
Acquisition gain - - 35 35
Share based payment charge / (credit) - - (440) (440)
Profit / (Loss) from operations 1,059 11,417 (18,865) (6,389)
Finance expense - - (1,433) (1,433)
Profit/(loss) before tax and discontinued operations 1,059 11,417 (20,298) (7,822)
Tax expense - - (939) (939)
Profit from discontinued operations - - 12,292 12,292
Profit/(loss) for the year 1,059 11,417 (8,945) 3,531
*FY2021 restated to reflect latest segment reporting, in which Revenue and
Gross profit from "mobile goods flow" and "make tax digital" are reclassified
from K3 Products to Third-party Solutions.
Segment assets and segment liabilities are reviewed by the CODM in a
consolidated statement of financial position. Accordingly, this information
is replicated in the Group consolidated statement of financial position
included within this announcement. As no measure of assets or liabilities
for individual segments is reviewed regularly by the CODM, no disclosure of
total assets or liabilities has been made, in accordance with the amendment to
paragraph 23 of IFRS 8.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. Transactions
between segments are accounted for at cost.
The Group has one customer relationship which accounts for 46% (2021: 43%) of
external Group revenue.
Analysis of the Group's external revenues (by customer geography) and
non-current assets by geographical location are detailed below:
External revenue by end-customer geography
External revenue Non-current assets
Year ended Year ended 2022 2021
30 November 30 November 2021
2022
£000 £000 £000 £000
United Kingdom 16,323 15,648 21,932 30,606
Netherlands 6,434 7,978 5,749 180
Ireland 631 1,157 1,650 5,941
Rest of Europe 7,166 7,575 2,323 (1,570)
Middle East 1,807 1,887 - -
Asia 8,882 7,494 181 304
USA 820 506 3 19
Rest of World 5,469 3,022 - -
47,532 45,267 31,838 35,480
% of non-UK revenue 66% 65%
External revenue by market
2022 UK Non-UK Total
£'000 £'000 £'000
Software Licence Revenue 1,236 4,438 5,674
Services Revenue 2,679 15,429 18,108
Maintenance & Support 11,929 10,862 22,791
Hardware and other Revenue 467 492 959
Total 16,311 31,221 47,532
External revenue by business unit geography
2022 Software Licencing Services Revenue Maintenance & support Revenue Hardware & Other Revenue Total
£'000 £'000 £'000 £'000 £'000
United Kingdom 1,082 2,983 12,364 454 16,883
Netherlands 4,574 14,984 7,853 124 27,535
Ireland (153) 26 430 13 316
Rest of Europe 171 88 2,144 367 2,770
Rest of World - 27 - 1 28
Total 5,674 18,108 22,791 959 47,532
External revenue by revenue recognition category
2022 Software Licencing Services Revenue Maintenance & support Revenue Hardware & Other Revenue Total
£'000 £'000 £'000 £'000 £'000
Goods Transferred at a point in time 4,390 10 95 923 5,418
Services transferred at a point in time 988 17,606 6,130 - 24,724
Services transferred over time 296 492 16,566 36 17,390
Total 5,674 18,108 22,791 959 47,532
Revenue to be recognised in the future, related to agreed performance
obligations that are unsatisfied or partially satisfied as at 30 November
2022, was as follows:
2023 2024 Later Total
£'000 £'000 £'000 £'000
Software Licence Revenue - 38 - 38
Services Revenue 15 40 - 55
Maintenance & Support 3,159 2,981 1,978 8,118
Hardware and other Revenue 18 220 - 238
Total 3,192 3,279 1,978 8,449
External revenue by market
2021 UK Non-UK Total
£'000 £'000 £'000
Software Licence Revenue 1,734 4,908 6,642
Services Revenue 2,648 14,676 17,324
Maintenance & Support Revenue 10,664 9,203 19,867
Hardware and other Revenue 628 806 1,434
Total 15,674 29,593 45,267
External revenue by business unit geography
2021 Software Licencing Services Revenue Maintenance & support Revenue Hardware & Other Revenue Total
£'000 £'000 £'000 £'000 £'000
United Kingdom 1,596 2,783 10,623 627 15,629
Netherlands 4,389 14,149 6,069 57 24,664
Ireland 107 176 569 50 902
Rest of Europe 550 216 2,606 700 4,072
Total 6,642 17,324 19,867 1,434 45,267
External revenue by revenue recognition category
Software Licencing Services Revenue Maintenance & support Revenue Hardware & Other Revenue Total
£'000 £'000 £'000 £'000 £'000
Goods Transferred at a point in time 6,642 - - 1,432 8,074
Services transferred at a point in time - 17,324 9,880 2 27,206
Services transferred over time - - 9,987 - 9,987
Total 6,642 17,324 19,867 1,433 45,267
Revenue to be recognised in the future, related to agreed performance
obligations that are unsatisfied or partially satisfied as at 30 November
2021, was as follows:
2022 2023 Later Total
£'000 £'000 £'000 £'000
Software Licence Revenue 328 - - 328
Services Revenue 93 - - 93
Maintenance & Support 4,073 - - 4,073
Hardware and other Revenue 5 - - 5
Total 4,499 -- - 4,499
Revenue recognised and included within contract assets can be reconciled as
follows:
2022
£'000
At 1 December 2021 3,077
Transfers in the period from contract assets to trade receivables (3,077)
Excess of revenue recognised over cash (or rights to cash) being recognised 5,512
during the period
At 30 November 2022 5,512
Revenue recognised and included within contract liabilities can be reconciled
as follows:
2022
£'000
At 1 December 2021 3,364
Amounts included in contract liabilities that was recognised as revenue during (3,364)
the period
Cash received in advance of performance and not recognised as revenue during 5,312
the period
At 30 November 2022 5,312
4 Tax expense / (charge)
2022 2021
£'000 £'000
Current tax expense/(credit)
Income tax of overseas operations on profits/(losses) for the period 203 676
Adjustment in respect of prior periods (100) (80)
Total current tax expense 103 596
Deferred tax (credit)/expense
Origination and reversal of temporary differences 9 233
Effect of changes in tax rate 10 -
Adjustments in respect of prior periods (32) -
Total deferred tax expense/(credit) (13) 233
Total tax expense in the current year 90 829
Income tax expense attributable to continuing operations 278 939
Income tax (credit) attributable to discontinued operations (188) (110)
90 829
The March 2021 Budget announced an increase to the main rate of corporation
tax to 25% from April 2023 and this rate was enacted on 10 June 2021. Deferred
tax balances as at 30 November 2022 have been measured at 25%.
The reasons for the difference between the actual tax charge for the period
and the standard rate of corporation tax in the UK applied to profits/(losses)
for the year are as follows:
2022 % 2021 %
£'000 £'000
Loss before taxation from continuing operations (3,807) (7,822)
(Loss)/profit before taxation from discontinued operations (note 6) (80) 12,182
(Loss)/profit before tax (3,887) 4,360
Expected tax charge/(credit) based on the standard rate of corporation tax (739) 19.0 828 19.0
Effects of:
Items not deductible for tax purposes 439 504
Non-taxable gain on disposal of shares - (2,274)
Income not taxable (496) -
Adjustment to tax charge in respect of prior periods (132) (180)
Movements in deferred tax not recognised 1,149 -
Differences between overseas tax rates (136) 571
Group relief not paid for - 154
Super-deduction - (11)
Movements in temporary differences not recognised - 1,184
Effect of deferred tax rate difference 5 53
Total tax expense / (credit) in current period 90 2.3 829 39.4
Deferred tax recognised directly in equity for FY2022 was £nil (2021: £nil).
Current tax recognised in equity for FY2022 was £nil (2021: £nil). None of
the items within other comprehensive income in the Consolidated Statement of
Comprehensive Income have resulted in a tax expense or tax income.
5 Acquisition of a subsidiary - Viji
On 27 January 2022, the Group acquired 100 per cent of the voting shares of
Viji, an innovative software developer with an exciting suite of products
focused on sustainability, for an initial consideration of €0.25 million and
agreed to an undiscounted deferred consideration of €0.1 million, due to be
paid a year after date of acquisition. There is also contingent consideration
of €0.7 million, dependent upon the achievement of agreed performance
criteria over the next two years from the date of acquisition. The
acquisition-related costs amounted to £0.1 million and are included in the
Consolidated Income Statement.
The acquisition has been accounted for using the purchase method of
accounting.
The following table summarises the recognised amounts of assets acquired and
liabilities assumed at the date of acquisition:
Provisional fair value to the Group
£'000
Other intangible assets 376
Property, plant and equipment 2
Borrowings (136)
Trade and other receivables 35
Cash and cash equivalents 30
Trade and other payables (34)
Net assets acquired 273
Goodwill arising on acquisition 102
375
Discharged by:
Cash paid on acquisition 208
Deferred consideration 75
Contingent consideration 92
375
Cash outflow on acquisition:
Cash paid on acquisition 208
Cash and cash equivalents acquired 30
178
The initial accounting for the acquisition of Viji has only been provisionally
determined at the date of finalisation of these Consolidated Financial
Statements based on Management's best estimates.
From the date of acquisition to 30 November 2022, Viji contributed £19
thousands to the Group's revenue and a profit of £0.1 million to the Group's
loss after tax.
If the acquisition of Viji were completed on 1 December 2021, the Group's
revenue for the year would have been £47,506k and the Group's loss after tax
would have been £5,078k.
6 Discontinued operations
On 26 February 2021 the Group announced that a sale of the Starcom business
for consideration of £14.7m had been approved and completed. Starcom had
already been classified as a discontinued operation in the prior year as it
represented a major line of business for the Group.
The post tax gain on disposal of the Starcom business was determined as
follows:
2022 2021
£'000 £'000
Cash consideration received - 14,474
Total consideration received - 14,747
Cash disposed of - (1,375)
Net cash inflow on disposal of discontinued operations - 13,372
Net assets disposed (other than cash)
Property, plant and equipment - (199)
Intangibles - (3,015)
Right of use asset - (454)
Trade and other receivables - (2,404)
Trade and other payables - 1,958
- (4,114)
Pre-tax gain on disposal of discontinued operations - 9,258
Gain on disposal of discontinued operations - 9,258
Trade and other payables includes an onerous contract provision of £1,125k
relating to higher than market pricing on the 3 year post completion service
agreement with the buyer.
The results of the Starcom business for the year are presented below:
2022 2021
£'000 £'000
Total Revenue - 2,309
Less inter-segment revenue - -
External revenue - 2,309
Cost of sales - (845)
Gross profit - 1,464
Administrative expenses - (1,011)
Impairment losses on financial assets - -
Amortisation of acquired intangibles - (107)
Profit from operations 346
Profit on disposal - 9,258
Finance credit/(expense) - 9
Profit before taxation from discontinued operations - 9,613
Tax credit including on gain on asset held for sale - 110
Profit for the year from discontinued operations - 9,723
2022 2021
Basic and diluted profit per share from discontinued operations Nil 22.0
The major classes of assets and liabilities of the Starcom business classified
as held for sale as at 30 November 2022 are as follows:
2022 2021
£'000 £'000
Property, plant, and equipment - 237
Right-of-use assets - 332
Goodwill - 2,373
Other intangible assets - 690
Deferred tax assets - 136
Trade and other receivables - 1,871
Cash and cash equivalents - 1,260
Assets classified as held for sale - 6,899
Trade and other payables - (3,196)
Provisions - (60)
Lease liabilities - (316)
Liabilities directly associated with assets classified as held for sale - (3,572)
Net Assets directly associated with disposal group - 3,327
The net cashflows incurred by Starcom are as follows:
2022 2021
£'000 £'000
Operating - 628
Investing - (129)
Financing - (157)
Net cash inflow - 342
On the 20 September 2021, the Group disposed of the customers and employees of
its Sage business to Pinnacle Computing (Support) Ltd for £1.68m.
Formal completion occurred in early October 2021, following a TUPE
consultation process in respect of the transfer to Pinnacle of the employees,
and the disposal consideration was subject to a downward adjustment of £0.2m
in respect of restructuring costs that Pinnacle undertook immediately
following completion. The Group maintained ownership of the sales ledger at
Completion which was £0.1m at the 30 November 2021.
The post tax gain on disposal of the Sage business was determined as follows:
2022 2021
£'000 £'000
Cash consideration received - 1,475
Total consideration received - 1,475
Cash disposed of - -
Net cash inflow on disposal of discontinued operations - 1,475
Net assets disposed (other than cash)
Trade and other receivables - 682
Trade and other payables - 478
- 1,160
Pre-tax gain on disposal of discontinued operations - 2,635
Gain on disposal of discontinued operations - 2,635
Trade and other payables includes the release of working capital accruals no
longer payable following the disposal of the business.
The results of the Sage business for the year are presented below:
2022 2021
£'000 £'000
External revenue (50) 4,011
Cost of sales (1) (2,437)
Gross profit (51) 1,574
Administrative expenses (31) (1,641)
Impairment losses on financial assets - 31
Profit from operations (82) (36)
Profit on disposal - 2,629
Finance (expense)/credit 2 (24)
Profit before taxation from discontinued operations (80) 2,569
Tax credit/(charge) (188) -
(Loss)/profit for the year from discontinued operations (108) 2,569
2022 2021
Basic and diluted profit per share from discontinued operations 0.2 5.8
The amounts included in the consolidated cashflows related to the Sage
business are as follows:
2022 2021
£'000 £'000
Operating (67) (230)
Investing - 1,475
Financing 2 (24)
Net cash inflow/(outflow) (65) 1,221
7 Goodwill and impairment
Goodwill acquired in business combinations is allocated at acquisition to the
cash generating units ("CGUs") that are expected to benefit from that business
combination.
The carrying value of goodwill in respect of all CGUs is set out below. These
are fully supported by either value in use calculations in the year or the
fair value less cost to sell for CGUs held for sale.
Goodwill carrying amount
2022 2021
£'000 £'000
Syspro 13,677 13,677
Global Accounts 9,371 9,227
Walton & Integrated Business Solutions (IBS) 1,868 1,868
Viji 106 -
25,022 24,772
The Group tests goodwill and the associated intangible assets and property,
plant, and equipment of CGUs annually for impairment, or more frequently if
there are indications that an impairment may be required.
The recoverable amounts of the remaining CGUs are determined from value in use
calculations. The key assumptions for these calculations are discount rates,
sales growth, gross margin, and admin expense growth rates. The assumptions
for these calculations reflect the current economic environment. The discount
rate represents the current market assessment of the risks specific to the
Group, taking into consideration the time value of money and individual risks
of the underlying assets that have not been incorporated in the cash flow
estimates. The discount rate calculation is based on the specific
circumstances of the Group and its operating segments and is derived from the
weighted average cost of capital (WACC). Other assumptions used are based on
external data and management's best estimates.
For all the CGUs where the recoverable amount is determined from value in use,
the Group performs impairment reviews by forecasting cash flows based upon the
Board 3-year plan starting in the 2023, which anticipates sales, gross margin
and admin cost growth based on management's best estimates. A projection of
sales and cash flows based upon a blended inflation rate (2.1%) is then made
for a further two years.
The pre-tax cash flow forecasts used the following key assumptions:
• Syspro - growth rates of 23.7% to 5.5% over the next three years;
• Global Accounts - revenue growing by 26.2% over the 5-year forecast period
with gross margin maintained at current performance;
• IBS and Walton - these CGUs relate to older products and the forecasts. A
decision was made last year to cease investing in these products with a plan
to transitioning customers, wherever possible, to Viji's platform. From FY27
we are assuming no revenue from these legacy products; and
• Viji - FY2023 will be second full year since acquisition. Growth rates of 30%
from FY2024 over the next three years.
The rate used to discount the forecast pre-tax cash flows is 17.4% (2021:
13.4%) and represents the Directors' current best estimates of the weighted
average cost of capital ("WACC"). The Directors consider that there are no
material differences in the WACC for different CGUs.
8 Notes to the cash flow statement
Cash and cash equivalents
2022 2021
£'000 £'000
Cash and bank balances available on demand 7,113 9,146
Bank overdrafts - (113)
7,113 9,033
Cash and cash equivalents comprise cash and bank balances available on demand.
The carrying amount of these assets is approximately equal to their fair
value. Cash and cash equivalents at the end of the reporting period as shown
in the consolidated statement of cash flows can be reconciled to the related
items in the consolidated reporting position as shown above.
Non-cash transactions
Additions to buildings, motor vehicles and equipment during the year amounting
to £233k (2021: £319k) were financed by new leases. During FY2022, £nil
(2021: £3 million) shareholders loan converted to equity.
9 Provision
Dilapidations Onerous contracts Deferred consideration Total
£'000 £'000 £'000 £'000
At 30 November 2021 370 769 844 1,983
Additions - - - -
Paid in the year - (342) (375) (717)
Interest 26 - - 26
Disposed (145) - - (145)
At 30 November 2022 251 427 469 1,147
Split as:
Current 251 342 375 968
Non-Current - 85 94 179
At 30 November 2022 251 427 469 1,147
The Onerous contract provision relates to commitments undertaken for the post
completion services agreement with the Buyer of Starcom for activity no longer
in the Group. The deferred consideration provision relates to above market
pricing included in the post completion services agreement with the Buyer of
Starcom. The non-current element of these provisions will be utilised evenly
until the end of February 2024.
10 Deferred tax
The net deferred tax asset/liability at the end of the year is analysed as
follows:
2022 2021
£000 £000
Deferred tax assets
Continuing operations 855 1,010
Deferred tax liabilities
Continuing operations (1,119) (1,288)
(264) (278)
Recognised deferred tax assets and liabilities and attributable to the
following:
£000's Assets Liabilities Net
2022 2021 2022 2021 2022 2021
Plant & Equipment 111 148 (1) (3) 110 145
Other temporary differences 663 806 (1,118) (1,285) (455) (479)
Losses 23 - - - 23
Business combinations 58 56 - - 58 56
Deferred tax assets / (liabilities)
855 1,010 (1,119) (1,288) (264) (278)
Movement in deferred tax during the year
1 December 2021 Recognised in income Disposal 30 November 2022
Plant & Equipment 145 (35) - 110
Other temporary differences (478) 23 (455)
Losses - 23 - 23
Business combinations 56 2 - 58
Deferred tax assets / (liabilities) (277) 13 - (264)
The Group have not recognised a deferred tax asset on £1.8m (2021: £2.8m) of
tax losses and intangible fixed asset timing differences carried forward due
to uncertainties over recovery.
No deferred tax liability is recognised on temporary differences of £20k
(2021: £23k) relating to the unremitted earnings of overseas subsidiaries as
the Group can control the timing of the reversal of these temporary
differences and it is probable that they will not reverse in the foreseeable
future.
11 Events after the reporting date
On the 24 February 2023 the Group agreed an extension to its Current Revolving
Credit Facility with Barclays for £3.5m until 31 March 2024.
12 Non-statutory information
The Group uses a variety of alternative performance measures, which are
non-IFRS, to assess the performance of its operations. The Group considers
these performance measures to provide useful historical financial information
to help investors evaluate the underlying performance of the business.
These measures, as described below, are used to improve the comparability of
information between reporting periods and geographical units, to adjust for
exceptional items or to adjust for businesses identified as discontinued to
provide information on the ongoing activities of the Group. This also reflects
how the business is managed and measured on a day-to-day basis.
*1 Adjusted EBITDA - is the loss from continuing activities adjusted to exclude
depreciation and amortisation of development costs), amortisation of acquired
intangibles exceptional impairment costs exceptional reorganisation costs
exceptional customer settlement provisions and share-based charges.
*2 Recurring or predictable revenue - contracted support, maintenance and
services revenues with a frame agreement of 2 years or more, as % of total
revenue.
*3 K3 Product revenue as a percentage of total Group revenue.
*4 K3 products gross profit as a percentage of total gross profit.
*5 Net debt comprises Bank Loans, Shareholder Loans and Overdrafts less Cash and
cash equivalents, including Cash and cash equivalents held for sale. It
excludes any liabilities associated with Right of Use Assets under IFRS16.
*6 Adjusted loss/earnings per share - basic loss per share from continuing
operations adjusted to exclude amortisation of acquired intangibles,
exceptional impairment costs, exceptional reorganisation costs, and
share-based charges net of the related tax charge.
*7 Underlying support/admin costs - administrative expenses adjusted to exclude
depreciation and amortisation of development costs, amortisation of acquired
intangibles, exceptional impairment costs exceptional reorganisation costs and
share-based charges.
*8 ARC (Annualised Recurring Contracts) - the annual contracted income from
support, maintenance, SaaS and term contract software spread over the term of
the contract.
*9 Cash outflow -speed at which business spends the money that is available to
it. Calculated as delta between cash and cash equivalents balances between two
periods.
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