REG - K3 Bus Tech Grp PLC - Final Results
26/03/2024 07:15
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RNS Number : 3005I K3 Business Technology Group PLC 26 March 2024
AIM: KBT
This announcement contains inside information for the purposes of Article 7 of
the Market Abuse Regulation (EU) 596/2014 as it forms part of UK domestic law
by virtue of the European Union (Withdrawal) Act 2018 ("MAR"), and is
disclosed in accordance with the company's obligations under Article 17 of MAR
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 year to 30 November 2023
Key Points
Restated
FY 2023 FY 2022
Revenue from continuing operations £43.8m £47.2m
Gross profit £27.1m £27.9m
― gross margin 62% 59%
Adjusted operating profit/(loss)(1) £1.3m (£0.6m)
Loss before tax from continuing operations (£1.8m) (£4.1m)
Net cash(1) £8.3m £7.1m
Reported loss per share (5.4p) (9.5p)
Adjusted gain/(loss) per share for continuing operations 1.0p (4.6p)
(1)refer to note 10
Financial
· Stronger financial position, with improved cash generation and
tighter cost discipline supporting increased net cash at financial year end of
£8.3m (30 November 2022: £7.1m).
· Total revenue decreased by 8% to £43.8m (2022: £47.2m) mainly
reflecting lower revenue from Global Accounts. Approx £0.4m (2022: £0.3m) of
income was not recognised as a result of the new revenue recognition policy
for K3 fashion and apparel products (income from contracts is now recognised
over the term of the contract, instead of upfront).
· Total annual recurring revenue ("ARR") increased to £24.7m
(2022: £22.4m), including double-digit ARR growth from K3 fashion and apparel
products and from the NexSys business unit.
· Encouraging return to profitability with adjusted operating
profit of £1.3m (2022: loss of £0.6m)
o adjusted operating profit/loss metric has replaced adjusted EBITDA as a
key performance indicator, being a better proxy for cash generation.
· Benefits of further cost reduction measures implemented in the
second half will be felt in FY 2024 and beyond.
Operational
· Move to new business unit structure at financial year end
establishes a better platform for the Group as the Board focuses on driving
cash and value.
· K3 Products division - continued strong sales growth from fashion
and apparel offering ("Fashion portfolio").
o Revenue of £13.1m (2022: £12.6m); gross profit of £10.4m (2022:
£9.8m), which is after £0.4m of Fashion portfolio revenue not booked (2022:
£0.3m), in line with new revenue recognition policy.
o Gross profit margin of 79% (2022: 78%).
o Fashion portfolio increased ARR by 28% to £5.8m at period-end, driven by
both new customer wins and existing customers expanding their software
licences.
o New dedicated management team at Retail Solutions has delivered benefits.
o Strategic decision to integrate K3 ViJi capabilities within Fashion
portfolio's existing corporate social responsibility functionalities rather
than maintain it as stand-alone product.
· Third-party Solutions division - results impacted by downturn in
activity at Global Accounts, which offset strong growth in the NexSys business
unit.
o Revenue of £30.7m (2022: £34.7m) and gross profit of £16.7m (2022:
£18.1m).
o Gross profit margin of 55% (2022: 52%) - reflected revenue mix and reduced
overheads.
o NexSys (formerly known as SYSPRO); performed strongly with average deal
size increased and a number of large new contracts secured.
o Global Accounts; significant slowdown in second half; remedial action
taken to reduce cost base.
Current Trading and Prospects
· The Board remains focused on the transition to higher quality
recurring earnings, as well as cash generation, cost discipline and additional
operational simplification, which will help to drive further shareholder
value.
· Group trading in the first quarter of the new financial year is
in line with budget, and K3 has a stronger balance sheet than in FY22, which
should continue to strengthen. While the markets that K3 serves remain
challenging, the Board believes that both divisions have good growth
opportunities.
· Overall, the Board expects cash generation to continue to improve
in FY24 and the Group to deliver a higher adjusted operating profit result.
Tom Crawford, Executive Chairman of K3 Business Technology Group plc, said:
"We made good progress in a number of important areas and achieved some
significant financial and strategic milestones against a challenging trading
environment. In particular, the Group's balance sheet has strengthened. Our
Fashion portfolio performed well and has attractive growth opportunities.
Third-party Solutions contended with a slowdown at Global Accounts, however
the NexSys operations grew strongly and continues to generate dependable and
significant cash flows from software licence and maintenance and support
renewals from its large user base.
"The transition to a unit structure will support our drive to generate value
for shareholders and we remain disciplined in our focus on cash generation,
costs and the shift to higher quality earnings. As we move through the new
financial year, we expect K3 to generate increased cash and deliver a further
improvement in adjusted operating profit."
Enquiries:
K3 Business Technology Group plc Tom Crawford, Executive Chairman T: 020 31786378 (today)
www.k3btg.com Eric Dodd, Chief Financial Officer
T: 0161 876 4498
finnCap Limited Julian Blunt/ Dan Hodkinson T: 020 7220 0500
(NOMAD & Broker) (Corporate Finance)
Sunila De Silva (Corporate Broking)
KTZ Communications Katie Tzouliadis/ Robert Morton T: 020 3178 6378
EXECUTIVE CHAIRMAN'S STATEMENT
Overview
We made good progress over the year in a number of important areas and,
against a challenging trading backdrop, K3 has achieved some significant
financial and strategic milestones.
The Group has continued to strengthen its financial position, with improved
cash generation raising net cash at the financial year-end to £8.3m from
£7.1m This was helped by tightening cost discipline across the Group, as well
as further actions to address overheads.
Operationally, we are seeing encouraging progress with our strategic products
for the fashion and apparel market ("Fashion portfolio") in the K3 Products
division. The Fashion portfolio delivered 28% growth in annualised recurring
revenue ("ARR") to £5.8m from £4.5m in the prior year. K3 Fashion, our
flagship product, which is globally endorsed by Microsoft, performed
particularly strongly and its growth potential remains exciting. In addition a
new dedicated management team at the Retail Solutions unit has driven
meaningful performance improvements, including higher margins and customer
retention.
Within the Third-party Solutions division, the NexSys operation, which makes
up 68% of the division's revenues and drives the division's significant cash
generation, grew strongly. The unit increased its extensive installed customer
base with new larger customer wins, in line with strategy. Importantly,
software licence and support and maintenance contract renewals at NexSys
remained very high at 98% (2022: 98%) and its net revenue retention was 109%.
Against this, Global Accounts, also part of the division, contended with a
slowdown in activity. The slowdown, which was apparent in the first half, was
sharper in the second half, and we responded with steps to address the
resource base.
While overall Group revenue decreased by 8% to £43.8m, the Group
significantly improved other key performance measures year-on-year. Total
annual recurring software revenue increased to £24.7m from £22.4m last year,
with the Fashion portfolio and NexSys both generating double-digit ARR growth.
Adjusted operating profit(1) moved from a loss of £0.6m in the prior
financial year to a profit of £1.3m. Gross profit margin increased
significantly to 62% from 59% in the prior year, and gross margin at both K3
Products and Third-party Solutions divisions was higher year-on-year, at 79%
and 55% respectively (2022: 78% and 52%%). Free cash flow(1) is a key
performance measure for the Board, and this improved from an outflow of £1.8m
in 2022 to an inflow of £1.1m in 2023, which is a £2.9m turnaround.
Looking ahead, we expect further progress in the new financial year as
software revenues grow and we maintain a disciplined approach to development
allocation and cost base control. Our strategic decision to incorporate the
nascent K3 ViJi product capability into our Fashion portfolio products, rather
than maintain it as a standalone offering, will help here.
At the K3 Products division, the Fashion portfolio, which is sold via our
business partner network, has good growth prospects. The new team at Retail
Solutions is confident of lifting net revenue retention, which is now at 103%,
and has refined the account management and sales strategy.
At the Third-party Solutions division, we have ambitious targets for NexSys,
supported by a good new business pipeline. The slowdown in customer activity
at Global Accounts is expected to continue in the short to medium term, but
the resource base is now more appropriately sized.
Financial Results
Total revenue for the year ended 30 November 2023 decreased by 8% to £43.8m
(2022: £47.2m). On a constant currency basis, total revenue was 7% lower
year-on-year. The reduction mainly reflected lower revenue from Global
Accounts, whose customers pulled back on expansion and project spend from the
levels seen prior to summer 2023. As reported with interim results, the
Group's revenue recognition policy for the Fashion portfolio was changed in
this financial year. Revenue from fashion product contracts is now recognised
over the term of the contract rather than proportionally upfront after the
completion of software installation, and matches revenue to cash collection.
The change in policy has reduced revenue by £0.4m (2022: £0.3m).
Gross profit was £27.1m (2022: £27.9m), reflecting lower revenue and
deferred gross profit of £0.4m from the Fashion portfolio following the
implementation of the new revenue recognition policy. Nonetheless, gross
margin was higher at 62% (2022: 59%), with both Divisions actively working to
improve gross margins.
A key performance measure for the Group previously was adjusted EBITDA. As
reported with interim results, we have now replaced this measure with adjusted
operating profit/(loss)(1), since the Board believes it is a better proxy for
understanding underlying profitability and cash requirements. This has
resulted in revised administration expenses, which now include depreciation
and amortisation being shown in the comparative 2022 data.
We are pleased to report that the Group has delivered an adjusted operating
profit of £1.3m for the financial year compared to a loss in the prior year
(2022: loss of £0.6m measured on the same basis). This £1.9m turnaround in
performance was supported by higher gross margins and lower costs. It is also
after the change in our revenue recognition policy for fashion and apparel
software sales.
The table below provides the reconciliation between adjusted operating profit
in the financial year and adjusted EBITDA in the prior year.
Restated
FY 2023 FY 2022 Change
£'000 £'000 %
Adjusted EBITDA (as previously reported for FY 2022) 3,497 5,064 -31%
- depreciation and amortisation (2,234) (5,383) -58%
- Impact of change in revenue recognition on FY22 NA (280) NA
Adjusted operating profit/(loss) 1,263 (599) +311%
Amortisation decreased year-on-year due to lower capitalisation of development
costs in FY23 and the impact of impairments in FY22.
The reported loss from operations reduced to £1.4m (2022: loss of £3.8m), an
improvement of £2.4m. The major factor driving this improvement was a
significant reduction in overheads, with £2.7m taken out of the Group's cost
base. The reported loss from operations is stated after £4.2m of impairment
and reorganisation costs, and historical acquisition credit of £0.3m
resulting from reversal of contingent consideration, partly offset by a credit
resulting from a £1.1m reversal of share-based payment charges (2022: £2.3m
of impairment, reorganisation and acquisition costs, and share-based payment
charges of £0.9m).
Reported adjusted administrative expenses decreased by 10% to £25.9m (2022:
£28.4m), helped by our tighter focus on costs in the second half, a
discipline that continues to yield savings.
The reported loss before tax decreased to £1.8m (2022: loss of £4.1m), a
£2.3m advancement. This mainly reflects our actions over the cost base, as
stated above. Net finance expenses were £0.4m (2022: £0.3m).
Adjusted earnings per share shows a significant improvement at 1.0p from the
prior year (2022: loss of 4.9p). Adjusted gain/(loss) per share excludes
exceptional reorganisation costs, exceptional impairment costs, acquisition
costs/credit and share-based charges/credit and is net of the related tax
credit of £0.2m (2022: charge £1.0m). The reported loss per share, which
includes profit from discontinued activities, also improved at 5.4p (2022:
9.5p).
Balance sheet and cash flows
The Group balance sheet remains strong, with cash and cash equivalents of
£8.3m (2022: £7.1m) and net cash of £8.3m (2022: £7.1m). K3 has banking
facilities with Barclays, which provides for the drawdown of up to £3.0m to
support seasonal cash movements. This facility agreement was extended in March
2024 on standard terms for a further two years until March 2026, with optional
future renewals. The extension was based on a facility maximum of £2.8m. At
30 November 2023, £nil was drawn down (2022: £nil).
Group cash flow is weighted towards the second half of the financial year.
This reflects the significant cash inflows that fall due in this period from
annual software licence and maintenance and support contract renewals. A large
proportion of these renewals are for NexSys software, where renewals remained
very high at 98%, which was in line with prior years, as expected.
Cash inflow from operations increased to £3.5m (2022: £2.4m). Net cash used
in investing activities decreased significantly at £1.4m (2022: £2.7m). This
resulted from our more disciplined approach to development expenditure as well
as actions to simplify the business. The £1.4m included spend on property,
plant and equipment of £0.6m (2022: £0.8m), lower development expenditure
capitalised at £0.7m (2022: £1.7m) and ViJi acquisition-related outflow of
£0.1m (2022: £0.2m).
Growth Strategy
The Board's focus is on driving cash generation and shareholder value. In
practise, this means that we are concentrating on the growth of those software
products and solutions that are differentiated in their market verticals and
provide demonstratable benefits to customers.
The K3 Products division continues to offer the opportunity of significantly
higher-margin growth. This reflects the fact that its solutions are based on
K3 intellectual property ("IP"). A key focus is the development and growth of
our core strategic fashion and apparel products and, in particular, the K3
Fashion product. Microsoft has endorsed K3 Fashion as its 'go to' embedded
solution for the fashion and apparel sector. We believe that its growth
opportunity is significant and our route-to-market remains our network of
business partners. We are now further enhancing our Fashion portfolio with
additional sustainability functionality from our ViJi product and are working
with Microsoft and our business partners to move fashion brands to our
specialist offering in the cloud.
NexSys (formerly K3 SYSPRO), which delivers and supports ERP solutions for
manufacturers and distributors in the UK, generates significant recurring
revenue and strong predictable cash flows. Our focus with NexSys is to target
larger, higher-value projects, as well as moving into attractive adjacent
verticals. The Global Accounts business, which also makes up the Third-party
Solutions division, is a long-established partner to the overseas franchisees
of the Inter IKEA Concept. While the expansion of IKEA stores by franchisees
has slowed, leading to a significantly weaker performance, Global Accounts,
nonetheless, remains a key support and services partner to this network.
Operational Review
The Group's segmental results for the financial year ended 30 November 2023
and comparatives for 2022 are summarised in the tables below. Reporting is
divided between the K3 Products division and the Third-party Solutions
division. K3 Products encompasses K3's own products and includes strategic
fashion and apparel products, for which the revenue recognition change had a
one-off impact in this year's results, and Retail Solutions. The Third-party
Solutions division consists of NexSys and Global Accounts, and revenues
comprise a mix of recurring revenue (from software licence renewals, and
support and maintenance contracts), and revenues from systems integration and
professional services, as well as one-off software licences.
Year ended 30 November Revenue (£m) Gross profit (£m) Gross margin
2023 2022 2023 2022 2023 2022
restated restated restated
K3 Products 13.1 12.6 10.4 9.8 79% 78%
Third-party Solutions 30.7 34.7 16.7 18.1 55% 52%
Total 43.8 47.2 27.1 27.9 62% 59%
K3 Products - K3 Fashion portfolio 2023 Year-on-year change
Annualised Recurring Revenue (ARR) £5.8m +28%
K3 Products
The division provides software products and solutions that are powered by our
own IP. They comprise:
• strategic products focused on fashion and apparel markets (the Fashion
portfolio);
• solutions for the visitor attraction market; and other stand-alone
point-of-sale retail solutions and apps ("Retail Solutions").
£m 2023 2022
restated
Revenue 13.1 12.6
Gross profit 10.4 9.8
Gross margin (%) 79% 78%
Adjusted operating loss (4.8) (6.9)
Our Fashion portfolio, which includes our Microsoft-endorsed flagship product,
K3 Fashion, continued to grow strongly, and its annualised recurring revenue
increased by 28% over the year to £5.8m. Total divisional revenue increased
by 4% to £13.1m (2022: £12.6m). The implementation of the new revenue
recognition policy for fashion products meant that £0.4m of revenue was not
recognised in the financial year under review, but will be recognised in
future years. Similarly, the revenue figure for the 2022 financial year has
been restated to take account of the new policy. This resulted in £0.3m of
revenue being deferred into future years. The Division's overall performance
was also impacted by high development expenditure on K3 ViJi and K3 Imagine.
We reviewed the commercial opportunity for both these two products, and have
addressed cost base accordingly. Further commentary is below.
Gross profit for the year increased to £10.4m (2022: £9.8m). This figure and
the last year's comparative are both stated after the effect of the new
revenue recognition policy. Gross margin improved to 79% (2022: 78%). The rise
reflected the higher margin revenue mix, together with pricing and actions at
Retail Solutions, where the new dedicated management team addressed the cost
base and implemented other initiatives.
Sales of our K3 Fashion flagship product were extremely encouraging and mainly
drove the 28% rise in total annualised recurring revenue in the Fashion
portfolio, with a contribution of £1.2m to incremental ARR in the financial
year. A total of five significant new customers were added, and existing
customers continued to expand their software licence estate with us. As we
previously announced, in the first half of the financial year, the business
partner network secured the largest global deployment of K3 Fashion to date,
with a major global jewellery/watches retailer. This contract is worth c.
£1.4m over three years. Other significant signings included: a c. £1.0m,
three-year contract with a Swedish outdoor sports fashion brand; a c. £0.5m
five-year contract with a major Swiss outdoor brand; and a five-year contract
with a European golf brand. Existing customers took up further software
licences for K3 Fashion, with these including a music mail-order and
merchandising retailer and a major wedding apparel designer. Each added an
additional c. £0.2m of annual recurring revenue to the Fashion portfolio.
As these incremental software licence orders demonstrate, new customer wins
have the potential to grow over time. The typical pathway is for new customers
to buy software licences for centralised functions, including purchasing,
catalogue management and pricing management, and then to take up additional
software licences as they progressively roll-out our software across their
operations in distribution centres and stores.
K3 Fashion continues to be globally endorsed by Microsoft as its recommended
embedded solution for the fashion and apparel vertical, and our business
partner network remains the main route-to-market for the Fashion portfolio. We
continued to invest in supporting our business partner network though our
channel partner and centre of excellence team.
The new dedicated management team at Retail Solutions is driving improvements
in adjusted operating profit, net revenue retention and customer satisfaction.
Net revenue retention is now above 100% and the new business unit leader has
refocused account management and sales activities.
We came to a difficult judgement at the end of the financial year, which was
to withdraw further investment in our standalone sustainability product for
fashion retailers, K3 ViJi, acquired in January 2022. The decision was taken
after a strategic and commercial assessment. While the market for
sustainability solutions is emerging and evolving legislative drivers will
promote greater focus in this area by fashion retailers, we concluded that, in
the current, challenging retail environment, the required return on investment
within our desired timeframe for a standalone product, was not likely to be
met. We are therefore concentrating on integrating K3 ViJi's capabilities
within K3 Fashion's existing corporate social responsibility functionalities,
and will promote our sustainability offering as features within our existing
Fashion portfolio.
Third-party Solutions
Third-party Solutions comprises two units:
• NexSys, which is a high-margin, value-added reseller and systems integrator of
SYSPRO ERP enriched with K3 IP and partner modules. Its solutions address the
needs of manufacturers and distributors, and are typically 'on-premise'.
Revenues are generated from implementations, software licence sales (including
renewals), and maintenance and support contracts. With over 40 years'
experience in providing innovative ERP solutions for its chosen markets,
NexSys has a large installed base of UK customers.
• Global Accounts, which provides specialist services and support, predominantly
to the Inter IKEA Concept overseas franchisee network.
£m 2023 2022
restated
Revenue 30.7 34.7
Gross profit 16.7 18.1
Gross margin % 55% 52%
Adjusted operating profit 8.3 8.1
The Division's revenue and profit performance was significantly affected by
the downturn in activity at Global Accounts, which mainly provides its
specialist services to the overseas franchisees of the Inter IKEA Concept.
This offset the strong growth at NexSys, which performed very well.
Total revenue was down by 11.5% to £30.7m year-on-year (2022: £34.7m) and
gross profit decreased by 8% to £16.7m (2022: £18.1m). However, gross margin
increased to 55% (2022: 52.%). This improvement reflected the revenue mix, and
specifically the higher proportion of software licence and maintenance and
support income, as well as the actions taken to adjust the Global Accounts
resource base.
The beginnings of a slowdown in activity that we reported in the first half at
Global Accounts materialised strongly in the second half of financial year. As
highlighted with interim results, we have taken remedial action to adjust the
contractor resource base in light of more subdued activity, with limited new
IKEA store openings. We continue to assist franchisees with our specialist
services, focusing on support and developing new ways of working in response
to franchisee needs. However, we expect a lower-level of activity in the
short to medium term.
The NexSys business (the new name for our K3 SYSPRO operations), which
provides business-critical ERP solutions for the UK manufacturing and
distribution markets, continued to perform very well. Against the difficult
backdrop of higher energy costs for the sector, which prompted some prospects
to defer decisions, NexSys secured six major new wins over the financial year,
including larger contracts, in line with strategy. New contracts included a
c. £0.6m deal with a manufacturer of automotive plastic components, a c.
£0.4m win with a bicycle manufacturer, a c. £0.4m order with a leading metal
fabricator of trailers and towing parts, and a c.£0.3m agreement with a
manufacturer of products for the farming industry. These order values are made
up of the first year's software licence, the first year's support, and initial
services. The services back-log remains healthy, and we are pleased with the
new business pipeline.
Central Costs
During the year, we took the decision to devolve greater responsibility and
accountability over resource allocation to our Business Unit heads. This
related in particular to HR, IT and finance functions. The result has been a
significant reduction in overall costs, with the Business Units prioritising
sales and profitability. The full benefits of this will be more apparent in
the new financial year and beyond.
The unallocated Central Support costs that were not matched to revenue
generation, which include our PLC costs, were £2.2m (2022: £1.8m).
The Board and Staff
On behalf of the Board, I would like to thank all our staff for their hard
work and efforts over the year. It has been a challenging year in many
respects and our people have responded with great commitment and energy.
The Board's strategy to further simplify operations, more effectively address
the opportunities within market sectors, and to drive cash generation and
shareholder value has led to some significant organisational changes during
the year. We are very grateful for everyone's contribution to this as we
continue to make progress towards achieving our strategic goals.
On 3 April 2023, Eric Dodd joined the Board as Chief Financial Officer, taking
over from Rob Price, the previous Chief Financial Officer. Since joining, Eric
has focused rigorously on cash, costs, and further operational simplification.
He has also implemented the new revenue recognition policy at the Fashion
portfolio.
On 30 October 2023, Marco Vergani stepped down as Chief Executive Officer of
the Company, in line with the decentralisation strategy. Accordingly, the
Group's business unit heads now report directly to the Board, with each head
taking greater responsibility and accountability for their respective
operations. We wish Marco well in his future endeavours.
Summary and Outlook
The new business unit structure has established a better platform for the
Group, as the Board focuses on driving value for shareholders. It provides
clear focus, greater accountability, and further opportunity to reduce
historical overhead.
The two divisions, K3 Products and K3 Third-party Solutions, both have growth
opportunities while also managing challenges. The growth opportunity with the
Fashion portfolio remains clear and will drive high-margin, recurring income,
while we expect NexSys to continue to generate significant high-quality cash
flows with leading margins. We have responded to the sharp slowdown in
activity at Global Accounts, and although we expect trading at the unit to
remain subdued, we continue to engage closely with IKEA and its overseas
franchisees.
K3 has started the new financial year with a stronger balance sheet than at
the same point last year. It will also benefit from the cost reduction
measures taken in the latter part of 2023 coming through more fully over the
course of the current financial year and next year. The Board is pleased to
report that Group trading in the first quarter is in line with budget and it
remains confident that K3 will continue to improve cash generation and deliver
higher adjusted operating profit.
Tom Crawford
Executive Chairman
FINANCIAL REVIEW
Overview
The Group's reported segments are 'K3 Products' and 'Third-party Solutions',
with Central Support costs stated separately, as previously. This aligns
segmental reporting with the Group's growth strategy.
Focus on value creation for shareholders
The Board's main focus is on value creation for shareholders. Driving cash
generation and growing annual recurring revenues ("ARR") is central to this.
We completed some important steps during the financial year in line with these
goals. Late in the second half of the year, we moved in full to a Business
Unit structure. Decentralising the business has established a better platform
from which to realise value creation for shareholders. It has increased
accountability while also driving significant reductions in IT, HR and finance
expenditure.
We further tightened our approach to expenditure on new product development
activities, which has helped to support a meaningful improvement in cash
generation. Specifically, we have allocated expenditure according to where
market, pipelines and margins indicated the highest probability of cash
returns over the medium term, withdrawing or reducing expenditure elsewhere.
We also identified unnecessary cost burdens, such as certain structures and
financing arrangements that did not offer tangible benefit to the Company. We
are continuing to exit these arrangements and to work on further simplifying
the business in order to establish the most appropriate cost base.
Since we believe that the closest metric to understanding cash generation is
adjusted operating profit/(loss), we have adopted it as the key measure of the
Company's performance. It replaces earnings before interest, tax, depreciation
and amortisation ("EBITDA"), which was used previously.
The Group's products for the fashion and apparel market offer the
highest-margin, highest growth opportunity, and ARR in the fashion portfolio
grew by over 28% in 2023.
Key performance indicators
The Directors consider the key performance indicators by which they measure
the performance of the Group by division to be:
o revenue;
o gross profit;
o gross profit margin;
o adjusted operating profit/(loss);
o free cashflow; and
o annual recurring revenue.
The Group's results for the year end to 30 November 2023, together with
comparatives for the same period in 2022, are summarised in the tables below.
Continuing Activities Revenue
2023 2022
£m £m
Revenue 43.8 47.2
Gross profit 27.1 27.9
Gross profit margin 62% 59%
Adjusted operating profit/(loss) 1.3 (0.6)
Free cashflow 1.1 (1.8)
Annual recurring revenue - Fashion 5.8 4.5
*restated
Overall Group revenue decreased by 8% or £3.5m to £43.8m (2022: £47.2m).
This was mainly due to a reduction in revenue at the Third-party Solutions
division of £3.4m.
We updated the Group's revenue recognition policy for K3 Fashion and K3
Pebblestone contracts in the year under review and now recognise the revenue
of a K3 Fashion and K3 Pebblestone contract evenly over its lifetime. This
approach makes it easier to manage the business and use benchmarks for
activities, including sales & marketing expenditure, customer acquisition
costs and customer churn. This will improve business understanding and further
support capital allocation and other decision-making processes. The change has
also simplified the balance sheet by lowering accrued income and matching
revenue recognition more closely to cash collection. For the year under
review, the shift to this new revenue recognition policy has reduced revenue
and operating profit by £0.4m respectively (FY2022: £0.3m).
ARR from the combination of K3 Fashion and K3 Pebblestone increased by 28% to
£5.8m (2022: £4.5m), driven by both new customers and existing customer
expansion.
Gross profit decreased by £0.8m or 4% to £27.1m (2022: £27.9m). However,
gross profit margin increased by three percentage points to 62%, reflecting
the change in sales mix.
Encouragingly, the Group moved to an adjusted operating profit of £1.3m in
2023 from a loss in 2022 (2022: loss of£0.6m). This was driven by lower
amortisation and more disciplined overhead expenditure.
Following the Company's transition to a Business Unit structure, impairments
of £2.1m (2022: £1.6m) relating to goodwill and capitalised Group-wide IT
projects were identified as no longer justifiable. A total of £2.1m in
reorganisation costs were incurred (2022: £0.6m) and related primarily to the
cost of people leaving the business. There is a credit resulting from
historical acquisitions of £0.4m due to reversal contingent consideration
obligation The departure of several senior staff members lead to lapses of
outstanding share options, which led to a credit of £1.1m (2022: £0.9m
debit).
Earnings Per Share
The Group generated adjusted earnings per share of 1.0p from Continuing
operations (2022: loss of 4.9p). Reported loss per share, which includes
profit from discontinued activities, was 5.4p (2022: loss of 9.5p).
Dividends
No dividend will be declared for the year ended 30 November 2023 (2022: nil).
Taxation
The corporation tax charge for the financial year was £0.5 million (2022: nil
charge). This comprised a credit for current taxation of £0.1 million (2022:
charge of £0.1m), which related to the non-UK businesses, and a charge for
deferred taxation of £0.4 million (2022: credit of £0.1 million).
Balance Sheet
Non-current assets reduced by £3.5m to £28.9m, which reflected a more
disciplined approach to the capitalisation of development expenditure and also
the impact of impairment of intangible and tangible assets of circa £2.1m.
Current assets decreased by £2.3m to £16.1m (2022: £18.5m). Receivables
reduced by £1.9m to £5.4m (2022: £7.3m) due to improved collection
procedures and the receivables ageing is excellent, with little unprovided
exposure over 60 days. The change in the revenue recognition policy has led to
a reduction in 'Contract Assets' and this should remain low in the future.
Trade & other payables reduced to £15.9m (2022: £16.9m). We expect this
balance to rise as we increase sales of fashion and apparel products,
especially K3 Fashion, and we invoice annually and quarterly in advance.
At the financial year end, cash balances stood at £8.3m (30 November 2022:
£7.2m). The Group has a bank facility with Barclays, its long-standing
bankers, which provides for the draw down of up to £2.8m to support seasonal
cash movements. At the year-end, £nil was drawn down (2022: £nil). After the
financial year end, the facility agreement was extended for further two years,
until March 2026.
Cash Flow
The Group's cash performance continued its improving trend. There were a
number of large movements in working capital, the two most significant being
the £3.5m reduction in receivables (including stock) and the £1.1m reduction
in payables. Net cash inflow from operating activities increased by £1.1m to
£3.5m (2022: £2.4m).
The more disciplined capital allocation and the ongoing corporate
simplification process have begun to deliver tangible benefits. Both investing
expenditure and financing cost have almost halved to £1.4 million and
£1.0 million respectively (2022: investing expenditure of £2.7 million and
financing cost of £1.4 million). A specific illustration is the 30% reduction
in lease liability payments, which mainly related to properties and vehicles,
to £0.7 million.
The £1.1 million improvement in operating cashflow together with the £1.3
million reduction in development expenditure and £0.7 million reduction in
financing costs combined to deliver a £2.8 million improvement in free
cashflow. As a result, the cash outflow in 2022 of £1.7m was converted to a
cash inflow of £1.1m in 2023. The Group's closing cash balance at 30 November
2023 was £8.3m (2022: £7.1m).
Eric Dodd
Chief Financial Officer
K3 Business Technology Group plc
Consolidated Income Statement
for the year ended 30 November 2023
Restated
Year ended Year ended
30 November 30 November
2023 2022
£'000 £'000
Revenue 43,779 47,252
Cost of sales (16,639) (19,382)
Gross profit 27,140 27,870
Adjusted administrative expenses (25,523) (28,367)
Impairment losses on financial assets (354) (102)
Adjusted operating profit/(loss) 1,263 (599)
Exceptional impairment (2,070) (1,603)
Exceptional reorganisation and acquisition costs (2,129) (595)
Exceptional acquisition/disposal related credit/(costs) 406 (98)
Share-based payment credit/(charge) 1,126 (855)
Loss from operations (1,404) (3,750)
Finance expense (417) (338)
Loss before taxation from continuing operations (1,821) (4,088)
Tax expense (564) (208)
Loss after taxation from continuing operations (2,385) (4,296)
Profit after taxation from discontinued operations - 108
Loss for the year (2,385) (4,188)
All the (loss)/profit for the year is attributable to equity shareholders of
the parent.
Loss per share
Restated
Year Year
ended ended
30 November 30 November
2023 2022
£'000 £'000
Basic and diluted (5.4)p (9.5)p
Basic and undiluted from Continuing operations (5.4)p (9.8)p
Consolidated Statement of
Comprehensive Income
for the year ended 30 November 2023
Restated
Year Year
ended ended
30 November 30 November
2023 2022
£'000 £'000
Loss for the year (2,385) (4,188)
Other comprehensive income
Exchange differences on translation of foreign operations 76 69
Other comprehensive income 76 69
Total comprehensive expense for the year (2,309) (4,119)
Total comprehensive expense 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.
Consolidated Statement of Financial Position
as at 30 November 2023
Restated Restated
2023 2022 2021
£'000 £'000 £'000
ASSETS
Non-current assets
Property, plant and equipment 1,323 1,766 1,551
Right-of-use assets 1,025 801 1,709
Goodwill 24,911 25,022 24,772
Other intangible assets 1,533 3,394 6,648
Deferred tax assets 77 1,551 1,636
Total non-current assets 28,869 32,534 36,316
Current assets
Stock 276 484 467
Trade and other receivables 7,555 10,764 8,100
Forward currency contracts - 110 -
Cash and short-term deposits 8,304 7,113 9,146
Total current assets 16,135 18,471 17,713
Total assets 45,004 51,005 54,029
LIABILITIES
Non-current liabilities
Lease liabilities 37 79 135
Provisions 105 179 1,129
Deferred tax liabilities 91 1,119 1,288
Total non-current liabilities 233 1,377 2,552
Current liabilities
Trade and other payables 15,946 16,882 14,456
Current tax liabilities 285 372 509
Lease liabilities 947 802 1,623
Borrowings 12 50 113
Provisions 305 968 854
Total current liabilities 17,495 19,074 17,555
Total liabilities 17,728 20,451 20,107
EQUITY
Share capital 11,183 11,183 11,183
Share premium account 31,451 31,451 31,451
Other reserves 11,151 11,151 11,151
Translation reserve 1,683 1,607 1,538
Accumulated losses (28,192) (24,838) (21,401)
Total equity attributable to equity holders of the parent 27,276 30,554 33,922
Total equity and liabilities 45,004 51,005 54,029
Consolidated Statement of Cash Flows
for the year ended 30 November 2023
Restated
Year Year
ended ended
30 November 30 November
2023 2022
£'000 £'000
Cash flows from operating activities
Loss for the period (2,385) (4,188)
Adjustments for:
Finance expense 417 336
Tax expense 564 20
Depreciation of property, plant and equipment 552 636
Impairment of property, plant and equipment 464 -
Depreciation of right-of-use assets 591 981
Amortisation of intangible assets and development expenditure 1,091 3,767
Impairment of intangible assets (including goodwill) 1,606 1,603
(Gain)/loss on sale of property, plant and equipment 11 10
Share-based payments (credit)/charge (969) 751
Net cash flow from provisions (740) (717)
Net cash flow from stock 208 17
Net cash flow from trade and other receivables 3,319 (2,774)
Net cash flow from trade and other payables (1,104) 2,380
Cash generated from operations 3,625 2,822
Income taxes paid (82) (395)
Net cash from operating activities 3,543 2,427
Cash flows from investing activities
Development expenditure capitalised (734) (1,725)
Acquisition of a subsidiary, net of cash acquired (86) (178)
Purchase of property, plant and equipment (588) (845)
Net cash from investing activities (1,408) (2,748)
Cash flows from financing activities
Proceeds from loans and borrowings 3,500 3,000
Repayment of loans and borrowings (3,536) (3,111)
Repayment of lease liabilities (708) (1,073)
Interest paid on lease liabilities (126) (132)
Finance expense paid (163) (150)
Net cash from financing activities (1,033) (1,466)
Net change in cash and cash equivalents 1,102 (1,787)
Cash and cash equivalents at start of year 7,113 9,033
Exchange gain/(losses) on cash and cash equivalents 89 (133)
Cash and cash equivalents at end of year 8,304 7,113
Consolidated Statement of Changes in Equity
for the year ended 30 November 2023
Share capital Share premium Other reserves Translation Restated Restated
reserve Accumulated Total equity
losses
£'000 £'000 £'000 £'000 £'000 £'000
At 30 November 2021 11,183 31,451 11,151 1,538 (19,522) 35,801
Prior period restatement - - - - (1,879) (1,879)
At 30 November 2021 - Restated 11,183 31,451 11,151 1,538 (21,401) 33,922
Changes in equity for year ended 30 November 2022
Loss for the year
- - - - (4,188) (4,188)
Other comprehensive income for the year - - - 69 - 69
Total comprehensive income/(expense) - - - 69 (4,188) (4,119)
Share-based payment - - - - 751 751
At 30 November 2022 - Restated 11,183 31,451 11,151 1,607 (24,838) 30,554
Changes in equity for year ended 30 November 2023
Loss for the year
- - - - (2,385) (2,385)
Other comprehensive income for the year - - - 76 - 76
Total comprehensive income/(expense) - - - 76 (2,385) (2,309)
Share-based payment - - - - (969) (969)
At 30 November 2023 11,183 31,451 11,151 1,683 (28,192) 27,276
Within the Share Capital reserve there are own shares held by a wholly owned
subsidiary, K3 Business Technology Group Trustees Company Limited, as trustee
of the group's employee share ownership plan. Own shares represent 26,809
(2022: 26,809) shares held under an employee share ownership plan which will
be issued to the employees when they choose to withdraw them. The market value
of these shares as at 30 November 2023 was £30,294 (2022: £34,181).
NOTES
1 Basis of preparation
Statement of compliance
These group financial statements have been prepared in accordance with UK
endorsed IFRS in conformity with the requirements of the Companies Act 2006
("IFRS") ("UK Adopted internal accounting standards"). The company financial
statements have been prepared in accordance with Financial Reporting Standard
101, Reduced Disclosure Framework ("FRS101").
The financial statements have been prepared on the historical cost basis.
Historical cost is generally based on the fair value of the consideration
given in exchange for goods and services.
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
2023, 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 2023 and 30 November 2022 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 2022 have been
filed with the Registrar of Companies, and those for 2023 will be delivered
following the Company's Annual General Meeting. The Auditor has reported on
the statutory accounts for 2023 and 2022. Their report for 2023 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 two years to 31 March 2026, on a simplified standard bank terms basis
with facility level consistent with 2023.
The capital structure of the Group has materially changed in the last three
years with the disposal of the Starcom and Sage businesses for a combined
£16.2m and the conversion of £3.0m shareholder loans to equity. The Group
therefore ended the year ended 30 November 2023 with a Net Cash position of
£8.3m (2022: £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 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:
o 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 licences 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.
o 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. There is an ongoing
performance obligation to maintain the product to ensure the functionality
continues to bolt onto Microsoft Dynamics products.
o 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 licence revenue:
Software licences for 3rd party products are recognised at a point in time, on
contract and issue of the initial licence key which is contemporaneous.
K3 bolt on own software IP is recognised over time. See note 11 for more
details.
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 licence is not distinct, and the customer continually receives
benefits.
Services revenues:
Services are linked to implementation and set up of K3 own and 3(rd) 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 recognized as it is performed.
Hardware:
Hardware is peripheral to a number of contract implementations; the revenue is
recognized 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. 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. More details including carrying values are included in
note 6.
Capitalised development expenditure and subsequent amortization
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, is discussed further in note 6.
Expenditure is only capitalised when the investment appraisal process has
assessed that the product is likely to benefit the Group in the future. More
details including carrying values are included in note 6.
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 on pages 10 to 14.
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 operating profit/(loss). The segment results for the year ended 30
November 2023 and for the year ended 30 November 2022, reconciled to loss for
the year.
Year ended 30 November 2023
K3 Products Third-party Solutions Central Costs Total
£'000 £'000 £'000 £'000
External revenue 13,085 30,694 - 43,779
Cost of sales (2,728) (13,911) - (16,639)
Gross profit 10,357 16,783 - 27,140
Gross margin 79.15% 54.68% - 61.99%
Adjusted administrative expenses (15,187) (8,475) (2,215) (25,877)
Adjusted operating profit/(loss) (4,830) 8,308 (2,215) 1,263
Exceptional impairment - - (2,070) (2,070)
Exceptional reorganisation costs - - (2,129) (2,129)
Acquisition/disposal credit/(costs) - - 406 406
Share-based payment credit/(charge) - - 1,126 1,126
(Loss)/profit from operations (4,830) 8,308 (4,882) (1,404)
Finance expense - - (417) (417)
(Loss)/profit before tax and discontinued operations (4,830) 8,308 (5,299) (1,821)
Tax expense - - (564) (564)
Profit/(loss) from discontinued operations - - - -
(Loss)/profit for the year (4,830) 8,308 (5,863) (2,385)
Year ended 30 November 2022 (restated)
K3 Products Third-party Solutions Central Costs Total
£'000 £'000 £'000 £'000
External revenue 12,588 34,664 - 47,252
Cost of sales (2,792) (16,590) - (19,382)
Gross profit 9,796 18,074 - 27,870
Gross margin 77.81% 52.14% - 58.98%
Adjusted administrative expenses (16,705) (10,004) (1,760) (28,469)
Adjusted operating profit/(loss) (6,909) 8,070 (1,760) (599)
Exceptional impairment - - (1,603) (1,603)
Exceptional reorganisation costs - - (595) (595)
Acquisition/disposal credit/(costs) - - (98) (98)
Share-based payment credit/(charge) - - (855) (855)
(Loss)/profit from operations (6,909) 8,070 (4,911) (3,750)
Finance expense - - (338) (338)
(Loss)/profit before tax and discontinued operations (6,909) 8,070 (5,249) (4,088)
Tax expense - - (208) (208)
Profit/(loss) from discontinued operations - - 108 108
(Loss)/profit for the year (6,909) 8,070 (5,349) (4,188)
*FY2022 restated.
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 on page
51. 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 42% (2022: 46%) 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
Restated
Year ended Year ended
30 November 30 November
2023 2022 2023 2022
£'000 £'000 £'000 £'000
United Kingdom 16,279 16,323 21,911 22,461
Netherlands 5,762 6,203 5,913 5,749
Ireland 110 631 - 1,650
Rest of Europe 8,223 7,166 974 2,323
Middle East 2,142 1,807 - -
Asia 6,200 8,882 68 181
USA 221 820 3 3
Rest of World 4,842 5,420 - -
43,779 47,252 28,869 32,367
% of non-UK revenue 63% 65%
External revenue by business unit geography
External revenue
Restated
Year ended Year ended
30 November 30 November
2023 2022
£'000 £'000
United Kingdom 16,820 16,883
Netherlands 23,657 27,255
Ireland 727 316
Rest of Europe 2,575 2,770
Rest of World - 28
43,779 47,252
% of non-UK revenue 62% 65%
Revenue recognised and included within contract assets can be reconciled as
follows:
2023
£'000
At 1 December 2022 - as previously stated 5,512
Amount restated due to change in accounting policy (2,785)
At 1 December 2022 - restated 2,727
Transfers in the period from contract assets to trade receivables (2,727)
Excess of revenue recognised over cash (or rights to cash) being recognised 1,286
during the period
At 30 November 2023 1,286
Revenue recognised and included within contract liabilities can be reconciled
as follows:
2023
£'000
At 1 December 2022 5,312
Amounts included in contract liabilities that was recognised as revenue during (5,312)
the period
Cash received in advance of performance and not recognised as revenue during 7,454
the period
At 30 November 2023 7,454
4 Tax expense/(charge)
Restated
2023 2022
£'000 £'000
Current tax expense/(credit)
Income tax of overseas operations on profits/(losses) for the period 597 203
Adjustment in respect of prior periods (479) (100)
Total current tax expense 118 103
Deferred tax (credit)/expense
Origination and reversal of temporary differences 180 (61)
Effect of changes in tax rate - 10
Adjustments in respect of prior periods 266 (32)
Total deferred tax expense/(credit) 446 (83)
Total tax expense in the current year 564 20
Income tax expense attributable to continuing operations 564 208
Income tax (credit) attributable to discontinued operations - (188)
564 20
Deferred tax balances as at 30 November 2023 have been measured at 25%
(FY2022: 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:
2023 2022
£'000 % £'000 %
Loss before taxation from continuing operations (1,821) (4,088)
Loss before taxation from discontinued operations - (80)
Loss before tax (1,821) (4,168)
Expected tax charge/(credit) based on the standard rate of corporation tax (419) 23.0 (792) 19.0
Effects of:
Items not deductible for tax purposes (64) 439
Income not taxable (369) (496)
Adjustment to tax charge in respect of prior periods 647 (132)
Movements in deferred tax not recognised 531 1,149
Differences between overseas tax rates 125 (136)
Effect of deferred tax rate difference 83 (12)
Total tax expense in current period 564 34.6 20 48.7
Deferred tax recognised directly in equity for FY2023 was £nil (2022: £nil).
Current tax recognised in equity for FY2023 was £nil (2022: £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 (Loss)/earnings per share
The calculations of (loss)/earnings per share are based on the profit/(loss)
for the year and the following numbers of shares:
2023 2022
Number of shares Number of shares
Denominator
Weighted average number of shares used in basic and diluted EPS 44,090,074 44,090,074
Certain employee options and warrants have not been included in the
calculation of diluted EPS because their exercise is contingent on the
satisfaction of certain criteria that had not been met at the end of the year.
Basic and diluted
2023 2022
£'000 £'000
Loss after tax from continuing operations (2,385) (4,296)
Profit after taxation from discontinued operations - 108
(Loss)/profit attributable to ordinary equity holders of the parent for basic
and diluted
(2,385) (4,188)
earnings per share
The alternative earnings per share calculations have been computed because the
directors consider that they are useful to shareholders and investors. These
are based on the following profits/(losses) and the above number of shares.
Basic and diluted before other items
2023 2022
£'000 £'000
Loss after tax from continuing operations (2,385) (4,296)
Add back other items:
Exceptional reorganisation costs 2,129 595
Exceptional impairment costs 2,070 1,603
Share-based payment (credit)/charge (1,126) 855
Acquisition/disposal related (credit)/costs (406) 98
Tax credit/ (charge) related to other items 175 (1,015)
Profit/(loss) attributable to ordinary equity holders of the parent for basic
and diluted
earnings from continuing operations before other items 457 (2,177)
2023 2022
Pence Pence
Profit/(loss) per share
Basic and diluted earnings/(loss) per share (5.4) (9.5)
Basic and diluted earnings/(loss) per share from continuing operations (5.4) (9.8)
Basic and diluted earnings/(loss) per share from discontinued operations - (0.2)
Adjusted earnings per share
Basic and diluted earnings/(loss) per share from continuing operations before 1.0 (4.9)
other items
6 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.
During the year, IBS CGU was merged with that of NexSys CGU as IBS entity
merged with NexSys entity to drive operational efficiency.
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
2023
£'000
NexSys and Integrated Business Solutions (IBS) 14,448
Global Accounts 9,366
Walton 1,097
ViJi -
24,911
Goodwill carrying amount
2022
£'000
NexSys (previously "Syspro") 13,677
Global Accounts 9,371
Walton & IBS 1,868
ViJi 106
25,022
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
Annual Budget starting in the 2024, 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 four years.
The rate used to discount the forecast pre-tax cash flows is 14.0% (2022:
17.4%) 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.
7 Deferred tax
The net deferred tax asset/liability at the end of the year is analysed as
follows:
Restated
2023 2022
£'000 £'000
Deferred tax assets
Continuing operations 77 1,551
Deferred tax liabilities
Continuing operations (91) (1,119)
(14) 432
Recognised deferred tax assets and liabilities and attributable to the
following:
Net
Restated
2023 2023 2022 2023 2022
£'000 £'000 £'000 £'000 £'000
Plant and equipment - - (1) - 110
Other temporary differences - (91) (1,118) (91) 241
Losses 77 - - 77 23
Business combinations - - - - 58
Deferred tax assets/(liabilities) 77 (91) (1,119) (14) 432
Restated
1 December Recognised in 30 November
2022 income Disposal 2023
£'000 £'000 £'000 £'000
Plant and equipment 110 (110) - -
Other temporary differences 241 (332) - (91)
Losses 23 54 - 77
Business combinations 58 (58) - -
Deferred tax assets/(liabilities) 432 (446) - (14)
The Group have not recognised a deferred tax asset on £3.6m (2022: £1.8m) 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 £31k
(2022: £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.
8 Notes to the cash flow statement
Cash and cash equivalents
2023 2022
£'000 £'000
Cash and bank balances available on demand 8,304 7,113
Bank overdrafts - -
8,304 7,113
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 £610k (2022: £233k) were financed by new leases.
9 Share capital
Issued and fully paid
2023 2022
Number £'000 Number £'000
Ordinary shares of 25p each
At beginning and end of the year 44,732,379 11,183 44,732,379 11,183
All shares have equal voting rights and there are no restrictions on the
distribution of dividends or repayment of capital.
No shares were allocated under the employee share option schemes during the
year.
2023 2022
Number Number
Own shares held 26,809 26,809
Own shares are held by a wholly owned subsidiary, K3 Business Technology Group
Trustees Company Limited, as trustee of the group's employee share ownership
plan.
1,200,000 warrants for ordinary shares of 25p were issued on 31 March 2020
following the receipt by the Group of £3,000,000 in shareholders loans. The
warrants are split as follows:
- CA Fastigheter AB 300,000
- Johannes Plan Fastigheter AB 300,000
- Kestrel Partners LLP discretionary clients 600,000
The warrants are over ordinary shares of 25p, are transferrable with a strike
price of 25p and expire on 31 March 2030. At 30 November 2023 none of these
warrants had been exercised. On 7 April 2021 the £3,000,000 Shareholder Loan
was converted to equity with the issue of 1,785,714 nominal shares.
At 30 November 2023 (and 30 November 2022) all SAYE options have lapsed.
LTIP
K3 Business Technology Group plc operates an equity-settled share-based
remuneration scheme for employees: the K3 Long Term Incentive Plan ("LTIP")
for certain senior management including executive directors.
As at 30 November 2023, an aggregate of 437,500 (2022: 1,675,000) LTIP options
over ordinary shares in the Company remained in issue.
10 Notes to the strategic report
*1 Adjusted operating profit/(loss) - is the profit/(loss) from continuing
activities adjusted to exclude exceptional impairment costs, exceptional
re-organisation cost and exceptional acquisition costs/(income) and
share-based payment charges/(credit).
*2 Recurring revenue - contracted support, maintenance and annual licence, as
% of total revenue.
*3 K3 Products 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 lease liabilities associated with Right-of-use assets under IFRS16.
*6 Adjusted loss/earnings per share - basic profit /(loss) per share from
continuing operations adjusted to exclude exceptional impairment costs,
exceptional re-organisation cost and exceptional acquisition costs/(income)
and share-based payment charges/ (credit), net of the related tax charge.
*7 Adjusted administrative expense - administrative expenses adjusted to
exclude exceptional impairment costs, exceptional re-organisation cost and
exceptional acquisition costs/(income) and share-based payment
charges/(credit).
*8 Free cash flow -Calculated as delta between cash and cash equivalents
balances between two periods, excluding exchange gain/(loss) on cash and cash
equivalents.
*9 Net cash -Calculated as cash and cash equivalents balances less bank
borrowings.
11 Prior period adjustment
During the year the Company's Directors reviewed the application of IFRS 15 in
respect of the Company's Fashion and Pebblestone revenue contracts. As a
result of this review the Directors determined that IFRS 15 had been
incorrectly applied when accounting for the Company's contracts with
customers. The historical application had determined that there were multiple
performance obligations within the contracts and revenue were recognised at
specified milestones.
However, upon reassessment, it was determined that the contracts should not be
segmented and represents single performance obligation. The Directors
determined that licences provided under these contracts are dependent on
updates for ongoing functionality, therefore determined to recognise revenue
based on time elapsed and thus rateably over the term of the contract.
The misapplication of IFRS 15 in prior periods led to early revenue and cost
recognition. The correction of this error affects the financial statements for
the years 2020 through 2022. The impact of these adjustments for these periods
are detailed below.
The Group has corrected this error from 1 December 2020 which has resulted in
adjustments to the amounts recognised in the Consolidated Financial
Statements. In accordance with IAS 8, the Group has restated FY2022. The
overall net impact of adjustments was a debit to retained earnings of £1.9
million as at 1 November 2022.
For comparability purposes, the following table gives the impact of the
revised accounting policy on the Consolidated Balance Sheet and Consolidated
Income Statement for the year ended 30 November 2022 by showing what the
results would have been had they been prepared under the previous accounting
policies.
11 Prior period adjustment (continued)
Consolidated Income Statement
As reported Adjust- Restated
Year ended ment Year ended
30 November 30 November
2022 2022
£'000 £'000 £'000
Revenue 47,532 (280) 47,252
Cost of sales (19,382) - (19,382)
Gross profit 28,150 (280) 27,870
Administrative expenses (28,367) - (28,367)
Impairment losses on financial assets (102) - (102)
Adjusted operating profit/(loss) (319) (280) (599)
Exceptional impairment (1,603) - (1,603)
Exceptional reorganisation and acquisition costs (693) - (693)
Share-based payment charge (855) - (855)
Loss from operations (3,470) (280) (3,750)
Finance expense (338) - (338)
Loss before taxation from continuing operations (3,808) (280) (4,088)
Tax expense (278) 70 (208)
Loss after taxation from continuing operations (4,086) (210) (4,296)
Profit after taxation from discontinued operations 108 - 108
Loss for the year (3,978) (210) (4,188)
The adjustment of £0.3 million to revenue is due to change in revenue
recognition in FY2023 (see note 11). FY2022 revenue would have been £0.3m
lower if the change in accounting policy was applied in FY2022. The tax impact
of this adjustment is £0.1 million.
11 Prior period adjustment (continued)
Consolidated Financial Position
As reported Adjustment Restated
2022 2022 2022
£'000 £'000 £'000
ASSETS
Non-current assets
Property, plant and equipment 1,766 - 1,766
Right-of-use assets 801 - 801
Goodwill 25,022 - 25,022
Other intangible assets 3,394 - 3,394
Deferred tax assets 855 696 1,551
Total non-current assets 31,838 696 32,534
Current assets
Stock 484 - 484
Trade and other receivables 13,549 (2,785) 10,764
Forward currency contracts 110 - 110
Cash and short-term deposits 7,113 - 7,113
Total current assets 21,256 (2,785) 18,471
Total assets 53,094 (2,089) 51,005
LIABILITIES
Non-current liabilities
Lease liabilities 79 - 79
Provisions 179 - 179
Deferred tax liabilities 1,119 - 1,119
Total non-current liabilities 1,377 - 1,377
Current liabilities
Trade and other payables 16,882 - 16,882
Current tax liabilities 372 - 372
Lease liabilities 802 - 802
Borrowings 50 - 50
Provisions 968 - 968
Total current liabilities 19,074 - 19,074
Total liabilities 20,451 - 20,451
EQUITY
Share capital 11,183 - 11,183
Share premium account 31,451 - 31,451
Other reserves 11,151 - 11,151
Translation reserve 1,607 - 1,607
Accumulated losses (22,749) (2,089) (24,838)
Total equity attributable to equity holders of the parent 32,643 (2,089) 30,554
Total equity and liabilities 53,094 (2,089) 51,005
11 Prior period adjustment (continued)
Consolidated Financial Position
As reported Adjustment Restated
2021 2021 2021
£'000 £'000 £'000
ASSETS
Non-current assets
Property, plant and equipment 1,551 - 1,551
Right-of-use assets 1,709 - 1,709
Goodwill 24,772 - 24,772
Other intangible assets 6,648 - 6,648
Deferred tax assets 1,010 626 1,636
Total non-current assets 35,690 626 36,316
Current assets
Stock 467 - 467
Trade and other receivables 10,605 (2,505) 8,100
Forward currency contracts - - -
Cash and short-term deposits 9,146 - 9,146
Total current assets 20,218 (2,505) 17,713
Total assets 55,908 (1,879) 54,029
LIABILITIES
Non-current liabilities
Lease liabilities 135 - 135
Provisions 1,129 - 1,129
Deferred tax liabilities 1,288 - 1,288
Total non-current liabilities 2,552 - 2,552
Current liabilities
Trade and other payables 14,456 - 14,456
Current tax liabilities 509 - 509
Lease liabilities 1,623 - 1,623
Borrowings 113 - 113
Provisions 854 - 854
Total current liabilities 17,555 - 17,555
Total liabilities 20,107 - 20,107
EQUITY
Share capital 11,183 - 11,183
Share premium account 31,451 - 31,451
Other reserves 11,151 - 11,151
Translation reserve 1,538 - 1,538
Accumulated losses (19,522) (1,879) (21,401)
Total equity attributable to equity holders of the parent 35,801 (1,879) 33,922
Total equity and liabilities 55,908 (1,879) 54,029
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