REG - Shearwater Group PLC - Results for the six months ended 30 September 2021
25/11/2021 07:00
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RNS Number : 5251T Shearwater Group PLC 25 November 2021
25 November 2021
SHEARWATER GROUP PLC
("Shearwater", or the "Group")
Results for the six months ended 30 September 2021
Enhanced margins across the Group and strong adjusted EBITDA growth
Shearwater Group plc, the organisational resilience group, is pleased to
announce its unaudited results for the six months ended 30 September 2021.
Financial highlights:
· Adjusted EBITDA(1) of £1.3 million, an increase of 19% (H1 FY21:
£1.1 million)
· Improved adjusted EBITDA margin of 12% (H1 FY21: 10%)
· Revenue of £10.6 million (H1 FY21: £11.2 million), driven by a
number of contracts moving into the second half
· Net cash of £4.4 million as at 30 September 2021, after
increased investment expenditure during the period and settling £1.1 million
VAT relating to the Covid-19 VAT deferral scheme introduced by the Government
Business highlights:
· Advisory revenues significantly ahead of the same period in the
prior year, with enquiries back to pre-Covid levels. Pentesting now better
understood as a compliance requirement
· Increased Software revenues, with more features and new
innovations now providing a springboard for further growth from our end
customer base of over 1,000
· R&D expenditure increased 67% to £421k as the push for
organic growth gains momentum
· c.50% of revenues have already been identified for our second
half, of which c.90% comes from long term clients
· Post period end, the final outstanding deferred consideration
loan balance was repaid ahead of schedule, leaving the Balance Sheet debt free
with c.£4 million net cash and substantial undrawn bank facilities
· Confident outlook with the Group trading in line with the
market's EBITDA expectations for the full year
(1)Adjusted EBITDA is defined as profit before tax, before one off
exceptional items, share based payment charges, finance charges, impairment of
intangible assets, fair value adjustments to deferred consideration, other
income, depreciation and amortisation
Phil Higgins, Chief Executive Officer of Shearwater Group PLC, commented:
"We have seen both our divisions grow profits in the period under review with
growth in our Software sales and a strong rebound in advisory business. The
increasing quality of our earnings coupled with investment in our
subsidiaries, enabled by our strong cash position, gives us confidence in the
outcome for the full year, especially with c.50% of second half revenues
identified."
Enquiries:
Shearwater Group plc www.shearwatergroup.com
David Williams c/o Alma PR
Phil Higgins
Cenkos Securities plc - NOMAD and Joint Broker +44 (0) 20 7397 8900
Ben Jeynes / Max Gould - Corporate Finance
Julian Morse / Michael Johnson - Sales
Berenberg - Joint Broker +44 (0) 20 3207 7800
Matthew Armitt / Mark Whitmore
Alma PR shearwater@almapr.co.uk
Susie Hudson / Caroline Forde / Joe Pederzolli +44 (0) 20 3405 0205
About Shearwater Group plc
Shearwater Group plc is an award-winning group providing cyber security,
managed security and professional advisory solutions to help create a safer
online environment for organisations and their end users.
The Group's differentiated full service offering spans identity and access
management and data security, cybersecurity solutions and managed security
services, and security governance, risk and compliance. Its growth strategy is
focused on building a scalable group that caters to the entire spectrum of
cyber security and managed security needs, through a focused buy and build
approach.
The Group is headquartered in the UK, serving customers across the globe
across a broad spectrum of industries.
Shearwater shares are listed on the London Stock Exchange's AIM under the
ticker "SWG". For more information, please visit www.shearwatergroup.com
(http://www.shearwatergroup.com) .
Chief Executive's review
Overview
It has been another positive period for the Group as we continued to develop
the business, winning 90 net new clients, drove further cross-selling and
secured major renewals with key customers.
Most pleasingly both divisions delivered an enhanced margin, reflecting our
ever-improving quality of earnings, which drove significant adjusted EBITDA
growth of 19% in the period to £1.3m (H1 FY21: £1.1m).
Whilst revenue was slightly below the prior year at £10.6m (H1 FY21: £11.2m)
we were pleased to see growth in our Software division and a strong rebound in
advisory business. Meanwhile, the majority of the Group's managed service
sales are anticipated to be weighted towards the final quarter of the year
when organisations often finalise their annual budgets. As we move into our
traditionally busier period we have good visibility with c. 50% of H2 revenues
identified from existing contract renewals. In addition to this, a healthy
pipeline of new business opportunities exists with both new and existing
clients within what remains a buoyant cyber-security market.
Looking to the second half and beyond, the opportunity exists to:
§ maintain and increase recurring revenue from our Software division
(currently 80% recurring)
§ upsell additional Software modules or products to existing customers
§ grow the proportion of revenue which is re-occurring (contracted or with
renewal opportunities) in our Services division
§ cross-sell Software products into our existing blue-chip Services division
clients
§ attract new clients to our continuously expanding portfolio of products and
services
Looking forward, the Group has visibility on an increasing amount of
identified renewal opportunities from existing clients as the gradual shift
away from appliance-based computing to software-based solutions creating
additional renewal opportunities. In excess of £15.5m has already been
identified for FY23 and the company would hope that this will grow in excess
15% per annum in the periods thereafter.
As at 30 September 2021 we had a net cash balance of £4.4m (30 September
2020: £3.0m) following the repayment of £1.1m of VAT deferrals during the
period (£0.2m remaining). We also repaid £0.3m of outstanding legacy loan
liabilities over the period and a further £0.5m post-period end, leaving the
business now debt-free. We continue to forecast cash generation in H2 leading
to a robust year end net cash position in line with expectations. The Group
also continues to benefit from an undrawn revolving facility of £4.0m.
Growth strategy
With Covid-19 restrictions easing and vaccination programmes progressing, we
are focused on executing our M&A strategy and, being cognisant of further
dilution at the current share price levels, are pleased to also have the
option to finance acquisitions via cash reserves and bank debt available to us
if required. We are currently assessing potential targets of a variety of
sizes which are in line with our strategy of either enhancing our Software
division or adding scale to our Services division.
As communicated in the full year results statement, we are hiring across all
Group businesses, with a budgeted plan to increase headcount in both sales
and technical roles to support long-term growth. Whilst we are not immune to
the labour shortage challenges which have been widely publicised across many
industries, we continue to focus on hiring to support long term growth.
Current trading and outlook
Trading in Q3 has started positively with the Group continuing to deliver
enhanced profitability across both divisions. We also continue to see a
conversion from the sale of appliance-based computing into more lucrative
software and subscription-based sales.
The risks that organisations face in the digital world continue to increase,
with the NCSC reporting their offering of support to 777 significant
incidents(2), up from 723 the previous year. Hybrid working, technological
advancements including 5G and a more widespread use of the cloud, as well as
the continued evolution of corporate compliance all present new security risks
for businesses and present a great opportunity for Shearwater.
We have a strong reputation in our industry, a strong financial position and a
clear strategy for growth.
We look forward to executing further on that strategy in H2 and building the
business towards our vision of becoming the provider of choice delivering next
generation technology, professional advisory, and cyber security services and
solutions.
Operational review
Our Group comprises of two divisions, Software (18% revenue, 50% operating
profit) and Services (82% revenue, 50% operating profit). Our Services
division clients are largely blue chips, and we have particular strength in
the banking, telco and technology sectors. Our Software offerings are sold
through distributors to the global reseller channel.
Whilst we are largely UK-focused, we will continue to build our international
reach. We are in the process of opening a new location in the Netherlands to
satisfy client demand and in order to be able to capitalise on future
opportunities with enterprise clients based in the region.
Our Group offering is made up of managed services and warranties, security
solutions, software licences (from owned IP) and advisory & engineering.
Over time we continue to look to replace lower margin activities with more
profitable activities, leading to increased margins and improved future
visibility of our earnings.
Key strengths include our very strong client relationships (61% of clients
have been serviced by the Group for three years or longer), our inclusion in
critical networks and the quality of our offering, as reflected in the 11
industry award nominations Shearwater received in H1 alone.
KPI Review
The Group tracks its progress against a number of KPIs, as recorded below:
· 90 new customer wins in the period (30 September 2020: 62)
· New software revenue of £0.4m (30 September 2020: £0.5m)
· Reported repeatable revenues represent c. 50% of total revenues
· Whilst early in development, 2% of revenues are now generated
through cross-selling (2020: 0.27%) with an element of this being repeatable
in nature
Divisional review
Software
Our Software division performed well, with revenue up 1% on H1 last year.
Further growth is anticipated in the second half, which is expected to be
driven by the upsell of our enhanced product sets to new and existing clients.
Renewal rates for Software customers remain stable at c.80%.
The division has delivered an improved EBITDA margin of 48% (2020: 41%)
generating an adjusted EBITDA of £0.9m (2020: £0.8m), 20% ahead of the prior
period.
Software
H1 FY22 H1 FY21 YOY
£ (000) £ (000) %
Revenue 1,887 1,861 1%
Gross profit 1,462 1,441 1%
Gross profit margin % 77% 77% -%
Overheads 552 682 19%
Adjusted EBITDA 910 759 20%
Adjusted EBITDA % 48% 41% 7%
As previously communicated, our Software division is working towards becoming
a leading Security-as-a-Service converged platform provider - a 'one stop
shop' for all an organisation's Access Management needs (forecast by Gartner
to grow to a US$9.2bn industry globally by 2025).
Progress made towards this ambition in the first half includes the continued
enhancement to our cloud offerings. We have also had good success selling a
new software product (which secures open-platform technology) into a major
financial institution. This product has therefore proven its value in this
vertical and generated significant new business leads with similar
organisations.
Services
Our Services division delivered revenue of £8.7m in the first six months,
driven by strong growth in advisory revenues, offset by a number of contracts
which have moved into the second half.
Margins increased to 10% (2020: 8%), leading to an adjusted EBITDA performance
of £0.9m (2020: £0.8m).
Services
H1 FY22 H1 FY21 YOY
£ (000) £ (000) %
Revenue 8,689 9,312 (7%)
Gross profit 2,639 2,257 17%
Gross profit margin % 30% 24% 6%
Overheads 1,735 1,488 (17%)
Adjusted EBITDA 905 769 18%
Adjusted EBITDA % 10% 8% 2%
We are pleased that our professional advisory businesses have returned to
pre-pandemic levels of activity, with utilisation rates significantly improved
from the prior year as demand for advisory services continues to grow.
Significant contract renewals concluded in the period included a $1 million
contract with a global technology corporation by Pentest and a significant
contract renewal with a leading British telecommunications and media company
by Brookcourt Solutions.
(2)National Cyber Security Centre Annual Review 2021
Finance review
Financial performance
Revenue
Revenues of £10.6 million (H1 FY20: £11.2 million) reflects a small
year-on-year deficit which is driven by some timing of renewal opportunities
within Services division detailed below.
Whilst the Group's Services division has witnessed increased demand for its
advisory services which has led to a healthy year-on-year improvement in
advisory revenues in the period, there has been some timing impact on security
solutions as well as managed services and warranties revenues. It is however
encouraging to see a healthy pipeline of renewal opportunities in H2 which
provides the opportunity to recover the H1 deficit.
The Group's Software division has delivered a marginal year-on-year
improvement, benefitting from c. 40 new clients. During the period renewal
rates have been maintained at c. 80% and as we go into H2 the addition of new
products/modules provides an opportunity to drive incremental revenue growth
with both new and existing customers.
Adjusted EBITDA
The Group delivered enhanced adjusted profitability in H1 generating adjusted
EBITDA of £1.3m, 19% ahead of the prior period with both divisions reporting
improved year-on-year profitability which contributed to an improved adjusted
EBITDA margin for the Group of 12% (30 September 2020: 10%). Additional
overhead costs of £0.2m reflect investments, into infrastructure and
marketing, as well as one off savings made in the prior year.
The income statement below details both statutory and alternative measures
which, in the Directors' opinion provides additional relevant information to
the reader in assessing the adjusted performance of the business.
2021 2020 Change
£ (000) £ (000) %
Revenue 10,576 11,173 (5%)
Gross profit 4,101 3,697 11%
Gross profit margin % 39% 33%
Overheads 2,840 2,635 (8%)
Adjusted EBITDA 1,261 1,062 19%
Adjusted EBITDA margin % 12% 10%
Finance charge 56 140
Depreciation 136 178
Amortisation of intangible assets - computer software 526 379
Adjusted profit before tax 543 365 49%
Amortisation of acquired intangible assets 1,050 1,050
Other income 20 -
Fair value adjustment for deferred consideration - (37)
Share based payments 31 132
Loss before tax (518) (780) 34%
Taxation (credit)/charge (138) (78)
Loss after tax (380) (702) 46%
Finance charges
A year-on-year reduction in Finance charges reflect a material reduction in
loan liabilities held by the Group following the repayment of loan liabilities
in the prior period. During the period the Group settled in full one of the
remaining two loans liabilities, twelve months early, generating additional
interest savings.
Depreciation
A year-on-year reduction in the depreciation of right of use assets relating
to office space recognises some consolidation of office space.
Amortisation of intangibles assets - computer software
An increased amortisation charge in the period incorporates the amortisation
of internally developed products for our software division which have gone
live.
Adjusted profit before tax
Adjusted profit before tax of £0.5m (H1 FY21: £0.4m) is 49% ahead of the
prior period and in addition to the improved adjusted EBITDA incorporates the
savings in finance charges and depreciation less the increase in amortisation
of computer software intangible assets which is detailed above.
Amortisation of acquired intangible assets
Amortisation of acquired intangible assets of £1.1m (H1 FY21: £1.1m) is in
line with the previous year.
Other income
Other income consist of the early repayment discount made relating to a £0.3m
loan liability which was repaid in April 2021.
Fair value adjustment to deferred consideration
A credit in the period relates to a fair value adjustment for deferred share
consideration owed to the previous owners of GeoLang Holdings Limited which
was settled in full in the previous fiscal period.
Share based payments
A charge of £0.03million (H1 FY20: £0.1 million) has been incurred in
relation to long-term incentive plans.
Earnings per share
Adjusted basic and diluted earnings per share of £0.02 (H1 FY21: £0.01)
incorporates the positive year-on-year improvement in adjusted profit before
tax which has been driven by improved profitability from trading. Reported
basic and diluted loss per share of £0.02 (H1 FY21: loss per share £0.03)
represents a continued year-on-year improvement.
Loss before tax
A reduced loss before tax in the period of £0.5million (2020: £0.8m)
recognises the year-on-year improvement in adjusted profit before tax and
savings in share-based payments recognised in the period.
Statement of Cash flow
Following two years of strong cash flow where the Group delivered strong
adjusted cash conversion (FY21 143% and FY20 165%), the Group has experienced
some unwinding of its working capital which has contributed to a cash outflow
in the period. In addition to these working capital movements, there were a
number of other adjusting items which are detailed below the summarised cash
flow statement below which resulted in a cash outflow in H1:
2021 2020
£ (000) £ (000)
Adjusted EBITDA 1,261 1,062
Movements in working capital (3,523) 677
Cash used / generated from operations (2,262) 1,739
Adjusted cash used / generated from operations (876) 1,245
Adjusting items (1,386) 494
Cash used / generated from operations (2,262) 1,739
Capital expenditure (net of disposal proceeds) (433) (284)
Tax paid (31) -
Interest paid (35) (12)
Payments of lease liabilities (112) (149)
Proceeds from issue of share capital - 3,750
Loan repayments (250) (4,151)
FX and other (3) (469)
Movement in cash (3,126) 424
Opening cash and cash equivalents 8,049 3,343
Closing cash and cash equivalents 4,923 3,767
Loans (520) (752)
Net cash / (debt) 4,403 3,015
2021 2020
Adjusting items £ (000) £ (000)
Repayment of deferred VAT liability (1,120) 494
VAT prepayment (191) -
Other specific new external investment (75) -
Adjusting items (1,386) 494
In addition to the adjusting items highlighted above, during the period the
Group has increased its investment into internal development of its software
products and repaid loan liabilities in advance of their contracted repayment
date. The resulting savings from the early repayment of loan liabilities in
the period and post the period end are expected to generate savings in excess
of £0.1m this year.
Despite the operating cash outflow in H1 the Group continued to collect cash
in an efficient manner, maintaining strong cash collection with minimal bad
debts.
Events after the balance sheet date
On 15 October 2021, the Group settled the remaining loan balance held with
Secarma Limited (contracted repayment date was 9 April 2022) securing an early
repayment discount of £50,000 plus any future interest. Following the
repayment, the Group has no loan liabilities outstanding.
The Group's clean balance sheet, (including an undrawn revolving credit
facility) puts the Group in a healthy position as it looks to execute on the
next phases of its growth strategy.
Alternative performance measures
This review includes alternative performance measures ('APMs') alongside the
standard IFRS measures. The Directors believe that alternative measures
provide additional relevant information regarding the adjusted performance of
the business. APMs are used to enhance the comparability of information
between reporting periods by adjusting for one off exceptional and other items
that affect the IFRS measure. Consequently, the Directors and management use
APM's in addition to IFRS measures to assess the adjusted performance of the
business.
Alternative performance measures used include:
§ Adjusted EBITDA
§ Adjusted profit before tax
§ Adjusted profit after tax
§ Adjusted earnings per share
Adjusting items include:
Exceptional items which are one off by their nature such as acquisition costs
or re-organisation costs and do not form part of the underlying operational
cost of the business.
Share based payment charges awarded form a long-term remuneration incentive to
certain staff. Despite this plan not having a cash cost to the business, a
share-based payment charge is taken to the statement of comprehensive income
which we believe does not form part of the underlying operating cost of the
business.
Other income generated from early repayments discounts for loan liabilities
is one off in its nature and therefore not a consistent income stream.
Fair value adjustment on deferred consideration represents an adjustment to
revalue deferred share consideration liability. We consider that these
charges/credits do not form part of the underlying operational cost base of
the business and we therefore exclude from our adjusted measures.
Acquisition amortisation of identified intangible assets acquired as part of
an acquisition are charged to the statement of comprehensive income but do not
form part of the underlying operating cost of the business.
A full reconciliation between adjusted and reported results is detailed below:
Six months to 30 September H1 FY22 H1 FY21
£ (000) £ (000)
Adjusted EBITDA 1,261 1,062
Share based payments charge (31) (132)
Fair value adjustment for deferred consideration - 37
EBITDA 1,230 967
Six months to 30 September H1 FY22 H1 FY21
£ (000) £ (000)
Adjusted profit before tax 543 365
Acquisition amortisation (1,050) (1,050)
Share based payments charges (31) (132)
Other income 20 -
Fair value adjustment for deferred consideration - 37
Reported loss before tax (518) (780)
Six months to 30 September H1 FY22 H1 FY21
£ (000) £ (000)
Adjusted profit after tax 570 332
Acquisition amortisation (939) (939)
Share based payments charge (31) (132)
Other income 20 -
Fair value adjustment for deferred consideration - 37
Reported loss after tax (380) (702)
Six months to 30 September H1 FY22 H1 FY21
£ (000) £ (000)
Adjusted EPS 0.02 0.01
Acquisition amortisation (0.04) (0.04)
Share based payments charge (0.00) (0.01)
Other income 0.00 0.00
Fair value adjustment for deferred consideration 0.00 0.00
Reported EPS (0.02) (0.03)
Principal risks and uncertainties
The Group works to minimise its exposure to operational, financial and other
risks however in pursuit of achieving its growth strategy there will always be
an element of risk that needs to be considered. The Group's principal risks
and uncertainties, as detailed in the financial statements for the year ended
31 March 2021, are all still considered to be valid. Over the past six months
these risks and uncertainties have remained very much in place.
Statement of Directors' responsibilities
We confirm that to the best our knowledge that:
§ The condensed interim set of financial statements has been prepared in
accordance with IAS 34 Interim Financial Reporting as adopted by the European
Union;
§ The interim report includes a fair review of information required by DTR
4.2.7R (indication of important events during the first six months and
description of principal risks and uncertainties for the remaining six months
of the year); and
§ The interim report includes a fair review of the information required by
DTR 4.2.8R (disclosure of related parties transactions and any change
therein).
Phil
Higgins
Paul McFadden
Chief Executive
Officer
Chief Financial Officer
Consolidated statement of comprehensive income
for the 6 months to 30 September 2021
2021 2020
(unaudited) (unaudited)
Note £ (000) £ (000)
Revenue 3 10,576 11,173
Cost of sales (6,475) (7,476)
Gross profit 4,101 3,697
Administrative expenses (2,871) (2,767)
Depreciation and amortisation (1,712) (1,607)
Other operating expenses/income 20 37
Total operating costs (4,563) (4,337)
Operating loss (462) (640)
Adjusted EBITDA 1,261 1,062
Depreciation and amortisation (1,712) (1,607)
Exceptional items - -
Share-based payments (31) (132)
Other operating expenses/income 20 37
Operating loss (462) (640)
Finance income - 2
Finance cost 4 (56) (142)
Loss before taxation (518) (780)
Income tax credit 5 138 78
Loss for the period and attributable to equity holders of the Company (380) (702)
Other comprehensive income
Items that may be reclassified to profit and loss:
Change in financial assets at fair value through OCI - -
Exchange differences on translation of foreign operations 1 (2)
Total comprehensive loss for the period (379) (704)
Earnings / (loss) per ordinary share attributable to the owners of the parent
Basic and diluted (£ per share) 6 (0.02) (0.03)
Adjusted basic and diluted (£ per share) 6 0.02 0.01
Adjusted EBITDA is a non-GAAP company specific measure which is considered to
be a key performance indicator of the Group's financial performance.
The results above are derived from continuing operations.
Consolidated statement of financial position
as at 30 September 2021
2021 2020
(unaudited) (unaudited)
Note £ (000) £ (000)
Assets
Non-current assets
Intangible assets 53,461 55,590
Property, plant and equipment 281 546
Deferred tax asset - 87
Total non-current assets 53,742 56,223
Current assets
Trade and other receivables 7 5,580 8,336
Cash and cash equivalents 4,923 3,767
Total current assets 10,503 12,103
Total assets 64,245 68,326
Liabilities
Current liabilities
Trade and other payables 8 5,153 8,711
Total current liabilities 5,153 8,711
Non-current liabilities
Creditors: amounts falling due after more than one year 9 2,952 4,152
Total non-current liabilities 2,952 4,152
Total liabilities 8,105 12,863
Net assets 56,140 55,463
Capital and reserves
Share capital 10 22,277 22,276
Share premium 34,581 34,581
FVTOCI reserve 14 14
Other reserves 24,407 24,198
Translation reserve 25 25
Accumulated losses (25,164) (25,631)
Equity attributable to owners of the Company 56,140 55,463
Total equity and liabilities 64,245 68,326
Consolidated statement of changes in equity
for the 6 months to 30 September 2021
Share capital (Note 10) Share premium FVTOCI Other reserves Translation reserve Accumulated losses Total equity
reserve
£ (000) £ (000) £ (000) £ (000) £ (000) £ (000) £ (000)
At 31 March 2020 (audited) 22,107 34,581 14 20,714 27 (24,929) 52,514
Loss for the period - - - - - (702) (702)
Other comprehensive loss for the period - - - - (2) - (2)
Total comprehensive loss for the period - - - - (2) (702) (704)
Contribution by and distribution to owners
Issue of share capital 169 - - - - - 169
Merger relief reserve - - - 3,352 - - 3,352
Share based payments - - - 132 - - 132
At 30 September 2020 (unaudited) 22,276 34,581 14 24,198 25 (25,631) 55,463
Profit for the period - - - - - 847 847
Other comprehensive loss for the period - - - - (1) - (1)
Total comprehensive loss for the period - - - - (1) 847 846
Contribution by and distribution to owners
Issue of share capital 1 - - (1) - - -
Share based payments - - - 179 - - 179
At 31 March 2021 (audited) 22,277 34,581 14 24,376 24 (24,784) 56,488
Loss for the period - - - - - (380) (380)
Other comprehensive loss for the period - - - - 1 - 1
Total comprehensive loss for the period - - - - 1 (380) (379)
Contribution by and distribution to owners
Issue of share capital - - - - - - -
Merger relief reserve - - - - - - -
Share based payments - - - 31 - - 31
At 30 September 2021 (unaudited) 22,277 34,581 14 24,407 25 (25,164) 56,140
Consolidated cash flow statement
for the 6 months to 30 September 2021
2021 2020
(unaudited) (unaudited)
Note £ (000) £ (000)
Cash flows from operating activities
Loss for the period (380) (702)
Adjustments for:
Amortisation of intangible assets 1,576 1,429
Depreciation of property, plant and equipment 136 178
Share-based payment charge 31 132
Other income (20) -
Fair value adjustment of deferred consideration - (37)
Finance income - (2)
Finance cost 56 142
Income tax (138) (78)
Cash flow from operating activities before changes in working capital 1,261 1,062
Decrease/(increase) in trade and other receivables 4,031 1,983
(Decrease)/increase in trade and other payables (7,554) (1,306)
Cash used / generated from operations (2,262) 1,739
Net foreign exchange movements (3) (3)
Finance cost paid (35) (12)
Tax (paid) / credit (31) -
Net cash used / generated from operating activities (2,331) 1,724
Investing activities
Purchase of property, plant and machinery (12) (32)
Purchase of software (421) (252)
Net cash used in investing activities (433) (284)
Financing activities
Proceeds from issue of share capital - 3,750
Repayment of loan liabilities (250) (4,151)
Expenses paid in connection with share issues - (466)
Repayment of lease liabilities (112) (149)
Net cash used in financing activities (362) (1,016)
Net increase/(decrease) in cash and cash equivalents (3,126) 424
Foreign exchange movement on cash and cash equivalents - -
Cash and cash equivalents at the beginning of the period 8,049 3,343
Cash and cash equivalents at the end of the period 4,923 3,767
Notes
1. General information
The interim consolidated financial information was authorised by the board of
directors for issue on 25 November 2021. The information for the six-month
period ended 30 September 2021 has not been audited and does not constitute
statutory accounts as defined in section 434 of the Companies Act 2006, and
should therefore be read in conjunction with the audited financial statements
of the Company and its subsidiaries for the year ended 31 March 2021, which
have been prepared in accordance with International Financial Reporting
Standards (IFRS). The interim consolidated financial information does not
comply with IAS 34 Interim Financial Reporting, as permissible under the rules
of AIM.
2. Statement of accounting policies
The significant accounting policies applied in preparing the financial
statements are outlined below. These policies have been consistently applied
for all the years presented, unless otherwise stated
a) Basis of preparation
These interim consolidated financial statements have been prepared in
accordance with International Financial Reporting Standards ('IFRS'),
including International Accounting Standards (IAS) and interpretations (IFRS
ICs) issued by the International Accounting Standards board (IASB) and its
committees, as adopted in accordance with international accounting standards
in conformity with the requirements of the Companies Act 2006.
The Consolidated financial statements have been prepared under the historic
cost convention, except for certain financial instruments that have been
measured at fair value. The Consolidated financial statements are presented in
Sterling, the functional currency of Shearwater Group plc, the Parent Company.
All values are rounded to the nearest thousand pounds (£'000s) except where
otherwise indicated.
b) Going concern
After making enquiries, the directors have a reasonable expectation that the
Group has adequate resources to continue in operational existence for at least
twelve months from the date of publication of these interim financial
statements. Accordingly, they continue to adopt the going concern basis in
preparing these consolidated financial statements.
The Directors have reviewed the Group's going concern position taking into
account its current business activities, performance to date against budgeted
targets and the factors likely to affect its future development which include
the Group's strategy, principal risks and uncertainties and its exposure to
credit and liquidity risks.
In addition to this the Directors continue to monitor the evolution of the
COVID19 pandemic and have taken steps to ensure that the Group is in a robust
position should any future trading downturn occur. Throughout the COVID19
pandemic the Group has demonstrated its ability to trade through challenging
conditions, and it is encouraging to now see our advisory businesses, which
were particularly impacted by the initially lockdown now delivering improved
results through a hybrid delivery model.
The Group has recorded improved year-on-year adjusted EBITDA profit for the
first six months to 30 September 2021, which is in line with its budgeted
target. At 30 September 2021 the Group had cash and cash equivalents of £4.9m
(H1 FY21: £3.8m) and whilst H1 has seen a cash outflow owing to some
unwinding of working capital, in addition to increased investment spend, the
repayment of deferred VAT and loan liabilities the Group is in an improved
year-on-year net cash position of £4.4m (H1 FY21: £3.0m). At 30 September
2021 net assets of £56.1m (H1 FY21: £55.5m) and net current assets of £5.4m
(H1 FY21: net current liabilities £3.4m) show favourable year-on-year
positions.
The Group has a £4.0 million 3-year revolving credit facility with Barclays
Bank plc, signed on the 25 March 2021 which can provide working capital
support if required. To date this facility remains un-utilised.
The Directors have reviewed a detailed reforecast of trading which includes a
cash flow forecast for a period which covers a period of trading to March 2023
and have challenged the assumptions used to create these forecasts. This
forecast demonstrates that the Group is able to pay its debts as they fall due
during this period.
The Directors have reviewed a highly sensitised reverse stress test scenario
which has factored in what the Directors believe would be an extreme scenario
which incorporates the removal of all new business revenues across both
segments of the Group, a reduction of renewal rates in our software division
to 60%, scaling back of revenues within our Services division leaving just
critical managed services revenues and already contracted revenues. Costs have
been scaled back sensitively in line with the reduction in revenues. Overall
the sensitised cash flow forecast demonstrates that the Group will be able to
pay its debts as they fall due for the period to at least 31 March 2023.
c) Critical accounting judgements estimates and assumptions
The preparation of financial statements requires management to make
judgements, estimates and assumptions that affect the amounts reported for
income and expenses during the year and that affect the amounts reported for
assets and liabilities at the reporting date.
The significant judgements made by management in applying the Group's
accounting policies and the key sources of estimation uncertainty were the
same as those described in the last annual financial statements.
Business Combinations
Management make judgments, estimates and assumptions in assessing the fair
value of the net assets acquired on a business combination, in identifying and
measuring intangible assets arising on a business combination, and in
determining the fair value of the consideration. If the consideration includes
an element of contingent consideration, the final amount of which is dependent
on the future performance of the business, management assess the fair value of
that contingent consideration based on their reasonable expectations of future
performance. In determining the fair value of intangible assets acquired, key
assumptions used include expected future cashflows, growth rates and the
weighted average cost of capital.
Impairment of goodwill, intangible assets and investment in subsidiaries
Management make judgements, estimates and assumptions in supporting the fair
value of goodwill, intangible assets and investments in subsidiaries. The
Group carry out annual impairment reviews to support the fair value of these
assets. In doing so management will estimate future growth rates, weighted
average cost of capital and terminal values.
Leases
Management make judgements, estimates and assumptions regarding the life of
leases. At present management are assessing all existing leases which all
relate to office space as we look to reduce the number of offices across the
Group. For this reason management have assumed that the life of leases does
not extend past the current contracted expiry date. A judgement has been taken
with regards to the incremental borrowing rate based upon the rate at which
the Group can borrow money.
d) Basis of consolidation
The group's interim consolidated financial statements incorporate the results
and net assets of Shearwater Group plc and all its subsidiary undertakings
made up to 30 September each year. Subsidiaries are all entities over which
the group has control. The group controls an entity when the group is exposed
to, or has rights to, variable returns from its involvement with the entity
and has the ability to affect those returns through its power over the entity.
Subsidiaries are fully consolidated from the date on which control is
transferred to the group. They are deconsolidated from the date that control
ceases. Where necessary, adjustments are made to the financial statements of
subsidiaries to bring the accounting policies used into line with those used
by the group. All inter-group transactions, balances, income and expenses are
eliminated on consolidation.
e) Business combinations and goodwill
Business combinations are accounted for using the acquisition accounting
method. This involves recognising identifiable assets (including previously
unrecognised intangible assets) and liabilities of the acquired business at
fair value. Any excess of the cost of the business combination over the
Group's interest in the net fair value of the identifiable assets and
liabilities is recognised in the consolidated statement of financial position
as goodwill and is not amortised. To the extent that the net fair value of the
acquired entity's identifiable assets and liabilities is greater than the cost
of the investment, a gain is recognised immediately in the consolidated
statement of comprehensive income.
After initial recognition, goodwill is stated at cost less any accumulated
impairment losses, with the carrying value being reviewed for impairment at
least annually and whenever events or changes in circumstances indicate that
the carrying value may be impaired. Goodwill assets considered significant in
comparison to the Group's total carrying amount of such assets have been
allocated to cash-generating units or groups of cash-generating units. Where
the recoverable amount of the cash-generating unit is less than its carrying
amount including goodwill, an impairment loss is recognised in the
consolidated statement of comprehensive income.
Acquisition costs are recognised in the consolidated statement of
comprehensive income as incurred.
f) Revenue
The Group recognises revenue in accordance with IFRS 15 Revenue from Contracts
with Customers. Revenue with customers is evaluated based on the five-step
model under IFRS 15 'Revenue from Contracts with Customers': (1) identify the
contract with the customer; (2) identify the performance obligations in the
contract; (3) determine the transaction price; (4) allocate the transaction
price to separate performance obligations; and (5) recognise revenues when (or
as) each performance obligation is satisfied.
The Group's revenues are comprised of a number of different products and
services across our two divisions, details of which are provided below:
Software
§ Software licences whereby the customer buys a software that it sets up and
maintains on its premises is recognised fully at the point the licence key /
access has been granted to the client. The Group sells the majority of its
software products through channels and distributors who are responsible for
providing 1(st) and 2(nd) line support to the client.
§ Software licences for the new 'Authentication as a Services' product
whereby the customer accesses the product via a cloud environment maintained
by the Company is recognised in two parts whereby 80% of the subscription is
recognised at the point that the licence key is provided to the customer with
the remaining 20% recognised evenly over the length of the contract. This
deferred proportion represents the obligation to maintain and support the
platform that the software runs on.
Services
§ Sale of third-party hardware, software and warranties:
a) Where the contract entails only one performance obligation to provide
software or hardware, revenue is recognised in full at a point in time upon
delivery of the product to the end client. This delivery will either be in the
form of the physical delivery of a product or the e-mailing of access codes to
the client for them to access third party software or warranties; and
b) Where a contract to supply external hardware, software and/or
warranties also include an element of ongoing internal support, multiple
performance obligations are identified and an allocation of the total contract
value is allocated to each performance obligation based on the standalone
costs of each performance obligation. The respective costs of each
performance obligations are traceable to supplier invoice and applying the
fixed margins, standalone selling prices are determined. Internal support is
recognised equally over the period of time detailed in the contract.
§ Sale of consultancy services are usually based on a number of consultancy
days that make up the contracted consideration. Consultancy days generally
comprise of field work and (where required) report writing and delivery which
are considered to be of equal value to the client. Revenue is recognised over
time based on the number of consultancy days provided within the period
compared to the total in the contract.
Revenue recognised in the statement of comprehensive income but not yet
invoiced is held on the statement of financial position within accrued income.
Revenue invoiced but not yet recognised in the statement of comprehensive
income is held on the statement of financial position within deferred revenue.
g) Use of additional performance measures
The Group presents adjusted EBITDA information which is used by the directors
for internal performance analysis and may not be comparable with similarly
titled measures reported by other companies. The term "adjusted EBITDA" refers
to operating profit or loss excluding amortisation of intangibles,
depreciation and impairment, share-based payments charge, exceptional items,
income tax expense, finance income, finance expenses or fair value adjustments
to deferred consideration provisions and contingent consideration paid.
h) Segmental reporting
For internal reporting and management purposes, the Group is organised into
two reportable segments based on the types of products and services from which
each segment derives its revenue - software and services. The Group's
operating segments are identified on the basis of internal reports that are
regularly reviewed by the chief operating decision maker in order to allocate
resources to the segment and to assess its performance. Please see note 3 for
more details.
i) Intangible assets
Intangible assets are carried at cost less accumulated amortisation and
accumulated impairment losses. Intangible assets acquired as part of a
business combination are recognised outside goodwill if the assets are
separable or arises from contractual or other legal rights and their fair
value can be measured reliably. Material expenditure on internally developed
intangible assets is taken to the consolidated statement of financial position
if it satisfies the 6 step criteria required under IAS 38.
Intangible assets with a finite life have no residual value and are amortised
over their expected useful lives as follows:
Computer software
2-5 years straight line basis
Customer relationships
1-15 years straight line basis
Software 10
years straight line basis
Tradenames
10 years straight line basis
The amortisation expense on intangible assets with finite lives is recognised
in the statement of comprehensive income within administrative expenses. The
amortisation period and the amortisation method for intangible assets with
finite useful lives are reviewed at least annually.
The carrying value of intangible assets is reviewed for impairment whenever
events or changes in circumstances indicate the carrying value may not be
recoverable.
j) Property, plant and machinery
Property, plant and equipment is stated at historical cost less accumulated
depreciation. Cost includes the original purchase price of the asset plus any
costs of bringing the asset to its working condition for its intended use.
Depreciation is provided at the following annual rates, on a straight-line
basis, in order to write down each asset to its residual value over its
estimated useful life.
The assets residual values and useful lives are reviewed, and adjusted if
appropriate, at the end of each reporting period.
20-33 per cent per annum
Plant and machinery
Office equipment 25 per cent per annum
Right of use assets Shorter of useful life of the asset or Lease term
Gains and losses on disposals are determined by comparing the proceeds with
the carrying amount and are recognised, as adjusted items if significant,
within the statement of comprehensive income.
3. Segmental information
In accordance with IFRS 8, the Group's operating segments are based on the
operating results reviewed by the Board, which represents the chief operating
decision maker. The Group reports its results in two segments as this
accurately reflects the way the Group is managed.
The Group is organised into two reportable segments based on the types of
products and services from which each segment derives its revenue - software
and services.
Segment information for the 6 months ended 30 September 2021 is presented
below and excludes intersegment revenue as they are not material, and assets
as the Directors do not review assets and liabilities on a segmental basis.
Six-month period ended 30 September
2021 2021 2020 2020
Revenue Profit Revenue Profit
(unaudited) (unaudited) (unaudited) (unaudited)
£ (000) £ (000) £ (000) £ (000)
Services 8,689 905 9,312 769
Software 1,887 910 1,861 759
Group total 10,576 1,815 11,173 1,528
Group costs (554) (466)
Adjusted EBITDA 1,261 1,062
Amortisation of intangibles (1,576) (1,429)
Depreciation (136) (178)
Share-based payments (31) (132)
Other income 20 -
Fair value adjustment to deferred consideration - 37
Finance income - 2
Finance cost (56) (142)
Loss before tax (518) (780)
The Group is domiciled in the United Kingdom and currently the majority of its
revenues come from external customers that are transacted in the United
Kingdom. A number of transactions which are transacted from the United Kingdom
represent global framework agreements, meaning our services, whilst transacted
in the United Kingdom, are delivered globally. The geographical analysis of
revenue detailed below is on the basis of country of origin in which the
master agreement is held with the customer (where the sale is transacted).
Six-month period ended 30 September
2021 2020
(unaudited) (unaudited)
£ (000) £ (000)
United Kingdom 7,698 7,166
Europe (excluding the UK) 1,964 3,192
North America 550 672
Rest of the world 364 143
10,576 11,173
4. Finance expenses
Six-month period ended 30 September
2021 2020
(unaudited) (unaudited)
£ (000) £ (000)
Interest payable on loan balances 15 119
Interest payable on bank revolving credit facility 35 13
Interest payable on lease liabilities 6 10
56 142
5. Income Tax
The tax expense recognised reflects managements' estimates of the tax charge
for the period and has been calculated using the estimated average tax rate of
UK corporation tax for the financial period of 19%.
6. Earnings/(loss) per share
Basic loss per share is calculated by dividing the loss attributable to the
ordinary shareholders by the weighted average number of ordinary shares
outstanding during the period.
For diluted loss per share, the weighted average number of shares in issue is
adjusted to assume conversion of all the potential dilutive ordinary shares.
The potential dilutive shares are anti-dilutive for the six months ended 30
September 2021 and the six months ended 30 September 2020 as the Group is loss
making.
Adjusted earnings per share has been calculated using adjusted earnings
calculated as profit after taxation but before amortisation of acquired
intangibles after tax, share based payments, impairment of intangible assets,
exceptional items after tax, fair value adjustment to deferred consideration
and contingent consideration.
Adjusted earnings per share is potentially dilutive in the six months to 30
September 2021, six months to 30 September 2020 and for the 12 months to 31
March 2021.
The calculation of the basic and diluted earnings per share from total
operations attributable to shareholders is based on the following data:
Six-month period ended 30 September
2021 2020
(unaudited) (unaudited)
£ (000) £ (000)
Net profit / loss from total operations
Earnings for the purposes of basic and diluted earnings / loss per share being (380) (702)
net loss attributable to shareholders
Add/(remove) 939 939
Amortisation of acquired intangibles
Share based payments 31 132
Other income (20) -
Fair value adjustment to deferred consideration - (37)
Adjusted earnings for the purpose of adjusted earnings per share 570 332
Number of shares No No
Weighted average number of ordinary shares for the purpose of basic and 23,809,739 23,424,168
diluted and adjusted basic earnings per share
Weighted average number of ordinary shares for the purpose of adjusted diluted 23,954,771 23,583,080
earnings per share
Earnings per share £ £
Basic and diluted loss per share (0.02) (0.03)
Adjusted Basic and diluted earnings per share 0.02 0.01
7. Trade and other receivables
Period ended 30 September
2020 2020
(unaudited) (unaudited)
£ (000) £ (000)
Trade receivables 4,798 5,541
Prepayments and other receivables 410 2,337
Accrued income 372 458
5,580 8,336
8. Trade and other payables Period ended 30 September
2021 2020
(unaudited) (unaudited)
£ (000) £ (000)
Trade payables 2,027 6,145
Accruals and other payables 1,480 1,299
Other taxation and social security 637 843
Loans 520 10
Deferred income 295 186
Lease liabilities 158 216
Corporation tax 36 12
5,153 8,711
9. Creditors: amounts falling due after more than one year
Period ended 30 September
2021 2020
(unaudited) (unaudited)
£ (000) £ (000)
Deferred tax 2,927 3,243
Loans - 742
Lease liabilities 25 167
2,952 4,152
10. Share capital
The table below details movements in share capital during the year:
Six-month period ended 30 September
In thousands of shares 2021 2020
In issue at 31 March 23,810 22,109
Options exercised during the period - -
Share issue as part of acquisition consideration - -
Share issue for deferred consideration - 129
Share placing - 1,563
In issue at 30 September 23,810 23,801
2021 2020
£ (000) £ (000)
Allotted, called up and fully paid
Ordinary shares of £0.10 each 2,381 2,380
Deferred shares of £0.90 each 19,896 19,896
22,277 22,276
The Company did not issue any shares in the six-month period ended 30
September 2021.
11. Related party transaction
The Directors of the Group and their immediate relatives have an interest of
17% (H1 FY20: 17%) of the voting shares of the Group.
12. Events after the reporting date
On 15 October 2021, the Group settled the remaining loan balance held with
Secarma Limited early (contracted repayment date was 9 April 2022) securing an
early repayment discount of £50,000 plus any future interest.
At 30 September 2021 Secarma Limited held a 12.3% stake in the Group.
13. Cautionary statement
This Interim Report has been prepared solely to provide additional information
to shareholders to assess the Company's strategies and the potential for these
strategies to succeed. The Interim Report should not be relied on by any other
party or for any purpose. The Interim Report contains certain forward-looking
statements with respect to the financial condition, results of operations and
businesses of the Company. These statements are made in good faith based on
the information available to them up to the time of their approval of this
report. However, such statements should be treated with caution as they
involve risk and uncertainty because they relate to events and depend upon
circumstances that will occur in the future. There are a number of factors
that could cause actual results or developments to differ materially from
those expressed or implied by these forward-looking statements. The continuing
uncertainty in global economic outlook inevitably increases the economic and
business risks to which the Company is exposed. Nothing in this announcement
should be construed as a profit forecast.
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