REG - RedstoneConnect PLC - Final Results
29 May 2018
RedstoneConnect Plc
("RedstoneConnect", the "Group" or the "Company")
Final results for the year ended 31 January 2018
RedstoneConnect (AIM: REDS), a leading provider of technology and services for smart buildings and commercial spaces, announces its final results for the year ended 31 January 2018.
Financial Highlights:
· Revenue up 15% to £47.6 million (2017: £41.5 million)
· Gross profit up 45% to £13.4 million (2017: £9.2 million), with an increased gross margin of 28% (2017: 22%)
· Adjusted EBITDA* up 60% to £3.2 million (2017: £2.0 million) reflecting the successful implementation of the strategy to focus on higher quality, higher margin business
· Adjusted profit before tax** of £2.4 million (2017: £1.3 million)
· Profit before tax from continuing operations of £1.5 million (2017: £1.2 million)
· Profit after tax from continuing operations of £1.5 million (2017: £1.8 million)
· Cash at year end of £3.4 million (2017: £3.2 million) and net cash of £1.2 million (2017: £0.8 million)
· Basic earnings per share from continuing operations of 7.72 pence (2017: 11.14 pence)
· Adjusted earnings per share from continuing operations 12.81 pence (2017: 13.13 pence)
* profit for the period from continuing operations before net finance costs, tax, depreciation, amortisation, integration costs and transactional items, impairment charge and share based payments.
** adjusted profit before tax is before: integration costs and transactional items, impairment charge, share based payments and amortisation recognised as a result of purchase price allocation under IFRS.Operational Highlights:
· In May 2017, completed a successful placing to raise £6.5 million, of which £1.4 million was used to acquire Anders + Kern ("A+K"), a systems and solutions integrator specialising in meeting room management and audio-visual solutions:
o Integration of A+K is now complete, providing the Group with an indirect sales channel to sell the Group's meeting room and space management software solutions to small and mid-sized clients, both in the UK and overseas
o A+K made a positive contribution to the Group's performance in the year
· £1.2 million of proceeds have been invested in development of the Group's software platform:
o In December 2017 we released OneSpace Link, a locally installed meeting room management solution which integrates with Microsoft Outlook
o Ongoing development of a full web-based meeting room management tool which will be offered as a module of the OneSpace platform
o Continued development of our OneSpace platform adding to existing modules which include desk management, wayfinding, car parking, visitor management, frictionless vending and space management
· OneSpace continues to gain traction. In December 2017, we announced a deal with a market-leading global technology business to provide an Original Equipment Manufacturer ("OEM") version of our platform. This deal was worth £2.25 million, our largest single contract for OneSpace thus far
· Continued strong performance and levels of renewals from our Managed Services division
· Agreements secured in the year for the Company's innovative in-Building Cellular ("IBC") and Distributed Antenna Systems ("DAS") solutions
Post Year End:
· Announced the proposed sale of the Systems Integration and Managed Services divisions for a total consideration of £23.0 million comprising; £19.6 million payable in cash on completion; £2.0 million payable on or before 30 November 2018, subject to completion of an already contracted project by Redstone Converged Solutions Ltd; and the waiver of loans owed by the Company to the divisions of £1.4 million. Owing to its size the disposal requires the approval of shareholders
· This disposal will allow the Group to focus on developing and growing the Company's software proposition in the smart building and co-working space markets both in the UK and internationally
Mark Braund, CEO of RedstoneConnect, commented:
"I'm pleased to report another year of continued operational and strategic progress across all our business units. We closed the year showing strong revenue and EBITDA growth, boosted by organic initiatives and the positive impact of bolt-on acquisitions.
However, following the disposal of our Systems Integration and Managed Services divisions, our core focus now shifts to accelerating our exposure to the provision of software solutions that support smart buildings and commercial spaces.
Employee mobility and agile working is driving demand as commercial real estate becomes more of a user experience business. We firmly believe that the significant global demand for workspace management solutions coupled with the market leading suite of services already being deployed within our software division, creates an ideal base from which to accelerate our growth.
Our strategic focus on creating greater levels of recurring, annuity based revenues, and improving the earnings visibility of the Group, underpins the Board's commitment to becoming a fast-growing workspace management software company delivering long term shareholder value."
A copy of these final results together with the annual report and accounts and further information on the Company is available on the Company's website at: www.redstoneconnectplc.com.
Enquiries:
RedstoneConnect Plc
Mark Braund (CEO)
Spencer Dredge (CFO)
via Vigo Communications
Cantor Fitzgerald Europe (Nominated Adviser & Joint Broker)
Marc Milmo/Phil Davies/Catherine Leftley/Callum Butterfield
+44 (0)20 7894 7000
Whitman Howard Limited (Joint Broker)
Nick Lovering
+44 (0)207 659 1234
Vigo Communications (Financial Public Relations)
Jeremy Garcia / Ben Simons / Antonia Pollock
+44 (0)20 7830 9700
About RedstoneConnect
RedstoneConnect is focused on technologies that make real estate more efficient and businesses more effective. Its businesses, Redstone, Connect IB and Commensus, provide the infrastructure capabilities and the software applications to deliver smart building and smart workspace solutions for commercial businesses, public sector organisations, real estate owners and managers. Visit our website at www.redstoneconnectplc.com.
Chairman's Statement
I am pleased to report another year of solid progress for RedstoneConnect Plc ("RedstoneConnect"). During this period, we broadened our operational base through acquisition, made significant investment in software product development and have grown our pre-tax profits. It was also a year where we set in motion the plan to focus on our Software business through the disposal of our Systems Integration and Managed Services divisions. RedstoneConnect's software offering has been enhanced following the fundraising in May 2017, which enabled the Group to develop its owned IP and release a number of new modules within our OneSpace software platform.
Using the proceeds from the fundraising, the Group acquired A+K, a systems integrator specialising in the meeting room management and audio-visual market, and I am delighted to welcome the team to RedstoneConnect. I am pleased to report the business is now fully integrated and making a positive contribution to trading. A+K will be the basis to build our channel sales capability allowing us to target mid-market clients with our meeting room and desk management solutions. These partners operate in the UK and internationally, and have established customer bases with meeting room hardware in place. Our aim is to sell our software through these channel partners enabling their end users to get more from their investment. As we develop further OneSpace modules, it is our intention also to offer these through this partner network.
On 29 May 2018 we announced the disposal of the Systems Integration and Managed Services divisions. The disposal, which owing to its size, is subject to shareholder approval at a meeting on 15 June 2018, will substantially change the shape of the Group. The Board has, for some time, considered that the growth prospects for our Systems Integration and Managed Services divisions are lower than those for the Software business. For the future we wish to focus on higher margin business in a less mature market with better visibility of revenues and with significant potential to grow internationally. The Systems Integration business is predominantly project based with the associated lack of forward visibility of revenues with a lower margin than we can achieve from sales of software. The Board therefore believes that by focusing investment on the development of the Software division, there is greater scope to build higher levels of better quality recurring earnings and therefore generate more attractive returns for shareholders.
Management believes the disposal terms represent a good return for both the Company and our shareholders. The two businesses were acquired for a combined consideration of £11.9 million and the disposal is for £21.6 million, £19.6 million payable in cash on completion, £2.0 million payable on or before 30 November 2018, subject to completion of an already contracted project by Redstone Converged Solutions Ltd, and the waiver of loans owed by the Company to the divisions of £1.4 million.
Following the disposal, the Group's focus will be entirely on building our business in the world of smart building and agile workplace markets after a successful year for the Group's OneSpace offering in the smart buildings space. The Software division demonstrated not only strong revenue growth in the year but using some of the funds raised in May 2017 further developed its owned IP and brought to market a number of new modules in our OneSpace platform.
RedstoneConnect is continuing to be seen as a visionary in the workspace management solutions market. We are working with a number of enterprise clients who recognise our vision that this new generation of technology is a way of optimising their corporate real estate as well as creating a better work environment for their employees. I am encouraged by the increased traction we are experiencing for our software solutions. We have secured a number of engagements to pilot our technology, with major international businesses. These pilots are the initial step to a full rollout. The pricing model for these deployments is a monthly fee per desk / room. We are working hard to ensure these relationships will develop into meaningful contracts.
Whilst the focus will be on growing the Group's Software as a Service ("SaaS") based revenues through multi-year contracts, over the near team the Board believes there also continue to be opportunities to deliver licensed based agreements aligned with the buying requirements of the potential customer base.
Outlook
There is currently a tipping point in the evolution of the workplace technology market. Until relatively recently the main focus of technology in the context of smart buildings has been on monitoring and managing energy use. However, today building operators are now far more interested in occupant well-being and space optimisation. Because this workplace technology market is in its infancy and is highly fragmented, RedstoneConnect has an opportunity to establish leadership through technology. The market is expanding rapidly with estimated compound annual growth rates between 2017 and 2022 of 25% in EMEA, North America and Asia. We want to use our available resources to capitalise on this opportunity.
Following the disposal of the Managed Services and Systems Integration business the Group will reduce in size operationally. However, we plan to use the funds realised from the disposal to accelerate the growth of our Software business. This growth will initially be organic through the development of our direct and indirect sales channels, both in the UK and overseas. However, should we identify appropriate targets, we also plan to make acquisitions of businesses which either have a customer base that can be migrated onto our OneSpace platform or offer complementary technology that can add value to the OneSpace platform.
After what has been a very traumatic number of years where we have taken the business from crisis to stabilisation we have now reached another important junction in the RedstoneConnect journey. The disposal of the Systems Integration and Managed Services business brings to an end the restructuring of the Group. From here we see a very exciting future where we build a business which is focused on high margin annuity revenues with significant international growth potential.
Frank Beechinor
Chairman
29 May 2018
Strategic report: Strategy and operational review
Strategy
The Group's strategy has been to provide a broad and innovative platform of systems integration, managed services and software solutions to the Smart Buildings and Smart Commercial Spaces market. Once approved by shareholders, the recommended disposal of the Systems Integration and Managed Services business will enable the Company to focus its resources on the Software business, which the Board believes has the greatest potential to drive long-term growth in shareholder value. An important component of our strategy is to invest in the development of our software IP.The changing business environment brings with it challenges for modern organisations in how to ensure both effective and efficient working. This challenge is one that faces all organisations both big and small, but one that becomes more difficult to manage effectively, the larger and more diverse the organisation. Speaking with clients, we are finding the key drivers for creating a successful office environment are not only the financial benefits associated with an efficient working environment by utilising space effectively, but also the benefits of a modern workplace when recruiting and retaining talent. We believe a digital experience is essential to achieving employee wellbeing and retention, through better engagement with the workplace, empowering employees to enjoy a more engaging work experience, driving productivity gains. We see this change gathering pace as more of the millennials join today's and tomorrow's workforce and as digitalisation continues to gather pace.
In 2017, the global market for occupancy analytics based software services was estimated to be worth $1.54 billion with growth of 24.5% CAGR rising to $4.60 billion in 2022 (Memoori, Occupancy Analytics and In-Building Location Based Services in the Commercial Office Space Report, Q1 2018). Industry analysts, Memoori, position RedstoneConnect's software technology as one of the top 6 global Workplace Management Platforms and in a recent market report Verdantix cited RedstoneConnect as one of the smart innovators in their analysis of the space management market. We intend to focus our energies on exploiting the enormous potential for growth in this market.
Our immediate key strategic priorities to drive future growth remain as follows:
· to focus on developing technology-led intellectual property based on OneSpace;
· to continue to grow our Smart Buildings software offering through a combination of organic growth and acquisition both in our domestic market and overseas;
· to develop new sales channels to market for our software solutions, focusing where possible on SaaS agreements; and
· to deliver higher quality earnings which, in turn, improve cash generation.
Principal activities during the year
During the year the Group continued to trade through three operating business segments: Systems Integration, Managed Services and Software.
The Systems Integration segment remained product-agnostic with a strong pedigree in addressing the enterprise market. This division offers physical, wireless and virtual infrastructure solutions, including fully integrated smart solutions such as innovative location-based services and in-building cellular or Distributed Aerial Systems ("DAS"). The Group's Systems Integration division has established an extensive range of skills and experience in the rapidly advancing market for smart buildings. In addition to the traditional project implementation business, the division has seen consulting engagements become a growing part of its portfolio of services.
Our Managed Services division has a number of long standing service engagements, typically 3-5 years' duration, all with blue chip enterprise-level customers. The Managed Services division combines an on-site client engagement services offering, with a hosted IT services capability.
The Software division's principal offering is a cutting-edge workspace management platform called OneSpace, with global reach and application. The application and services suite provides a broad range of location-based services, which originally established its strong user experience credentials in the smart city, retail and hospitality sectors, markets which remain active for our software technology today. OneSpace materially helps customers optimise space and enhance employee wellbeing.
The functionality includes:
· 2D/3D mapping;
· Wayfinding;
· Desk management;
· Visitor management;
· Car parking management;
· Meeting room management;
· Cashless vending; and
· Analytics.
The software suite is built to an open-architecture standard, is applicable to both on-premise and cloud strategies and has a secure API layer, allowing easy integration with third party applications. The data gathering, analytics and dashboard functionality enables clients to deploy mobile and agile working strategies, configuring space to achieve increased engagement with the workforce whilst realising significant cost benefits. Whilst the corporate real estate market presents a huge opportunity, the combination of the above functions and services also apply to additional market segments such as co-working office environments.
The value in today's world of understanding business data cannot be underestimated. Our software platform aims to collect data from every end-point and product API. The value adding activities, which are enabled from both the collection and analysis of this data are what drives the financial return on investment. This is certainly the case for the OneSpace product. Understanding current working behaviours and utilisation of office and commercial spaces enables clients to right size their office portfolios. We have already seen existing clients experience a compelling return on investment where the use of OneSpace has enabled multi-million-pound savings in both capital expenditure and annual operating expense.
Our software offering is suited to both direct and channel routes to market. With the investment made in the year, we believe our products have a broader appeal beyond just enterprises and can be deployed to mid-market clients and SMEs. Customers can purchase individual modules allowing us to 'land and expand' from an initial sale of, say a meeting room management solution, to adopting the full OneSpace suite.
Overview of performance
We are pleased with the progress the Group has made in the financial year ended 31 January 2018 during which we focused on three key opportunities, namely:
· maximising organic growth initiatives;
· investing in software development; and
· leveraging the acquisition of A+K, completed in May 2017.
Overall the Group delivered a good operational performance in the year, in both Managed Services and more significantly, the Software division, resulting in an increase in the Group's gross profit and operating margins. However, 2017 was challenging for the Systems Integration division which saw a marked reduction in profitability. In the year to 31 January 2018, Group revenues increased by 15% to £47.6 million (2017: £41.5 million). More significantly however, gross profit increased by approximately 45% to £13.4 million (2017: £9.2 million) largely thanks to the excellent growth seen in the Software division in the year. Group gross margin increased to 28% (2017: 22%). This strong headline trading performance has been achieved despite the challenges experienced in the Systems Integration division and is predominantly due to the progress made in the year by the Software division.
The Software division worked on a number of high value assignments during the year including a smart city UK project, a smart shopping centre in Munich as well as several corporate projects for enterprise level customers. During the year we increased the scope of the global master framework agreements for OneSpace with the investment bank UBS and global media events company UBM, with deployments of OneSpace into a number of both companies' international offices. We continue to develop further opportunities with OneSpace and already have a number of revenue generating pilot projects, which we hope in time will develop into full deployments of the solution.
In December 2017 we announced a major contract with an original equipment manufacturer ("OEM") to allow them to embed OneSpace into their hardware solutions. The contract, with a value of £2.25 million, is the largest contract we have signed to date for our OneSpace product as it is the first major contract to embed our software into a third-party solution, a fantastic endorsement of the OneSpace product.
The Board has been considering the options available to it to maximise shareholder value from the Systems Integration and Managed Services divisions given that they operate in slower growth and lower margin markets. The Systems Integration division also has high levels of project-based work with less predictable revenues. There are furthermore considerable swings in the division's working capital requirements. Although the division achieved lower revenues in the current financial year, it had built a strong pipeline of business at the year-end which will benefit the following year and this led to higher than normal levels of working capital being employed in the business at the year end, with a resulting negative impact on the Group's net cash. The action which the Board proposes to take in this regard is explained in the proposed post balance sheet events section below.
The financial performance of the Group for the year is covered in more detail in the Financial Review.
Software developmentIn May 2017, the Company raised funds to accelerate the development and functionality of OneSpace, in particular, to improve the platform architecture and develop further modules. As a result of the Board's efforts and the investments made to date in the software offering, the Software division has grown considerably over the past twelve months.
During the year we invested £1.2 million to improve scalability and enable the technology to operate on multiple cloud platforms. This supports deployments of our software platform in smart city, retail, hospitality and commercial real estate markets. Importantly, we further developed the OneSpace product family to address the integrated Workspace Management opportunity emerging in commercial real estate, as organisations adapt to more agile working environments and greater workforce mobility. At the end of the year we announced delivery of the first new module for the OneSpace family, an entry-level meeting room scheduling tool called Link that integrates with Microsoft Outlook to make room scheduling and associated services such as audio-visual equipment and catering, easily booked from the desktop. Link has also been integrated with Liso, a well-established meeting room signage product deployed across the world by Swedish manufacturer, Evoko.
Other developments include important enhancements to OneSpace, some of which were going through user-acceptance testing as we closed out the year. Specifically, we are adding web-based resource scheduling for meeting rooms, desks and car parking to an already impressive workspace management technology that provides powerful wayfinding and analytics for workspace utilisation. Additionally, all end user applications for OneSpace are being made available through a powerful new mobile application available in both iOS and Android variants.
Our development team has also made significant progress in developing our technology platform to incorporate a microservice architecture platform, through which services and applications can be deployed across multiple cloud-provider technologies. This modular deployment provides a scalable platform for a SaaS-based solution as well as reducing the future development time to create new functions and modules.
Acquisition
As we create additional modules for OneSpace we are productising them to be channel ready so we may rapidly expand market access in the future through value-add partners. The acquisition of A+K in May 2017 for £1.4 million cash has brought with it expertise in designing channel ready products and provides the route to engaging with an important channel to market, the AV reseller (audio-visual). AV resellers operate across the market spectrum from small to very large businesses, providing solutions to improve the quality, efficiency and performance of meetings. New OneSpace product modules fit this market well and provide customers with a strong meeting room management solution that can act as a starting point for more innovative functions available to support the modern workplace, such as visitor management, desk management, wayfinding (indoor navigation) and analytics that help workspace planners optimise the working environment. We continue to develop this theme within our product development and go-to-market strategy.The acquisition added a team of 20 staff to the Group and A + K contributed revenues of £2.1 million and EBITDA of £0.1 million in the year.
Proposed post balance sheet disposal
Following the acquisition of Connect IB in March 2016, the Board has focused on the development of the Company into a software-led business. The Board believes that the Group's capital resources are best utilised in growing the technology-led software business with the focus on higher margin, recurring SaaS revenue.
As a result, the Group announced on 29 May 2018 the proposed disposal of the Systems Integration and Managed Services divisions to Excel I.T. Services Limited for a total consideration of £21.6 million in cash, of which £19.6 million is payable on completion, and a further £2.0 million payable on or before 30 November 2018, subject to completion of an already contracted project by Redstone Converged Solutions Ltd ("Additional Consideration"). In addition, intercompany loans to the divisions amounting to a further £1.4 million will be waived.
The Additional Consideration will be retained by the Purchaser for working capital purposes relating to a project, which is due to complete in November 2018. In the event that the Additional Consideration is not sufficient to cover the ongoing working capital relating to the project, the Company may be required to provide additional working capital equal to any such deficit, subject to the terms of the Share Purchase Agreement.
Under Excel I.T. Services' ownership the Systems Integration and Managed Services businesses will continue to act as a channel for the Company's software products and services.
As well as providing the Board with the opportunity to focus its energies on maintaining and accelerating the progress in the Software division, the disposal of the Systems Integration and Managed Services divisions will:
· provide the Board with a clear platform to execute its strategy of becoming a software led company focused on the attractive smart buildings and co-working technology markets;
· strengthen the Group's balance sheet, greatly improving our cash position; and
· enable the Group to invest in its technology as well as providing the Group with the flexibility to take advantage of potential acquisition opportunities which broaden its software suite of products into the smart building and co-working space technology markets.
The Board believes that the proposed terms of the disposal represent good value for shareholders. If approved by shareholders, it is expected that completion of the disposal will occur on 15 June 2018.
Outlook
The Board believes there are substantial opportunities for growth in the smart software and co-working technology markets, particularly in light of increasing interest in agile working and the connected office environment, a core focus for the Group's occupancy management software platform, OneSpace.The Board further believes the Group is in a strong position following the investment made in developing our software and smart working solutions over the past 24 months. RedstoneConnect's software platform, services and application suite have broad appeal and we have increasing interest and early engagements, giving us confidence in securing new client mandates over the coming months. The opportunity in the corporate real estate market, which enables employee and visitor engagements through software technology, continues to gather pace and we are ideally positioned to benefit.
Our plan in the coming year is to invest into sales and marketing to maximise the opportunity in the market for workplace technology. We will also continue to invest in software product, focusing development efforts on functionality to enhance the existing offering thus maintaining competitive differentiation through technology innovation. With the benefit of the proceeds from the disposal of the Systems Integration and Managed Services businesses, we will be well placed to explore opportunities to complement the organic growth opportunity we see for our software products with acquisition opportunities that could deliver either a complementary suite of software products into the smart building and co-working sectors or have the potential to increase our customer base and geographic reach.
Finally, on behalf of the Board, I wish personally to thank and acknowledge my colleagues for what they have achieved during the year.
Mark Braund
Chief Executive Officer
29 May 2018
Strategic report: Financial review
Overview
The main focus during the year has been to continue to strengthen our software offering. The Company raised additional capital in May 2017 and has since invested some of the funds raised to deliver a defined program of software development. This has resulted in a broader OneSpace proposition which has enhanced functionality across the platform, its mobile offering and various modular point solutions. We have complemented this development program with an acquisition, which we anticipate will benefit the Group in future years as we take these new software offerings to market. The acquisition of A+K is seen as a key component in our channel strategy.
During the year the Group reported improved trading performance, with its Software division recording the biggest divisional increase in both revenue and profit. Managed Services has also performed reasonably well with the added benefit of a full year contribution from Commensus. The Systems Integration division however had a challenging year, experiencing a slow first half and whilst the second half reported better performance, full year revenue, gross margin and profitability was not as strong as the prior year. The Systems Integration division is a projects business and as a result gross profit margins can fluctuate based on the size and complexity of each project.
Share consolidation and capital reduction
On 5 June 2017 the Group held its AGM, at which a share consolidation was approved whereby every 100 'Existing Ordinary Shares' with a nominal value of 0.1 pence be consolidated into one 'New Issued Ordinary Share' with a nominal value of 10 pence.
The share consolidation involved 2,078,479,485 shares of 0.1 pence in the issued share capital of the Company being consolidated into 20,784,795 ordinary shares of 10 pence each, effective 6 June 2017.
At the same time, shareholders approved a Reduction of Capital which resulted in the following transactions:
(a) the Company's share premium account was transferred to the Company's accumulated deficit in distributable funds;
(b) the Company's deferred shares were cancelled and the capital redemption reserve arising was transferred to the Company's accumulated deficit; and
(c) the Company's merger reserve was transferred to the Company's accumulated deficit.
This resulted in the Company having an accumulated surplus in distributable funds of £12,410,292.
The Directors believe that, subject to the future performance of the Group, this should give the Company the ability to make distributions to Shareholders and/or buy back its own ordinary shares if, the Directors consider that it is appropriate to do so. The Reduction of Capital was approved by the Courts and became effective on 28 June 2017.
Where applicable, the comparative figures relating to number or value of shares throughout this report have been amended to reflect the effects of the share consolidation had it been in place at the beginning of the previous financial year.
Acquisitions
On 9 May 2017 (prior to the Group's share consolidation), RedstoneConnect acquired 100% of the share capital of Easter Road Holdings Limited ("ERH"), and its 100% owned subsidiary Anders + Kern U.K. Limited ("A+K"), for a total consideration of £1.4 million. Deal costs of £0.1 million were incurred and recorded under integration and transactional items in the Income Statement. The transaction was satisfied fully by cash which was financed out of the proceeds of a placing of 433,333,334 new ordinary shares of 0.1 pence each (prior to the share consolidation) at a price of 1.5 pence per share, raising £6.5 million, before expenses.
Trading performance
Revenue for the year of £47.6 million (2017: £41.5 million) increased by £6.1 million or 15% year on year. This increase in revenue was, in the most part, achieved as a result of a full year contribution from Commensus of £2.4 million, the acquisition of A+K in May 2017 (which contributed £2.1 million in revenue in the year), as well as strong growth seen in the Software division. The Software division, benefitted from the OEM software contract recorded in the second half of the year which contributed revenues of £2.25 million. These increases in revenue were offset in part by the reduction in revenue performance from the Systems Integration division.
The Group reported gross profit for the year of £13.4 million, which was 45% ahead of the prior year (2017: £9.2 million), and gross profit margin at 28% which represents a 600 basis points increase over the same period (2017: 22%). The uplift in gross profit performance has been achieved through a greater contribution from the Software division, with its high gross margin at 83% and to a lesser extent, the Managed Services division, with a full year contribution from Commensus with its higher margin service offering, offset by lower margin contribution from Systems Integration.
As a result of the strong gross profit performance, adjusted EBITDA has increased in the year by 60% to £3.2 million (2017: £2.0 million), this increase being supported by an additional £1.5 million EBITDA contribution from the Software division.
The improved trading performance resulted in a £0.4 million increase at the operating level, with profit of £1.6 million (2017: £1.2 million), representing a 32% year on year increase. The Group reports its second consecutive profitable year following its recent restructuring, recording profit before tax from continuing operations of £1.5 million (2017: £1.2 million) and post-tax earnings from continuing operations of £1.5 million (2017: £1.8 million), with the prior year benefitting from a credit to tax of £0.6 million versus a £0.1 million credit in the current year.
Year ended 31 January 2018
Systems Integration
Managed Services
Software
Group Overhead
Total
£'000
£'000
£'000
£'000
£'000
Revenue
24,213
18,023
5,338
-
47,574
Gross profit
3,777
5,140
4,441
-
13,358
Gross margin
15.6%
28.5%
83.2%
-
28.1%
Adjusted EBITDA
613
2,567
1,884
(1,857)
3,207
Operating profit from continuing operations
409
1,948
1,371
(2,157)
1,571
Adjusted profit before taxation
463
2,207
1,660
(1,959)
2,371
Profit after taxation from continuing operations
405
1,986
1,374
(2,249)
1,516
Operating profit from continuing operations
409
1,948
1,371
(2,157)
1,571
Adjusting items:
Integration and transactional costs included within administrative expenses
12
36
171
218
437
Depreciation
93
252
47
10
402
Amortisation
59
281
285
-
625
Share based payment charge
40
50
10
72
172
Adjusted EBITDA
613
2,567
1,884
(1,857)
3,207
Profit/(loss) before taxation from continuing operations
404
1,952
1,348
(2,249)
1,455
Adjusting items:
Integration and transactional costs included within administrative expenses
12
36
171
218
437
Amortisation of intangible assets from business combinations
7
169
131
-
307
Share based payment charge
40
50
10
72
172
Adjusted profit before taxation
463
2,207
1,660
(1,959)
2,371
Amortisation split:
Development capitalised
-
-
152
-
152
Software capitalised
52
112
2
-
166
Business combinations
7
169
131
-
307
Amortisation of intangible assets
59
281
285
-
625
Year ended 31 January 2017
Systems Integration
Managed Services
Software
Group Overhead
Total
£'000
£'000
£'000
£'000
£'000
Revenue
24,586
15,310
1,625
-
41,521
Gross profit
4,084
3,714
1,426
-
9,224
Gross margin
16.6%
24.3%
87.8%
-
22.2%
Adjusted EBITDA
1,082
1,959
343
(1,374)
2,010
Operating profit from continuing operations
874
1,432
(19)
(1,096)
1,191
Adjusted profit before taxation
888
1,524
321
(1,407)
1,326
Profit after taxation from continuing operations
1,478
1,432
7
(1,128)
1,789
Operating profit from continuing operations
874
1,432
(19)
(1,096)
1,191
Adjusting items:
Integration and transactional costs included within administrative expenses
9
50
77
(347)
(211)
Depreciation
122
281
20
1
424
Amortisation
70
183
118
-
371
Impairment of intangible assets
-
-
146
-
146
Share based payment charge
7
13
1
68
89
Adjusted EBITDA
1,082
1,959
343
(1,374)
2,010
Profit/(loss) before taxation from continuing operations
872
1,426
(16)
(1,128)
1,154
Adjusting items:
Integration and transactional costs included within administrative expenses
9
50
77
(347)
(211)
Amortisation of intangible assets from business combinations
-
35
113
-
148
Impairment of intangible assets
-
-
146
-
146
Share based payment charge
7
13
1
68
89
Adjusted profit before taxation
888
1,524
321
(1,407)
1,326
Amortisation split:
Development capitalised
21
43
3
-
67
Software capitalised
49
105
2
-
156
Business combinations
-
35
113
-
148
Amortisation of intangible assets
70
183
118
-
371
Systems Integration
The Systems Integration division had a challenging year following a slow first half. It reported lower revenues in the year at £24.2 million (2017: £24.6 million), albeit with a second half weighting which was anticipated at the start of the year, as result of order unwind and the profile of new project wins and delivery. The revenue shortfall was a result of slower uptake and delays in delivering infrastructure projects for both Smart building and DAS engagements.
Gross margin percentage at 15.6% is down 100 basis points from 16.6% in 2017, contributing a gross profit of £3.8 million, down £0.3 million (2017: £4.1 million). The decrease in gross profit margin is a result of two material infrastructure projects one of which is traditional cabling and the other a Smart Building mandate, which are contracted at lower margins. As a result, adjusted EBITDA at £0.6 million (2017: £1.1 million) and operating profit on continuing operations at £0.4 million (2017: £0.9 million) are both down £0.5 million on the prior year. A+K's sales of AV products and services contributed £0.7 million of revenues and £0.3 million gross margin from the date of its acquisition in May 2017.
Managed Services
During the year, revenues grew by 18% to £18.0 million (2017: £15.3 million) and gross profit increased by £1.4 million or 38% to £5.1 million (2017: £3.7 million). The year ended 31 January 2018 was the first full year of contribution from Commensus which was acquired in November 2016. The full year contribution from Commensus was £2.4 million of revenue (2017: £0.5 million) and £1.3 million (2017: £0.3 million) of gross profit. The increase in gross margin has been offset by a corresponding increase in overheads of £0.8 million, resulting in an increase in adjusted EBITDA of £0.6 million to £2.6 million (2017: £2.0 million) and operating profit of £2.0 million (2017: £1.4 million).
Software
This division includes revenues and profits generated from Connect IB product offerings including OneSpace.
Revenues of £5.3 million (2017: £1.6 million) generated gross profit of £4.4 million at a margin of 83.2% (2017: £1.4 million and a margin of 87.8%), resulting in a positive adjusted EBITDA contribution of £1.9 million (2017: £0.3 million) and operating profits of £1.4 million (2017: loss of £0.02 million after £0.1 million impairment of intangible assets). The performance has been underpinned by a few notable contracts, including the £2.25 million OEM for OneSpace alongside the mandates for a smart city solution and a digital retail solution.
Investment in overheads of £1.2 million has been made during the year, with additional employees complementing the existing team and supporting a scalable business platform, as we look to grow the business following this year's period of investment in product.
The impact of the investments in the Software business is beginning to show positive signs and, we have already seen increased client engagements, which start with a pilot or proof of concept. This increase in client activity across a range of vertical markets, we hope over time will develop into full contract engagements and global mandates. We also see the investment program as essential in our strategy of developing new channels to market, and some of the investment has been and will continue to be focused on productising aspects of the modular platform offering, to enable other vendors and partners to take our software products to market. We see this as a big opportunity in 2019 and beyond.
The impairment charge in the prior year arose as a result of the development in previous years of the original OneSpace product, following the acquisition of Connect IB and re-engineering of the product to what it is today as a component of our cloud platform. The charge results from the now 'end of life' previous version of the OneSpace product.
Group overheads
The Group reported central overheads of £2.2 million at an operating level (2017: £1.1 million). This includes a charge in the current year relating to integration and transactional items of £0.4 million (2017: credit of £0.2 million). The previous year also benefited from an exceptional credit of £0.2 million relating to the unwinding of accruals associated with former premises, thus the increase in continuing overheads was £0.3 million. This increase reflects investment in additional headcount and marketing activities.
Integration and transactional items
A charge of £0.4 million (2017: £0.2 million credit) has been recorded in integration and transactional items from continued operations in the year. This charge comprises an integration charge of £0.3 million (2017: £0.4 million credit) and a transactional charge of £0.1 million (2017: £0.2 million charge).
The integration charge includes £0.2 million employee related costs and £0.1 million business restructuring costs, whilst the £0.1 million transactional items resulted from professional fees associated with the acquisition of A+K as well as fees incurred in respect of the share placing, share consolidation and capital reduction.
Taxation
The tax credit reported in the income statement of £0.1 million (2017: £0.6 million) is the release of the deferred tax liability associated with the amortisation of the corresponding intangible assets from business combinations of £0.1 million (2017: £0.03 million), with the prior year also benefitting from the recording of a tax asset of £0.6 million in relation to previous years' trading losses.
The Group has the benefit of trading losses which are available to offset against future profits. As at 31 January 2018, the tax losses in the Group totalled £10.4 million (2017: losses of £9.7 million), of which we anticipate utilising £3.6 million against future profits and as such have recognised a deferred tax asset of £0.6 million (2017: £0.6 million). The tax losses primarily sit within the Systems Integration division at £4.7 million, with £1.4 million and £0.9 million trading losses relating to the Managed Services and Software divisions respectively, and the remaining £3.4 million in relation to the central function. Following the disposal of the Systems Integration and Managed Services divisions, £5.3 million of the tax losses will leave the Group, with £5.1 million losses remaining, £1.7 million in the Software division and £3.4 million within the central function.
Earnings per share - continuing operations
Basic earnings per share ("EPS") recorded in the year was 7.7 pence, which was down against the prior year at 11.1 pence. EPS on a diluted basis, allowing for employee share options and warrants, was 7.1 pence (2017: 10.1 pence). An analysis is provided in note 4 'Earnings per share'.
Adjusted basic earnings per share recorded in the year was 12.8 pence, which was marginally behind the prior year at 13.1 pence. Adjusted EPS on a diluted basis, allowing for employee share options and warrants, was 12.8 pence (2017: 11.9 pence). An analysis is provided in note 4 'Earnings per share'.
On a comparable basis, both EPS and adjusted EPS have been impacted by the dilutive effect of the shares issued during the year, with an additional 3.5 million shares and 1.9 million weighted average shares in 2018 on a basic and diluted basis. The previous year also benefitted from the credit to the income statement from integration and transactional items of £0.2 million (2018: charge of £0.4 million) as well as the release of accruals of £0.2 million (2018: £nil) in relation to previous premises and a tax credit of £0.6 million (2018: £0.1 million credit).
Research and development
During the year the Group has made a significant investment of £1.2 million (2017: £0.4 million) in further developing the Software IP, as well as extending the OneSpace product family, each one bringing added functionality to the product offering. New products launched in the year included the Meeting Room Management plug-in, a full web based Meeting Room Management product, and a market leading mobile application. There has also been significant investment in the core platform which hosts the OneSpace product offering. The platform is now multi-tenanted with a microservices architecture and is truly cloud agnostic, which allows for speedy deployment and upgrades to all instances of installed product. This investment is capitalised and recorded in the statement of financial position as an intangible asset. An analysis is provided in note 16 'Other intangible assets' of the report and accounts. We anticipate more development in 2019 as we further improve the software offering, with already identified specific enhancements.
Intangible assets and goodwill
As a result of the acquisition of A+K, the Group intangible assets increased by £0.2 million and goodwill by £1.1 million. A breakdown of the intangible assets and goodwill arising on the acquisition is provided in note 6 'Acquisitions of businesses' of the report and accounts.
Amortisation of £0.3 million has been recognised in the income statement in respect of total acquired intangible assets (2017: £0.2 million).
Cash flow
Cash and cash equivalents at the end of the year was £3.4 million (2017: £3.2 million), an increase of £0.2 million. Net cash at the year-end amounted to £1.2 million (2017: £0.8 million).
The business operations generated cash of £2.7 million (2017: £1.9 million) from profitable trading during the year. Increased working capital requirements primarily in the Software and Systems Integration businesses resulted in a net cash outflow from operating activities of £2.3 million (2017: £0.9 million cash inflow), largely as a result of higher debtors and accrued income which resulted in an outflow of £4.9 million (2017: £0.1 million). In particular, this outflow has arisen from substantially higher fourth quarter activity in 2018 on infrastructure projects which will benefit revenues in the next financial year. In prior years, including 2017, quarter four has traditionally been our slowest quarter and has therefore seen working capital inflows. The proposed disposal of the Systems Integration and Managed Services divisions involves the recovery of £3.6 million of cash and excess working capital tied up in those divisions at the year end.
Cash outflows from investing activities of £3.1 million (2017: cash outflows £4.0 million), resulted from the investments in A+K of £1.2 million (net of cash acquired), investment in the development of software IP of £1.2 million and investment in fixed and intangible assets of £0.6 million.
Cash flows generated from financing activities of £5.7 million (2017: £5.2 million) comprised funds raised from the issue of new equity, net of issue costs of £6.2 million (2017: £3.0 million) and cash outflows relating to repayment of debt and interest totalling £0.6 million (2017: £2.3 million). The funds raised during the year were used to fund the acquisition of A+K and investment made in software IP.
Dividend policy
Following the capital reduction implemented after last year's AGM, the Company is in a position to adopt a dividend policy. The proposed disposal of the Systems Integration and Managed Services divisions will furthermore generate a profit on disposal as well as substantial cash resources. The Board considers that it is in shareholders' best interests to retain resources in the Group to invest in further software development and potential acquisitions. However, should it become apparent in the next 24 months that not all of the available resources are required, the Board will consider implementing a distribution policy or return of capital to shareholders.
Borrowing and bank facility
As reported in 2017, on 14 November 2016 the Group entered into a long-term arrangement with Barclays to finance the acquisition of Commensus with a fixed term loan of £2.35 million. The loan is repayable over four years, with quarterly repayments of £0.15 million, and carries a coupon of 3.5%. The first repayment was made in February 2017 and a total of £0.6 million has been repaid in the year ended 31 January 2018.
As a result of the fixed term loan, a reduced revolving loan facility of £1.65 million was agreed (previously £2.5 million). This facility will ratchet back up to a maximum of £2.5 million in line with the repayments of the £2.35 million term loan, and as such the facility is £2.24 million at 31 January 2018. The facility remains undrawn as at the balance sheet date.
Subsequent to the acquisition of A+K in May 2017, as part of the integration within the Group, the business moved its banking facilities from Clydesdale Bank to Barclays. At the time of acquisition, A+K had bank loans with Clydesdale amounting to £0.3 million. As part of the bank transition a £0.5 million mortgage, secured against the property owned by A+K, was put in place through Barclays and the funds used in part to repay the Clydesdale loans. The Barclays mortgage loan represents 69% of the property value of £0.7 million, carries a coupon of 2.5% and is repayable over three years. Repayments are £0.01 million quarterly, and represent repayment of principal and interest.
As a result of the Group's term loan and facility arrangements, the following banking covenants are in place: -
· Leverage cover: total borrowings must not exceed 200% of trailing twelve-month EBITDA;
· Debt service: adjusted cash flow as a ratio to adjusted debt service shall not fall below 2 times;
· Interest cover: Earnings Before Interest and Tax, ("EBIT"), must exceed 2.5 times gross financing costs; and
· Debtor cover: debtor book cover less than 90 days cannot fall below 3 times the drawn facility.
These covenants must be tested at each financial quarter, and must be based on the previous twelve month period results. During the year to 31 January 2018 the covenants have been tested at the quarterly interval, and all have been within the facility limits.
Should the disposal of the Systems Integration and Managed Services divisions be approved by shareholders, the Group intends to use part of the proceeds to repay the balance of the fixed term loan. If the Group were to repay the outstanding loan balance as the date of this report, the maximum breakage costs incurred would be £0.09 million.
Spencer Dredge
Chief Financial Officer
29 May 2018
Consolidated statement of comprehensive income
For the year ended 31 January 2018
Note
2018
2017
£'000
£'000
Revenue
2
47,574
41,521
Cost of sales
(34,216)
(32,297)
Gross profit
13,358
9,224
Administrative expenses
(11,787)
(8,033)
Operating profit
1,571
1,191
Adjusted EBITDA*
3,207
2,010
1,
1,
Integration and transactional items included within administrative expenses
(437)
211
Depreciation
(402)
(424)
Amortisation
(625)
(371)
Impairment of intangible assets
-
(146)
Share based payment charge
(172)
(89)
Operating profit
1,571
1,191
Net finance costs
(116)
(37)
Profit before tax
1,455
1,154
Taxation
61
635
Profit for the year after tax
1,516
1,789
Discontinued operations
(7)
316
Profit for the year
1,509
2,105
Total comprehensive profit for the year attributable to equity holders
1,509
2,105
Basic earnings/(loss) per share
Continuing operations
4
7.72p
11.14p
Discontinued operations
4
(0.03p)
1.97p
Total
4
7.69p
13.11p
Diluted earnings/(loss) per share
Continuing operations
4
7.72p
10.12p
Discontinued operations
4
(0.03p)
1.79p
Total
4
7.69p
11.91p
* Profit for the year from continuing operations before net finance costs, tax, depreciation, amortisation, integration and transactional items, impairment charges and share based payment charge.
Consolidated statement of financial position
As at 31 January 2018
2018
2017
£'000
£'000
ASSETS
Non-current assets
Goodwill
12,232
11,087
Other intangible assets
4,212
3,222
Property, plant and equipment
1,614
906
Deferred tax
34
62
Total non-current assets
18,092
15,277
Current assets
Inventories
224
143
Trade and other receivables
13,605
8,779
Cash and cash equivalents
4,423
4,468
Total current assets
18,252
13,390
Total assets
36,344
28,667
EQUITY and LIABILITIES
Capital and reserves attributable to equity shareholders
Share capital
2,078
3,687
Share premium
-
32,589
Merger reserve
-
1,911
Reverse acquisition reserve
(4,236)
(4,236)
Accumulated surplus/(deficit)
24,560
(19,470)
Total equity
22,402
14,481
Current liabilities
Overdraft
980
1,273
Bank loans
638
653
Trade and other payables
10,595
10,318
Corporation tax
-
11
Total current liabilities
12,213
12,255
Non-current liabilities
Provisions
141
169
Bank loans
1,588
1,762
Total non-current liabilities
1,729
1,931
Total liabilities
13,942
14,186
Total equity and liabilities
36,344
28,667
The financial statements were approved by the Board of Directors and authorised for issue on 29 May 2018.
They were signed on its behalf by:
Spencer Dredge
Chief Financial Officer
RedstoneConnect Plc, Company Number: 5332126
Consolidated statement of cash flows
For the year ended 31 January 2018
2018
2017
£'000
£'000
Cash flows from operating activities
Profit for the year
1,509
2,105
Depreciation
402
424
Amortisation
625
371
Share based payment charge
172
89
Net finance costs
116
37
Taxation
(61)
(635)
Intangible asset impairment
-
146
Provisions released
(28)
(610)
Operating cash flows before movements in working capital
2,735
1,927
Decrease in inventories
92
37
Increase in receivables
(4,894)
(133)
Decrease in payables
(248)
(270)
Movement in provisions
-
(687)
Operating cash flows after movements in working capital
(2,315)
874
Tax (paid)/refunded
(54)
39
Net cash generated (used in)/from operating activities
(2,369)
913
Cash flows from investing activities
Research and development
(1,232)
(367)
Acquisition of subsidiaries (net of cash acquired)
(1,249)
(3,140)
Acquisition of intangible assets
(176)
(138)
Acquisition of property, plant and equipment
(395)
(351)
Net cash used in investing activities
(3,052)
(3,996)
Cash flows from financing activities
Proceeds from issues of share capital (net of issue costs)
6,240
2,979
Loan drawn
1,150
3,789
Loan repaid
(1,605)
(1,500)
Net finance costs
(116)
(37)
Net cash generated from financing activities
5,669
5,231
Net increase in cash and cash equivalents
248
2,148
Cash and cash equivalents at start of year
3,195
1,047
Cash and cash equivalents at end of year
3,443
3,195
Cash and cash equivalents comprise cash at bank and other short-term highly liquid investments with maturity of three months or less, as adjusted for any bank overdrafts.
Consolidated statement of changes in equity
Attributable to equity holders of the Company
Share capital
Share premium/ merger reserve
Reverse acquisition reserve
Accumulated (deficit)/ surplus
Total
£'000
£'000
£'000
£'000
£'000
At 1 February 2016
3,436
31,374
(4,236)
(21,664)
8,910
Profit for the year
-
-
-
2,105
2,105
Total comprehensive profit for the year
-
-
-
2,105
2,105
Transactions with the owners:
Proceeds from shares issued
251
3,272
-
-
3,523
Share issue costs
-
(146)
-
-
(146)
Share based payment charge
-
-
-
89
89
At 31 January 2017
3,687
34,500
(4,236)
(19,470)
14,481
At 1 February 2017
3,687
34,500
(4,236)
(19,470)
14,481
Profit for the year
-
-
-
1,509
1,509
Total comprehensive profit for the year
-
-
-
1,509
1,509
Transactions with the owners:
Proceeds from shares issued
433
6,067
-
-
6,500
Share issue costs
-
(260)
-
-
(260)
Capital reduction
(2,042)
(40,307)
-
42,349
-
Share based payment charge
-
-
-
172
172
At 31 January 2018
2,078
-
(4,236)
24,560
22,402
Notes to the financial statements
1 General information
RedstoneConnect plc is a company incorporated in England and Wales under the Companies Act 2006 and listed on the AIM market. The nature of the Group's operations and its principal activities are set out in the Directors' report and in the Operational review of the report and accounts.
The financial statements are presented in pounds sterling as that is the currency of the primary economic environment in which the Group operates. There are no foreign subsidiaries in the Group.
Going concern
The Directors consider that the Company and the Group have adequate resources to continue in existence for the foreseeable future. In assessing the outlook for the Company and Group, the Board took account of the £21.6 million consideration for the proposed disposal of the Systems Integration and Managed Services divisions to Excel I.T. Services Limited, of which £19.6 million is payable on completion and a further £2.0 million by 30 November 2018, as well as Group's £2.24 million overdraft facility.
The Directors have assessed the Group's current forecasts, taking into account reasonable changes in trading performance. The assessment considered stress tests and mitigating actions available to the Group. On the basis of this review, the Directors believe that the Group will continue to operate within the resources currently available to it. Furthermore, the Directors have reviewed the projections in accordance with the banking facility covenants and current cash flow forecasts indicate that the Group will not breach these terms in the foreseeable future. The Directors accordingly continue to adopt the going concern basis in preparing the financial statements.
2 Segmental reporting
The Group has undergone a period of transformation over the last two financial periods, with the disposal of the telecommunications business and the acquisition of Connect IB Ltd and Commensus Plc. In order to support this, the Board have amended the segments by which it reports the business activities of the Group.
In the opinion of the Directors the Group's activities comprise three material business segments which reflect the profiles of the risks, rewards and internal reporting structures within the Group.
These are as follows:
· Systems Integration
· Managed Services
· Software
All activities were conducted within the United Kingdom and it is the opinion of the Directors that this represents one geographical segment.
Year ended 31 January 2018
Systems Integration
Managed Services
Software
Group Overhead
Total
£'000
£'000
£'000
£'000
£'000
Revenue
24,213
18,023
5,338
-
47,574
Cost of sales
(20,436)
(12,883)
(897)
-
(34,216)
Gross Profit
3,777
5,140
4,441
-
13,358
Administrative expenses
(3,164)
(2,573)
(2,557)
(1,857)
(10,151)
Adjusted EBITDA/(LBITDA)*
613
2,567
1,884
(1,857)
3,207
Integration and transactional costs included within administrative expenses
(12)
(36)
(171)
(218)
(437)
Depreciation
(93)
(252)
(47)
(10)
(402)
Amortisation
(59)
(281)
(285)
-
(625)
Share based payment charge
(40)
(50)
(10)
(72)
(172)
Operating profit/(loss)
409
1,948
1,371
(2,157)
1,571
Net finance costs
(5)
4
(23)
(92)
(116)
Profit/(loss) before taxation
404
1,952
1,348
(2,249)
1,455
Taxation
1
34
26
-
61
Profit/(loss) after taxation
405
1,986
1,374
(2,249)
1,516
Year ended 31 January 2017
Systems Integration
Managed Services
Software
Group Overhead
Total
£'000
£'000
£'000
£'000
£'000
Revenue
24,586
15,310
1,625
-
41,521
Cost of sales
(20,502)
(11,596)
(199)
-
(32,297)
Gross Profit
4,084
3,714
1,426
-
9,224
Administrative expenses
(3,002)
(1,755)
(1,083)
(1,374)
(7,214)
Adjusted EBITDA/(LBITDA)*
1,082
1,959
343
(1,374)
2,010
Integration and transactional costs included within administrative expenses
(9)
(50)
(77)
347
211
Depreciation
(122)
(281)
(20)
(1)
(424)
Amortisation
(70)
(183)
(118)
-
(371)
Impairment of intangible assets
-
-
(146)
-
(146)
Share based payment charge
(7)
(13)
(1)
(68)
(89)
Operating profit/(loss)
874
1,432
(19)
(1,096)
1,191
Net finance costs
(2)
(6)
3
(32)
(37)
Profit/(loss) before taxation
872
1,426
(16)
(1,128)
1,154
Taxation
606
6
23
-
635
Profit/(loss) after taxation
1,478
1,432
7
(1,128)
1,789
* profit for the period from continuing operations before net finance costs, tax, depreciation, amortisation, integration costs and transactional items, impairment charge and share based payments.
3 Acquisition of business
On 9 May 2017 (prior to the Group's share consolidation), RedstoneConnect acquired 100% of the share capital of Easter Road Holding Limited ("ERH"), and its 100% owned subsidiary Anders + Kern U.K. Limited ("A+K"), for a total consideration of £1.4 million. Deal costs of £0.1 million were incurred and recorded under integration and transactional items in the Income Statement. The transaction was satisfied fully by cash which was financed out of the placing of 433,333,334 new ordinary shares of 0.1 pence each at a price of 1.5 pence per share, raising £6.5 million, before expenses.
The acquisition of ERH is in line with RedstoneConnect's strategy of developing its core Redstone business through both organic and acquisitive growth. In addition, this acquisition offers significant synergies for the enlarged group in terms of potential new clients for RedstoneConnect and a channel to market for the Group product and services.
The book value of A + K net assets acquired and their fair values are summarised below:
Book value
Fair value adjustments
Fair value to Group
£'000
£'000
£'000
Intangible assets
-
207
207
Property, plant and equipment
715
-
715
Current assets
307
-
307
Current liabilities
(552)
(66)
(618)
Non-current liabilities
(266)
-
(266)
Deferred tax liability
(50)
(40)
(90)
Total net assets
154
101
255
Fair value of net assets acquired
255
Goodwill
1,145
Total consideration
1,400
Cash
1,400
Cash
1,400
Less: cash acquired
(151)
Total cash consideration net of cash acquired
1,249
The fair value of the financial assets including trade receivables with a fair value and gross contractual value of £158,000. The best estimate at acquisition date of the contractual cash flows to be collected was £110,000.
The goodwill arising from the acquisitions is not deductible for income tax purposes.
Since acquisition date Anders + Kern (U.K.) Limited contributed £2,068,000 in revenue and £25,000 to the Group's profit before taxation in the year. Had the acquisition occurred at the beginning of the year, the Group's revenue would have been £48,400,000 and the Group's profit before taxation would have been £1,487,000 for the year.
The goodwill acquired represents the value of the sales channel within the acquired business as well as potential future synergies within the Groups sales function.
The identifiable intangible assets related deferred tax liability are as follows:
Fair value to Group
£'000
Brand and customer relationships
207
Deferred tax liability
(40)
Total
167
The Group has applied the 'Income Approach' valuation method to identify the above acquired intangible assets.
The Income Approach focuses on the income-producing capability of the subject asset. The underlying premise of this approach is that the value of an asset can be measured by the present worth of the net economic benefit (cash receipts less cash outlays) to be received over the life of the subject asset.
The steps followed in applying this approach include estimating the expected after-tax cash flows or profits attributable to the asset over its life and converting these after-tax cash flows to present value. This has been calculated using the Discounted Cashflow Methodology ("DCF").
The discounting process uses a rate of return, which accounts for both the time value of money and investment risk factors. Finally, the present value of the after-tax cashflows over the life of the asset is totalled to arrive at an indication of Fair Value of the asset.
For the Customer relationships we have approached this by way of ascertaining the post-tax annual value of these contracts after applying an attrition rate based on historical trends.
4 Earnings per share
Earnings per share data is based on the Group profit/(loss) for the year and the weighted average number of ordinary shares in issue.
On 5 June 2017, the Group held its AGM at which the Shareholders approved a share consolidation whereby every 100 'Existing Ordinary Share' with a nominal value of 0.1 pence would be consolidated into one 'New Issued Ordinary Share' with a nominal value of 10 pence each. This resolution was approved by the shareholders at the AGM and subsequently the consolidation took effect on 6 June 2017.
The 'weighted average ordinary share in issue' and 'weighted average potential diluted shares in issue' values used in the earning per share calculations have been restated to reflect the position had the share consolidation been in affect at those reporting dates.
2018
Continuing
Discontinued
Total
£'000
£'000
£'000
Profit/(loss) for the year
1,516
(7)
1,509
Adjustment to basic earnings/(loss):
Integration and transactional costs
437
7
444
Tax credit on integration and transactional costs
(84)
(1)
(85)
Intangible asset amortisation
625
-
625
Deferred tax credit on intangible asset amortisation
(120)
-
(120)
Share based payment charge
172
-
172
Deferred tax credit on share based payment charge
(33)
-
(33)
Adjusted earnings attributable to owners of the Company
2,513
(1)
2,512
Number of shares
No.
No.
No.
Weighted average ordinary shares in issue
19,621,325
19,621,325
19,621,325
Weighted average potential diluted shares in issue
19,621,325
19,621,325
19,621,325
Earnings/(loss) per share
Basic earnings/(loss) per share
7.72 pence
(0.03) pence
7.69 pence
Diluted earnings/(loss) per share
7.72 pence
(0.03) pence
7.69 pence
Adjusted earnings/(loss) per share
Basic earnings/(loss) per share
12.81 pence
(0.01) pence
12.80 pence
Diluted earnings/(loss) per share
12.81 pence
(0.01) pence
12.80 pence
2017
Continuing
Discontinued
Total
£'000
£'000
£'000
Profit for the year
1,789
316
2,105
Adjustment to basic earnings:
Integration and transactional costs
(211)
(318)
(529)
Tax credit on integration and transactional costs
40
60
100
Intangible asset amortisation
371
-
371
Deferred tax credit on intangible asset amortisation
(70)
-
(70)
Impairment of intangible assets
146
-
146
Tax credit on impairment of intangible assets
(27)
-
(27)
Share based payment charge
89
-
89
Deferred tax credit on share based payment charge
(17)
-
(17)
Adjusted earnings attributable to owners of the Company
2,110
58
2,168
Number of shares
No.
No.
No.
Weighted average ordinary shares in issue
16,068,962
16,068,962
16,068,962
Weighted average potential diluted shares in issue
17,685,269
17,685,269
17,685,269
Earnings per share
Basic earnings per share
11.14 pence
1.97 pence
13.11 pence
Diluted earnings per share
10.12 pence
1.79 pence
11.91 pence
Adjusted earnings per share
Basic earnings per share
13.13 pence
0.36 pence
13.49 pence
Diluted earnings per share
11.93 pence
0.33 pence
12.26 pence
5 Share consolidation and reserves
On 5 June 2017 the Group held its AGM, at which a share consolidation was approved whereby every 100 'Existing Ordinary Shares' with a nominal value of 0.1 pence be consolidated into one 'New Issued Ordinary Share' with a nominal value of 10 pence.
The share consolidation involved 2,078,479,485 shares of 0.1 pence in the issued share capital of the Company being consolidated into 20,784,795 ordinary shares of 10 pence each, effective 6 June 2017.
At the same time, shareholders approved a Reduction of Capital which resulted in the following transactions:
(a) the Company's share premium account was transferred to the Company's accumulated deficit in distributable funds;
(b) the Company's deferred shares were cancelled and the capital redemption reserve arising was transferred to the Company's accumulated deficit; and
(c) the Company's merger reserve was transferred to the Company's accumulated deficit.
This resulted in the Company having an accumulated surplus in distributable funds of £12,410,292.
The Directors believe that, subject to the future performance of the Group, this should give the Company the ability to make distributions to Shareholders and/or buy back its own ordinary shares if, the Directors consider that it is appropriate to do so. The Reduction of Capital was approved by the Courts and became effective on 28 June 2017.
The movement in issued and fully paid ordinary share capital detailed below reflects these changes.
2018
2017
2018
2017
Number
Number
£'000
£'000
Allotted, called up and fully paid:
Ordinary shares of 10p each
20,784,795
16,451,461
2,078
1,645
Deferred shares of 100p each
-
1,271,440
-
1,271
Deferred shares of 10p each
-
7,707,140
-
771
2,078
3,687
Movement in issued and fully paid ordinary share capital during the year was as follows:
Shares issued
Share capital
Share premium
Merger reserve
Total
Number
Price
£'000
£'000
£'000
£'000
Placing and open offer
4,333,334
1.5p
433
6,067
-
6,500
Placing fee
-
(260)
-
(260)
Capital reduction
-
(38,396)
(1,911)
(40,307)
Total movement in the year
4,333,334
433
(32,589)
(1,911)
(34,067)
At 31 January 2017
16,451,461
1,645
32,589
1,911
36,145
At 31 January 2018
20,784,795
2,078
-
-
2,078
6 Subsequent events
On 29 May 2018 the Group announced the proposed disposal of the Systems Integration and Managed Services divisions to Excel I.T. Services Limited for a total consideration of £21.6 million in cash, of which £19.6 million is payable on completion, and a further £2.0 million payable on or before 30 November 2018, subject to completion of an already contracted project by Redstone Converged Solutions Ltd ("Additional consideration"). In addition, intercompany loans to the divisions amounting to a further £1.4 million will be waived.
The Additional Consideration will be retained by the Purchaser for working capital purposes relating to a project, which is due to complete in November 2018. In the event that the Additional Consideration is not sufficient to cover the ongoing working capital relating to the project, the Company may be required to provide additional working capital equal to any such deficit, subject to the terms of the Share Purchase Agreement.
7 Annual General Meeting
Further details in relation to the Annual General Meeting shall be provided in due course.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.ENDFR FKCDNNBKKNPB
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