REG - SysGroup PLC - Final Results

SysGroupAnnouncement

26/06/2019 07:06

RNS Number : 4117D
SysGroup PLC
26 June 2019
 


26 June 2019
SysGroup plc
("SysGroup" or the "Company" or the "Group")
 
Final Results for the year ended 31 March 2019
 
SysGroup PLC (AIM:SYS), the multi award-winning managed IT services and cloud hosting provider is pleased to announce its final results for the year ended 31 March 2019.
 
HIGHLIGHTS
 
Financial
·    Revenue increased by 22% to £12.77m (2018: £10.45m)
o  £9.47m of revenue is recurring in nature (2018: £7.13m)
·    Adjusted EBITDA1 increased by 41% to £1.41m (2018: £1.0m)
·    Adjusted PBT2 growth of 39% to £0.75m (2018: £0.54m)
·    Cash generated from operations3 increased 50% to £1.21m (2018: £0.80m)
·    Net cash/(debt)4 of £0.47m (2018: £(0.92m))
 




 


2019


2018


Change (%)




Revenue


£12.77m


£10.45m


+22%




Recurring revenue % of total revenue


74%


68%


+6%




Gross Margin


£7.78m


£5.99m


+30%




Gross Margin %


61%


57%


+4%




Adjusted EBITDA1


£1.41m


£1.00m


+41%




Adjusted PBT2


£0.75m


£0.54m


+39%




Adjusted Basic EPS5


3.1p


2.3p


+35%




Statutory loss before tax


£(0.83)m


£(0.01)m


-




Basic EPS


(2.8)p


1.0p


-




Net cash/(debt)4


£0.47m


£(0.92)m


-




 
Operational
·    Acquisition of Certus IT Limited in February 2019 for initial consideration of £8.0m
·    Successful placing of new ordinary shares raising £10.0m (gross) in February 2019
·    New 5-year bank facilities consisting of:
o  £1.75m term loan
o  £3.25m acquisition revolving credit facility
·    Implementation of Employee EMI Share Option Scheme
·    Completion of office refurbishment programme
 
Post period-end developments
·    Acquisition of Hub Network Services Limited for £1.45m in cash
·    Won Autotask International Partner of the Year 2019 Award
·    Certus IT acquired on a cash free debt free basis resulting in a post completion adjustment to the initial consideration of £0.25m cash returned to the Group
 
1Adjusted EBITDA, is earnings before interest, taxation, depreciation, amortisation of intangible assets, exceptional items, fair value adjustments and share based payments.
2Adjusted profit before tax ("Adjusted PBT") is profit before tax after adding back amortisation of intangible assets, exceptional items, fair value adjustments and share based payments.
3Cash generated from operations represents Operational cashflows adjusted to exclude cashflows for exceptional items
4Net cash/(debt) represents cash balances less bank loans, finance lease liabilities and contingent consideration.
5Adjusted Basic EPS is profit after tax after adding back amortisation of intangible assets, exceptional items, fair value adjustments, share based payments and associated tax.
 
Adam Binks, Chief Executive Officer commented:
"I am delighted to announce another solid year for the Group, in which we delivered double digit growth in revenue and adjusted profit as well as achieving a number of strategic milestones. Our scale, customer base and geographical coverage have grown considerably and, importantly, so too has the quality of our revenue streams. We are beginning to see the benefits of our investment in sales and marketing and are well positioned to meet the complex requirements of our customers and prospects. The post period acquisition of Hub Network Services announced earlier this week also further underpins our capabilities in being able to source and deliver complementary acquisitions which is pivotal to the successful delivery of our stated strategy."
"The momentum achieved in the year has carried over into the start of the new financial year, and with the growth expected to continue, I remain optimistic for the future."
 




For further information please contact:
 
SysGroup plc
Adam Binks, CEO
Martin Audcent, CFO
 


 
 
Tel: 0151 559 1777
 




Shore Capital (Nomad and Broker)
Edward Mansfield / Daniel Bush / Anita Ghanekar
 


Tel: 020 7408 4090




Alma PR (Financial PR)
Josh Royston / Hilary Buchanan / Helena Bogle
 


Tel: 020 3405 0205




About SysGroup
SysGroup is a leading provider of Managed IT Services, Cloud Hosting, and expert IT Consultancy. The Group delivers solutions that enable clients to understand and benefit from industry leading technologies and advanced hosting capabilities. SysGroup focuses on a customer's strategic and operational requirements - enabling clients to free up resources, grow their core business and avoid the distractions and complexity of delivering IT services.
The Group has offices in Liverpool, Coventry, London, Telford and Newport.
 
For more information, visit http://www.sysgroupplc.com
 
 
 
STRATEGIC REPORT
 
Chairman's statement
We are pleased to present the Group's final results for the year ended 31 March 2019, delivering double digit growth in revenue and Adjusted EBITDA and demonstrating the continued execution of the Group's buy-and-build strategy. The Group achieved a number of milestones during the year, progressing its journey of becoming the leading provider of managed IT services.
 
The Group successfully raised £10.0m (gross) by way of an equity placing ("Placing") in February 2019 to fund further opportunities for growth. On behalf of the Company and the rest of the Board, I would like to thank both our new and existing shareholders for their continued support and commitment to our vision. The support by investors has been mirrored by the commitment of Santander to the Group through the provision of £5.0m in new bank facilities. This commitment places the Group in a strong position to continue to execute its growth strategy.
The Placing enabled the acquisition of Certus IT Limited ("Certus") by the Group in February. The deal was transformational adding new customers, expertise, further scale and enhanced geographical reach to the Group. We expect Certus to be trading under the SysGroup brand later this financial year, and the majority of the operations integration will take place in H2 FY20. We will continue to assess complementary acquisition opportunities in line with our growth strategy.
The restructuring of the Board was completed during the year with the appointment of Martin Audcent as Chief Financial Officer in July 2018, putting in place the last of the building blocks in establishing the right mix of experience on the Board. These results mark the first full year with Adam Binks as Chief Executive Officer and the contribution his leadership and vision has delivered to the Group is palpable. I believe we have the right team in place to see the Company through to its next stages of growth.
The market environment remains buoyant and the opportunities for the Group as a trusted IT partner are long term. Furthermore, we continue to invest in the business and our people and I would like to thank all of our dedicated employees for their contribution to the Group. I look forward to the new year with confidence.
 
 
Michael Edelson
Chairman
26 June 2019
 
 
 
 
Chief Executive Officer's report
 
Introduction
The 2019 financial year saw an acceleration of the Group's growth strategy, delivering against our expectations and building upon the newly-formed business foundations established in the prior year.
 
The Company delivered revenue growth of 22% to £12.77m and adjusted EBITDA growth of 41% to £1.41m which supported a 50% increase in cash generation to £1.20m. Recurring revenues now represent approximately 74% of the Group's total revenue (FY18: 68%), demonstrating our continued shift and strategic focus on higher quality earnings over lower margin VAR. The addition of new managed service customers to this base has contributed to a steadily growing monthly run-rate of recurring revenues, which, combined with the addition of Certus during the year, has launched the business into the next stage of its growth roadmap.
 
We have spent considerable time during the year enhancing and streamlining the business platform, and ensuring we remain close to our customer base. During the year we undertook a re-branding exercise, bringing all of the previously acquired businesses under the SysGroup brand with a single go-to-market offering. We have continued to invest in our people and systems to support the Group's growth strategy.
Market
We are still in the infancy in the journey to cloud adoption and fully outsourced IT, and customers and prospects are looking to trusted IT partners to help them navigate the complexities of the outsourced IT landscape. Security, compliance and IT governance remain the key drivers for businesses seeking expert advice in helping them to ultimately outsource to ensure they remain protected and compliant.
 
The market for managed IT service providers remains highly fragmented and characterised by a plethora of small, often localised players. Many of these players reach a natural ceiling, above which they do not have either the inclination or expertise to grow. This provides significant opportunity for further consolidation and we expect to continue to play a role in that in line with our buy-and-build strategy.
 
Strategy
The Group's clear strategy remains consistent: to expand its position as a trusted provider of Managed IT Services to clients in the UK. The Board believes that a business focused on the provision of Managed IT Services offers the highest growth opportunity and the potential for increased margins and longer-term contracts, thereby providing greater revenue visibility. In pursuit of this strategy, the Group has positioned itself as an extension of a customer's existing IT department, with an emphasis on consultative-led sales to guide customers through the complexities and developments in the market. The process is supplemented by customer service and support. The Group invests in R&D to ensure its clients take advantage of the latest and best solutions available to them, with a vendor/cloud agnostic approach. 
 
The Company's route to execute this strategy is through a combination of organic and acquisitive growth whilst ensuring we create cross-selling opportunities across our acquired customer bases.  
 
Acquisitions
The acquisition of Certus IT in February was in line with our stated strategy of augmenting our growth with carefully selected acquisitions. Certus is a well-established and growing managed services provider which has a complementary service offering, geographical reach and customer base to SysGroup. Certus has bolstered the Group's existing managed service offerings, by expanding the enlarged Group's current IaaS customer base, significantly adding to its managed connectivity portfolio and further strengthening the existing relationship with Dell EMC by upgrading the Group to gold partner status.
 
Further, the Group announced the acquisition of Hub Network Services Limited ("HNS") earlier this week for a cash consideration of £1.45m on a cash free debt free basis. HNS is a well-established B2B managed services provider with a primary focus on delivering fast, low latency network connectivity and co-location solutions. The integration of HNS into the Group's existing operations has already commenced and we expect to be leveraging the operational benefits of HNS from H2 FY20.
 
The Board continues to assess strategic acquisition opportunities that fit within its strict criteria and importantly, further the Group's customer acquisition priorities.
 
New Banking Facilities
In February, the Company re-financed its existing term loan facility as a £1.75m term loan over five years and arranged a new £3.25m acquisition revolving credit facility with Santander to provide additional financial flexibility for the Group. The continued support from Santander further underpins the external confidence that has been placed in the Board to deliver on the Group's growth strategy as well as providing the Group with the capital to deliver subsequent acquisitions.
The banking facilities have a five-year term with covenants that will be tested quarterly on a 12-month rolling basis relating to interest cover, net debt to Adjusted EBITDA leverage and debt service cover.
Sales and Marketing
The investments that we have made in sales and marketing have already made a change to the business and we will continue to see the benefits as we grow. The appointments that we have made to date, and continue to make, include several highly skilled senior individuals reflecting our consultancy first approach. Our clients come to us with complex IT needs and it is therefore important that our salespeople fully understand the options available to them and are able to provide clients with a bespoke, end to end solution that best suits these needs.
 
The brand consolidation work concluded in the financial year has aided our sales effort and played a key role in growing our pipeline of opportunities. Recognition of SysGroup is undoubtedly growing in the marketplace and, with it, our reputation as a trusted provider. The unified brand will also accelerate our ability to integrate acquired businesses with ease.
 
Financial review

Group revenue for the year grew by 22% to £12.77m for the year to 31 March 2019 (2018: £10.45m) with growth from existing customers and from the post-acquisition trading of Certus IT, acquired in February 2019. The revenue growth resulted from an increase in higher quality Managed IT Services sales which is principally contracted income on three-year contracts. Value Added Resale revenue of £3.3m was consistent with the prior year revenue of £3.3m. Value Added Resale is a complementary sell to the customer base and is subject to the timing and size of customer's IT asset refresh cycles.




 


2019


2019


2018


2018




Revenue by operating segment


£'000


%


£'000


%




Managed IT Services


9,448


74%


7,130


68%




Value Added Reseller


3,325


26%


3,321


32%




 


12,773


100%


10,451


100%




The Group adopted "IFRS15 Revenue from Contracts with Customers" and "IFRS9 Financial Instruments" in this years' financial statements and the changes required have had no material impact to the Group's financial statements. Further information on the adoption of IFRS15, IFRS9 and the Group's revenue recognition policy is included in note 1 to the Accounts.
Gross profit for the year was £7.78m (2018: £5.99m) representing a gross margin of 61% (2018: 57%). The increase in gross margin percentage is attributable to the change in sales mix with the business focussed more on Managed IT Services growth this year. In 2019, 74% of revenue (2018: 68%) came from Managed IT Services which has a gross margin of 74% (2018: 75%). Value Added Resale was 26% of revenue (2018: 32%) with gross margin percentage increasing to 25% in 2019 (2018: 20%) which reflects improvements made in our supplier procurement processes.
Operating expenses before depreciation, amortisation, exceptional items, fair value adjustment and share based payments increased from £5.0m in 2018 to £6.4m in 2019 reflecting an increase in  overhead costs from newly acquired businesses and an increase in operational investment to enhance our Group Sales and Marketing teams.
Adjusted EBITDA was £1.41m for the year to 31 March 2019, an increase of £0.41m (+41%) compared to £1.0m in 2018. Adjusted EBITDA is not a defined term and is calculated differently by each company, the Directors consider that Adjusted EBITDA figure is the most appropriate measure to assess the business performance since this reflects the underlying trading performance of the Group. The reconciliation of Operating (loss)/profit to Adjusted EBITDA is shown below:




Reconciliation of operating (loss)/profit to Adjusted EBITDA


 


 


2019
£'000


2018
£'000




Operating (loss)/profit


 


 


(659)


77




Depreciation


 


 


494


372




Amortisation of intangible assets


 


 


723


500




EBITDA


 


 


558


949




Exceptional items


 


 


736


581




Fair value adjustment


 


 


-


(540)




Share based payments


 


 


119


10




Adjusted EBITDA


 


 


1,413


1,000




 
The Group has incurred exceptional costs during the year of £0.74m (2018: £0.58m) comprising £0.55m for acquisitions, £0.49m relating to the acquisition of Certus IT Limited and £0.07m attributable to a terminated acquisition process. Exceptional costs also include £0.18m of costs associated with integrating acquired businesses and restructuring the Group's internal operations. Amortisation of intangible assets was £0.72m (2018: £0.50m), of which £0.66m (2018: £0.45m) relates to the amortisation of acquired intangible assets.
The share-based payments charge has increased to £0.12m in 2019. The higher charge results from the grant of share options under new EMI Schemes registered this year, to the Executive Directors and, in November 2018,  to all SysGroup employees who, at the time of grant, had been employed by the Group for more than one year.
The loss before tax for the year was £0.83m (2018: £0.007m) and the loss position results from the impact of acquisition related exceptional costs and amortisation of acquired intangible assets. The prior year loss before tax includes a one-off £0.54m credit in respect of a contingent consideration adjustment.
Cashflow and net debt
The cash inflow from operations for the year was £0.60m (2018: £0.21m). This includes interest and tax payments and the £0.61m exceptional cash costs from acquisitions, integration and restructuring (2018: £0.59m). The underlying operational cash conversion, i.e. excluding the costs of acquisitions, integration and restructuring, was within expectations at 86% of Adjusted EBITDA compared to 80% in 2018. The increase resulted from improvements made to the Group's working capital management this year with changes made to the timing of raising contract invoices and a strengthening of our credit control processes.
 




Cash conversion


 


 


2019
£'000


2018
£'000




Operational cashflows


 


 


601


207




Adjustments:


 


 


 


 




Exceptional cost cashflows


 


 


611


592




Cash generated from operations


 


 


1,212


799




Adjusted EBITDA


 


 


1,413


1,000




Cash conversion


 


 


86%


80%




The cash balance increased by £2.06m to £3.38m (2018: £1.32m), with £0.60m of the increase coming from operational cashflows and net £1.46m from financing and investing activities. The investment cashflows include £7.96m cash paid on completion to acquire Certus IT Limited and a £0.95m cash balance was acquired with the company. The acquisition was funded by a £10.0m equity share placing of 26,315,792 1p ordinary shares with net proceeds, after related professional fees, of £9.34m.
Net cash/(debt) comprises cash balances less bank loans, finance lease liabilities and contingent consideration. At 31 March 2019, the Group had a net cash balance of £0.47m (2018: net debt balance of £0.92m), a cash positive movement of £1.39m.




Reconciliation of Net cash/(debt)


 


 


2019
£'000


2018
£'000




Cash balances


 


 


3,376


1,315




Bank loans - current


 


 


(224)


(216)




Bank loans - non-current


 


 


(1,397)


(1,742)




Finance leases


 


 


(285)


(275)




Contingent consideration


 


 


(1,000)


-




Net cash/(debt)


 


 


470


(918)



 
 
 
 
 
 
 
 



 
Consolidated Statement of Financial Position
The principal movements on the consolidated statement of financial position arise from the equity fund raise and the acquisition of Certus IT Limited in February 2019. Non-current assets of £23.1m (2018: £13.6m) have increased from the £5.78m goodwill and £3.78m acquired intangible assets relating to Certus. Net working capital including cash balances is £0.57m (2018: £0.25m) and the impact of Certus working capital balances is detailed in note 8. Non-current liabilities includes £1.00m (2018: £Nil) of fair value contingent consideration relating to the Certus acquisition, this is payable three months after the earn out period has expired in February 2020.
 
Following the £10.0m equity raise in February 2019, the equity attributable to the shareholders of the company has increased by £9.34m, representing the proceeds of the equity raise less the related costs. The share capital of £0.49m (2018: £0.23m) has increased by £0.26m and the excess of the net proceeds above the par value of the shares, £9.08m, has been allocated to the share premium account (2018: £Nil).
Summary & Outlook
The momentum achieved in the year has carried over into the start of the new financial year, and we expect that pace of growth to continue. We have the right tools and strategic partnerships in place to meet clients increasingly complex requirements and the relevant expertise to guide our clients from consultation, through to delivery and on-going support. Our scale, customer base and geographical coverage have grown considerably and, importantly, so too has the quality of our revenue streams. With a highly fragmented market and the continuing opportunity to acquire good businesses to complement increasing organic growth, we remain optimistic for the future.
Adam Binks

Chief Executive Officer

26 June 2019
 
 
 
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 2019




 


Notes


2019
Group
£'000


2018
Group
£'000




Revenue


3


12,773


10,451




Cost of sales


 


(4,994)


(4,456)




Gross profit


 


7,779


5,995




Operating expenses before depreciation, amortisation, exceptional items, fair value adjustment and share based payments


 


(6,366)


(4,995)




 Adjusted EBITDA


 


1,413


1,000




Depreciation


4


(494)


(372)




Amortisation of intangibles


11


(723)


(500)




Exceptional items


7


(736)


(581)




Fair value adjustment


 


- 


540




Share based payments


 


(119)


(10)




Administrative expenses


 


(8,438)


(5,918)




Operational (loss)/profit


 


(659)


77




Finance costs


5


(167)


(84)




Loss before taxation


 


(826)


(7)




Taxation


10


104


245




Total comprehensive (loss)/profit attributable to the equity holders of the company


 


(722)


238




Basic earnings per share (EPS)


9


(2.8p)


1.0p




Diluted earnings per share (EPS)


9


(2.8p)


1.0p




 
 
 
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 MARCH 2019




 


 


2019


2018




 


 


Group


Group




 


Notes


£'000


£'000




Assets


 


 


 




Non-current assets


 


 


 




Goodwill


11


15,508


9,727




Intangible assets


11


6,173


3,094




Property, plant and equipment


 


1,420


809




 


 


23,101


13,630




Current assets


 


 


 




Trade and other receivables


13


2,856


1,624




Cash and cash equivalents


 


3,376


1,315




 


 


6,232


2,939




Total Assets


 


29,333


16,569




Equity attributable to the equity shareholders of the parent


 


 


 




Called up share capital


17


494


231




Share premium reserve


 


9,080


-




Other reserve


 


2,129


2,010




Translation reserve


 


4


4




Retained earnings


 


8,370


9,092




 


 


20,077


11,337




Non-current liabilities


 


 


 




Obligations under finance leases


16


81


128




Contingent consideration due on acquisitions


14


1,000


-




Bank loan


15


1,397


1,742




Deferred taxation


 


1,120


674




 


 


3,598


2,544




Current liabilities


 


 


 




Trade and other payables


14


3,992


1,900




Contract liabilities


 


1,238


425




Bank loan


15


224


216




Obligations under finance leases


16


204


147




 


 


5,658


2,688




Total Equity and Liabilities


 


29,333


16,569




 
 
 
 
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 MARCH 2019
 




 


Attributable to equity holders of the parent

 



 


Share capital


Share premium account


Other reserve


Translation reserve


Retained Profit


Total

 


 



 


£'000


£'000


£'000


£'000


£'000


£'000

 



At 31 March 2017


231


-


2,000


4


8,854


11,089

 



Comprehensive income


 


 


 


 


 


 

 



Profit for the period


-


-


-


-


238


238

 



Total Comprehensive income


-


-


-


-


238


238

 



Distributions to owners


 


 


 


 


 


 

 



Share options granted


-


-


10


-


-


10

 



Total distributions to owners


-


-


10


-


-


10

 



At 31 March 2018


231


-


2,010


4


9,092


11,337

 



 


 


 


 


 


 


 

 



Comprehensive income


 


 


 


 


 


 

 



Loss for the period


-


-


-


-


(722)


(722)

 



Total Comprehensive income


-


-


-


-


(722)


(722)

 



Distributions to owners


 


 


 


 


 


 

 



Share options granted


-


-


119


-


-


119

 



Issue of share capital - fees


-


(657)


-


-


-


(657)

 



Issue of share capital - placing


263


9,737


-


-


-


10,000

 



Total distributions to owners


263


9,080


119


-


-


9,462

 



At 31 March 2019


494


9,080


2,129


4


8,370


20,077

 



 
 
 
 
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 MARCH 2019
 




 


 


2019
Group
£'000


2018
Group
£'000




Cash flows used in operating activities


 


 


 




Profit after tax


 


(722)


238




Adjustments for:


 


 


 




Depreciation and amortisation


4


1,226


872




Fair value adjustment on contingent consideration


 


-


(540)




Finance costs


5


167


84




Share based payments


 


119


10




Taxation


10


(104)


(245)




Operating cash flows before movement in working capital


 


686


419




(Increase)/decrease in trade and other receivables


 


(188)


190




Increase/(decrease) in trade and other payables


 


275


(416)




Operating cashflows before interest and tax


 


773


193




Interest paid


 


(123)


(66)




Taxation (paid)/refunded


 


(49)


80




Operational cashflows


 


601


207




Cash flows from investing activities


 


 


 




Payments to acquire property, plant & equipment


 


(296)


(212)




Deferred consideration


 


-


(150)




Acquisition of subsidiary companies


8


(7,956)


(3,850)




Cash acquired with acquisitions


8


949


327




Net cash used in investing activities


 


(7,303)


(3,885)




Cash flows from financing activities


 


 


 




Net proceeds from issue of ordinary share capital


17


9,343


-




(Repayment)/utilisation of loan facility including fees


 


(383)


1,940




Capital repayment of finance leases


 


(197)


(228)




Net cash from financing activities


 


8,763


1,712




Net increase / (decrease) in cash and cash equivalents from continuing operations


 


2,061


(1,966)




Cash flows from discontinued operations


 


 


 




Net cash used for operating activities


 


-


(192)




Net increase in cash and cash equivalents from discontinued operations


 


-


(192)




Cash and cash equivalents at the beginning of the year


 


1,315


3,473




Cash and cash equivalents at the end of the year


 


3,376


1,315




 
 
 
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION
FOR THE YEAR ENDED 31 MARCH 2019
1.    Accounting policies
SysGroup Plc (the 'Company') is a company incorporated and domiciled in the United Kingdom. The company's registered office is at Walker House, Exchange Flags, Liverpool, L2 3YL. These consolidated financial statements comprise the Company and its subsidiaries (together referred to as the 'Group').
Statement of compliance
The Group and Company financial information have been prepared in accordance with International Financial Reporting Standards (IFRSs and IFRIC interpretations) as endorsed by the European Union ("endorsed IFRS") and with those parts of the Companies Act 2006 applicable to companies preparing their accounts under endorsed IFRS.
 
This consolidated financial information does not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. The comparative figures for the financial year ended 31 March 2018 are an extract of the Company's statutory accounts for the year ended 31 March 2018, prepared in accordance with International Financial Reporting Standards (IFRS), approved by the Board of Directors on 27 June 2018 and delivered to the Registrar of Companies. The report of the auditor on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 (2) or (3) of the Companies Act 2006.
 
The statutory accounts for the year ended 31 March 2019 will be delivered to the Registrar of Companies following the Company's Annual General Meeting. The Auditors have reported on those accounts; their report was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 (2) or (3) of the Companies Act 2006.
 
Basis of preparation
The consolidated financial information is derived from the Group's consolidated Financial Statements for the year ended 31 March 2019, which have been prepared in accordance with International Financial Reporting Standards (IFRS), as endorsed by the European Union (EU) and those parts of the Companies Act 2006 applicable to companies reporting under IFRS.
The principal accounting policies adopted in the preparation of the Financial Statements are set out below. The policies have been consistently applied to all the years presented, unless otherwise stated. The consolidated financial statements have been prepared under the historical cost basis, except for the revaluation of certain financial liabilities which have been valued in accordance with IFRS9.
The preparation of financial statements in compliance with adopted IFRS requires the use of certain critical accounting estimates. It also requires Group management to exercise judgement in applying the Group's accounting policies. The areas where significant judgements and estimates have been made in preparing the financial statements and their effect are disclosed in note 2. The financial statements are presented in pounds sterling, rounded to the nearest thousand, unless otherwise stated.
Going concern
The Directors have prepared the financial statements on a going concern basis which assumes that the Group and the company will continue to meet liabilities as they fall due. The Directors have reviewed forecasts prepared for the period ending 31 March 2021 and considered the projected trading forecasts and resultant cashflows together with the confirmed loan facilities and other sources of finance. The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group can continue to operate within the current facilities available to it.
The Directors therefore have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future and thus they continue to adopt the going concern basis of accounting in preparing the financial statements.
New standards and interpretations
A number of new standards and amendments to standards and interpretations have been issued during the year ended 31 March 2019. The Group has adopted all of the new and revised standards and interpretations issued by the IASB and the International Financial Reporting Interpretations Committee (IFRIC) of the IASB, as they have been adopted by the European Union, that are relevant to its operations and effective for accounting years beginning on 1 January 2018. 
IFRS15 Revenue from Contracts with Customers
The Group conducted a full review of IFRS15 to assess the impact of the new standard on the Group's financial reporting processes. The Group applied the retrospective method to adopt IFRS15 and applied the practical expedient to not restate contracts starting and completing in the same financial year. A report of the findings was presented to the Audit Committee with two specific areas of financial reporting identified requiring a change in accounting treatment:
1.   Costs to obtain contracts
In the financial year to 31 March 2019, sales commission was paid in respect of managed service contracts with the commission payable for the benefit of the full contract period.  Under IFRS15, the sales commission cost is therefore recoverable over the full term of the managed service contract and is therefore capitalised as a "Prepayment" with the cost charged to the Consolidated Statement of Comprehensive Income on a straight-line basis over the term of the related managed service contract. In the prior financial year to 31 March 2018, sales commission was not capitalised. The sales commission scheme in operation at that time paid commission on a basis where the cost was appropriately matched and recovered against the profits of the related managed service contracts in the Consolidated Statement of Comprehensive Income as such no adjustment is required to the previously recognised figures.
2.   Revenue and related costs recognition on set-up of lease lines
In some customer contracts, the Group sets up and installs new lease line connections prior to managed services being delivered to the customer. The set up and installation is usually delivered by a third party supplier. Under IFRS15, we consider the set up and installation to be an activity that relates directly to the subsequent provision of the managed services and as such we have deferred the one-off revenue and costs over the period of the related managed service contract in the financial statements to 31 March 2019. Deferred revenue is included in contract liabilities. Previously this revenue was recognised on delivery and not deferred over the life of the contract. The accounting adjustment is not material to the Group Statement of Comprehensive Income in the current or prior year due to the quantum of such revenue.

 
Following the adoption of IFRS15, the Group's revenue recognition policy has been outlined in greater detail and is presented in the Revenue Recognition accounting policy note.
IFRS9 Financial Instruments
The Group has adopted IFRS 9 for the first time in the current financial year. IFRS 9 replaces the provisions of IAS 39 that relate to the recognition, classification and measurement of financial assets and financial liabilities, derecognition of financial instruments, impairment of financial assets and hedge accounting. The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses lifetime expected loss allowances for all trade receivables.
The Group have reviewed their financial instruments and believe that all assets held at amortised cost have a low credit risk at the year end. The Group have also identified no assets which include a significant financing component. Historically the Group's debtor impairment has been immaterial, and this is not expected to change in the near future, as such the Group have assessed the recoverability of financial instruments on a case by case basis which the Directors do not believe will give a material difference to the impairment of such assets.
New standards not yet effective
New standards, amendments to standards and interpretations have been issued but are not effective (and in some cases had not yet been adopted by the EU) for the financial year beginning 1 January 2019. These have not been early adopted and the Directors are considering the potential impact of IFRS 16 Leases.
IFRS16 Leases
IFRS16 replaces IAS17 Leases and substantively changes the accounting for operating leases. Where a contract meets IFRS16's definition of a lease, lease agreements will give rise to the recognition of a non-current asset representing the right to use the leased item, and a loan obligation for future lease payables. Lease costs will be recognised in the form of depreciation of the right to use asset and interest on the lease liability, which may impact the phasing of operating profit and profit before tax, compared to existing cost profiles and presentation in the income statement, and will also impact the classification of associated cash flows. The detailed assessment of the impact on the Group is ongoing, with the current focus being on assessing the completeness of lease contracts. The Group currently anticipate adopting the modified retrospective approach in adopting IFRS16 but this is still being considered by the Directors. It is thought that the practical expedients on short term and low value leases will also be utilised. The adoption is expected to have an impact on the presentation of the Group's assets and liabilities, relating to property leases and our initial assessment is that the standard will increase lease assets by £0.4m, increase lease liabilities by £0.5m and increase adjusted EBITDA by £0.2m but will have an immaterial overall effect on profit before tax.
Basis of consolidation
Where the company has control over an investee, it is classified as a subsidiary. The company controls an investee if all three of the following elements are present: power over the investee; exposure to variable returns from the investee; and the ability of the investor to use its power to affect those variable returns. Control is re-assessed whenever facts and circumstances indicate that there may be a change in any of these elements of control.
The consolidated financial statements present the results of the company and its subsidiaries (the Group) as if they formed a single entity. Intercompany transactions and balances between group companies are therefore eliminated in full.
The consolidated financial statements incorporate the results of business combinations using the acquisition method. In the statement of financial position, the acquirer's identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of acquired operations are included in the consolidated statement of comprehensive income from the date on which control is obtained. They are deconsolidated from the date on which control ceases.
 
 
Consolidated statement of cash flows
The Group have reclassified cash flows relating to exceptional costs from investing activities to operating cashflows within the company and consolidated cash flow statements. This has had no overall effect on the prior year cash movement but has resulted in £592,000 of cash outflows being reclassified from investing activities to operating cashflows in the prior year.
 
Revenue
Revenue is recognised to the extent that it is probable that the economic benefits associated with the transaction will flow into the Group and revenue represents the fair value of amounts received or receivable for goods and services provided net of trade discounts and VAT.
The Group's income streams were reviewed in readiness for the adoption of IFRS15 and three categories of performance obligation have been identified: managed services, professional services and value added resale. All customer sales are signed as contracts or orders which separately specify the services and products to be delivered and these are mapped to one of the three revenue recognition categories. The contracts or orders specify, by service and product, the sales price and the contracted term of the services. As such, the separate performance obligations and allocation of transaction price can be identified clearly from the customer sales contracts.
The revenue recognition policies can be summarised as follows:




Revenue category


Performance delivery


Revenue recognition




Managed services


Contracted managed IT services are delivered from an agreed commencement date and for a contracted time period, typically three years with a twelve-month automatic extension. Managed services is comprised of different streams including hosting and support but due to the nature of this revenue the streams are considered inter-dependant. The services are delivered uniformly over the duration of the contract and invoiced either quarterly or monthly in advance of the service delivery period.


Revenue is recognised evenly over the duration of the contract period based on the sales price as specified in the customer sales contract. This is on the basis that the customer receives and consumes the services evenly over the term of the contract. Amounts invoiced in advance of service delivery periods are accounted for as contract liabilities and recognised as revenue in the Consolidated Statement of Comprehensive Income to match the period in which the services are delivered.




Professional services


Professional services are delivered by a team of technical consultants based on a scope of work agreed and signed with a customer. The scope of work includes a specification of the work to be delivered, an estimation of the number of consultancy days required, and a sales value based on a day rate. Professional services are invoiced either in advance of work performed, in arrears after the service is delivered or as part of a larger project contract milestone.


Revenue is recognised based on chargeable days delivered using the sales day rate specified in the customer contract. Revenue recognition is therefore matched to the timing of when the customer receives the benefit of the consultancy services which is in line with the day the work is performed. The relevant details of customer engagements and the time delivered by consultants is recorded on the Group's financial systems.  Professional services are either invoiced in arrears for the actual days delivered or invoiced in advance. When invoiced in advance, the sales value is treated as contract liabilities and recognised as revenue in the Consolidated Statement of Comprehensive Income in the period in which the consultancy days are delivered.




Value added resale


Value added resale ("VAR") comprises sales of IT hardware, licences and warranties ("products") where the Group satisfies its performance obligation by procuring the products from suppliers for delivery to the customer. There are no further or ongoing obligations to the Group after delivery. The sales price for each product is separately specified in the customer sales contract. VAR sales are either invoiced in full in advance of delivery or invoiced according to an agreed contract milestone if part of a larger contract.


Revenue is recognised on delivery of the products from the supplier. Invoices are typically raised in advance of delivery and treated as contract liabilities until delivery has been fulfilled. At this point the revenue and associated purchase cost is recognised in the Consolidated Statement of Comprehensive Income.




 


 


 



 
 
 
 
 



Segmental reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker has been identified as the Board of Directors.
 
Exceptional costs
The Group presents as exceptional items on the face of the Statement of Comprehensive Income those material items of income and expense which the Directors consider, because of their size or nature and expected non-recurrence, merit separate presentation to facilitate financial comparison with prior periods and to assess trends in financial performance. Exceptional items are included in Administration expenses in the Consolidated Statement of Comprehensive Income but excluded from Adjusted EBITDA as management believe they should be considered separately to gain an understanding of the underlying profitability of the trading businesses.
 
Intangible assets
Intangible assets are recognised on business combinations if they are separable from the acquired entity or give rise to other contractual/legal rights. The amounts ascribed to such intangibles are arrived at by using appropriate valuation techniques (see section related to critical estimates and judgements below).
The significant intangibles recognised by the Group, their estimated useful economic lives and the methods used to determine the cost of intangibles acquired in business combinations are as follows:
Intangible asset                                       Estimated UEL                   Valuation method
Customer relationships                         5-7 years                              Estimated discounted cash flow
Software and web design costs         3-5 years                              Cost less amortisation
 
2   Significant accounting estimates and judgements
The preparation of this financial information requires management to make estimates and judgements that affect the amounts reported for assets and liabilities at the period end date and the amounts reported for revenues and expenses during each period. The nature of the estimation or judgement means that actual outcomes could differ from the estimates and judgements taken in the preparation of the financial statements.
Significant accounting estimates
Impairment of goodwill and other intangibles
The Group tests goodwill for impairment on an annual basis in line with the accounting policy noted above. This involves judgement regarding the future development of the business and the estimation of the level of future profitability and cash flows to support the carrying value of goodwill. An impairment review has been performed at the reporting date taking into account sensitivities around future business performance, covering a range of outcomes and risks over levels of revenue, cost and cash generation.  No impairment has been identified. More details including carrying values are included in note 11.
 
Valuation of intangible assets acquired in business combinations
Determining the fair value of customer relationships acquired in business combinations requires estimation of the value of the cash flows related to those relationships and a suitable discount rate in order to calculate the present value. More details including carrying values are included in note 11.
Valuation of contingent consideration
The Group has contingent consideration payable which is based on the future performance of acquired companies. When valuing the contingent consideration still payable on acquisitions, the Group considers various factors including the performance of the acquired entity since acquisition together with an estimate of the expected future trading performance for the period to the expiry of the earn-out period. Contingent consideration is recognised at, and carried thereafter at, fair value. All changes in fair value (other than measurement period adjustments) are reflected in the income statement.
 
Significant accounting judgements
Revenue
Management make judgements in determining the appropriate application of revenue recognition policies to the sale of services and products. An explanation of the Group's revenue recognition policy is shown in note 1.
Assessment of CGU's and carrying value of intangible assets
A CGU is the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets and the Board of Directors use judgement to identify the CGUs of the Group. The Board have reviewed the Group's CGU's this year and exercised their judgement to amend the CGUs following the integration of previously acquired businesses and changes to the Group's management and reporting structure in the current financial year. The Board have concluded that the Group has a single CGU of "Managed IT Services". See note 11.
 
Useful economic lives of intangible assets
Intangible assets are amortised over their useful economic lives. Useful lives are based on management's estimates of the period over which the assets will generate revenue, which are periodically reviewed for continued appropriateness. Changes to estimates can result in changes in the carrying values and hence amounts charged to the income statement in particular periods which could be significant.
3      Segmental analysis


The chief operating decision maker for the Group is the Board of Directors. The Group reports in two segments:
·    Managed IT Services - this segment provides all forms of managed services to customers and includes professional services.
·    Value Added Resale (VAR) - this segment provides all forms of VAR sales where the business sells products and licences from supplier partners.
 
The monthly management accounts reported to the Board of Directors is reviewed at a consolidated level with the operating segments representative of the business model for growth of recurring contract income in Managed IT Services and VAR sales as a complementary business activity. The Board review the results of the operating segments at a revenue and gross profit level since the Group's management and operational structure supports both operational segments as group functions. In this respect, assets and liabilities are also not reviewed on a segmental basis. All assets are within the UK other than a low value of property, plant & equipment in the USA.
All segments are continuing operations and there are no transactions between segments.




 


2019


2019


2018


2018




Revenue by operating segment


£'000


%


£'000


%




Managed IT Services


9,448


74%


7,130


68%




Value Added Resale


3,325


26%


3,321


32%




 


12,773


 100%


10,451


 100%




 


 


 


 


 




No individual customer accounts for more than 5% of the Group's revenue.


 




The revenue by geographic location for where services are delivered to customers is shown below.




 


2019


2019


2018


2018




 


£'000


%


£'000


%




UK


12,526


98%


10,213


98%




Rest of World


247


2%


238


2%




 


12,773


 100%


10,451


 100%




 


 


 


 


 




 


 


 


2019


2018




 


 


 


£'000


£'000




Revenue


 


 


 


 




Managed IT Services


 


 


9,448


7,130




Value Added Resale (VAR)


 


 


3,325


3,321




 


 


 


12,773


10,451




Gross Profit


 


 


 


 




Managed IT Services


 


 


6,959


5,329




Value Added Resale (VAR)


 


 


821


666




 


 


 


7,780


5,995




There were no sales between the two business segments, and all revenue is earned from external customers. The business segments' gross profit is reconciled to profit before taxation as per the consolidated income statement. The Group's overheads are managed centrally by the Board and consequently there is no reconciliation to profit before tax at a segmental level.




Assets and liabilities related to contracts with customers


 


 




The Group has recognised the following liabilities related to contracts with customers. There are no assets arising from contracts with customers




 


2019


2018




 


£'000


£'000




Current contract liabilities relating to deposits from customers


1,238


425




The following table shows how much of the revenue recognised in the current year relates to contract liabilities:




 


2019


2018




 


£'000


£'000




Release of contract liability recognised in revenue which was included in the contract liability balance at the beginning of the year


425


465




 



 
 
 
 
 
 
 
 
 
 
 
 



 
4      Operating (loss)/profit




 


 


 


2019


2018




 


 


 


£'000


£'000




Operating (loss)/profit is after charging the following:


 


 




Auditor's remuneration:


 


 




 


Group:


Audit


60


49




 


 


Other advisory


-


5




 


Company:


Audit


4


4




Depreciation of tangible fixed assets:


 


 




 


Owned


 


345


201




 


Held under finance leases


158


171




Amortisation of intangible assets


723


500




Staff costs (note 6)


4,710


3,972




Share based payments


119


10




Rentals payable under operating leases


168


156




Exceptional items (note 7)


736


581




 
5      Finance expense
 




 


2019


2018




 


£'000


£'000




Interest payable on finance leases


13


17




Interest payable on bank loan


108


49




Arrangement fee amortisation on bank loan


46


18




 


167


84




 
6      Staff numbers and costs




The average monthly number of full-time persons employed by the Group, including executive Directors during the year was:




 


2019


2018




Research and Development


3


4




Technical Support


52


48




Sales and Marketing


17


11




Executive and Administration


15


11




 


87


74




The aggregate payroll costs including Executive Directors and excluding Non-Executive Directors were as follows:




 


2019


2018




 


£'000


£'000




Wages and salaries


4,154


3,548




Social security costs


441


365




Benefits in kind


26


22




Pension benefits


89


37




Share based payment expense


119


10




 


4,829


3,982




 
7      Exceptional costs




 


2019


2018




 


£'000


£'000




Acquisitions


554


186




Integration and restructuring


182


395




Total


736


581




The Directors believe these costs are exceptional as their size and one-off nature are significant enough to the Group's profit and loss to warrant separate consideration. The acquisitions cost of £554,000 represents £66,000 professional fees incurred on a terminated acquisition process and £498,000 professional fees and other costs relating to the Certus IT acquisition. In the prior year, the £186,000 costs relate to the acquisition of Rockford IT Limited. Integration and restructuring costs represent the costs incurred for integrating newly acquired companies and for restructuring the internal business to manage the requirements of a larger group.




 
8      Acquisitions
In February 2019, the company acquired 100% of the share capital of Certus IT Limited ("Certus"), a Managed IT Services company registered in England & Wales with a head office in Newport, South Wales. Certus provides Managed IT services, cloud hosting, value added resale, and IT consultancy.
Certus was acquired for an initial £7,956,000 cash consideration paid on completion, subject to final adjustment on the completion accounts, with a maximum £1,000,000 additional consideration payable in cash in twelve months' time depending on Certus' profit performance in the twelve-month period following completion and subject to 70% of the gross margin being achieved from recurring income.  In respect of the contingent consideration, the company will pay £2.50 consideration for every £1.00 of EBITDA achieved by Certus over and above a floor of £1.2m and up to a maximum of £1.6m EBITDA.
The company incurred £498,000 of professional fees and other acquisition costs in relation to this acquisition. These costs are included as Exceptional costs in the Group's consolidated statement of comprehensive income for the year ended 31 March 2019.
The Directors have considered the intangible assets acquired with Certus and have accordingly recognized an intangible asset for customer relationships which has been calculated using a discounted cashflow method, based on the estimated level of profit to be generated from the customers acquired. A post tax discount rate of 10.45% was used in the valuation and the customer relationships are being amortised over an estimated useful life of 7 years. The goodwill arising on this acquisition is attributable to the technical skills of the workforce and cross-selling opportunities achievable from combining the acquired customer bases and trade with the existing Group.
The goodwill and intangible asset has been allocated to a new CGU, Certus IT, given the company has its own management and operational structure, cash generation and financial reporting processes in place.
Since the acquisition date to 31 March 2019, Certus IT Limited contributed £1.0m to Group revenue and £0.09m to Group EBITDA. Had the acquisition taken place on 1 April 2018, the contribution to Group revenue would have been £7.8m to Group revenue and £1.1m to Group EBITDA.




Recognised amounts of net assets acquired and liabilities assumed


Book Values   £'000


 
Adj.  
£'000


Fair
Value   £'000




Cash and cash equivalents


949


-


949




Trade and other receivables


1,179


(135)


1,044




Property, plant and equipment


869


(32)


837




Stock and work in progress


32


(32)


-




Intangible assets


-


3,777


3,777




Trade and other payables


(2,570)


(2)


(2,572)




Corporation tax


(162)


-


(162)




Deferred tax liability


(56)


(642)


(698)




Identifiable net assets


241


2,934


3,175




Goodwill


 


 


5,781




Total


 


 


8,956




Satisfied by:


 


 


 




Cash consideration - paid on acquisition


 


 


7,956




Contingent consideration


 


 


1,000




Total consideration


 


 


8,956




 
9      Earnings per share




 


2019


2018


 




(Loss)/profit for the financial year attributable to shareholders


(£722,000)


£238,000


 




Weighted number of issued equity shares


 25,843,624


    23,103,898


 




Weighted number of equity shares for diluted EPS calculation


 26,999,313


    23,298,898


 




Adjusted basic earnings per share (pence)


3.1p


2.3p


 




Basic earnings per share (pence)


(2.8p)


1.0p


 




Diluted earnings per share (pence)


(2.8p)


1.0p


 




 




Profit used in the Earnings per Share calculation


 


 


2019
£'000


2018
£'000




(Loss)/profit after tax used for basic earnings per share


 


 


(722)


238




Amortisation of intangible assets


 


 


723


500




Exceptional items


 


 


736


581




Fair value adjustment


 


 


-


(540)




Share based payments


 


 


119


10




Tax adjustments


 


 


(47)


(250)




Adjusted profit used for Adjusted Earnings per Share


 


 


809


539




 
For diluted earnings per share, the weighted number of ordinary shares in issue during the year is adjusted to include the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential shares into ordinary shares. 




 
10   Taxation




 


2019


2018


 




Current tax


£'000


£'000


 




Current tax - current year


105


32


 




Adjustments in respect of prior years


55


(126)


 




Tax refund


(12)


(80)


 




Total current tax debit/(credit)


148


(174)


 




Deferred tax


 


 


 




Deferred tax - timing differences


(252)


(71)


 




Total deferred tax


(252)


(71)


 




Total tax credit


(104)


(245)


 




 


 


 


 




The effective tax rate for the year to 31 March 2019 is higher (2018: lower) than the standard rate of corporation tax in the UK. The differences are explained below:


 


 




 


2019
£'000


2018
£'000


 




Loss on ordinary activities before tax


          (826)


                    (7)


 




Loss on ordinary activities before taxation multiplied by the standard rate of UK corporation tax of 19% (2018:19%)


(157)


(1)


 




Effects of:


 


 


 




Expenses not deductible


10


33


 




Income not taxable


(24)


(106)


 




Prior year adjustment


55


(126)


 




Re-measurement of deferred tax due to changes in UK rate


-


5


 




Deferred tax not recognised


-


(130)


 




Tax refund


12


80


 




Total tax credit


          (104)


               (245)


 




 
Factors affecting future tax charges:

The UK corporation tax rate will change from 19% to 17% on 1 April 2020.

 
11   Intangible assets




Group


Website Cost


Software & licences


Customer relationships


Goodwill


Total




 


£'000


£'000


£'000


£'000


£'000




Cost


 


 


 


 


 




At 1 April 2017


197


72


2,383


7,620


10,272




Additions


26


6


-


-


32




Acquisitions


-


95


1,850


2,107


4,052




At 31 March 2018


223


173


4,233


9,727


14,356




At 1 April 2018


223


173


4,233


9,727


14,356




Additions


-


10


-


-


10




Acquisitions


-


16


3,777


5,781


9,574




At 31 March 2019


223


199


8,010


15,508


23,940




Amortisation
At 1 April 2017


191


30


814


-


1,035




Charge for the year


7


47


446


-


500




At 31 March 2018


198


77


1,260


-


1,535




At 1 April 2018


198


77


1,260


-


1,535




Charge for the year


8


59


656


-


723




At 31 March 2019


206


136


1,916


-


2,258




Net book value


 


 


 


 


 




At 31 March 2018


25


96


2,973


9,727


12,821




At 31 March 2019


17


62


6,094


15,508


21,682



 
 
 
 
 
 
 
 



All amortisation and impairment charges are included in the depreciation, amortisation and impairment of non-financial assets classification, which is disclosed as administrative expenses in the statement of comprehensive income. Customer relationships have a remaining amortisation period of between 2 and 7 years.
Cash-generating units
Goodwill and intangible assets are allocated to CGUs in order to be assessed for potential impairment. During the year, the Directors reconsidered the CGUs within the Group following the unification of all Group management and operations under a single brand, SysGroup, in April 2018. The Group has a Senior Management Team that manages the SysGroup business within a single operational and delivery structure having fully integrated previously acquired Rockford IT, System Professional and Netplan businesses. The Board of Directors review the Group's performance at a consolidated level reflecting how the business is managed and controlled. In view of these developments in the year, the Directors concluded that the CGUs that represented the acquired businesses at the "statutory entity" level is no longer appropriate and that the Group has a single CGU of "Managed IT Services". As the Group acquires new businesses, they will form their own CGU until they have been integrated into the Group's core operational structure. Accordingly, Certus IT Limited, acquired in February 2019 is recognised as a separate CGU, "Certus IT", in this year's impairment review.
The allocation of goodwill and carrying amounts of assets for each CGU is as follows:




 


Allocation of goodwill


Carrying value of assets




 


 2019


2018 


2019


2018




 


 £'000


£'000 


£'000


£'000




Managed IT Services


9,727 


9,727 


11,894


13,166




Certus IT


5,781 


- 


8,698


-




 


15,508 


9,727 


20,592


13,166




 
Impairment review
When assessing impairment, the recoverable amount of each CGU is based on value-in-use calculations (VIU). VIU calculations are an area of material management estimate as set out in note 2. These calculations require the use of estimates, specifically: pre-tax cash flow projections; long-term growth rates; and a pre-tax discount rate. Cash flow projections are based on the Group's detailed annual operating plan for the forthcoming financial year which has been approved by the Board.
The VIU calculation is determined based on a discounted cash flow basis and is allocated to individual cash generating units. Cash flows beyond the forthcoming financial year use estimated growth rates which are stated below. The assumptions for growth rates and margins are based on management's experience of growth and knowledge of the industry sector, markets and our own internal opportunities for growth and margin enhancement. The projections beyond five years use an estimated long-term growth rate of 2.5% (2018: 2.9%) for revenue. This represents management's best estimate of a long-term annual growth rate aligned to an assessment of long-term GDP growth rates. A higher sector-specific growth rate would be a valid alternative estimate. A different set of assumptions may be more appropriate in future years dependent on changes in the macroeconomic environment.
The discount rates used are based on management's calculation of the WACC using the capital asset pricing model to calculate the cost of equity. Specific rates are used for each CGU in the VIU calculation and the rates reflect management's assessment on the level of relative risk in each respective CGU. Discount rates can change relatively quickly for reasons both inside and outside management control. Those outside management direct control or influence include changes in the Group's Beta, changes in risk free rates of return and changes in Equity Risk Premia. Matters inside management control are the delivery of performance in line with plans or budgets and the production of high or low risk plans.
At the year-end reporting date, goodwill was reviewed for impairment in accordance with IAS 36 "Impairment of Assets". No impairment charges arose as a result of this review.
The assumptions used for the impairment reviews are as follows:




2019


 


 


Managed IT Services*


Certus IT




Discount rate


 


 


10.45%


10.45%




Revenue growth rate year 2 to year 5


 


 


5.0%


5.0%




Terminal growth rate


 


 


 


2.5%


2.5%




 


 


 


 




2018


 


 


Managed IT Services*


Certus IT




Discount rate


10.13%


-


 




Revenue growth rate year 2 to year 5


5.0%-7.5%


-


 




Terminal growth rate


 


2.9%


-


 



 
 
 
 
 
 
 
 



*In 2018, the CGU's were Rockford IT, System Professional and Netplan.
 
 
12   Investments




Company


2019
£'000


2018
£'000




Investment in Subsidiaries


 


 




At 1 April 2018


14,279


10,429




Additions (note 8)


8,956


3,850




At 31 March 2019


23,235


14,279




 


 


 




The Company's subsidiary undertakings all of which are wholly owned and included in the consolidated accounts are:




Undertakings


Registration


Principal activity




System Professional Ltd


England


Managed Services




Netplan Internet Solutions Limited


England


Managed Services




Netplan LLC*


USA


Managed Services




SysGroup (DIS) Ltd


England


Managed Services




SysGroup (NH) Ltd


England


Managed Services




Node Group Ltd


England


Managed Services




Project Clover Ltd


England


Managed Services




SysGroup (EH) Ltd


England


Managed Services




Rockford IT Ltd


England


Managed Services




Certus IT Ltd


England


Managed Services



 
 
 
 
 



 
*Netplan LLC is a wholly owned subsidiary of Netplan Internet Solutions Limited
The recoverable amounts have been determined from discounted cash flow calculations based on cash flow projections from the approved annual operating plan covering a one-year period to 31 March 2020. The principal assumptions can be found in note 11.
SysGroup (NH) Limited (Company Number 03963376), SysGroup (EH) Limited (Company Number 05814619), SysGroup (DIS) Limited (Company number 05743110), Project Clover Ltd (Company number 08995906) are taking advantage of the exemption from audit under section 479a of the Companies Act 2006 following the guarantee provided by SysGroup plc under section 479C of the Companies Act 2006. The registered office of all subsidiaries is the same as the registered office of the parent company with the exception of Netplan LLC whose registered office is c/o USA Corporate Services Inc, 19 West 34Th Street, Suite 1018, New York, 10001.

 
13   Trade and other receivables
 




 


Group


Company


Group


Company




 


2019


2019


2018


2018




Amounts due within one year


£'000


£'000


£'000


£'000




Trade debtors


1,744


-


1,101


-




Other debtors


 


130


-


35




Amounts due from subsidiaries


-


241


-


-




Prepayments


1,112


91


523


100




 


2,856


462


1,624


135




The carrying value of trade and other receivables approximates to their fair value.

 
14   Trade and other payables




 


Group


Company


Group


Company




 


2019


2019


2018


2018




Amounts due within one year


£'000


£'000


£'000


£'000




Trade payables


1,885


252


893


102




Amounts due to subsidiaries


-


2,868


-


2,584




Accruals


979


287


484


160




Total financial liabilities, excluding loans and borrowings measured at amortised cost


2,864


3,407


1,377


2,846




Corporation tax


311


-


85


-




Other taxes and social security costs


817


114


438


30




 Total creditors


3,992


3,521


1,900


2,876




 


 


 


 


 




 


Group


Company


Group


Company




 


2019


2019


2018


2018




Contingent consideration due on acquisitions


£'000


£'000


£'000


£'000




Certus IT


1,000


1,000


-


-




 
The fair value of contingent consideration is in relation to the acquisition of Certus IT Limited (note 8) and is recognised at the full value of the consideration. The consideration is expected to be paid in the financial year to 31 March 2021. An adjustment for discounting has not been applied given the immateriality.
To the extent trade payables and other payables are not carried at fair value in the consolidated balance sheet, book value approximates to fair value at 31 March 2019 and 31 March 2018.
15    Loans and borrowings




 


Group


Company


Group


Company




 


2019


2019


2018


2018




Non- Current


£'000


£'000


£'000


£'000




Obligations under finance leases


81


-


128


-




Bank loan


1,397


1,397


1,742


1,742




 Total


1,478


1,397


1,870


1,742




 


 


 


 


 




 


Group


Company


Group


Company




 


2019


2019


2018


2018




Current


£'000


£'000


£'000


£'000




Obligations under finance leases


204


-


147


-




Bank loan


224


224


216


216




Total


428


224


363


216




 
The company re-financed its bank loan facilities with Santander in February 2019. The existing term loan of £1.75m was re-financed as a new Senior Term Loan facility of £1.75 million with a five-year term to February 2024 and with quarterly bank loan repayments of £62,500 for eight Quarters followed by £104,166 for the following twelve Quarters. The bank loan is fully secured by a debenture over SysGroup PLC and its subsidiaries and interest is charged at LIBOR + 3.0% per annum. At 31 March 2019, the Senior Term loan was drawn down by £1.75m.
As part of the same re-financing process, the company signed a new Acquisition Revolving Credit Facility with Santander of £3.25 million on a five-year term to February 2024. The company has not drawn down any funds under this RCF facility at 31 March 2019. On utilisation of the RCF, quarterly loan repayments will become payable at 3.75% of the aggregate principal balance following the expiry of a two-year availability period. The RCF is fully secured by a debenture over SysGroup PLC and its subsidiaries and interest is charged at LIBOR + 3.5% per annum
The Senior Term Loan and RCF loan facilities have financial covenants that are tested quarterly on a twelve-month rolling basis relating to interest cover, net debt to Adjusted EBITDA leverage and debt service cover.




16   Leases


Group obligations under finances leases




 


Minimum Lease Payments


Interest


Present Value


 




Future lease payments are due as follows:


2019


2019


2019


 




 


£'000


£'000


£'000


 




Not later than one year


217


13


204


 




Later than one year and not later than 5 years


85


4


81


 




Later than 5 years


-


-


-


 




 Total


302


17


285


 




 


 


 


 


 




 


Minimum Lease Payments


Interest


Present Value


 




Future lease payments are due as follows:


2018


2018


2018


 




 


£'000


£'000


£'000


 




Not later than one year


158


11


147


 




Later than one year and not later than 5 years


134


6


128


 




Later than 5 years


-


-


-


 




 Total


292


17


275


 




The company has no finance leases.


 


 


 


 




 
 
 
Group operating leases


 


 


 


 




The total future value of minimum lease payments is due as follows:


 




 


Leasehold Property


Other


Leasehold Property


Other




 


2019


2019


2018


2018




 


£'000


£'000


£'000


£'000




Within one year


160


-


193


-




Within two to five years


108


-


268


-




After five years


-


-


-


-




 Total


268


-


461


-




 


 


 


 


 



 
 
 
 
 
 
 
 
 
 
 
 



17   Share capital




 


Group
2019


Group 2019




Equity share capital


Number


£'000




Allotted, called up and fully paid


 


 




At 1 April 2017


23,103,898


231




At 31 March 2018


23,103,898


231




Issue of share capital - equity placing


26,315,792


263




Issue of share capital - share premium


-


9,080




At 31 March 2019


49,419,690


9,574




In February 2019, the company raised £10.0m gross proceeds from an equity share placing to fund the acquisition of Certus IT Limited. The company issued 26,315,792 1p ordinary shares at 38.0p. The net proceeds of the equity raise, including the professional fees incurred, was £9.34m.
18   Post balance sheet events
On 24 June 2019 the Group announced the acquisition of Hub Network Services Limited ("HNS"), a company registered in England & Wales, for a cash consideration of £1.45m on a cash free debt free basis. The gross assets of the company were £0.8m at the company's last year end reporting date, 31 October 2018. HNS is a well-established B2B managed services provider with a primary focus on delivering fast, low latency network connectivity and co-location solutions.

 
 




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END
 
 
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