CTP.L Regulatory News (CTP)

Castleton Technology PLC

("Castleton", the "Group" or the " Company")

Final Results

For the Year Ended 31 March 2016

Castleton Technology plc (AIM: CTP), the software and managed services provider to the public and not-for-profit sectors, announces its audited final results for the year ended 31 March 2016.

Highlights

Ø Building on the success of the previous year, three further acquisitions were made during the period, enabling Castleton to offer the only truly integrated, single Enterprise Resource Planning ("ERP") platform solution in the social housing sector:

· Brixx Solutions Limited ("Brixx"), a provider of financial modeling software, on 31 May 2015

· Impact Applications Limited ("Impact"), a provider of business critical repairs management and scheduling, on 31 May 2015

· Kypera Holdings Limited ("Kypera"), which provides fully integrated housing management and finance software, on 29 January 2016

Ø Revenues of £18m (2015: £6.1m) with adjusted EBITDA* of £3.6m (2015: loss of £0.1m), including only part-year contributions from companies acquired during the year

Ø Strong growth in recurring revenue base - now represents 58% of Group revenues

Ø Operations established in Australia with a presence in New Zealand and South Africa; scope for further international expansion

Post Period End Highlights

Ø New perpetual licence agreement with 365 Agile Group granting Castleton an exclusive licence for 365 Agile's suite of mobile working software solutions in the social housing sector, enabling Castleton to keep 100% of associated revenues

David Payne, Chairman of Castleton, commented:

"Having continued to add complementary software businesses to the Castleton portfolio, we now have the genuine potential to become the go-to supplier for software and IT services in the social housing market. The acquired businesses have now been largely integrated and our focus now turns to the significant cross-selling opportunities that exist while providing our customers with the technology and services that they require. Our aspiration is to become a leading software and IT managed services provider in the public and not-for-profit sectors.

"The new financial year is progressing well with the Group trading in line with market expectations and the Board continues to be optimistic about the Group's prospects."

*Before net finance costs, depreciation, amortisation, exceptional costs and share based payment charges.

The Annual Report and Accounts for the year ended 31 March 2016 will be posted to shareholders at least 21 days prior to the AGM and a copy is available on the Company's website at www.castletonplc.com.

Enquiries:

The information communicated in this announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) No. 596/2014

Chairman's Statement

I am pleased to report the results of the Group for the year ended 31 March 2016. It has been another year of significant change, which has seen the Group continue its strategy to build a focused software and IT managed services business serving the public and not-for-profit sectors. Following on from the acquisitions in the prior year, the Group acquired Brixx Solutions Limited ("Brixx"), and Impact Applications Limited ("Impact"), on 31 May 2015. Brixx is a provider of financial modeling software and Impact a provider of business critical repairs management and scheduling, both specifically for the social housing sector. Later in the year, on 29 January 2016, the Group acquired Kypera Holdings Limited ("Kypera"), which provides fully integrated housing management and finance software. The acquisition of Kypera was important strategically as it enables Castleton to offer the only truly integrated, single Enterprise Resource Planning ("ERP") platform solution in the social housing sector. The Group is now on a clear path to achieving its goal to become a successful niche player in software and IT managed services within the public sector and not-for-profit market place.

Reported Results

The Group income statement for the year shows turnover of £18.0 million, a loss before tax of £1.9 million and an adjusted EBITDA* of £3.6 million. With three acquisitions completed at various stages during the year, these results represent 10 months of trading from Brixx and Impact and 2 months of trading from Kypera and are therefore not indicative of the ongoing financial trading position of the Group. In addition to this, the Group acquired the IP for the Agile software product post year-end, details of which can be found below. Exceptional items of £2.2 million include acquisition related costs and restructuring costs for the acquired entities.

Given the acquisitions in the year, I therefore expect that, with a full year of trading, the Group will show improved results when it reports the next financial year.

*Earnings for the year from continuing operations before net finance costs, depreciation, amortisation, exceptional costs and share based payment charges.

Capital Reorganisation

Prior to the capital reorganisation, the Group had in excess of 9,500 shareholders. This added a considerable cost to the overheads of the Group caused by the associated registrar's costs and the need to print such a large number of annual accounts. Over 95 per cent. of shareholders, by number, had holdings of £100 or less. It therefore became clear to the Board of Directors that, for a group of Castleton's size, this represented a disproportionately large number of small shareholdings. The Group therefore undertook a capital reorganisation on 22 October 2015; firstly by consolidating every 160 existing ordinary shares of 0.1 pence into 1 Interim Ordinary Share of 16 pence each, and then sub-dividing each newly created Interim Ordinary Share into 8 new ordinary shares of 2 pence each. Overall the effect was a reduction by 20 times of the number of ordinary shares in issue, a 20 fold increase in the share price and a reduction in the number of shareholders to just over 1,000.

Equity and Debt Raised in the Year

To finance the acquisitions of Brixx and Impact during the year, the Group entered a new bank facility on 1 June 2015 with the Group's existing bankers, Barclays Bank Plc, comprising a term loan of £5.0 million together with an overdraft of up to £2.5 million. The Group also drew down £1.5 million under its loan agreement with MXC Capital Limited ("MXC Capital"). On 9 June 2015, the Group raised £2.2 million by way of an oversubscribed equity placing of 97,777,876 new ordinary shares at a price of 2.25 pence per ordinary share (pre capital reorganisation referred to above). These proceeds were used to strengthen the Group's balance sheet following the acquisition of Impact and Brixx. On 1 February 2016, to finance the acquisition of Kypera, the Group extended its term loan facility with Barclays by £1.0 million and issued £3.5 million in convertible loan notes.

Subsequent Events

On 4th April 2016, the Group formalised its existing exclusive reseller agreement with 365 Agile Group plc ("365Agile") and entered into a new perpetual licence agreement ("the Agreement") with 365Agile whereby Castleton has been granted an exclusive licence for 365Agile's suite of mobile working software solutions in relation to the social housing sector. Castleton will pay 365Agile consideration of £1.8m payable over four years, with a contingent element payable depending on total revenue in the first three years of the Agreement. The Group believes that this is strategically important, as it secures the use of the 365Agile product going forward whilst enabling Castleton to keep 100% of the revenue associated with sales thereof by the Group, compared to having a 70% commission payable to 365Agile under the previous agreement.

Opportunity / Outlook

With further quality software and IT services assets having been acquired, we continue to see enormous potential to become the go-to supplier for software and IT services in the social housing market. The acquired businesses have now been largely integrated and our focus now turns to the large cross-selling opportunities we have and providing our customers with the technology and services that they require. Our aspiration is to become the leading niche software and IT managed services provider in the public and not-for-profit sectors. As I stated last year, MXC Capital is a cornerstone investor in the Group, with a proven track record of executing very similar strategies with other listed businesses, with great results. I believe we have the team, assets and experience in place to deliver value to our shareholders. The new financial year is progressing well with the Group trading in line with market expectations and the Board continues to be optimistic about the Group's prospects.

Chief Executive's Review

Overview

I am pleased to report the progress the Group has made during the financial year to 31 March 2016. Following on from the acquisitions made in the prior year, we acquired the Brixx and Impact businesses at the end of May 2015 which added best in class software solutions and at the end of January 2016, we acquired Kypera which provides fully integrated housing management and finance software. This strategic acquisition enables Castleton to offer the only truly integrated, single ERP platform solution in the social housing sector. Castleton is now the pre-eminent supplier of software and IT services to the social housing sector as well as a leading niche player in the wider public and not-for-profit sectors; over one third of all the social housing associations in the UK are now Castleton customers.

Our focus during the year has also been on integrating the businesses acquired, both those described above and those acquired in the previous financial year. The Group is now aligned along 2 divisions, Software Solutions and Managed Services, each focusing on their separate yet complementary offerings.

The scope to provide multiple service lines to our customers gives me great confidence that Castleton will continue to deliver for its shareholders.

Trading Results

The reported revenue for the year from continuing operations of £18.0 million and adjusted EBITDA* of £3.6 million reflect a full 12 months of trading for companies acquired in the prior year (Montal, Keylogic, Opus and Documotive) but reflect only a partial year's trading of the companies acquired in the year, representing 10 months' of trading from Brixx and Impact and 2 months' of trading from Kypera. They are therefore not indicative of the ongoing financial performance of the Group.  

The underlying metrics of the business were particularly pleasing. The Managed Services division's adjusted EBITDA* grew 25% year on year as we look to transition to more profitable deals. Organic growth across the Software Solutions division was 20% and recurring revenue across the Group now stands at 58%.

In addition to this, the Group acquired the IP for the 365Agile software product post year-end which is likely to increase margins as the Group will no longer pay commission on sales of this strategic asset.

*Earnings for the year from continuing operations before net finance costs, depreciation, amortisation, exceptional costs and share based payment charges.

Outlook

With the acquisition of Kypera, we are now the only truly integrated, single ERP platform solution able to meet every aspect of our customers' needs - the only "one stop shop" serving the sector. Kypera also increases our international reach, something we are planning to build on in the future.

On 4 April 2016, we acquired the IP for the 365Agile software for use in our market. This is strategically important in that it secures the Company's use of the 365Agile software going forward whilst enabling Castleton to keep 100% of the revenue associated with sales thereof by the Company, compared to having a 70% commission payable to 365Agile Group plc under the previous agreement.

Whilst the integration of the companies that we have acquired is well progressed, the growth the company is experiencing, along with the nature of the integration activities such as moving offices, harmonising processes and systems and getting the right structure in place has brought some operational challenges to the Group which we are actively addressing. Once integration is complete, we can fully focus on the numerous cross selling opportunities that exist within the 600 plus customer base, opportunities which I am truly excited about.

Overall, we have entered the current financial year confidently and are on track with our H1 budget.

The UK IT services market remains a very interesting space at this time. It is very fragmented in nature, which presents the type of opportunities we, as the Board of Castleton, are looking for. In particular, we see the public and not-for-profit sectors as attractive markets due to their niche requirements and we believe a significant opportunity exists to capitalise on the ability to address historic under-investment in IT infrastructure in those sectors.

Castleton is well positioned to provide an eco-system of integrated modular solutions supported by scalable infrastructure platforms, helping organisations operate more effectively and achieve their goals, whilst bringing visible recurring annuity revenues to the Group. The Group brings together trusted brands with a pedigree of delivering solutions that meet customer needs whilst offering a refreshing change of culture and approach, focusing on customer collaboration using modern technology.

Financial Review

In this report I will cover the results for the year ended 31 March 2016 and look at the new opportunities that we see for the future of the Group.

Principal events and overview

The period since the last report has been another transformative year with three acquisitions during the year.

The year has also seen a considerable amount of integration activity. With the exception of Kypera which was acquired on 29 January 2016, the legal entities relating to all previous acquisitions have been hived up into two trading entities, Castleton Managed Services Ltd and Castleton Software Solutions Ltd, depending on their focus. We have also consolidated our offices with the Managed Services division now based in a single location and, shortly after the year end, we merged the site acquired along with the acquisition of Impact into our Software Solutions headquarters in Sutton Coldfield. With the exception of Kypera, we have also rolled out a common accounting platform across the Group, which brings a greater degree of process and visibility to our back office operations. We have also organised our teams, including our sales, development and project related staff along functional lines acting across all the acquired entities and locations.

In addition to the above, we competed the liquidation and strike off of c.40 legacy legal entities, leaving the Group structure much cleaner going forwards.

Overall, the above gives us a much more stable platform on which to build and grow the business around the products and services acquired.

Acquisitions

On 31 May 2015, the Company acquired the entire issued share capital of Brixx Solutions Limited ("Brixx") and Impact Applications Limited ("Impact").

Brixx provides software which enables users to produce financial models and long-term forecasts. Brixx has a specific solution, HousingBrixx, which has been developed to meet the needs of the social housing sector where financial modelling is critical. HousingBrixx is a trusted brand with a business critical function which has led to a high level of customer loyalty; currently over 300 social housing organisations use this solution. The platform upon which HousingBrixx is based is owned by Brixx International Ltd to whom a licence fee will continue to be payable. Castleton has the right to buy the intellectual property for the underlying platform for use in the social housing market.

Total consideration for the acquisition of Brixx was £5.2 million, payable in cash. £4.7 million was paid during the year, the remaining £0.5 million paid 12 months after completion and shortly after the year end in May 2016.

Impact provides an IT based repairs and maintenance product called Impact Response. The software aids organisations, mainly housing associations and contractors, with repairs and maintenance service delivery and was developed in-house. Impact provides a complete in-house solution which includes product development, implementation, testing and customisation, through to training, hosting, maintenance and support. The opportunity and capability exists to integrate Impact's software into Castleton's CRM solution for an end-to-end customer service.

Consideration for the acquisition of Impact was £4.88 million, of which £1.66 million was satisfied via the issue of new ordinary shares of 0.1 pence each in the capital of Castleton ("Ordinary Shares") at a price of 2.25 pence per Ordinary Share. The remaining £3.22 million was paid in cash on completion.

On 29 January 2016, the Company acquired the entire issued share capital of Kypera Holdings Limited ("Kypera") for a net cash consideration of £3.5 million. Kypera has developed a modern housing and finance management system using the latest Microsoft.NET technology. The system enables customers to handle critical operational and management processes within their organisations more effectively and efficiently. Kypera's complete in-house solution includes scoping, project management, implementation, importing of historic data, testing and training. Consideration for the acquisition was £5.0 million, paid wholly in cash and including a cash for cash payment of £1.5 million which included the repayment of £0.3 million of a director's loan, resulting in net consideration of £3.5 million.

Trading results

The trading results for the year comprise a full year of trading for all entities acquired in the prior year, 10 months of trading results from Brixx and Impact and 2 months of trading results from Kypera. It is therefore reasonable to say that the results for the year are not fully representative of future years.

Revenue and gross profit

Revenue and gross profit derive from the entities acquired in the prior year and those acquired during the year and amounted to £18.0 million and £11.3 million respectively, representing a gross margin of 63%.

Administrative expenses including exceptional items

The administrative expenses from continuing activities were incurred in the running of the acquired entities, and include the cost of the Group Board and its advisors, including the cost of occupancy, back office support services, and the fees associated with maintaining the AIM listing as well as amortisation and exceptional items. Exceptional items of £2.2 million (2015: £2.1 million) include costs relating to the acquisitions, the fundraising and provisions relating to restructuring activities either undertaken in the year or announced prior to the end of the financial year.

Adjusted EBITDA*

The adjusted EBITDA for the year amounts to £3.6 million (2015: loss of £0.1 million).

The cost in the year for the plc Board and its advisors was £1.2 million, and we continue to maintain tight controls on expenditure.

* Adjusted EBITDA represents earnings for the year before net finance costs, depreciation, amortisation, exceptional costs, and share based payment charges.

Finance income and costs

Finance income comprises the fair value gain on the interest rate swap which ended in September 2015, and finance costs comprise interest payable on bank borrowings and the unwind of discount on convertible loan notes. Finance income and costs amounted to £0.3 million (2015: £0.6 million) and £0.7 million (2015: £0.7 million) respectively.

Loss for the year attributable to the owners of the parent company

The Group loss for the year to 31 March 2016 was £1.1 million (2015: £2.1 million). This comprises the loss before tax of £1.9 million (2015: loss of £3.1 million), which includes the gain on the interest rate swap of £0.3 million (2015: £0.6 million) and a tax credit of £0.8 million (2015: £0.1 million). In 2015, the loss of £2.1 million included profit from discontinued operations of £0.9 million.

Cash flow

Cash generated from operations during the year was £0.6 million (2015: £0.5 million) reflecting an increase in working capital of approximately £3.0 million. £1.9 million of this movement is due to an increase in trade debtors due to collection issues following the new finance system implementation and staffing issues following office integration and these have now been addressed. Post year-end operating cash flow has been strong with £1.3 million of cash generated from continuing operations in the first quarter of the new financial year.

Net of cash acquired, £11.7 million of cash was used for the acquisition of subsidiaries which was funded through £2.2 million raised from the issuance of shares and £11.0 million from borrowings, net of repayments made.

This resulted in an overall decrease in funds of £0.9 million, giving a net negative cash position at the balance sheet date of £0.3 million.

Reporting metrics

The reporting metrics and Key Performance Indicators normally reviewed by the Board include the income statement categories as outlined in this report along with measures specific to individual business units and divisions and the available resources and strength of the balance sheet.

Funding

During the year, the Group took out a £5.0 million term loan with Barclays to help fund the acquisitions of Brixx and Impact and increased the overdraft facility to £2.0 million. The term loan is secured with a fixed and floating charge over the entities in the Group and is repayable over 5 years at £0.25 million per quarter. At the same time, the Company also drew down £1.5 million under its loan agreement with MXC Capital Limited ("MXC Capital").

On 9 June 2015, the Group raised £2.2 million (before expenses) via an oversubscribed equity placing of 97,777,876 new ordinary shares at 2.25 pence per share to strengthen the Company's balance sheet following the acquisitions of Brixx and Impact. At the same time, the £1.5 million due under the loan agreement with MXC Capital was converted into new ordinary shares at 2.0 pence per share. In addition, the £1.0 million of loan notes issued to the vendors of Documotive at the time of the Documotive acquisition were also converted into new ordinary shares at 1.1 pence per share.

On 29 January 2016, to assist in the funding of Kypera, the Company issued £3.5 million of unsecured convertible loan notes. The loan notes have a 5-year term and carry interest at a rate of 5% per annum. The loan notes are capable of being converted into new ordinary shares at a price of 85.6 pence per ordinary share, which represented a 5% premium to the mid closing price on 28 January 2016, the day immediately prior to completion. Conversion is at the option of the holder at any time during the 5-year term. The Company can redeem the loan notes from the third anniversary of issue, assuming the loan notes have not already been converted into Ordinary Shares.

MXC Capital subscribed for £1.5 million of the loan notes with the remaining £2.0 million of loan notes being subscribed for by the Business Growth Fund Plc.

At the same time, the Barclays term loan was extended by a further £1.0 million to aid with the funding of the acquisition of Kypera and the overdraft was extended by a further £0.5 million to £2.5 million. The term of the loan was extended by a further year with £0.25 million payable per quarter. As at the balance sheet date, £5.25 million of term loan was outstanding.

At the balance sheet date, the Group held £0.45 million of convertible loan notes that were issued as part of the acquisition of Opus. Conversion notices were issued post year-end and the loan notes convert into ordinary shares on dates up to September 2018.

The final payment in relation to the interest rate swap was made on 30 September 2015.

Going Concern

The Directors have prepared detailed cash flow projections including sensitivity analysis on key assumptions. The Group's forecasts and projections, taking account of reasonably possible changes in trading performance and the timing of key strategic events, show the Group will be able to operate within the level and conditions of available funding. Based on the level of support demonstrated by the equity placing and loan note issuance during the year and the funding available, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future.

Accordingly, the Group continues to adopt the going concern basis in preparing its consolidated financial statements.

Consolidated Statement of Comprehensive Income

For the year ended 31 March 2016

* Total result for the year from Continuing Operations before net finance costs, tax, depreciation, amortisation, exceptional costs and share-based payment charges

Earnings per share have been restated to reflect the share consolidation which took place on 22 October 2015.

Consolidated Balance Sheet

As at 31 March 2016

Consolidated Statement of Changes in Equity

For the year ended 31 March 2016 

(a) Equity reserve

During the year ended 31 March 2015, three convertible loan notes were issued as part of the consideration for the acquisitions of Documotive Limited (now Castleton Software Solutions Ltd), Keylogic Limited and Opus Information Technology Limited.

On 30 September 2015, additional convertible loan notes of £0.4 million were issued in settlement of contingent consideration payable in respect of the acquisition of Opus Information Technology Limited.

On 31 January 2016, two convertible loan notes were issued in order to part finance the acquisition of Kypera Holdings Limited.

The fair value of the equity component of convertible loan notes issued is the residual value after deduction of the fair value of the debt component of the instrument from the face value of the loan note in accordance with IFRS.

The issue of warrants and options to shareholders acting in their capacity as equity owners results in a credit to the equity reserve with the corresponding cost deducted from share premium (see note (f) below).

 (b) Merger reserve

The merger reserve arose from the acquisition of Redstone Communications Limited (£216,000) and Maxima Holdings Limited (formerly Maxima Holdings plc) (£7,750,000) and represents the difference between the value of the shares acquired (nominal value plus related share premium) and the nominal value of the shares issued.

(c) Conversion of financial instruments

In order to help finance the acquisitions made on 31 May 2015, the Company had drawn down £1.5 million under a loan agreement with MXC Capital Limited ("MXC Capital"). Amounts drawn down under the loan agreement with MXC Capital were capable of being converted into new ordinary shares at 2 pence per ordinary share*. On 30 June 2015, the Company allotted 75,000,000 new Ordinary Shares pursuant to the conversion of the £1.5 million drawn under the loan facility with MXC Capital Limited, at a price of 2 pence per share*.

On 30 June 2015 the Company allotted 90,909,090 new ordinary shares* pursuant to the conversion of the loan notes issued as part of the consideration for the acquisition of Documotive Limited (now Castleton Software Solutions Limited), at a price of 1.1 pence per share*.

On 21 December 2015 the Company allotted 2,000,000 new ordinary shares pursuant to the conversion of the loan notes issued as part consideration for the acquisition of Keylogic Limited, at a price of 40 pence per share.

(d) Exercise of options

On 30 September 2015, MXC Capital Limited exercised options over 16,929,888 ordinary shares*. The options were exercised at a price of 0.8 pence per ordinary share.

(e) Exercise of warrants

On 8 January 2016, the company allotted 577,768 new ordinary shares pursuant to the exercise of warrants issued as part of the acquisition of Montal Computer Services Limited (now Castleton Managed Services Limited). The warrants were exercised at a price of 22 pence per Ordinary Share.

(f) Cancellation of Warrants

On 18 July existing warrants held by MXC Capital were cancelled and replaced with options under an Employee Share Scheme (see note 24 of the full statutory accounts).

(g) Share Issue

Details of shares issued in the year are set out in note 23 of the full statutory accounts. The credit to share premium is after issue costs of £111,000.

* pre capital reorganisation on 22 October 2015

Consolidated Cash Flow Statement

For the year ended 31 March 2016

Notes to the Consolidated Financial Statements

Year ended 31 March 2016

1 Accounting policies - Group

Castleton Technology plc (Castleton) is a public limited company incorporated and domiciled in England and Wales, whose shares are publicly traded on the AIM division of the London Stock Exchange. The registered office is 100 Fetter Lane, London, EC4A 1BN and the principal place of business is the United Kingdom. The principal accounting policies, which have been applied consistently in the preparation of these consolidated financial statements throughout the year and by all subsidiary companies, are set out below:

1.1 Basis of preparation

The preliminary financial information does not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006 for the financial years ended 31 March 2016 and 31 March 2015, but has been derived from those accounts. These financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") and IFRSIC interpretations as adopted by the EU and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The financial information included in this preliminary announcement does not include all the disclosures required by IFRS or the Companies Act 2006 and accordingly it does not itself comply with IFRS or the Companies Act 2006.

Statutory accounts for 2015 have been delivered to the Registrar of Companies and those for the financial year ended 31 March 2016 will be delivered following the Company's annual general meeting. The auditors have reported on those accounts and their opinion was unqualified and did not contain statements under section 498(2) or (3) of the Companies Act 2006.

The consolidated financial statements of Castleton have been prepared on the going concern basis and in accordance with EU adopted International Financial Reporting Standards (IFRS), IFRIC interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and financial liabilities (including derivative financial instruments) at fair value through profit or loss.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Section 1.29 in the accounting policies in the full statutory accounts.

Cash flows and operations that relate to a major component of the business or geographical region that has been disposed of or is classified as held for sale or distribution are shown separately from continuing operations. Comparative amounts are restated.

New standards adopted in the year are discussed in Section 1.28 of the full statutory accounts.

Going Concern

The Directors have prepared detailed cash flow projections including sensitivity analysis on key assumptions. The Group's forecasts and projections, taking account of reasonably possible changes in trading performance and the timing of key strategic events, show the Group will be able to operate within the level and conditions of available funding. Based on the level of support documented by the equity placing and loan note issuance during the year and the funding available, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future.

Accordingly, the Group continues to adopt the going concern basis in preparing its consolidated financial statements.

The accounting policies used in the preparation of this preliminary announcement have remained unchanged from those set out in the statutory accounts for the year ended 31 March 2015. They are also consistent with those in the full accounts for the year ended 31 March 2016 which have yet to be published.

2 Segment reporting

Operating segments are reported in a manner consistent with the internal reporting to the Chief Operating Decision Makers ('CODM'). The CODM has been identified as the Executive Board.

The Group is comprised of the following main operating segments:

Managed Services

In this segment are the results of Castleton Managed Services Ltd (formerly Montal Computer Services Limited) for the year ended 31 March 2016 and Keylogic Limited for the period from 1 April 2015 to 20 September 2015, at which point the trade and assets of Keylogic were hived up into Castleton Managed Services Ltd.

In the year ended 31 March 2015, this segment comprised the results of Montal Computer Services Limited for the period from acquisition on 20 June 2014 and Keylogic Limited for the period from acquisition on 1 March 2015.

Software Solutions

This segment comprises the results of Castleton Software Solutions Ltd (formerly Documotive Limited) for the year ended 31 March 2016. It also includes results for both Opus Information Technology Limited for the period from 1 April 2015 to 30 November 2015 as well as Castleton Financial Modelling Solutions Ltd (formerly Brixx Solutions Limited) and Impact Applications Limited for the period from acquisition on 31 May 2015 to 30 November 2015.

On 1 December 2015 the trade and assets of Opus Information Technology Limited, Impact Applications Limited and Castleton Financial Modelling Solutions Ltd were hived up into Castleton Software Solutions Ltd.

The segment also includes the results of Kypera Limited and Kypera Pty from the date of acquisition on 29 January 2016 to 31 March 2016.

In the year ended 31 March 2015, this segment comprised the results of Documotive Limited for the period from acquisition on 18 November 2014 and Opus Information Technology Limited for the period from acquisition on 1 March 2015.

Year ended 31 March 2016

*Earnings for the year from continuing operations before net finance costs, depreciation, amortisation, exceptional items, group management charge and share based payment charges.

Year ended 31 March 2015

Segment Assets 12,815 9,856 759 23,430

Segment Liabilities (6,885) (6,774) (2,249) (15,909)

*Earnings for the year from continuing operations before net finance costs, depreciation, amortisation, exceptional items, group management charges and share based payment charges.

Income streams originating outside of the United Kingdom comprised £38,000 in respect of Kypera Pty (2015: nil).

The Group had no customers who accounted for more than 10% of the Group's revenue during the year (2015: nil).

3 Business Combinations

Brixx

On 31 May 2015 Castleton acquired the entire issued share capital of Brixx Solutions Limited ('Brixx') for a total initial consideration of £5.0 million payable in cash (of which £1.0 million was deferred and £0.5 million remains outstanding at the period end, with £0.5 million paid on 31 July 2015 and the final £0.5 million paid on 31 May 2016). In July 2015, a further £0.1 million was paid following agreement of completion accounts.

From the date of acquisition to 30 November 2015, when the business was hived into Castleton Software Solutions Ltd, Brixx recorded revenue of £0.7 million and a profit before taxation of £0.4 million. Assuming the combination had taken place at the beginning of the year, the reported revenue from Brixx would have been £0.9 million and the profit for the year before taxation would have been £0.4 million.

If Brixx had been consolidated from 1 April 2015 the consolidated statement of income would show pro-forma revenue of £18.1 million and loss before taxation of £1.5 million.

Acquisition costs were £0.2 million.

Impact

On 31 May 2015 Castleton acquired the entire issued share capital of Impact Applications Limited ('Impact') for a total consideration of £4.88 million payable as to £3.22 million in cash and the issue of 74,088,888 ordinary shares of 0.1 pence each. The fair value of shares issued (£1.67 million) was based on the published closing share price of 2.225 pence on 29 May 2015.

From the date of acquisition to 30 November 2015, when the business was hived into Castleton Software Solutions Ltd, Impact recorded revenue of £1.3 million and a profit before taxation of £0.4 million. Assuming the combination had taken place at the beginning of the year, the reported revenue from Impact would have been £1.4 million and the profit for the year before taxation would have been £0.1 million.

If Impact had been consolidated from 1 April 2015 the consolidated statement of income would show pro-forma revenue of £18.0 million and loss before taxation of £1.8 million.

Acquisition costs were £0.3 million.

Kypera

On 29 January 2016 Castleton acquired the entire issued share capital of Kypera Holdings Limited ('Kypera') for a total consideration of £5.0 million payable in cash.

The acquisition of Kypera was funded by an extension to the Company's existing facilities with Barclays Plc and the issue of £3.5 million of convertible loan notes. The Loan Notes have a 5 year term and carry interest at a rate of 5% per annum. The Loan Notes are capable of being converted into new ordinary shares of 2 pence each in the capital of Castleton at a price of 85.6 pence per Ordinary Share.

MXC Capital Limited, a substantial shareholder in the Company, subscribed for £1.5 million of the Loan Notes. The remaining £2 million of Loan Notes were subscribed for by the Business Growth Fund Plc ("BGF"). 

The issue of the Loan Notes to MXC Capital is considered a related party transaction on the basis that MXC Capital is a substantial shareholder in the Company and Ian Smith, CEO of Castleton, is a substantial shareholder of MXC Capital.

Further details of the loan notes are set out in note 19 to the full statutory accounts.

From the date of acquisition to 31 March 2016, Kypera recorded revenue of £0.4 million and a profit before taxation of £0.1 million. Assuming the combination had taken place at the beginning of the year, the reported revenue from Kypera would have been £2.5 million and the profit for the year before taxation would have been £0.5 million.

If Kypera had been consolidated from 1 April 2015 the consolidated statement of income would show pro-forma revenue of £20 million and loss before taxation of £1.5 million.

Acquisition costs were £0.3 million.

The total goodwill, representing synergies expected to accrue to the enlarged group, and intangible assets arising from the acquisitions is the difference between the fair value of consideration less the fair value of assets acquired, as set out below. The fair values for Kypera are provisional.

The consideration was satisfied as follows:

On acquisition of each business the Directors assessed the business acquired to identify any intangible assets. Customer contracts and related relationships met the criteria for recognition as intangible assets as they are separable from each other and have a measurable fair value, being the amount for which an asset would be exchanged between knowledgeable and willing parties in an arm's length transaction.

As part of the acquisition of Brixx, an option at Castleton's discretion was agreed to acquire the operating platform for Brixx software, which is currently used under licence at a cost of 15% of revenues per annum. The cost of exercising this option is £1.5 million. The option has been valued on a discounted cash flow basis applied to a Black Scholes option pricing model with volatility of 15%.

For the customer contracts the fair value of the intangible assets was calculated by using the discounted cash flows arising from the existing customer contracts base for both of the businesses. Customer retention was assumed to be between 94%-97% based on past experience.

For software, a royalty relief calculation was used to calculate the fair value of the intangible assets, with an assumed royalty rate of between 8-15%.

A long term growth rate of 2.0% was applied with a discount rate of 9.9%. The reasonable economic life of the customer relationships and software was assumed to be 15 years. The reasonable economic life of the option was assumed to be 5 years. The identifiable intangible assets and related deferred tax liability are as follows:

The goodwill arising from acquisitions is attributable to synergies from continuing operations and the knowledge and ability of the workforce.

Opus

On 30 September 2015, convertible loan notes of £0.4 million were issued in settlement of contingent consideration payable in respect of the acquisition of Opus Information Technology Limited. The loan notes are convertible in three equal tranches over three years. The convertible loan notes are valued on a Black Scholes option pricing model under standard option pricing assumptions. The fair value of the loan notes has been calculated as follows:

The difference between the fair value of these loan notes and the loan notes issued on acquisition represents an adjustment to the purchase price and has been recognised in the income statement within acquisition and integration costs along with a further £50,000 of cash consideration which was paid in January 2016.

Castleton Software Solutions Ltd (formerly Documotive Limited)

Within the first twelve months of ownership the Company has identified a further fair value adjustment in respect of the acquisition of Documotive Limited (now Castleton Software Solutions). This has resulted in increased bad debt provision and increased goodwill in respect of this acquisition of £21,000.

4 Income tax

(a) Tax on profit on ordinary activities

The rate of UK Corporation tax for the year beginning 1 April 2014 was 21% and the rate of UK corporation tax for the year beginning 1 April 2015 is 20% and the relevant deferred tax balances reflect this. Further changes have been announced to reduce the rate to 19% from 1 April 2017 and to 18% from the year starting 1 April 2020. Deferred tax has been re-measured on the basis of these new rates and reflected in the financial statements.

(b) Reconciliation of the total income tax credit

The tax on the Group's profit before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to losses of the consolidated entities as follows:

(c) Unrecognised deferred tax

The Group has unrecognised deferred tax assets of £13.7 million (2015: £13.7 million) in respect of losses and reliefs, which the Group is unlikely to be able to utilise except in very limited circumstances. The composition of these deferred tax assets is as follows: property, plant and equipment differences £4.8 million (2015: £4.8 million), short-term temporary differences £0.1 million (2015: £0.1 million) and tax losses of £8.8 million (2015: £8.8 million). Deferred tax assets have not been recognised in respect of losses where it is the view of the Directors that it is not probable that future taxable profits of the nature required will be available to offset against any deferred tax asset.

Deferred tax liabilities arose in respect of the amortisation of intangible assets recognised on acquisitions made, the difference between capital allowances and depreciation.

5 Earnings/loss per share

On 22 October 2015 each existing ordinary share of 0.1 pence each was consolidated into 1 new ordinary share of 16 pence each and subsequently sub-divided into 8 new ordinary shares of 2 pence each. In accordance with IAS 33 the earnings per share calculation has reflected this change. Comparative periods have been restated accordingly.

Basic earnings/loss per share and diluted earnings/loss per share are calculated using a weighted average number of shares of 72,265,145 and 80,345,997 respectively (March 2015: weighted average number of shares of 40,948,460 and 44,753,580). Adjusted EBITDA* has been shown on the grounds that it is a common metric used by the market in monitoring similar businesses.

The weighted number of shares and the loss for the year for the purposes of calculating the fully diluted earnings per share are the same as the basic loss per share calculation. This is because the outstanding share options and warrants would have the effect of reducing the loss per ordinary share and would, therefore, not be dilutive under the terms of IAS 33.

* Total result for the year from Continuing Operations before net finance costs, tax, depreciation, amortisation, exceptional costs and share-based payment charges.

6 Intangible assets

The amortisation in both years relates to continuing operations, and is included in the loss for the year from Continued Operations in the Income Statement within administrative expenses.

Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate thatthe carrying value may be impaired Goodwill is supported by calculating the discounted cash flows arising from the existing businesses. A long term growth rate of 2.0% was applied with a discount rate of 9.5%.

Impairment tests for goodwill

The recoverable amount of all cash generating units (CGU) has been determined based on value-in-use calculations. These calculations use pre-tax cash flow projections based on financial budgets approved by management until 31 March 2018. Cash flows beyond this period are extrapolated using the estimated growth rates stated below.

For each of the CGUs with a significant amount of goodwill the key assumptions In addition to long term growth rate and discount rate used in the value-in-use calculations are as follows:

Managed Services

Gross margin - 36%

Operating margin - 20%

Software Solutions

Gross margin - 77%

Operating margin - 19%

For all cash generating units the long term growth rate assumed is 2.0%. The pre-tax discount rate used is 9.5%, which reflects management's risk-adjusted estimate of the weighted average cost of capital.

A reasonably possible adverse movement in any of the above key assumptions made would not give rise to impairment.

7 Net cash flows from continuing operating activities

8 Subsequent events

On 4th April 2016, the Group formalised its existing exclusive reseller agreement with 365 Agile Group plc ("365Agile") and entered into a new perpetual licence agreement ("the Agreement") with 365Agile whereby Castleton has been granted an exclusive licence for 365Agile's suite of mobile working software solutions in relation to the social housing sector.

Castleton will pay 365Agile consideration of £1.8m payable over four years, with a contingent element payable depending on total revenue in the first three years of the Agreement. The Group believes that this is strategically important, as it secures the use of the 365Agile product going forward whilst enabling Castleton to keep 100% of the revenue associated with sales thereof by the Group, compared to having a 70% commission payable to 365Agile under the previous agreement.

On 8 July 2016, the company issued 250,000 new Ordinary Shares pursuant to the conversion of loan notes issued as part of the previous acquisition of Opus Information Technology Limited. The Vendors have undertaken not to sell or otherwise dispose of their interests in the Loan Note Shares at any time during the 12 months following the admission of the Loan Note Shares to trading on AIM.