CTP.L Regulatory News (CTP)

Castleton Technology plc

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

Preliminary Results

For the Year Ended 31 March 2019

Castleton Technology plc (AIM: CTP), the software and managed services provider to the public and not-for-profit sectors, announces its unaudited preliminary results for the year ended 31 March 2019.

Financial Highlights

· Revenue up 13% to £26.4 million (FY18: £23.3 million) of which 58% is recurring (an increase of £1.4 million over the prior year). Adjusted EBITDA* up 24% to £6.3 million (FY18: £5.1 million)

· Adjusted EBIDTA* margin increased to 24% (FY18 22%)

· Operating cashflow** up 25% to £6.5 million (FY18: £5.2 million)

§ Post exceptional items at £6.1 million (FY18: £4.5 million)

· Operating cash conversion** of 103% (FY18: 101%)

§ Post exceptional items at 97% (FY18: 88%)

· Total net debt reduced from £6.3*** million to £5.1 million

· Basic EPS of 5.08 pence (FY18: 5.23 pence).

Operational Highlights

· 50% of customers now taking more than one product or service, up from 40% in FY18

· Secured significant multi-year and multi-product contracts throughout the year, including:

§ 4 year, £1.2 million contract with Dumfries and Galloway Housing Partnership ("DGHP") for the provision of a full end-to-end managed service

§ Subsequent £0.4 million contract to provide DGHP with a Unified Communications solution

§ 5 year, £1.3 million contract with Connect Housing Association ("Connect") for Castleton's full suite of integrated software solutions

§ Existing customer New Gorbals, who had the complete solution set, added one of Castleton's newly launched solution's, Asset Management

· Launch of Castleton.DIGITAL, a self-service customisable digital delivery platform

· Acquisition of Deeplake Digital Limited ("Deeplake"), provider of digital technology for landlord and tenant communication in the social housing sector, for cash consideration of £1.8 million

· Acquisition of Castleton India (previously known as CarbonNV InfoLogic India Private Limited) for a total consideration of £0.35 million. Castleton India, which has offices in Bangalore and Vadodara, India, previously provided additional development capability to the Group via a service agreement. The acquisition has enabled the Group to secure the additional development capability and skills within the company on a more permanent basis.

· Acquisition of exclusive and perpetual licence in relation to the platform upon which Castleton's modelling solution is based, for £1.6 million in cash and shares.

Dean Dickinson, CEO of Castleton, said:

"It has been another year of significant progress for Castleton, delivering strong organic growth at both revenue and EBITDA level underpinned by healthy cash generation. This has not only resulted in the continued reduction in net debt, but it has also enabled operational growth through the acquisition of Deeplake, the perpetual licence for our modelling solution, the launch of new digital solutions and expanded development capabilities with Castleton India.

A number of milestone projects are now fully-live and operational with three early adopter sites for integrated solutions. These combined customer references have been a major contributor to us winning the new integrated solutions contract in January with Connect. The early adopters and this new contract demonstrate the strength of our proposition, our ability to cross-sell and the trust our customers have in our capabilities to deliver on their vision for complete digital transformation."

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

** Pre-exceptional items

*** Excluding £1.6 million owed in respect of exercise of options held by MXC Guernsey Limited, as announced on 21 February 2018

The Annual Report and Accounts for the year ended 31 March 2019 will be posted to shareholders at least 21 days prior to the AGM.

Please see a video of the Company's results here https://plcwebcast.uk/ctpfyresultsjune2019

About Castleton Technology plc

Castleton Technology plc is a leading supplier of complementary software and managed services to the public and not-for-profit sectors. The Group is a 'one stop shop', providing integrated housing systems via the Cloud, working in partnership with its customers and resellers to help drive efficiencies whilst improving controls and customer service. www.castletonplc.com

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

Excellent Financial Results

I am very pleased to be able to report on another year of excellent progress for Castleton. We have continued to grow our revenues organically, recording an increase of 7% in the year to 31 March 2019 ("FY19"). We also increased recurring revenues in absolute terms by £1.4 million and these now stand at 58% of total revenue. Furthermore, despite continued investment in the business, particularly in relation to our software products, we have been able to increase our Adjusted EBITDA margin from 22% in FY18 to 24% in FY19.

Cash generation has continued to be impressive, giving us the confidence to invest over £0.6 million in refreshing our data centres in order to increase capacity for future growth, especially in cloud related services. The level of cash generation has also allowed us to reduce net debt by £1.2 million and enabled our acquisition of Deeplake Digital, a provider of digital technology for landlord and tenant communication in the social housing sector, thereby bolstering our product offering. During the year we acquired the perpetual licence for our modelling solution and also an offshore development facility in India which, in conjunction with our UK development teams, will allow us to bring new products to market more quickly.

The year under review has also seen early success in our strategy of cross-selling into our customer base, evidenced by the fact that the number of customers taking two products or more has increased to 50% from 40% in the prior year.

Market Focus

We continue to focus on the social housing sector and adjacent markets, such as the outsourced maintenance contractor business. The breadth and level of integration of our software offerings and associated expertise provides our customers with the full range of technology and services that they require. This focus, allied with our increased development capability, means that we can respond to our customers' needs and bring new and exciting products to market in a short timescale. One such offering is our artificial intelligence ("AI") capability where we have linked voice recognition devices, such as Amazon's Alexa, to our systems, which will allow our customers to dramatically change the way they interact with tenants and thereby increase the efficiency of their operations.

Dividend

This is the third year in a row in which cash generation has been c. 100% of adjusted EBITDA. Given this continued strong cash generation, as a Board we are pleased to propose a maiden dividend of 1p per share, subject to shareholder approval at the Company's AGM, which will be held on 19 August 2019. The dividend will be payable on 23 September 2019 to shareholders on the register as at 23 August 2019 and with a corresponding ex-dividend date of 22 August 2019. We will continue to review the level of dividend and intend to maintain a progressive dividend strategy.

An Enabling Culture

Castleton is a young, dynamic and exciting business with a culture built on focus, pride and teamwork. The Board believe that all employees should be able to share in the success of Castleton and during the year two initiatives were launched in order to allow this to happen. Firstly, we introduced a UK Sharesave scheme which was well received with 45% of eligible employees investing in the scheme. Secondly, we introduced a bonus scheme so that, subject to the achievement of targets, each employee in Castleton has the possibility to benefit from the continued growth and success of the Company.

As a Board we seek to engage regularly with staff, with Board meetings held at our various offices, and any members of staff are encouraged to approach me with any ideas or concerns they may have. In addition, we have launched employee feedback surveys (eNPS) with collaborative workshops held to increase engagement and address key themes arising from the surveys.

Outlook

The financial year ended 31 March 2019 has been another year where our strategy to build a cash generative, high recurring revenue business with good levels of organic growth has been successfully executed. The one area that has not yet lived up to our expectations is our Australian Operation (reported within our Software Solutions division) - we have taken action to address this, but it has had a slight impact on our outlook for next year.

With our sector focus and breadth of product offering, we continue to see enormous potential to become the supplier of choice for software and IT services in the social housing market. There remains a significant cross-sell opportunity across our existing customer base as 50% of our c.600 housing association customers only take one of our products or services. As we continue to enhance our development capability and increase and invest into our product set in order to allow greater cloud usage, we believe we will be able to further capitalise on our already established position within the social housing sector.

To maximise this opportunity, post year end, we decided to merge our Software Solutions and Managed Services divisions into a single entity and this integration will be complete by the end of June 2019. The primary drivers for this change are to set the right technological trajectory for Castleton, in recognition of the fact that customers are moving to a "Cloud First" deployment strategy, to maximise the cross-sell opportunity, to focus on higher margin revenue and to ensure our customers receive integrated products and services with world class support.

The combination of a healthy pipeline of new business, together with our new development capabilities and our improved organisational structure, give me confidence for the year ahead and I expect that we will show continued progress in both our financial and operational metrics when we next report.

David Payne

Chairman

Chief Executive's Review

Overview

Castleton have enjoyed another year of significant progress throughout the financial year ending 31 March 2019, demonstrating strong organic growth at both revenue and EBITDA level. Excellent cash generation has not only resulted in the continued reduction in net debt, but it has also enabled operational growth through the acquisition of Deeplake Digital, the launch of new digital solutions and expanded development capabilities with Castleton India.

We have seen some milestone projects go fully-live and operational with our three early adopter sites for integrated solutions; Cluid Housing, New Gorbals Housing Association and Circle Housing. These combined customer references have been a major contributor to us winning a brand-new integrated solutions contract valued at £1.3 million, with Yorkshire based Housing Association Connect Housing. This five-year contract demonstrates the strength of our proposition, our ability to cross-sell and the trust our customers have in our capabilities to deliver on their vision for complete digital transformation.

Our continued investment in research and development enables Castleton to keep ahead of the curve and meet the needs of our market. The addition of our Indian development capabilities means we can bring new solutions to the market faster and more cost effectively. The delivery of our Castleton.DIGITAL solution, which launched in September 2018, is an excellent example of the Indian operation's performance.

We have continued to deliver enhancements across our solutions portfolio and service offering. The market we operate in is fast embracing digital means to engage with tenants and as a result, we launched several new solutions. This includes embarking on a first-of-its kind project with our customer Housing Solutions to introduce Artificial Intelligence technology into tenants' homes. Add to this our portal and app platform, Castleton.DIGITAL, plus the acquisition of Deeplake's two-way SMS technology, and we have the strongest portfolio of digital solutions that support the market's increasing demand for digital self-service.

Just as digital self-service has become an integral part of our customers' IT transformation strategy, we have also seen Cloud delivery becoming more significant, with the level of interest shown by our customers increasing. After the year end, we have therefore taken the decision to merge the two divisions (Software Solutions and Managed Services) to create a truly 'one Castleton' structure. This integration will be completed by the end of June 2019, with plans to deliver a unified, seamless and enhanced customer experience.

Our renewed customer-centric approach is evident by the stability we have gained across our software support services over the last 12 months. We have reduced open support tickets by 80% over the course of the year and delivered a customer satisfaction level of 96.3% against service level agreements.

Castleton have undertaken a significant exercise to increase our employee engagement. This has included the launch of a UK Sharesave scheme, with 45% of eligible employees enrolling during its launch in August 2018. We intend to make this available for new Castleton employees in August 2019. Further to this, we launched a company bonus scheme during the year based upon individuals achieving key performance metrics. This will pay out for 2019 performance. We have also started to measure employee engagement through Employee Net Promoter Score, where we have seen a 36-point improvement in employee satisfaction.

The focus during the year has also continued to be on optimising the business, strengthening the management team and business platform and expanding our product offering which will in turn allow the Group to grow and maximise the opportunities available in our chosen market.

Our Market and What We Do

The markets in which we operate are focused around public sector and not-for-profit social housing but also include the contractors who provide repairs services to the social housing providers. Castleton now has ten offices globally; seven in the UK, one in Australia as our operations grow following the acquisition of Kinetic in the prior year and two in India. This demonstrates our ability to grow and scale our business in new geographies.

Our Software Solutions provides all key business processes to social landlords covering everything from tenant engagement, rent collection, financial planning and control, document management and repairs management. All key processes are available to be utilised on a mobile platform via apps or digital engagement. The range of solutions provides customers with significant improvements in service, performance and insight, as well as delivering a solid return on investment.

Our Cloud Delivery capability offers a wide range of IT infrastructure solutions which support an organisation's business objectives, including helping to drive efficiencies, manage legacy architectures or providing customers and staff with the latest social, mobile and cloud technologies. We also have the capability to provide a full IT outsource service where we become the Housing Associations' IT capability.

Trading Results

Revenue for the year showed an increase of 13.3% to £26.4 million (2018: £23.3 million) with 58% of revenue being recurring in nature (2018: 60%). Adjusted EBITDA* showed a stronger performance, improving by 23.5% to £6.3 million (2018: £5.1 million), reflecting the Company's operational gearing and ability to scale profitably.

Operating cash conversion was 103% of adjusted EBITDA* (2018: 101%) and 98% of adjusted EBITDA* post exceptional costs (2018: 91%), demonstrating the cash generative nature of the business. The cash generated enabled a reduction in net debt of £1.2 million to £5.1 million as well as funding the acquisition of Deeplake Digital and Castleton India. The earnings per share at a basic level was 5.08p, compared to earnings per share of 5.23p in the previous year, with the higher prior year figure due to significant exceptional credits.

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

Deeplake

On 10 January 2019, the Group acquired Deeplake, a leading provider of Communications Management Software to the social housing sector, for a cash consideration of £1.8 million financed through a combination of cash generated in the year and an increase in our banking facilities.

 India

On 20 February 2019, the Group acquired Castleton India (previously known as CarbonNV InfoLogic India Private Limited), for a total consideration of £0.35 million comprising £0.15 million of cash consideration and the issue of 200,331 shares in the Company.

Modelling Solution Licence

During the year, we also acquired an exclusive and perpetual licence in relation to the platform upon which Castleton's modelling solution is based, for £1.6 million in cash and shares, which has enhanced our margins on this product.

Operational Review

During the year, we have continued to make improvements to the quality of the business processes, people, structure and control. We have also launched new products, both through our own IP and partnering arrangements. I am therefore confident that the organic growth demonstrated during the current year will continue as we further cross sell into the customer base. Our contracted backlog of revenue has grown by 12.6%, which gives us good forward visibility of revenue.

The increase in customer revenues was primarily driven by the addition of new customers and through cross-selling of products and / or services into the Group's existing base. During the year the number of customers who have two or more of our products increased to 50% from 40% in 2018. Whilst this shows good progress, it also means that 50% (2018: 60%) of our customer base still uses just one product, providing a very strong opportunity for further organic growth.

The individual value of new contracts continues to grow. New contracts signed during the year include a five-year contract with Connect Housing with a total contract value of £1.3 million for the provision of the entire suite of our software products and a full end to end managed service contract with Dumfries and Galloway Housing Partnership (DGHP) worth £1.2 million over 4 years. Furthermore, we extended the DGHP contract by winning a second tender for a Unified Communications platform in February 2019 worth £0.4 million.

Following the acquisition of Kinetic Information Systems Pty Ltd ("Kinetic") in December 2017, we recruited a new General Manager to head up the Castleton business in Australia. Unfortunately, we had significant execution issues that resulted in the General Manager leaving the business in October 2018 after 6 months in post. In addition, the vendors of the Kinetic business decided to move on before the 2 year earn out period for personal reasons thereby foregoing deferred consideration of AUS$ 0.5 million. We then took the action of promoting resource from within the business in Australia and we are pleased with the last quarter of trading.

In order to increase our ability to create further innovative IP solutions we entered into a service agreement with an Indian development capability at the start of the financial year. The success of this working relationship led to the acquisition of this business, as noted above. This has allowed us to bring new solutions to the market quicker and at a reduced cost when compared to UK development costs.

Current Trading and Outlook

I am delighted to report another year of strong results, with increased revenues and EBITDA and the completion of two acquisitions, augmenting the Group's customer base and capability. Since I arrived mid-way through the financial year ending 31 March 2017 (FY17), we have successfully executed on our growth strategy, growing revenues from £20.3m in FY17 to over £26m for the year just ended. The market presents us with as much opportunity now as it did then and that, together with the acquisitions made in the intervening period, will allow us to continue to execute successfully on the growth strategy.

The benefits of the extensive changes we have made to the business are now increasingly showing through in our results and, combined with the internal reorganisation that we have just done, we are now in a significantly better position to grow and increase profitability. Competition remains strong, particularly in managed services, so referenceability is important, which we can increasingly provide.

Trading since the end of the financial year has been in line with expectations and we expect to see seasonality between the two halves of the financial year, with earnings and cash flows being stronger in the second half than the first half.

Making the best use of technology remains a key focus for the social housing sector and we are well placed to deliver the digital solutions our customers and end-users need, both now and in the future. We will continue to invest in our technology platform and solution set and look to the future with confidence.

Dean Dickinson

Chief Executive

Chief Financial Officer's review

I am pleased to present this report as Chief Financial Officer.

Principal events and overview

The year ended 31 March 2019 has again been one of growing the business organically, demonstrating operational leverage as recurring revenues continue to grow and growing the business in terms of offerings and capability through acquisitions. Organic growth which excludes revenue of £0.3 million and adjusted EBITDA* of £0.2 million for Deeplake, has been 7.3% at the revenue level and 13.0% at the adjusted EBITDA* level, demonstrating, as in prior years, continued operational leverage.

Recurring revenues in the year increased from £14.0 million in 2018 to £15.4 million in 2019 representing 58% (2018: 60%) of total revenue.

Cash generation has been pleasing with cash generated from operations during the year of £6.5 million (2018: £5.2 million), thereby representing 103% operating cash conversion. The resulting cash flow has allowed us to reduce net debt to £5.1 million (including convertible loan notes and deferred consideration) from £6.3 million at the end of the prior year. The balance of the loan from Barclays Bank stands at £4.0 million at the end of the year following an increase in the facility of £1.5 million for the acquisition of Deeplake.

Trading results and acquisitions

The trading results for the year comprise a full year of trading for all entities acquired in the prior years and results from two acquisitions in the year, which is a continuation of the strategy started in 2014 of bringing together a number of best of breed software and managed services providers to the social housing market.

The Company acquired Deeplake, a provider of two-way communication technologies and associated software for a cash consideration of £1.8 million on 10 January 2019. Deeplake contributed £0.3 million of revenue and £0.2 million of profit before tax in the year.

We also acquired Castleton India on 20 February 2019 for a total comprising of 200,331 ordinary shares of 2 pence in the capital of the Group ("Ordinary Shares") and £156,000 of cash, a total consideration of £351,000.

Revenue and gross profit

Revenue amounted to £26.4 million (2018: £23.3 million). £15.0 million was generated by the Software Solutions division (2018: £12.4 million) and £11.4 million (2018: £10.9 million) was generated by the Managed Services division. As we see the services offered by the Managed Services division, namely Cloud delivery becoming more significant going forwards and the level of interest shown by our customers increasing in this area, we took the decision post year end to merge the two divisions to create a truly 'one Castleton' structure. This integration will be completed by the end of June 2019 with the business operating from a single entity which will assist in delivering a unified, seamless and enhanced customer experience.

Recurring revenue represents 58.3% of total revenues (2018: 60.1%) although recurring revenues increased by £1.4 million in absolute terms to £15.4 million, up from £14.0 million in 2018. The decrease in percentage of recurring revenue is due to the stronger performance of professional services and other one-off revenue items in the year.

Gross profit amounted to £19.0 million (2018: £16.1 million), representing a gross margin of 72% (2018: 69%).

Administrative expenses including exceptional items

The administrative expenses of £17.2 million (2018: £14.8 million) were incurred in the running of the business and include the cost of the 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 of £3.2 million (2018: £3.0 million).

Exceptional costs of £0.3 million arising in the year (2018 credit of £0.8 million) relate to acquisition related costs for Deeplake, Castleton India and restructuring costs for Kinetic (which had been acquired at the end of the prior year). The credit in 2018 related to restructuring activities undertaken in the year, offset by the release of exceptional provisions made in prior periods.

Adjusted EBITDA*

The adjusted EBITDA for the year amounts to £6.3 million (2018: £5.1 million).

The cost in the year for the plc Board and its advisors was £1.7 million (2018: £1.4 million). Adjusted trading EBITDA was therefore £8.0 million (2018: £6.5 million).

Finance income and costs

Finance income represents the interest earned on deferred income from the sale of the consulting business sold in 2015, and finance costs comprise interest payable on bank borrowings and the interest and unwind of discount on the Kypera Loan Notes. Finance income and costs amounted to £0.01 million (2018: £0.02 million) and £0.3 million (2018: £0.3 million) respectively.

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

The Group profit after tax for the year to 31 March 2019 was £4.1 million (2018: profit of £4.2 million). This comprises profit before tax of £1.2 million (2018: profit of £1.8 million), which includes the finance income of £0.01 million (2018: £0.03 million), and a tax credit of £2.9 million (2018: £2.3 million) arising from R&D tax credits, the unwind of deferred tax recognised on intangible assets and the recognition of a deferred tax asset relating to unused capital allowance.

IFRS 15

IFRS 15, Revenue from Contracts with Customers, has been fully adopted during the year.

IFRS 15 has had a significant impact on revenue recognition in technology related companies and specifically software companies, so we have undertaken significant work in preparing for the implementation of this standard. We have taken account of adoption of the standard by similar companies and enlisted the assistance of our advisors in developing our policy. Overall, we were already largely compliant with the requirements of the standard and the impact on our reported revenue for the year was a reduction of £0.1 million and an insignificant change to adjusted EBITDA*. The impact on the opening net asset position was a reduction of £0.5 million before tax.

Earnings per share

Earnings per share at a basic level were 5.08p, compared to earnings per share of 5.23p in the previous year.

Cash flow, funding and investment

Cash generated from operations during the year was very solid at £6.5 million (2018: £5.2 million), thereby representing a third year in a row with c.100% operating cash conversion. Working capital decreased by approximately £0.2 million (2018: decrease of £0.1 million).

Net of cash acquired, £2.0 million of cash was used in business combinations with £1.8 million used for the acquisition of Deeplake. A further £0.2 million for the acquisition of Castleton India (2018: £1.1 million for Kinetic) was funded through cash generated by the business. Over the course of the year, £0.6 million (2018: £0.6 million) of the £1.8 million due under the terms of the Agile Licence was paid. The remaining balance of Agile deferred consideration at the year-end was £0.2 million and this was paid in April 2019.

During the year, the Group repaid £0.8 million of the Barclays term loan in line with the facility agreement (2018: £1.0 million). In January 2019, the remaining £2.5 million facility was re-financed to a £4.0 million facility, the £1.5 million additional facility being used to fund the £1.8 million acquisition of Deeplake as well as assist in the cash requirements for the acquisition of Castleton India. As at the balance sheet date, £4.0 million (2018: £3.3 million) of term loan was outstanding. Since the initial bank loan was put in place in 2015, the financial strength of the company has increased considerably which assisted in lowering the margin paid on our borrowings by 25 basis points.

During the year the Group invested over £0.6 million in customer related capital expenditure and infrastructure in our leased datacentre sites, providing increased capacity for future contract expansion as well as improving the capabilities offered to existing customers. Whilst we do not expect to incur similar capital expenditure amounts over the coming year, our stable and strong cash flows allow us to invest where necessary to continue to grow the business. The Group also invested in software research and development, capitalising £0.5 million of R&D expenditure during the period (2018: £0.4 million).

During the year, on 3 April 2018, the Group paid £1.7 million to MXC in full settlement of the MXC Scheme and no further amounts are due to MXC.

Overall increase in funds in the year of £0.9 million (2018: £0.2 million) gave a net positive cash position at the balance sheet date of £1.4 million (2018: £0.5 million).

Dividend

After we stated last year that we would look to implement a progressive dividend policy, I am delighted to announce a maiden dividend of 1p per share, subject to shareholder approval at the Company's AGM, which will be held on 19 August 2019. The dividend will be payable on 23 September 2019 to shareholders on the register as at 23 August 2019 and with a corresponding ex-dividend date of 22 August 2019.

Deferred income

Deferred income arises where revenue is invoiced ahead of delivery of performance obligations and therefore recognition of revenue. This is common in software maintenance, hosting, managed services and software subscription agreements. Invoicing is largely quarterly, half yearly or annually in advance and therefore deferred income levels fluctuate throughout the year. At 31 March 2019 deferred revenue was £9.2 million (2018: £7.8 million) and of the increase of £1.4 million, £1.3 million is due to the adoption of IFRS 15 whereby if implementation revenues are not considered to be a distinct performance obligation, they are recognised over the contract term. There has been an associated increase in deferred costs of £0.8m.

Going Concern

The Directors have prepared detailed cash flow projections including sensitivity analysis on key assumptions. The Group is forecasting significant free cash flow and therefore the projections prepared show that not only should the Group be able to operate within the level and conditions of available funding, but also that net debt will be reduced over the coming year. Based on 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.

Haywood Chapman,

Chief Financial Officer

Consolidated Statement of Comprehensive Income

For the year ended 31 March 2019

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

Consolidated Balance Sheet

As at 31 March 2019

Consolidated Statement of Changes in Equity

For the year ended 31 March 2019 

 (a) Equity reserve

The equity reserve consists of the equity component of convertible loan notes that were issued as part of the consideration for past acquisitions less the equity component of instruments converted or settled.

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.

The £143,000 balance at 31 March 2019 relates to the loan notes issued for the purchase of Kypera Holdings Limited.

(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) Translation reserve

On consolidation, the balance sheets of Castleton Technology Pty Ltd (formerly Kypera Australia Pty Ltd) and Kinetic Information Systems Pty Ltd are translated into sterling at the rates of exchange ruling at the balance sheet date. Income statement Items and cash flows are translated into sterling at rates approximating to the foreign exchange rates at the date of the transaction. Exchange gains or losses arising from the consolidation of these two Australian companies are recognised in the translation reserve.

(d) Other reserves

Other reserve movements were share options exercised but not yet registered - see section (h) below.

(e) Shares issued to Brixx International

During the period, the Company issued a total of 1,432,706 new ordinary shares of 2 pence each to Brixx International Limited at a price of 82.75 pence per ordinary share, in respect of the acquisition of the exclusive, perpetual and assignable licence in relation to the Castleton Strategic Modelling (formerly "Brixx") platform ("the Asset Purchase"), further development of the platform and settlement of pre Asset Purchase licence fees payable.

The consideration for the Asset Purchase was £1,686,000, of which £1,186,000 was satisfied by the issue of new ordinary shares of 2 pence each and £500,000 was paid in cash on 2 July 2018. The cash element has been included in "Purchase of intangible assets" in the Consolidated Cash Flow Statement.

 (f) Conversion of MXC Loan notes

On 9 August 2018, MXC Guernsey Limited, a wholly owned subsidiary of MXC Capital Limited ("MXC") served a conversion notice with respect to the remaining convertible loan notes ("CLNs") it held, together with the accrued interest, amounting to £632,000 in total.

The CLNs were converted at 85.6 pence per ordinary share of 2 pence each in the capital of the Company therefore 738,896 new ordinary shares of 2 pence were allotted to MXC on 17 August 2018.

(g) Shares issued to the owners of CarbonNV InfoLogic India Private Limited

On 20 February 2019 the Company issued 200,331 ordinary shares of 2 pence in the capital of the Company ("Ordinary Shares") and paid cash of £154,678 (total consideration of £350,000) for the acquisition of Castleton India (previously known as CarbonNV InfoLogic India Private Limited).

(h) Exercise of share options

On 29 August 2018, Haywood Chapman, Chief Financial Officer, exercised 271,000 options over new ordinary shares of 2 pence each in the capital of the Company, at an exercise price of 22 pence per ordinary share.

On 28 March 2019 options in respect of 66,225 shares of 2 pence each were exercised at an exercise price of 75.5 pence per share and application made for admission to trading. The obligation to issue the shares has been recognised in other reserves (see (d) above), and on 1 April 2019 the shares were registered and issued.

(i) Capital reduction

On 23 October 2018, the High Court of Justice in England and Wales made an order confirming the cancellation of the amount standing to the credit of the Company's share premium account (the "Capital Reduction") under section 648 of the Companies Act 2006. This transfers the balance into the Profit and loss reserve.

(j) IFRS 15 Cumulative adjustment

Adoption of IFRS 15 from 1 April 2018 has required an adjustment to accumulated loss to reflect the cumulative effect of the change in policy net of tax.

Consolidated Cash Flow Statement

For the year ended 31 March 2019

1 Accounting policies - Group

Basis of preparation

The preliminary results for the Company and its subsidiaries (the "Group") for the year ended 31 March 2019 are unaudited. The financial information set out in this announcement does not constitute the Group's financial statements for the year ended 31 March 2019 or 31 March 2018 as defined by Section 434 of the Companies Act 2006.

This financial information has been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union, IFRIC interpretations and the Companies Act 2006 applicable to companies reporting under IFRS and therefore complies with Article 4 of the EU IAS regulations.

The financial information for the year ended 31 March 2018 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies. The auditors, RSM UK Audit LLP, reported on those accounts and 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.

The statutory accounts for the year ended 31 March 2019 will be finalised on the basis of the financial information presented by the Directors in these preliminary results and will be delivered to the Registrar of Companies following the Annual General Meeting.

The same accounting policies and methods of computation are followed as in the latest published audited accounts for the year ended 31 March 2018, which are available on the Group's website except for as described below:

Revenue recognition

IFRS 15 (Revenue from customer contracts) is effective for the Group for the period starting 1 April 2018. The Group has applied IFRS 15 on a cumulative effect basis with practical expedients from the date of initial application (1 April 2018), without restatement of comparative amounts.

The company generates revenue from the provision of software licences, implementation services, maintenance and support, outsourced hosting managed services and sale of hardware. Products and services are sold in bundled packages and may include ad-hoc consultancy services for example to implement upgrades or to provide for further user licences during the contract period.

Software licences are provided on either a 'hosted' or 'installed' basis and contracts typically include an initial contract term of more than one year and, thereafter renew on an annual basis.

Implementation services comprise 'go live' support which can include; design and build, data migration, training, configuration and implementation.

Hosted managed services contracts are multi-element contracts which may include hosted IT infrastructure, hosted desktop, data back-up, support services and provision of various software applications.

Revenue is recognised when the performance obligation has been satisfied by transferring the promised good or service to the customer.

At contract inception, the transaction price is determined, being the amount that the company expects to receive for transferring the promised goods or services. The transaction price is allocated to the performance obligations in the contract based on their relative standalone selling prices.

Software

Software comprises a licence to use the software, upgrades and support and maintenance. Management have concluded that the upgrades are fundamental to the functionality of the software and that therefore, there is a single performance obligation. Management have also determined that the licence granted to the customer provides them with the right to access the intellectual property as it exists, throughout the licence period, and consequently, where there is an obligation to provide the licence with upgrades over time, revenue from this single performance obligation is recognised on a straight line basis over the contract period. In instances where there are no ongoing obligations, the revenue would be recognised at a point in time.

Implementation services

Determination of whether implementation is a distinct performance obligation is based on the degree of complexity involved in the service, as judged by management. Where the service comprises basic changes and configuration to implement the software, it is regarded as distinct. Where the implementation requires significant configuration and modification of the underlying software, it is not considered to be distinct and is combined with other promises in the contract. The treatment of implementation services will be assessed on a contract by contract basis.

Managed services

Excluding implementation, which is assessed separately (see above), all remaining goods and services within managed services contracts are part of a series of goods and services that are substantially the same and have the same pattern of transfer to the customer. The revenue from all these services is recognised on a straight-line basis over the contract period, which is the period over which the customer receives and consumes the benefits of goods and services.

Sales of hardware

Sales of hardware are recognised at the point that control of the hardware is transferred to the customer. This is usually on delivery.

Financing arrangements

Where a financing component exists in customer contracts, because of the payment profile of the implementation fee which is paid upfront but may be recognised over the period of the contract, the financing component of the fee is separated from the monthly revenue and recognised separately as interest.

Contract costs

The incremental costs associated with obtaining a contract are recognised as an asset if the company expects to recover the costs. Costs that are not incremental to a contract are expensed as incurred. Management determine which costs are incremental and meet the criteria for capitalisation.

Costs to fulfil a contract, which are not in the scope of another standard, are recognised separately as a contract fulfilment asset to the extent that they relate directly to a contract which can be specifically identified and the costs are expected to be recovered. Contract fulfilment assets are amortised over the expected contract period on a systematic basis representing the pattern in which the associated performance obligation is satisfied.

Costs to fulfil a contract, which do not meet the criteria above, are expensed as incurred.

The company undertakes an assessment, at each reporting date, to determine whether capitalised contract costs and contract fulfilment assets are impaired. An impairment loss is recognised if the carrying amount of the capitalised contract costs or contract fulfilment asset exceeds the remaining consideration expected to be received for the services to which the asset relates, less the costs that directly relate to providing the services under the contract.

Deferred and accrued income

Where the payment schedule within a customer contract does not match the transfer of goods and services, the company will recognise either accrued or deferred income.

A deferred income contract liability is recognised where payments made exceed the revenue recognised at the period end date. An accrued income contract asset is recognised where payments made are less than the revenue recognised at the period end date.

Financial instruments

The adoption of IFRS 9 'Financial Instruments' with effect from 1 April 2018 has not had a material impact on the results of the Group.

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 for the year ended 31 March 2019.

The segment is engaged in the provision of IT infrastructure and support for businesses throughout the United Kingdom.

Software Solutions

This segment comprises the results of Castleton Software Solutions Ltd and Castleton Technology Pty Ltd for the year ended 31 March 2019.

The results of Kinetic Information Systems Pty Ltd ("Kinetic") are included in this segment from the date of acquisition on 1 December 2017.

The results of DeepLake and Castleton Technology India are included in this segment from their respective dates of acquisition (10 January 2019 and 20 February 2019).

The segment is engaged in the provision of integrated software solutions to the housing association sector.

Year ended 31 March 2019

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

Year ended 31 March 2018

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

Income streams originating outside of the United Kingdom comprised £1,940,000 in respect of Castleton Technology Pty Ltd (formerly Kypera Australia Pty Limited) and Kinetic which had a combined revenue in 2018 of £1,000,000. Income and expenditure from these Australian companies have been grouped within Software Solutions in the above analysis.

The Group had no customers who accounted for more than 10% of the Group's revenue during the year (2018: nil).

Revenue by products and services

Analysis of revenue by category is as follows:

3 Exceptional Items

In accordance with the Group's policy in respect of exceptional items the following (credits)/charges arose during the year:

4 Business Combinations

DeepLake Digital Limited ('DeepLake')

On 10 January 2019, the Group acquired DeepLake who provide digital technology via SMS, e-mail and social media platforms for landlord and tenant communication specifically in the social housing sector, using its own proprietary software.

The Group paid a cash amount of £1,800,000 to acquire 100% of the share capital of DeepLake. £153,000 of DeepLake acquisition costs were taken as an expense to exceptional costs during the year.

In the period between acquisition in January 2019 and 31 March 2019, DeepLake recorded revenue of £278,000 and profit before tax of £174,000.

CarbonNV InfoLogic India Private Limited ("Castleton India")

On 20 February 2019, the Group acquired Castleton India, which has offices in Bangalore and Vadodara, India, and has provided additional development capability to the Group via a service agreement in the year prior to acquisition.

The Group paid a total consideration of £351,000 to acquire 100% of the share capital of Castleton India. This comprised of 200,331 ordinary shares of 2 pence in the capital of the Group and £156,000 of cash. £77,000 of Castleton India acquisition costs were taken as an expense to exceptional costs during the year.

In the period between acquisition in February 2019 and 31 March 2019, Castleton India recorded intercompany revenue of £52,000 and loss before tax of £5,000.

The total gross contracted amount of trade receivables acquired in these acquisitions was £103,000.

5 Finance income and costs

Finance income

Finance costs

6 Income tax credit

(a) Income tax credits

The rate of UK Corporation tax has been 19% since 1 April 2017 and will be 17% from the year beginning 1 April 2020.

 (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 profits of the consolidated entities as follows:

A research and development (R&D) claim relating to 2016/17 was submitted to HMRC during the year. Further claims are expected to be made for 2017/18 and 2018/19 and estimates of the value of these claims have been recognised. During the year, £110,000 cash was received in respect of R&D claims relating to the year ending 31 March 2016.

(c) Unrecognised deferred tax asset

The Group has unrecognised deferred tax assets in respect of certain losses and reliefs, of £6.0 million (2018: £7.3 million). The composition of these losses and reliefs is as follows: property, plant and equipment differences £0.3 million (2018: £1.6 million), and tax losses of £5.7 million (2018: £5.7 million). Deferred tax assets have not been recognised in respect of these losses and reliefs where it is the view of the Directors that it is not certain that future taxable profits of the nature required will be available to offset against any deferred tax asset.

Deferred tax liabilities arise in respect of the temporary differences on acquired intangible assets.

Deferred tax assets are recognised for tax losses, unused capital allowances and tax relief carried forward of £2,786,000 (2018: £1,385,000) and in respect of share-based payments of £316,000 (2018: £63,000), to the extent that the realisation of the related tax benefit through future taxable profits is probable.

7 Earnings per share

Basic earnings per share are calculated by dividing the profit attributable to equity shares of the Company £4,096,000 (2018: £4,123,000) by the weighted average number of shares of 80,659,635 (March 2018: weighted average number of shares of 78,714,832).

Diluted earnings per share are calculated by dividing the profit attributable to equity shares of the Company £4,233,000 (2018: £4,123,000) by the weighted average number of shares of 88,097,141 respectively (March 2018: weighted average number of shares of 82,474,239).

8 Intangible assets

Customer contracts and related relationships relate to the value of contracts and relationships of acquired companies and includes the value of reseller agreements.

The amortisation in both years relates to operations and is included in the profit for the year from operations in the Consolidated Statement of Comprehensive Income within administrative expenses.

Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Goodwill is supported by calculating the discounted cash flows arising from the existing businesses.

9 Property, plant and equipment

The depreciation for the year of £453,000 (2017: £306,000) has been charged to administrative expenses.

A mortgage loan of £92,000 (2018: £100,000) is secured on a long leasehold property with a book value of £163,000 (2018: £167,000). Short leasehold property has a book value of £92,000 (2017: £85,000).

10 Trade and other receivables

* Adoption of IFRS 15 from 1 April 2018 has resulted in an increase in current other receivables of £0.5 million and non-current other receivables of £0.3 million.

11 Cash and cash equivalents

12 Trade and other payables

Current

Non-current

* Adoption of IFRS 15 from 1 April 2018 has resulted in an increase in current deferred income of £0.7 million and non-current deferred income of £0.6 million.

13 Borrowings

The mortgage is secured over a long leasehold property. The property is held within fixed assets at a cost £0.2 million. The mortgage is repayable monthly at an interest rate of 2.9% above base rate. The remaining term at 31 March 2019 is 113 months.

Overdraft facility

The Group has an overdraft facility of £2.5 million with Barclays Bank plc ("Barclays"). Interest is payable at 2.5% above LIBOR on the overdraft balance, which is repayable on demand. At the balance sheet date none (2018: none) of the facility had been utilised. The overdraft is secured on the assets of the Group by way of fixed and floating charges.

Bank loan

On 10 January 2019, the Company settled its loan agreement with Barclays and replaced it with a new facility for £4.0 million. Interest is payable at 2.25% (2018: 2.5%) above LIBOR on the outstanding balance, which is repayable at a rate of £333,000 (2018: £250,000) per quarter over 3 years.

The loan is secured on the assets of the Group by way of fixed and floating charges.

14 Convertible loan notes

Kypera Loan notes

On 31 January 2016, in order to fund the acquisition of Kypera, the Company issued £3.5 million of unsecured loan notes ("Kypera Loan Notes"), which have a term of 5 years and carry interest at a rate of 5% per annum. The Kypera Loan Notes can be converted into new ordinary shares of 2 pence each at a price of 85.6 pence per Ordinary Share. Conversion is at the option of the holder at any time during the 5-year term. The Company can redeem the Kypera Loan Notes from the third anniversary of issue if not already converted.

On 9 August 2018, MXC Guernsey Limited, a wholly owned subsidiary of MXC Capital Limited ("MXC") served a conversion notice with respect to the remaining convertible loan notes ("CLNs") it held, together with the accrued interest, amounting to £632,000 in total. The CLNs were converted at 85.6 pence per ordinary share of 2 pence each in the capital of the Company therefore 738,896 new ordinary shares of 2 pence were allotted to MXC on 17 August 2018.

15 Deferred consideration

16 Net cash flows from operating activities

The principal non-cash transactions in 2019 are as below:

During the period, the Company issued a total of 1,432,706 new ordinary shares of 2 pence each to Brixx International Limited at a price of 82.75 pence per ordinary share, in respect of the acquisition of the exclusive, perpetual and assignable licence in relation to the Castleton Strategic Modelling (formerly "Brixx") platform, further development of the platform and settlement of pre Asset Purchase licence fees payable. The consideration for the Asset Purchase was £1,686,000, of which £1,186,000 was a non cash transaction and £500,000 was also paid in cash.

Conversion of MXC Loan notes on 9 August 2018, MXC Guernsey Limited, a wholly owned subsidiary of MXC Capital Limited ("MXC") served a conversion notice with respect to the remaining convertible loan notes ("CLNs") it held, together with the accrued interest, amounting to £632,000 in total. The CLNs were converted at 85.6 pence per ordinary share of 2 pence each in the capital of the Company therefore 738,896 new ordinary shares of 2 pence were allotted to MXC on 17 August 2018.

On 20 February 2019 the Company issued 200,331 ordinary shares of 2 pence to the former owners of CarbonNV InfoLogic India Private Limited (now known as Castleton India) at a price of 97.5 pence per ordinary share in respect of the acquisition of Castleton India. The consideration for the Asset Purchase was £351,000, of which £195,000 was a non cash transaction and £156,000 was also paid in cash.

On 23 October 2018, the Company completed a capital reduction process, which debited the Company's share premium account under section 648 of the Companies Act 2006 with £18,835,000 and credited the profit and loss reserve with £18,835,000.

Adjustments to the March 2018 balance sheet due to the introduction of IFRS 15 were made which credited deferred income £1,286,000, debited other debtors with £760,000, debited the deferred tax asset with £100,000 and debited the brought forward profit and loss reserve with £426,000.

The principal non-cash transactions in 2018 are as below:

Settlement of the MXC Scheme which credited other creditors and debited the accumulated loss reserve with £1,662,000. On 3 April 2018, the cash was paid to MXC which resulted in a financing cash outflow of £1,662,000 during the financial year ending 31 March 2019.

The waiver of the debt part of the Opus Loan notes which credited provisions and debited Loan notes with £215,000.

The waiver of the equity part of the Opus Loan notes which credited the profit and loss reserve and debited the Equity reserves with £392,000.

Reconciliation of net debt

Net debt as referred to in the Strategic Report is calculated as follows:

* Included within Gross debt - variable interest rates and also within Borrowings - repayable within one year, is an overdraft of £nil (2018: £nil).

17 Subsequent events

As we see the services offered by the Managed Services division, namely Cloud delivery becoming more significant going forwards and the level of interest shown by our customers increasing in this area, we took the decision post year end to merge the two divisions to create a truly 'one Castleton' structure. This integration will be completed by the end of June 2019 with the business operating from a single entity which will assist in delivering a unified, seamless and enhanced customer experience.