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Castleton Technology plc

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

Final Results

For the Year Ended 31 March 2018

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 2018.

Financial Highlights

· Revenue up 15% to £23.3 million (FY17: £20.3 million) of which 60% is recurring (2017: 65%)

· Adjusted EBITDA* up 17% to £5.1 million (FY17: £4.4 million)

· Operating cashflow pre exceptionals up 13% to £5.2 million (FY17: £4.6 million)

§ Post exceptionals at £4.5 million (FY17: £3.8 million)

· Operating cash conversion pre exceptionals consistently strong at 101% (FY17: 105%)

§ Post exceptionals at 88% (FY17: 86%)

· Total net debt reduced from £9.0 million to £6.3** million

· Basic EPS up 786% to 5.23 pence from 0.59 pence for FY17

Operational Highlights

· 77% of new product and service sales were to existing customers showing significant progress in cross-selling strategy

· 40% of customers now taking more than one product or service, up from 35% in FY17

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

§ 7 year, £2.6 million contract with North Hertfordshire Homes for the provision of a fully managed hosted desktop service

§ 10 year contracts with both Co-operative Housing Ireland ("CHI") and Circle VHA, Ireland, for the integrated product suite, with CHI's on a hosted basis

§ Existing customer New Gorbals added four additional solutions to now have the complete solution set

· Acquisition of Kinetic Information Systems Pty Ltd ("Kinetic"), the leading provider of software solutions to the Community Housing sector in Australia, for an initial cash consideration of AU$2.0 million (£1.14 million)

§ Strategic acquisition to enable Castleton to leverage Kinetic's market leading status and enhance the Group's existing operations in Australia's growing Community Housing sector

· Post year end 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, as announced today

§ No more licence fees payable, thereby enhancing the Group's margin by c.£0.3 million per annum

§ Licence enables Castleton to use, modify, maintain, distribute and sell the platform

Corporate Highlights

· Removal of all evergreen options from Company's balance sheet

· Establishment of new Long-Term Incentive Plan to incentivise certain members of the Company's management team expected to be instrumental in the creation of long-term value for shareholders

Dean Dickinson, CEO of Castleton, said: "We are pleased to report that Castleton has continued to perform well in delivering another year of significant organic growth in both revenues and profit, underpinned by ongoing excellent cash generation. The Group has also achieved a number of key operational milestones, notably the delivery of our integrated product suite on two milestone contracts and the acquisition of Kinetic, enhancing our existing operations in Australia's growing Community Housing sector."

"We have begun to capitalise on cross-selling opportunities with an impressive 77% of new sales being to existing customers, though there is still significant opportunity to further penetrate our customer base. We also continue to see success in winning significant, multi-year contracts with new customers. The market opportunity remains large and given the Group's now established position as a 'one stop shop' serving the social housing sector, the Board is very optimistic about the Group's continued growth prospects."

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

**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 2018 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.

Please see a video of the Company's results here http://bit.ly/CTP_FY18.

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

Dear Shareholder

I am pleased to be able to report on another year of solid progress for Castleton. Following the acquisitive growth of prior years to build our market position, the financial year ended 31 March 2018 has been a year where execution of the strategy of building a cash generative, recurring revenue business showing good levels of organic growth has been demonstrated. The year has also seen significant success in cross-selling into the customer base with 77% of new sales being with existing customers. The level of cash generation has continued to be impressive, allowing the Group not only to reduce net debt, but also make a bolt-on acquisition which has bolstered our presence in the Australian market.

The Board

There have been changes at Board level as the Group continues to grow and evolve.

Ian Smith, Executive Deputy Chairman, stepped down from the Board on 18 July 2017. I would like to thank Ian for his instrumental role in establishing and delivering Castleton's organic and acquisitive growth strategy, formerly as CEO and latterly as Executive Deputy Chairman. During his tenure on the board we have built a leading supplier of software and IT managed services within the public and not for profit sectors and he leaves us well placed to maximise the opportunities we see in our chosen markets.

On 18 July 2017 Paul Gibson was appointed as Non-Executive Director. Paul is an operating partner at MXC Capital Limited and has had a highly successful career in the TMT sector, most recently as Chief Operating Officer of Advanced Computer Software Plc ("ACS") prior to its acquisition by Vista Equity Partners for £725 million. In his five years at ACS Paul oversaw a period of exceptional value creation and transformation, with responsibility for driving both organic and acquisitive growth. Prior to ACS, Paul held a number of senior roles in both financial and operational capacities, latterly as finance director of Redac Limited, the Alchemy backed turnaround that was subsequently sold to ACS for £100 million. The foundations of Paul's career were built at Unigate GrandMet (now Diageo) and Oracle.

Opportunity / Outlook

We continue to see enormous potential to become the supplier of choice for software and IT services in the social housing market. The breadth and level of integration of our offering and expertise provides our customers with the technology and services that they require and means there is a significant cross-sell opportunity for the Group. Though we have started to gain traction in cross-selling our product and service set to our existing customers, the level of penetration across our customer base is still low and continues to represent a significant opportunity and this, combined with a healthy pipeline of new business, gives me confidence for the year ahead.

As well as changes at Board level as mentioned above, there has been a significant strengthening of the senior management team within the Group consisting of new role creation and external hires. To help drive performance, the Group has established a new Long-Term Incentive Plan (the "LTIP") in order to incentivise the senior management team who are expected to be instrumental in the creation of long-term value for shareholders. The options are exercisable at the nominal value of the Ordinary Shares and represent approximately 1.7% of the current issued share capital of the Group. The LTIP provides for the options to vest in stages dependent on the share price growth, with full vesting being dependent on the Group's share price growing at 40% per annum over a three-year period from a base price of 68 pence, being the share price at the date the Board resolved to establish the LTIP.

With the team now in place, which has been much enhanced during the current year, a broad customer base, a wide range of products and services and solid cash flows enabling repayment of debt, I am confident of our future success and I expect that the Group will show further growth when it next reports.

Given our confidence in future prospects, the Board intends to implement a progressive dividend policy during the current year.

Chief Executive's Review

Overview

I am pleased to report the significant progress the Group has made during the financial year to 31 March 2018, demonstrating double digit organic growth at both the revenue and EBITDA level. Excellent cash generation has not only resulted in a continued reduction in net debt, but also enabled the small bolt-on acquisition of Kinetic Information Systems Pty Ltd ("Kinetic") to be made to enhance our Australian operation.

In addition, the development of the integrated product suite was completed to schedule in September 2017 and delivered to customers for implementation starting in October 2017. This gives us further opportunities to deliver a fully integrated ERP housing suite as well as individual best in class software solutions. We sold our first integrated product suite, delivered in the Cloud by our Managed Services division, which has gone live in June 2018. This has given us the platform to deliver significant organic growth as well as increasing the number of solutions sold to our customers.

The focus during the year has also been 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 six offices in the UK and a growing operation in Australia, which was expanded during the year by the acquisition of Kinetic, demonstrating our ability to grow and scale our business in a new geography.

The Group remains aligned along two divisions; Software Solutions and Managed Services, with each focusing on their separate, yet complementary, offerings.

Our Software Solutions division 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 Managed Services division 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 14.9% to £23.3 million (2017: £20.3 million) with 60% of revenue being recurring in nature (2017: 65%). Adjusted EBITDA* showed a stronger performance, improving by 16.7% to £5.1 million (2017: £4.4 million), reflecting the Company's operational gearing and ability to scale profitably.

The underlying metrics of the business were particularly encouraging. The Managed Services division's trading EBITDA** grew 10.0% year on year from £3.0 million in the prior year to £3.3 million in the current year as we look to transition to more profitable deals. The Software Solutions division's trading EBITDA** grew 18.5% from £2.7 million in the prior year to £3.2 million in the current year.

Operating cash conversion was outstanding for the second year in a row at 101% of adjusted EBITDA* (2017: 105%) and 88% of adjusted EBITDA* post exceptional costs (2017: 86%), demonstrating the cash generative nature of the business. The cash generated enabled a reduction in net debt*** and also the acquisition of Kinetic. The earnings per share at a basic level was 5.23p, compared to earnings per share of 0.59p in the previous year, driven by growth in EBITDA*, significant exceptional credits and recognition of deferred tax assets relating to brought forward losses.

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

** Trading EBITDA before Group costs (i.e. the cost of the plc Board and its advisors)

*** Net cash less borrowings, deferred consideration and convertible loan notes.

Kinetic

On 1 December 2017, the Group acquired Kinetic, the leading provider of software solutions to the Community Housing sector in Australia, for an initial cash consideration of AU$2.6 million (£1.48 million) financed through cash generated in the year. The AU$2.6 million included $0.6 million (£0.34 million) for cash acquired with the business.

Kinetic is Australia's leading provider of ERP software solutions for the Australian social housing sector and has 50 customers, with revenue of AUS$ 2.3 million and normalised EBITDA of AUS$ 0.6 million for the year to 30th June 2017. Adding Kinetic to the existing business in Australia gives Castleton a stronger market presence and adds scale to the operation. The 50 customers also present an opportunity to cross sell Castleton products, thereby increasing organic growth potential and creating value for these customers.

To drive the Australian focus, during the year, we have recruited a new experienced General Manager to head up Castleton Australia and help evolve the business in that geography.

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 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 9%, which gives us good forward visibility of revenue.

The increase in revenues was 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, existing customers took 77% of new product sales demonstrating the cross-sell uptake and the number of those who have two or more of our products increased to 40% from 35% in 2017. Whilst this shows good progress, it also means that 60% of our customer base still uses just one product, providing a very strong opportunity for further organic growth. The acquisition of Kinetic brings another 50 customers in the Australian market into which we can cross-sell other products from the Castleton group.

The individual value of new contracts continues to grow. New contracts signed during the year include a seven-year contract with North Hertfordshire Homes with a total contract value of £2.6 million for the provision of a fully managed hosted desktop service and five housing deals selling the integrated product including a 10-year deal with Co-operative Housing Ireland. Not only is this deal significant due to the 10-year tenure of the contract, but Co-operative Housing Ireland are the first of our customers to take a number of modules of the integrated product on a hosted basis. In addition, an existing customer New Gorbals has now purchased the complete solution set including our Business Intelligence suite with the latest purchase adding four additional solutions to the five that they had previously procured. This further demonstrates the cross-sell opportunity.

In order to increase our ability to create further innovative IP solutions we have entered into a service agreement with an Indian development capability. This will allow us to bring new solutions to the market quicker and at a reduced cost when compared to UK development costs.

Outlook

Castleton is increasingly well positioned to provide an eco-system of integrated modular solutions supported by scalable infrastructure platforms, helping organisations to operate more effectively and achieve their goals, whilst bringing visible recurring annuity revenues to the Group. 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.

The Group has clearly demonstrated execution of the strategy we have set out and I am confident that the business will continue to maximise the opportunities that we see in our chosen markets by offering our customers an integrated suite of products, either on an installed or cloud delivery basis, in turn allowing them to increase efficiencies and lower their costs of operating. We have now developed a fully integrated solution, which is demonstrable and referenceable and which will enable us to bid for more new opportunities.

The new financial year has started well and is comfortably in line with expectations. The Group has good visibility of revenues, a strong product pipeline, and a significantly improved structure, even compared to a year ago, that will enable us to continue to execute our strategy. Our growing customer base provides a significant opportunity for cross-selling, adding further organic growth along with new customers. The Board continues to view the future with confidence.

Financial Review

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

Principal events and overview

The year ended 31 March 2018 has been one of demonstrating the impact 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. Organic growth, which excludes revenue of £0.4 million and adjusted EBITDA* of £0.1 million for Kinetic, has been 12.9% at the revenue level and 15.1% at the adjusted EBITDA* level, demonstrating operational leverage as additional recurring revenues are added. Recurring revenues now stand at £14.0 million (2017: £13.1 million) representing 60% (2017: 65%) of total revenue.

Cash generation has been very pleasing with cash generated from operations during the year of £5.2 million (2017: £4.6 million), thereby representing 101% operating cash conversion. The resulting cash flow has allowed us to reduce net debt to £6.3 million (including convertible loan notes and deferred consideration) from £9.0 million at the end of the prior year. The balance of the loan from Barclays Bank has reduced by £1.0 million from £4.3 million to £3.3 million during the year.

The cash generative nature of the business has also allowed us to agree to pay cash of £1.7 million to MXC Guernsey Limited, a wholly owned subsidiary of MXC Capital Limited (together, "MXC") to acquire the B shares MXC held in Castleton Technology Intermediate Holding Company Limited which were issued in July 2015 and which entitled MXC to 5% of shareholder value created from that date (the "MXC Scheme"). With regard to the £1.7 million payable in respect of the MXC Scheme, the cash was paid post year-end on 3 April 2018. If this had been paid pre year-end, resulting net debt would have been £8.0 million.

The strong levels of cash flow also enabled us to repay during the year £0.5 million of the £3.5 million convertible loan notes issued to part fund the acquisition of Kypera ("Kypera Loan Notes"), leaving £2.5 million Kypera Loan Notes outstanding at the year-end. These actions have avoided any dilution from the MXC Scheme and reduced the dilutive effect of the Kypera Loan Notes.

The cash generated also allowed us to acquire Kinetic Information Systems Pty Ltd ("Kinetic") for AUS$2.0 million (£1.14 million) - net of cash acquired - which has bolstered our presence in the Australian market and added 50 customers to our customer base.

Included in exceptional items is a restructuring charge of £0.1 million relating to the closure in the year of a scanning bureau in one of the Group's offices which led to 20 redundancies and hence the reduction in average headcount in the year from 185 in 2017 to 169. Scanning services to our customers are now provided by a specialist third party scanning provider.

Key Performance Indicators ('KPIs')

On a monthly basis, the Directors review KPIs relating to revenue, operating costs and cash to ensure the continued growth and development of the Group. Primary KPIs for 2017 and 2018 were:

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

Trading results

The trading results for the year comprise a full year of trading for all entities acquired in the prior years and four months of trading for Kinetic which was acquired on 1 December 2017. Kinetic, the leading provider of software solutions to the Community Housing sector in Australia, was acquired for an initial cash consideration, net of cash acquired, of AU$2.0 million (£1.14 million) financed through cash generated in the year. During the period, Kinetic contributed £0.4 million of revenue and £0.1 million of profit before tax.

Revenue and gross profit

Revenue amounted to £ 23.3 million (2017: £20.3 million), of which £12.4 million was generated by the Software Solutions division (2017: £10.8 million) and £10.9 million (2017: £9.4 million) was generated by the Managed Services division. Recurring revenue represents 60.1% of total revenues (2017: 64.8%), the decrease in percentage terms due to the strong performance of non-recurring revenues, predominately implementation revenues, during the year.

Gross profit amounted to £16.1 million (2017: £14.3 million), representing a gross margin of 69% (2017: 70%). Gross margin for the Software Solutions division decreased slightly from 92% to 91% and for the Managed Services division it also decreased slightly from 45% to 44%, due to some changes in the sales mix.

Administrative expenses including exceptional items

The administrative expenses 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 £3.0 million (2017: £3.0 million) and exceptional items. A credit of £0.8 million in relation to exceptional items (2017: charge of £0.7 million) includes costs relating to restructuring activities undertaken in the year, offset by the release of exceptional provisions made in prior periods, including the release of provisions for an onerous contract, the claim for which has now been settled during the period and also includes a credit in relation to the revaluation of contingent consideration.

Adjusted EBITDA*

The adjusted EBITDA for the year amounts to £5.1 million (2017: £4.4 million).

The cost in the year for the plc Board and its advisors was £1.4 million (2017: £1.3 million), and we continue to maintain tight controls on expenditure. Trading EBITDA was therefore £6.5 million (2017: £5.7 million).

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

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 £0.02 million (2017: £0.02 million) and £0.3 million (2017: £0.7 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 2018 was £4.3 million (2017: profit of £0.5 million). This comprises the profit before tax of £1.8 million (2017: loss of £0.5 million), which includes the finance income of £0.03 million (2017: £0.02 million), and a tax credit of £2.5 million (2017: £1.0 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.

Earnings per share

Earnings per share at a basic level were 5.23p, compared to earnings per share of 0.59p in the previous year, driven by growth in EBITDA*, significant exceptional credits and recognition of deferred tax assets relating to unused capital allowances. Due to the level of exceptional credits which are not expected to recur as well as a higher than usual tax credit during the year, earnings per share going forward are expected to be lower than in the current year.

Cash flow

Cash generated from operations during the year was very solid at £5.2 million (2017: £4.6 million), thereby representing a second year with more than 100% operating cash conversion. Working capital decreased by approximately £0.1 million (2017: decrease of £0.1 million).

Net of cash acquired, £1.1 million of cash was used in business combinations which was the acquisition of Kinetic (2017: £1.0 million, £0.5 million for Brixx and £0.5 million in relation to the exclusive licence agreement with 365 Agile Group plc ("Agile Licence")) which was funded through cash generated by the business.

This resulted in an overall increase in funds of £0.2 million (2017: £0.6 million), giving a net positive cash position at the balance sheet date of £0.5 million (2017: £0.3 million).

Given the strong cash generation of the business, the Group has the confidence to increasingly invest in customer related capex and infrastructure in the coming year as we seek to win new hosted and managed service deals. The Group will also look to continue the investment in software development

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 2018 deferred revenue was £7.8 million (2017: £8.4 million).

Funding and debt repayment

During the year, the Group repaid £1.0 million of the Barclays term loan in line with the facility agreement (2017: £1.0 million). As at the balance sheet date, £3.3 million (2017: £4.3 million) of term loan was outstanding.

In February 2018, the Group agreed to pay cash of £1.7 million to MXC in full settlement of the MXC Scheme. The cash was paid on 3 April 2018.

Over the course of the year, £0.6 million (2017: £0.5 million) of the £1.8 million due under the terms of the Agile Licence was paid with £0.7 million (2017: £1.3 million) owed at the balance sheet date. A further £0.3 million was paid in April 2018.

During the year, the remaining £0.3 million of the convertible loan notes issued in relation to the acquisition of Opus were cancelled in agreement with the holders.

In addition, in April 2017, the Group repaid £0.5 million of the £3.5 million Kypera Loan Notes issued. £0.5 million had already been repaid in March 2017. The Kypera 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 of the acquisition of Kypera. Conversion is at the option of the holder at any time during the five-year term.

Going Concern

The Directors have prepared detailed cash flow projections including sensitivity analysis on key assumptions. The Group's forecasts and projections, taking into account 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 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 2018

(1) Adjusted EBITDA is defined as operating profit or loss before exceptional items, depreciation, amortisation and share based payments. 

Consolidated Balance Sheet

As at 31 March 2018

Consolidated Statement of Changes in Equity

For the year ended 31 March 2018 

(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 £251,000 (2017: £2,919,000) balance at 31 March 2018 relates to the loan notes issued for the purchase of Kypera Holding Limited. The remainder of the reserve has been transferred into the accumulated loss because the other loan notes which were issued to finance the acquisitions of Castleton Software Solutions Limited, Keylogic Limited and Opus Information Technology Limited, have been fully settled.

 (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)  Conversion of loan notes

On 8 July 2016, the Company issued 250,000 new ordinary shares of 2 pence each ("Ordinary Shares") at a price of 40 pence pursuant to the conversion of loan notes issued as part of the previous acquisition of Opus Information Technology Limited ("Opus Loan Notes").

On 4 October 2016, the Company issued a further 375,000 new Ordinary Shares at a price of 40 pence pursuant to the conversion of Opus Loan Notes.

(e)  Waiver of Opus Loan Notes 

On 21 June 2017, it was agreed by the beneficiaries of the Opus Loan Notes that they would waive the remaining £220,000 of loan notes held by them in consideration for the Group surrendering any potential warranty claims for onerous contracts under the sale and purchase agreement. This has resulted in the release of the equity component of £392,000.

(f) On 16 November 2017, the Company issued 175,000 new Ordinary Shares at a premium of 6p per share pursuant to the exercise of share warrants.

(g) On 20 February 2018, the Company agreed to pay cash of £1,662,000 to MXC in full settlement of the MXC Scheme described in the Financial Review. The cash was paid on 3 April 2018.

Consolidated Cash Flow Statement

For the year ended 31 March 2018

Notes to the Consolidated Financial Statements

Year ended 31 March 2018

1 Accounting policies - Group

Basis of preparation

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 provisions of 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.

Publication of non-statutory accounts

This summary does not constitute statutory accounts within the meaning of the Companies Act 2006. It is an extract from the full accounts for the year ended 31 March 2017 on which the auditor has expressed an unqualified opinion and does not include any statement under section 498 of the Companies Act 2006. The full accounts contain a detailed statement of the accounting policies which have been used to prepare this summary and remained unchanged from the prior year. The accounts will be posted to shareholders on or before 31 July 2017 and subsequently filed at Companies House.

A full set of the audited statutory accounts will be available at www.castletonplc.com

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 2018.

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 Australia Pty Limited for the year ended 31 March 2018.

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

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

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.

Year ended 31 March 2017

*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 £1,000,000 in respect of Kypera Australia Pty Limited and Kinetic (2017: £353,000). Income and expenditure from both 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 (2017: 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:

A deferred tax charge was recognised for £523,000 of the £748,000 credit relating to the revaluation of the Agile contingent consideration.

The exceptional costs relating to the acquisition of Kinetic have been transferred to Castleton Technology Pty Ltd in Australia where no tax credit has been recognised.

No tax charge has been recognised in relation to £250,000 reduction in acquisition costs.

There have been no other significant tax adjustments relating to the other exceptional items

4 Business Combinations

Kinetic Information Systems Pty Ltd ('Kinetic')

On 1 December 2017, the Group purchased Kinetic, the leading provider of software solutions to the Community Housing sector in Australia. This strategic acquisition enables the Group to capitalise on the significant opportunities that Australia's growing Community Housing sector presents, using the capabilities that the Group has developed to successfully serve the UK.

The Group paid an amount of AU$2,605,000 (£1,479,000) to acquire 100% of the share capital of Kinetic from the previous owners which included a cash for cash payment of £427,000. A further AU$24,000 (£14,000) completion payment was paid after the year-end.

£240,000 of Kinetic acquisition costs were taken as an expense to exceptional costs during the year.

Conditions required to trigger the payment of a further AU$500,000 of deferred consideration payable contingent on the vendor remaining in employment and treated as remuneration, have not been met so there is now no further liability. An immaterial amount of remuneration has not been accrued as a result of this non adjusting post balance sheet event.

One-off costs relating to the acquisition of Kinetic of £212,000 have been recognised within the Consolidated Statement of Comprehensive Income within "Exceptional Items".

In the four months from the date of acquisition to 31 March 2018, Kinetic recorded revenue of AU$0.7 million (£0.4 million) and profit before tax of AU$0.1 million (£0.07 million). For the year ended 30 June 2017, Kinetic recorded (unaudited) revenue of AU$2.3 million (£1.4 million) and profit before tax of AU$0.4 million (£0.3 million).

The calculation of provisional fair values of consideration, assets and liabilities such as goodwill and intangible assets involve the estimation of future cash flows delivering from or accruing to those assets.

The gross contracted amount of trade receivables acquired was £124,000.

Agile

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

Cash consideration for Agile is payable over three years for a value of £1.8 million, of which £1.1 million (2017: £0.5 million) has been paid up to the balance sheet date and a further £0.3m was paid in April 2018.

The original agreement with Agile included contingent consideration if the total annual recurring revenue from sales of the Agile product exceeded £2.2 million over three years from the date of the agreement which was 4 April 2016. At 31 March 2018, management's view is that the annual recurring revenue figure of £2.2 million will not be achieved over this timescale and therefore the contingent consideration relating to the purchase of Agile has been valued at £nil (2017: £0.7 million). This has been released as a credit to exceptional items in the Consolidated Statement of Comprehensive income.

Kypera

In the prior year, a fair value adjustment to goodwill was made in relation to an onerous contract provision which existed at the date of acquisition of £0.752 million which related to a customer claim and the associated rectification costs. During the year, full and final settlement has resulted in an exceptional credit of £0.5 million which includes a settlement payment from the former owner of Kypera.

5 Finance income and costs

Finance income

Finance costs

6 Income tax credit

(a) Income tax credits

The rate of UK Corporation tax for the year beginning 1 April 2016 is 20% and 19% from 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/(loss) 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:

A research and development claim of £427,000 relating to 2015/16 was submitted to HMRC during the year. Further claims are expected to be made for 2016/17 and 2017/18 although a reasonable estimate of the value cannot be made at this point. No tax charge or credit has been booked for 2016/17 or 2017/18 relating to research and development. Post year-end, £110,000 cash was received in respect of research and development 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 £7.3 million (2017: £9.1 million). The composition of these losses and reliefs is as follows: property, plant and equipment differences £1.6 million (2017: £3.1 million), short-term temporary differences £nil (2017: £0.1 million) and tax losses of £5.7 million (2017: £5.9 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.

During the year a deferred tax asset of £1,385,000 was recognised in respect of decelerated allowances from property plant and equipment due to the increased certainty of future taxable profits.

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 £1,385,000 and in respect of share based payments of £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 and diluted earnings per share are calculated by dividing the profit attributable to equity shares of the Company £4,123,000 (2017: £463,000) by the weighted average number of shares of 78,714,832 and 82,474,239 respectively (March 2017: weighted average number of shares of 78,339,832 and 86,215,879).

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 Income Statement 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.

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 2019. 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 used in the value-in-use calculations are as follows:

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

9 Property, plant and equipment

As at 31 March 2018 included in equipment, fixtures and fittings are assets held under finance leases with a carrying value of £nil (2017: £69,000) on which the depreciation charge was £nil (2017: £27,000).

The depreciation for the year of £306,000 (2017: £225,000) and has been charged to administrative expenses.

A mortgage loan of £100,000 (2017: £110,000) is secured on a long leasehold property with a book value of £167,000 (2017: £170,000). Short leasehold property has a book value of £85,000 (2017: £89,000).

10 Trade and other receivables

As at 31 March 2018, trade receivables of £0.2 million (2017: £0.2 million) were impaired and fully provided for.

The carrying value of trade receivables that would otherwise be past due or impaired but whose terms were renegotiated were £nil. The individually impaired receivables relate to receivables over 182 days, customers in financial difficulty, customer acceptance issues and cancelled contracts.

As at 31 March 2018, trade receivables of £1.8 million were past due but not impaired (2017: £1.9 million). In the table below, these comprise the receivables over 30 days, which relate to a number of independent customers for whom there is no recent history of default. The ageing analysis of net trade receivables which are past due and not impaired is as follows:

The provision is calculated by central management with local knowledge on a specific basis based on their best estimate of recoverability taking into account the age and specific circumstances relating to the debtor. The maximum exposure to credit risk at the reporting date is the fair value of each class of receivable mentioned above. The Group does not hold any collateral as security. The carrying amounts of the Group's trade and other receivables are denominated in pounds.

Movements on the Group provision for impairment of trade receivables are as follows:

The creation and release of a provision for impaired receivables has been included in 'administrative expenses' in the income statement. Amounts charged to the allowance account are generally written-off, when there is no expectation of recovering additional cash.

The other asset classes within trade and other receivables do not contain impaired assets.

11 Cash and cash equivalents

The table below shows the balance with the major counterparty in respect of cash and cash equivalents.

12 Trade and other payables

Current

Non current

13 Borrowings

Current

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 2018 is 125 months.

Overdraft facility

The Company has an overdraft facility of £2.5 million with Barclays. Interest is payable at 2.5% above LIBOR on the overdraft balance, which is repayable on demand. At the balance sheet date none (2017: £0.3 million) 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 31 May 2015, the Company entered into a loan facility agreement with Barclays Bank plc ("Barclays") for £5 million. Interest is payable at 2.5% above LIBOR on the outstanding balance, which is repayable at a rate of £250,000 per quarter over 5 years. On 31 January 2016, Barclays extended the facility by a further £1 million, which increased the payment terms by 12 months. The overdraft is secured on the assets of the Group by way of fixed and floating charges.

14 Convertible loan notes

* At 31 March 2017 the Kypera loan notes were due to be paid in more than one year and the Opus loan notes had £140,000 due in less than one year and £75,000 due in more than one year.

Opus Loan Notes

During the year ended 31 March 2016 £0.4 million of convertible loan notes were issued to satisfy the contingent consideration for the acquisition of Opus Information Technology Limited ("Opus Loan Notes"). The Opus Loan Notes were redeemable in cash or convertible into new ordinary shares of 2 pence each in the capital of the Company ("Ordinary Shares") at a price of 40 pence per Ordinary Share in various tranches: £0.15 million on 30 September 2016, £0.15 million on 30 September 2017 and £0.1 million on 30 September 2018.

On 8 July 2016, the company issued 250,000 new Ordinary Shares pursuant to the conversion of Opus Loan Notes. A further 375,000 Ordinary shares pursuant to the conversion of Opus Loan Notes were issued on 4 October 2016, all in part settlement of the balance.

On 21 June 2017, it was agreed by the beneficiaries of the Opus Loan Notes that they would waive the remaining £0.22m of loan notes held by them in consideration of surrendering any potential warranty claims under the sale and purchase agreement. 

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, which is rolled up into the loan. The Kypera Loan Notes can be converted into new Ordinary Shares 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 and earlier by request.

On 31 March 2017 £0.5 million of the Kypera Loan Notes were repaid. A further repayment of £0.5 million was made on 27 April 2017 in respect of the Kypera Loan Notes.

15 Deferred and contingent consideration

Current

The acquisition of the Agile business in the prior year gave rise to a liability for deferred consideration payable over 4 years plus a contingent consideration based on the revenue from the business generated by 4 April 2019.

 Management has assessed that the targets for contingent consideration will not be met and has consequently released the balance of £748,000 relating to the contingent consideration as an exceptional credit in the Consolidated Statement of Comprehensive Income.

16 Net cash flows from operating activities

Non-cash transactions

The principal non-cash transactions are as below:

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 accumulated loss and debited the Equity reserves with £392,000.

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.

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 (2017: £316,000).

17 Subsequent events

On 31 May 2015 the Company acquired Brixx Solutions Limited ("Brixx"), since renamed Castleton Strategic Modelling, whose solution, HousingBrixx, enables users to produce financial models and long-term forecasts. At the time of the Brixx acquisition it was announced that the platform upon which Castleton Strategic Modelling is based was owned by Brixx International Ltd, to whom a licence fee has since been payable, and that Castleton had an option to acquire the IP for this platform (the "Option").

On 18 June 2018 the Company exercised the Option to acquire an exclusive, perpetual and assignable licence in relation to the platform (the "Acquisition") which enables Castleton to use, modify, maintain, distribute and sell the platform. Following the Acquisition, no further licence fees are payable to Brixx International Ltd leading to an increase in margin for the Group of approximately £0.3 million per annum in relation to sales of Castleton Strategic Modelling.

The consideration for the Acquisition was £1.6 million, of which £1.1 million was satisfied by the issue of 1,299,094 Ordinary Shares at a price of 82.75 pence per Ordinary Share, being the closing mid-price on the day of exercise of the Option (the "Share Price"). The remaining £0.5 million was paid in cash from the Company's existing resources.

Castleton has also agreed to pay Brixx International Ltd £0.06 million for further development of the platform, such amount to be satisfied by the issue of 72,508 new Ordinary Shares at the Share Price.

Furthermore, at the date of Acquisition, £51,000 was due and owing by the Group to Brixx International Ltd, in respect of licence fees payable pre Acquisition which was settled by the issue of 61,079 Ordinary Shares at the Share Price. As stated above, no further licence fees are or will be payable to Brixx International Ltd.