CTP.L Regulatory News (CTP)

14 November 2016

Castleton Technology plc

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

Unaudited Interim Results for the six months ended 30 September 2016

Castleton Technology plc (AIM: CTP), the software and managed services provider to the public and not-for-profit sectors, today announces its unaudited interim results for the six months ended 30 September 2016 in which the Group recorded its first profit.

Highlights

§ Revenues of £9.7 million (H1 2015: £8.5 million), of which over 60% are recurring

§ Adjusted EBITDA(1) post central costs of £2.0 million (H1 2015: £1.7 million)

§ Cash flow from operations of £1.8 million (H1 2015: £0.8 million)

§ Profit after tax for the period of £0.6 million (H1 2015: loss of £1.1 million)

§ Cross selling opportunities being maximised, demonstrating customer confidence in the product suite, with 88% of orders being from existing relationships

§ Customer base now 600+

Post period end highlights

§ Appointment post period end of Dean Dickinson as CEO with Ian Smith moving to Executive Deputy Chairman.

David Payne, Chairman of Castleton, commented:

"Castleton has the building blocks for growth as a leading supplier to the public and not-for-profit sectors, specifically the social housing market. The integration of the businesses we've acquired has progressed well and signs from our customers are encouraging. I'm confident that the Company will maintain its organic growth, whilst increasing its profitability by providing more of our customers with our broader range of complementary services - whilst continually building our core of repeat revenues. I'm excited by our Company's future prospects".

(1) Before net finance costs, tax, depreciation, amortisation, exceptional items and share based payments

Enquiries:

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. Castleton works in partnership with its customers and resellers to help drive efficiencies whilst improving controls and customer service. www.castletonplc.com.

Chairman's Statement

I am pleased to report the results of the Group for the six months ended 30 September 2016.

Background and basis of results

The results for the first half of the financial year show evidence of clear progress and represent the first period of full contribution from all seven acquired companies.

Trading and results

As the integration of businesses acquired over the last 2 years nears completion, the consequent reduction in exceptional integration and strategic costs (which in prior periods included acquisition related costs) has contributed to a profit before tax of £0.04 million (H1 2015: loss of £1.4 million). This is after amortisation of intangibles of £1.5million (H1 2015: £1.3million). The amortisation of intangibles, alongside a reduction in future tax rates have resulted in a deferred tax credit of £0.6 million (H1 2015: £0.3 million) leading to profit after tax of £0.6 million (H1 2015: loss of £1.1 million).

The Group generated revenue for the six months to 30 September 2016 of £9.7 million (H1 2015: £8.5 million) which included revenue of £0.3 million from the licence agreement with 365 Agile entered into during the period. Recurring revenues are more than 60% of total revenues, with further growth in recurring revenue expected. The customer base of over 600 has also provided significant cross-selling opportunities with an increasing number of customers taking more than one product and/or service.

The Group generated an adjusted EBITDA* of £2.0 million in the period (H1 2015: £1.7 million). Cash flow from operations was £1.8 million (H1 2015: £0.8 million) giving cash conversion of EBITDA of 86% (H1 2015: 48%). The increase has largely been driven by improved cash collection with a decrease in trade and other receivables of £0.7m (H1 2015: increase of £0.05 million) following completion of the integration of the finance function and stabilisation of finance processes.

Central costs amounted to £0.6 million (H1 2015: £0.6 million) before management recharges, excluding net finance costs, depreciation, amortisation of intangible assets, acquisition and integration costs and share based payments.

Acquisition and integration costs amounted to £0.1 million (H1 2015: £1.4 million) arising from transaction related costs in the current year, reorganisation costs and project costs in respect of integration of products, services and back office functions.

The 'trading' performance of the Group during the period is further explained in note 3 'Segment Reporting'. The Group is split into Managed Services consisting of Castleton Managed Services Ltd, and Software Solutions which comprises the results of Castleton Software Solutions Ltd and Kypera Holdings Limited as well as the revenues arising from the 365 Agile Agreement.

Net finance costs amounted to a P&L charge of £0.2 million (H1 2015: £0.2 million).

Basic profit per share from continuing activities was 0.80p (H1 2015: loss of 1.61p).

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

365Agile licence agreement

On 4 April 2016, the Group ended its existing exclusive reseller agreement with 365 Agile and entered into a new perpetual licence agreement ("the 365Agile Agreement") whereby Castleton has been granted an exclusive worldwide licence for 365Agile's suite of mobile working software solutions in relation to the social housing sector and has taken on the associated workforce. Under the terms of the 365Agile Agreement, Castleton will pay 365Agile £1.8m over four years, plus a further contingent element depending on total revenue in the first three years of the Agreement. Under IFRS 3 - Business Combinations, the 365Agile Agreement is recognised as a business combination, further details of which can be found in Note 2 to the interim results. We believe that this agreement is strategically important, as it secures the use of the 365Agile product going forward whilst enabling Castleton to keep 100% of the revenue associated with sales thereof by the Group, compared to having a 70% commission payable to 365Agile under the previous agreement. 

Opus Loan note conversion

On 5 July 2016, the Company received a notice of exercise in relation to £100,000 of convertible unsecured loan notes, convertible at 40 pence per share, which were issued in relation to the Company's acquisition of Opus Information Technology Ltd. The Company therefore issued 250,000 new ordinary shares of 2 pence each in the capital of Castleton.

Subsequent to the period end, on 4 October 2016, another notice of exercise was received and the Company issued a further 375,000 new Ordinary Shares.

Cash Flow

Cash generated by operations amounted to £1.8 million (H1 2015: £0.8 million) comprising adjusted EBITDA* of £2.0 million (H1 2015: £1.7 million) and working capital investment of £0.2 million (H1 2015: £1.0 million).

Net finance charges paid of £0.1 million (H1 2015: £0.4 million) reflect the cash cost of the interest on the loan with Barclays with the comparative period including interest paid on the swap derivative settlement of £0.3 million.

There were loan repayments of £0.5 million in the period (H1 2015: £0.3m) in respect of the Barclays Bank facility entered into to fund the acquisitions of Brixx, Impact and Kypera in the last financial year.

The total decrease in cash and net cash equivalents was £0.02 million (H1 2015: increase £0.02 million).

Balance sheet

Included in the balance sheet at the reporting date is £33.8 million (H1 2015: £28.5 million) of intangible assets, which have arisen from the acquisitions of Montal, Documotive, Keylogic, Brixx, Impact and Kypera in previous periods, and the 365 Agile Agreement entered into during this period.

Borrowings

The Group's financing consists of a £6.0 million, six-year term loan from its principal bankers Barclays, as well as its overdraft facility of £2.5 million. Financing also includes loan notes issued as part funding for the acquisitions of Kypera and Opus and deferred consideration in respect of the 365 Agile Agreement. The term loan was originally for £5.0 million taken on to assist in funding the acquisitions of Impact and Brixx and provide additional working capital. This was subsequently extended by £1.0 million to assist in funding the acquisition of Kypera in January 2016. The term loan is repayable at £0.25 million per quarter and has an interest coupon of 3.0% above LIBOR. At 30 September 2016, net debt stood at £10.5 million (excluding contingent consideration) which includes £3.3 million of loan notes issued to fund the acquisition of Kypera, £0.3 million relating to the fair value debt element of the loan notes from the Opus acquisition and £1.6 million of deferred consideration in relation to the 365 Agile Agreement. Net debt including estimated contingent consideration is £11.1 million.

The Board

On 31 August 2016 Carolyn Bell resigned from her position as Operations Director.

Dean Dickinson was appointed as Chief Executive Officer on 31 October 2016. Dean was previously Managing Director of Advanced Business Solutions, part of Advanced Computer Software Group Limited (previously Advanced Computer Software plc ("ACS")), where he led the impressive growth of the Public Sector and Enterprise division following the acquisition of COA Solutions in 2010. Dean was part of the senior management team that sold ACS to Vista Private Equity for £725 million in March 2015.

Dean has over 30 years' operational experience in the software industry and was one of four directors at Walker Inc responsible for an MBO backed by Alchemy Private Equity in 2002 to form a new business called Arelon. Arelon merged with Cedar in 2003 and was rebranded COA Solutions where he became Deputy Managing Director for the business as a whole.

Ian Smith has remained on the Board in an executive role as Deputy Chairman.

Outlook

I am pleased with the progress we have made in the period and believe Castleton has the building blocks in place for growth as a leading supplier to the public and not-for-profit sectors, specifically the social housing market. The integration of the businesses we've acquired has progressed well and signs from our customers are encouraging. We will continue to concentrate on maintaining organic growth across the Group, whilst increasing profitability by providing more of our customers with our broader range of complementary services - and all the time building our core of repeat revenues.

David Payne

Non-Executive Chairman

14 November 2016Consolidated Statement of Comprehensive Income

*earnings from continuing operations before net finance costs, tax, depreciation, amortisation, exceptional items and share-based payments.

There is no other comprehensive income in the period.

The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes.

Consolidated Statement of Financial Position

Consolidated Statement of Changes in Equity

Attributable to shareholders of the parent company

a) Merger reserve

The merger reserve arose from the acquisition of Redstone Communications Limited (£216,000) and Maxima Holdings Limited (formerly Maxima Holdings plc) (£7.75 million) 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.

b) Equity reserve

The equity reserve arises from the recognition of the fair value of the equity components of convertible loan notes. During the year ended 31 March 2015, three convertible loan notes were issued as part of the consideration for the acquisitions of Documotive Limited (now Castleton Software Solutions Ltd), Keylogic Limited and Opus Information Technology Limited. The fair value of the equity components of the convertible loan notes are based on a Black Scholes option pricing model under standard option pricing assumptions.

On 30 September 2015, additional convertible loan notes of £0.4 million were issued in settlement of contingent consideration payable in respect of the acquisition of Opus Information Technology Limited. The fair value of the equity components of the convertible loan notes are based on a Black Scholes option pricing model under standard option pricing assumptions.

On 31 January 2016, two convertible loan notes were issued in order to part finance the acquisition of Kypera Holdings Limited. The company issued £3.5 million of unsecured loan notes, which have a term of 5 years and carry interest at a rate of 5% per annum. The 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 Loan Notes from the third anniversary of issue if not already converted. The convertible loan notes are valued on a Black Scholes option pricing model under standard option pricing assumptions.

c) Conversion of financial instruments

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

On 30 June 2015 the Company allotted 90,909,090 new ordinary shares* pursuant to the conversion of the loan notes issued as part of the consideration for the acquisition of Documotive Limited.

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

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

d) Exercise of warrants

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

e) Cancellation of Warrants

On 18 July 2015 existing warrants held by MXC Capital were cancelled and replaced with options under an Employee Share Scheme.

f) Share Issue

On 8 July 2016, the Company issued 250,000 new Ordinary Shares pursuant to the conversion of loan notes issued as part of the previous acquisition of Opus Information Technology Limited at a price of 40p per share. The Vendors have undertaken not to sell or otherwise dispose of their interests in the Loan Note Shares at any time during the 12 months following the admission of the Loan Note Shares to trading on AIM.

* pre capital reorganisation on 22 October 2015

Consolidated Cash Flow Statement

Comprising:

Notes to the half-yearly financial information

1. Basis of preparation and general information

The interim financial information is unaudited. This condensed consolidated interim financial information was approved by the Directors and authorised for issue on 14 November 2016.

The Company is a public limited liability company incorporated and domiciled in England. The address of its registered office is Castleton Technology plc ("Castleton"), 100 Fetter Lane, London, EC4A 1BN. The Company is listed on the AIM market of the London Stock Exchange.

Castleton and its subsidiaries have not applied IAS 34, Interim Financial Reporting, which is not mandatory for UK AIM listed companies, in the preparation of this half-yearly financial report.

This condensed, consolidated interim financial information for the six months ended 30 September 2016 does not comply, therefore with all the requirements of IAS 34, 'Interim financial reporting' as adopted by the European Union. The consolidated interim financial information should be read in conjunction with the annual financial statements of Castleton for the year ended 31 March 2016, which have been prepared in accordance with IFRS as adopted by the European Union.

This condensed consolidated interim financial information does not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 March 2016 were approved by the Board of directors on 15 August 2016 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under sections 498 (2) or (3) of the Companies Act 2006.

Accounting policies

The accounting policies used in the preparation of the financial information for the six months ended 30 September 2016 are in accordance with the recognition and measurement criteria of International Financial Reporting Standards ("IFRS") as adopted by the European Union and are consistent with those which will be adopted in the annual statutory financial statements for the year ending 31 March 2017.

While the financial information included has been prepared in accordance with the recognition and measurement criteria of IFRS, as adopted by the European Union (EU), these financial statements do not contain sufficient information to comply with IFRSs.

Exceptional items

Items which are material either because of their size or their nature, and which are non-recurring, are highlighted separately on the face of the income statement. The separate reporting of exceptional items helps provide a better picture of the Group's underlying performance. Items which may be included within the exceptional category include:

· spend on the integration of significant acquisitions and other major restructuring programmes;

· significant goodwill or other asset impairments; and

· other particularly significant or unusual items.

Spend on integration is incurred by the Group when integrating one trading business into another. The types of costs include employment related costs of staff made redundant as a consequence of integration, due diligence costs, property costs such as lease termination penalties and vacant property provisions, third party advisor fees and rebranding costs.

Exceptional items are excluded from the headline profit measures used by the Group and are highlighted separately in the income statement as management believe that they need to be considered separately to gain an understanding of the underlying profitability of the trading businesses.

For further detail refer to note 4. 

Going concern

The consolidated interim financial information of Castleton has been prepared on the going concern basis.

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

Based on these facts, the Directors consider that the adoption of the going concern basis is appropriate.

2. Business combinations

365 Agile acquisition

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

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

From the date of acquisition to 30 September 2016, 365Agile recorded revenue of £0.3 million and a loss before taxation of £0.02m.

The total goodwill, representing synergies expected to accrue to the enlarged group and the knowledge and ability of the workforce, and intangible assets arising from the acquisitions is the difference between the fair value of consideration less the fair value of assets acquired, as set out below. The fair values for 365Agile are provisional.

Cash consideration is payable over four years for a value of £1.8m. Further contingent consideration of £0.3 million is payable if revenue from the software of £2.2 million is generated by 4 April 2019. A further contingent fee will be paid at 50% of the revenue that exceeds the £2.2 million threshold. If the conditions are met the amounts payable are due to be paid within 90 days of 4 April 2019.

On acquisition of the business the Directors assess the business acquired to identify any intangible assets. The software licence meets the criteria for recognition as an intangible asset as it is separable from the other assets and has a measurable fair value, being the amount for which an asset would be exchanged between knowledgeable and willing parties in an arm's length transaction.

The fair value of the software was calculated by using the discounted cash flows arising from the existing and anticipated revenue.

A long term growth rate of 2.0% was applied with a discount rate of 9.5%. The reasonable economic life of the software was assumed to be 15 years.

The goodwill arising from the acquisition is attributable to the value inherent in the assembled workforce.

3. 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 six months ended 30 September 2016.

Software Solutions

This segment comprises the results of Castleton Software Solutions Ltd, Kypera Limited, Kypera Australia Pty Limited and 365Agile for the six months ended 30 September 2016

Unaudited for the six months ended 30 September 2016

*earnings from continuing operations before interest, tax, depreciation, amortisation, exceptional items and share-based payments.

Unaudited for the six months ended 30 September 2015

*earnings from continuing operations before interest, tax, depreciation, amortisation, exceptional items and share-based payments.

4. Exceptional costs

 In accordance with the Group's policy in respect of exceptional costs the following charges were incurred:

5. Taxation

Tax on profit on ordinary activities

The rate of UK corporation tax for the year beginning 1 April 2016 is 20%. Further changes have been announced to reduce the rate to 19% from 1 April 2017 and to 17% from the year starting 1 April 2020. Deferred tax has been re-measured on the basis of these new rates and reflected in the financial statements.

6. Earnings per share

Basic earnings/(loss) per share and diluted earnings/(loss) per share are calculated using a weighted average number of shares

of 78,204,586 and 86,743,592 respectively (30 September 2015: weighted average number of shares of 66,879,227 and 31 March 2016: weighted average number of shares of 72,265,145). Earnings / loss per share based on Adjusted EBITDA* has been shown on the grounds that it is a common metric used by the market in monitoring similar businesses.

This measure is derived as follows:

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

7. Net cash flows from operating activities

Advisers

Financial Adviser and Broker

FinnCap, 60 New Broad Street London, EC2M 1JJ

Auditors

RSM UK Audit LLP, Portland, 25 High Street, Crawley, West Sussex, RH10 1BG

Solicitors

Beachcroft LLP, 100 Fetter Lane, London, EC4A 1BN

Registrars

Capita IRG Plc, The Registry, 34 Beckenham Road, Beckenham, Kent, BR3 4TU

Principal Bankers

Barclays Bank plc, 1 Churchill Place, London, E14 5HP

Company Number

03336134

Further details can be found on the Castleton website at the following address: www.castletonplc.com