CTP.L Regulatory News (CTP)

15 December 2015 

Castleton Technology plc

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

Unaudited Interim Results for the six months ended 30 September 2015

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 2015.

The Group has completed the first phase of building a business focused on the public and not-for-profit sectors, following the acquisitions of Brixx Solutions Limited ("Brixx") and Impact Applications Limited ("Impact") during the period. Integration of all the acquired businesses is now significantly progressed and the cross-selling opportunities are gaining momentum.

Highlights

§ Adjusted EBITDA(1) of £1.7 million (H1 2014: loss £0.1 million)

§ Revenue for the 6 months of £8.5 million, including 4 months' contribution from Brixx and Impact

§ 55% is recurring

§ Organic growth(2) of 16%

§ Diluted adjusted EBITDA per share of 2.44 pence (H1 2014: loss of 0.35 pence)

§ Acquisitions of Impact and Brixx on 31 May 2015 for £5.0 million each

§ Oversubscribed placing raising £2.2 million to part fund acquisitions of Impact and Brixx

§ Conversion of £2.5 million loan notes held by Documotive vendors and MXC Capital

§ 56 customers won since acquisition, providing further cross-selling opportunities

§ Customer base is now over 450 strong

Post period end highlights

§ Integration of acquired businesses substantially complete;

§ Castleton Managed Services Ltd: Merger of Keylogic Limited ("Keylogic") and Montal Holdings Limited ("Montal")

§ Castleton Software Solutions Ltd: Merger of Documotive Limited ("Documotive"), Opus Information Technology Limited ("Opus"), Brixx and Impact

§ Common staff contracts, systems and internal staffing structure implemented providing a deep level of integration

David Payne, Chairman of Castleton, commented:

"Castleton has now put the building blocks in place to become 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. I'm confident that the company will maintain its organic growth, whilst increasing the contribution from providing more of our customers with our broader range of complementary services - and all the time building our core of repeat revenues. I'm excited by our company's potential".

(1) Before net finance costs, tax, depreciation, amortisation, acquisition and integration costs and share based payments

(2) Organic growth based on orders across all group companies comparing 12 months to September 2015 with 12 months to September 2014

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. The acquisitions of Montal, Documotive, Opus, Keylogic, Brixx and Impact bring together an exceptional suite of solutions, providing the foundation for this platform. 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

Dear Shareholder

I am pleased to report the results of the Group for the six months ended 30 September 2015.

Background and basis of results

The results for the first half of the financial year show evidence of clear progress, with the acquisitions in May 2015 of Impact, a specialist provider of maintenance scheduling software to social housing and commercial clients, and Brixx, a specialist provider of financial modelling software to the social housing market. These results therefore include six months of reported results for the four acquisitions made in the previous year, namely Montal, Documotive, Keylogic and Opus and four months of reported results for both Impact and Brixx.

Acquisitions in the period

Impact

Impact provides an IT based repairs and maintenance scheduling product called Impact Response and provides a complete in-house solution which includes product development, implementation, testing and customisation, through to training, hosting, maintenance and support. In the year to 31 August 2014, the business delivered sales of £2.0 million and profit before tax of £0.3 million. Net assets as at 31 August 2014 were £0.9 million.

Total consideration for the acquisition of Impact was £5.0 million, of which £1.7 million was satisfied via the issue of new ordinary shares at a price of 2.25 pence per share (before the post period end capital reorganisation). The remaining £3.3 million was paid in cash on completion.

Brixx

Brixx provides software which enables users to produce financial models and long-term forecasts. HousingBrixx is a trusted brand with a business critical function which has led to a high level of customer loyalty; currently over 300 social housing organisations use this solution. In the year to 31 December 2014, the business delivered sales of £1.2 million with profit before tax of £0.4 million. Net liabilities as at 31 December 2014 were £0.2 million.

Total consideration for the acquisition of Brixx was £5.0 million, payable in cash with £0.5 million deferred for 12 months.

I welcome both businesses and their employees to the Group. I believe they are both excellent acquisitions and I am sure we will all enjoy a prosperous and exciting future together.

Trading and results

During the period, four resellers (including master reseller Viaduckt) were signed up in the Netherlands in order to take the Castleton product set to the Dutch social housing sector. The first customer in the Netherlands went live at the beginning of October 2015. As announced on 14 September 2015, the Group has also entered into a strategic partnership with a leading supplier of software solutions to the public and social housing marketplace.

The Group generated revenue for the six months to 30 September 2015 of £8.5 million which included revenue of £1.0 million from Impact and £0.5 million revenue from Brixx, the two companies acquired during the period. Recurring revenues stand at 55% of total revenues, with further growth expected. Organic growth on a 12 month basis across the Group is 16%, reflecting the enlarged customer base which currently stands at over 450 customers. This enlarged customer base 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(1) of £1.7 million in the period (H1 2014: loss of £0.1 million).

Central costs amounted to £0.6 million (H1 2014: £0.3 million), excluding net finance costs, depreciation, amortisation of intangible assets, acquisition and integration costs and share based payments.

Acquisition and integration costs amounted to £1.4 million (H1 2014: £0.1 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 explained in note 3 'Segment Reporting'. The managed services segment relates to Montal and Keylogic, combined to be Castleton Managed Services Ltd from 1 October 2015 and the software solutions business relates to Brixx, Impact, Documotive and Opus, combined to be Castleton Software Solutions Ltd from 1 December 2015.

Net finance costs amounted to £0.2 million (H1 2014: £0.04 million). The increase relates to the Barclays Bank Plc ("Barclays") and MXC facilities entered into in order to fund the acquisitions of Brixx and Impact. The MXC facility was not drawn down and was cancelled at Castleton's request during the period.

Basic loss per share from continuing activities was 1.61p (H1 2014: loss of 0.98p)

(1) Before net finance costs, tax, depreciation, amortisation, acquisition and integration costs and share based payment

Placing and conversion of loan notes

On 30 June 2015, gross proceeds of £2.2 million were raised by a placing of new ordinary shares in the Company at 2.25 pence per share in order to part fund the acquisitions of Impact and Brixx. The placing was heavily oversubscribed.

In addition, on 30 June 2015 the Company allotted 75,000,000 new ordinary shares (before the post period end capital reorganisation) pursuant to the conversion of the £1.5 million drawn under the loan facility with MXC Capital Limited and a further 90,909,090 new ordinary shares (before the post period end capital reorganisation) pursuant to the conversion of the loan notes issued as part of the consideration for the acquisition of Documotive.

Cash flow

Cash generated from continuing operations amounted to £0.8 million (H1 2014: cash used £0.3 million) comprising adjusted EBITDA(1) profit of £1.7 million (H1 2014: loss of £0.1 million) and working capital investment of £1.0 million (H1 2014: investment of £0.2 million).

Net finance charges paid of £0.4 million (H1 2014: £0.3 million) reflect the cash cost of the interest swap derivative of £0.3 million (H1 2014: £0.3 million) and interest on the new loan with Barclays.

There were loan repayments of £0.3 million and settlement of a derivative contract of £0.3 million in the period (H1 2014: £0.3 million).

The total increase in net cash and cash equivalents of £0.02 million (H1 2014: decrease of £2.7 million) was generated from continuing activities (continuing and discontinued operations in 2014).

The fund raise in June 2015 provided £2.2 million of cash, with costs of the share issue amounting to £0.1 million. Proceeds from the Barclays facility were £5.0 million with a further £1.5 million from the draw-down of the MXC Loan facility providing £6.5 million in total. £0.3 million of the term loan was repaid during the period.

Balance sheet

Included in the balance sheet at the reporting date is £28.5 million (H1 2014: £5.0 million) of intangible assets, arising from the acquisitions of Montal, Documotive, Keylogic, Brixx and Impact.

The fair value of the loan notes issued as part of the consideration for Keylogic (£0.8 million) is included in borrowings under current liabilities along with £1.0 million due under the Barclays term loan.

Bank financing

During the period, the Group took on a £5.0 million, five year term loan from its principal bankers, Barclays, as well as extending its overdraft facility to £2.0 million. The term loan was taken on to assist in funding the acquisitions of Impact and Brixx and provide additional working capital. The term loan is repayable over five years, at £0.25 million per quarter and has an interest coupon of 3.0% above LIBOR. At 30 September 2015, net debt stood at £6.1 million which includes £1.2 million relating to the fair value debt element of the loan notes from the Keylogic and Opus acquisitions and £0.6 million of deferred consideration for the Opus and Brixx acquisitions.

As a result of historic Group banking arrangements, the Group had to service a derivative contract until its maturity in September 2015. This interest rate swap was entered into when the previous Board deemed it prudent to hedge against interest rate movements, in a period when the Group had in place a material bank term loan and debt facility. At the end of September 2014, the gross liability under the derivative stood at approximately £0.6 million. This liability was fully settled within the period and there is no further liability.

The Board

During the period Davinder Sanghera and Carolyn ("Caro") Bell were appointed to the Board as Chief Operating Officer and Operations Director respectively.

Davinder joined Castleton in November 2014 at the time of its acquisition of Documotive, where she was Sales Director. Davinder joined Documotive in its formative year and was instrumental in driving product development and sales strategy within the business. Davinder has 23 years' experience within the social housing sector and over 12 years' specific experience in selling Housing Management and Finance software solutions.

Caro joined Castleton to support the management team in delivering the Group's strategy. Prior to Castleton, Caro was IT Director at Bromford Housing Group, where she led some of their major business transformational projects. Prior to this, Caro has worked as IT Director for Alliance Medical Ltd, and as Head of IT Operations at Trader Media Group, holding responsibility for the management of the IT infrastructure behind autotrader. She holds an MBA from Manchester Business School.

I welcome both Davinder and Caro to the Board.

Grant of options

During the period, the Company awarded options over a total of 8.6% of the fully diluted share capital in the Company to certain members of the Board and MXC Guernsey Limited ("MXC"). All of the options are evergreen, meaning that the percentage of the fully diluted issued share capital held under option will remain constant, notwithstanding any further issues of ordinary shares in the capital of the Company. The options were awarded under a variety of schemes, both approved and unapproved. All of the options are subject to vesting criteria whereby the average price of ordinary share must exceed 60 pence (post the post period end capital reorganization as referred to below), and in some cases 80 pence, for a 10 day period between the second and third anniversaries of 1 April 2015. If the average price of an ordinary share does not reach or exceed the targets above then the options shall lapse. The options issued to MXC replaced the warrant in favour of MXC. These new incentive plans result in a charge of £122k in the period (H1 2014: nil).

Capital reorganisation

Post period end, in October 2015 and following approval by shareholders at the Company's annual general meeting, every 160 ordinary shares of 0.1 pence each were consolidated into 1 new ordinary share of 16 pence each and subsequently sub-divided into 8 new ordinary shares of 2 pence each. The reduction in administration costs as a result of the reorganization will be c £25,000 annually.

Opus Earn-Out

The Company has announced today the issue of £0.4 million of convertible loan notes in respect of the earn-out that was put in place at the time of the acquisition of Opus, alongside a cash payment of £0.1 million. The loan notes are redeemable in cash or convertible into new ordinary shares at 40 pence per share in various tranches up to 30 September 2018.

Outlook

I am pleased with the progress we are making and the Board remains committed to building the leading supplier of software and managed services to the not-for-profit and social housing sector. The businesses we have acquired over the past 15 months are bedding in well and early signs from our customers are encouraging, as they begin to take advantage of the broader range of products and services we can offer them. With a strong core of recurring revenue, I am confident we can maintain organic revenue growth whilst we accelerate the number of our customers taking more of our services. 

David Payne

Non-Executive Chairman

14 December 2015

Consolidated Statement of Comprehensive Income

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

Earnings per share have been restated to reflect the share consolidation which took place on 22 October 2015. For further details see note 5.

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

Consolidated Statement of Financial Performance

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

During the year ended 31 March 2015, three convertible loan notes were issued as part of the consideration for the acquisitions of Documotive Limited, 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.

c) Loan facility conversion

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.

d) Exercise of options

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

e) Loan note conversion

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.

* Pre post period end capital reorganisation 

Consolidated Cash Flow Statement

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 December 2015.

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, EC1A 4BN. 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 2015 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 2015, 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 2015 were approved by the Board of directors on 21 September 2015 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 2015 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 ended 31 March 2016.

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 Company'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. Based on the level of support demonstrated by the oversubscribed equity placing on 30 June 2015 and the funding available, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future.

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

2. Business combinations

Brixx

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

The Directors' assessment of the assets acquired and liabilities assumed has not been completed at the time of these interim results. The Directors have allocated provisional fair values in preparing these results.

From the date of acquisition to 30 September 2015, Brixx recorded revenue of £0.5 million and a profit before taxation of £0.3 million. Assuming the combination had taken place at the beginning of the year, the interim reported revenue from Brixx would have been £0.7 million and the profit for the year before taxation would have been £0.3 million.

Acquisition costs were £0.2 million.

Impact

On 31 May 2015 Castleton acquired the entire issued share capital of Impact Applications Limited ('Impact') for a total consideration of £5.0 million payable as to £3.33 million in cash and £1.67 million in shares.

The Directors' assessment of the assets acquired and liabilities assumed has not been completed at the time of these interim results. The Directors have allocated provisional fair values in preparing these results.

From the date of acquisition to 30 September 2015, Impact recorded revenue of £1.0 million and a profit before taxation of £0.5 million. Assuming the combination had taken place at the beginning of the year, the interim reported revenue from Impact would have been £1.1 million and the profit for the year before taxation would have been £0.2 million.

Acquisition costs were £0.3 million.

The total provisional goodwill and intangible assets arising from the acquisitions is the difference between the fair value of consideration less the provisional fair value of assets acquired:

The consideration was satisfied as follows:

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

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

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

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

A long term growth rate of 2.5% was applied with a discount rate of 9.5%. The reasonable economic life of the customer relationships and software was assumed to be 10 years. The reasonable economic life of the option was assumed to be 5 years. The identifiable intangible assets and related deferred tax liability are as follows:

Opus

Additional convertible loan notes of £0.4 million have been issued in settlement of contingent consideration payable in respect of the acquisition of Opus Information Technology Limited which are convertible in three equal tranches over three years ("Additional Loan Notes"). The Additional Loan Notes are based on a Black Scholes option pricing model under standard option pricing assumptions. The fair value of the Additional Loan Notes has been calculated as follows:

The difference between the fair value of Additional Loan Notes and the loan notes issued on acquisition represents an adjustment to the purchase price and has been recognised in the income statement within acquisition and integration costs along with a further £0.1 million of cash consideration which will be payable in equal tranches in January 2016 and January 2017.

3. Segment reporting

Operating segments are reported in a manner consistent with the internal reporting to the Chief Operating Decision Maker ('CODM'). The CODM has been identified as the Group Chief Executive and the Chief Financial Officer. 

The Group Chief Executive and the Chief Financial Officer are jointly responsible for resource allocation and assessing the performance of the operating segments. The operating segments are defined by distinctly separate product offerings or markets. The CODMs assesses the performance of the operating segments based on a measure of adjusted EBITDA. This measurement basis excludes discontinued operations.

The Group Is comprised of the following main operating segments:

Managed Services

In this segment are the results of Montal and Keylogic for the six months ended 30 September 2015.

Software Solutions

This segment comprises the results of Documotive and Opus for the six months ended 30 September 2015 and the results of Brixx and Impact for the period from acquisition on 31 May 2015 to 30 September 2015.

Unaudited for the six months ended 30 September 2015

*earnings from continuing operations before interest, tax, depreciation, amortisation, acquisition and integration costs 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. Earnings per share

On 22 October 2015 every 160 existing ordinary share of 0.1 pence each were consolidated into 1 new ordinary share of 16 pence each and subsequently sub-divided into 8 new ordinary shares of 2 pence each. In accordance with IAS 33 the earnings per share calculation has reflected this change. Comparative periods have been restated accordingly.

Basic earnings/loss per share and diluted earnings/loss per share are calculated using a weighted average number of shares of 66,879,227 and 69,783,239 respectively (March 2015: weighted average number of shares of 40,948,460 and 44,753,580 respectively and September 2014: weighted average number of shares of 31,185,868). 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, acquisition and integration costs and share-based payment charges.

6. Net cash flows from continuing operating activities

7. Subsequent events

On 22 October 2015 every 160 ordinary shares of 0.1 pence each were consolidated into 1 new ordinary share of 16 pence each and subsequently sub-divided into 8 new ordinary shares of 2 pence each.

On 1 October, Montal changed its name to Castleton Managed Services Ltd ("Castleton Managed Services"). On the same date Keylogic Ltd, the managed service company acquired on 1 March 2015 was hived up into Castleton Managed Services.

On 1 December, Documotive changed its name to Castleton Software Solutions Ltd ("Castleton Software Solutions"). On the same date, Opus, Brixx and Impact entities were hived up into Castleton Software Solutions.

A copy of the interim results can be found on the Company's website www.castletonplc.com.

By order of the Board

Advisers

Financial Adviser and Broker

FinnCap, 60 New Broad Street London, EC2M 1JJ

Auditors

RSM UK Audit LLP (formerly Baker Tilly 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, 54 Lombard Street, London, EC3V 9EX

Company Number

03336134

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