Essensys Regulatory News (ESYS)

22 October 2019

essensys plc

("essensys" or the "Group")

Full Year Results

Strong performance in maiden results

essensys plc (AIM:ESYS), the leading global provider of mission critical software-as-a-service (SaaS) platforms and on-demand cloud services to the flexible workspace industry, announces audited results for the year ended 31 July 2019.

Financial summary:

Delivering our Strategy

·; Successful IPO on AIM in May 2019

o £28m total funds raised from oversubscribed IPO

o £14m gross proceeds retained by essensys  

·; Accelerated investment in long-term organic growth and international expansion

o US: West Coast office operational; sales team expanded; essensysCloud extended

o Vietnam: offshore development capability expanded to drive product development

o Europe: Connect entry into the European mainland

·; De-risking and underpinning future growth

o Existing customers continue to grow

o Strong momentum of new customer wins

o 358 Connect live sites at year end, up 38%

High growth and recurring revenue

·; Revenue and underlying profits ahead of expectations for FY19

o Revenue increased by 26%

o Adjusted EBITDA margin of 20%

o Group Annual Recurring Revenue ("ARR") gross margin of 70%

·; High recurring revenues - ARR 79% of overall Group revenues 

·; US business supporting high growth levels - recurring revenues up 71% 

·; Strong balance sheet to support organic growth, investments and acquisitions

Current trading and outlook:

·; Excellent pipeline visibility - 64 Connect sites contracted for delivery post year end 

·; Strong sales pipeline from new and existing customers underpins confidence for 2020

Mark Furness, CEO of essensys, said:

"I am delighted to announce strong maiden results for essensys. We have a simple vision - to power the world's largest community of tech-driven flexible workspaces. We are at the beginning of the adoption curve for flexible workspaces, with market penetration expected to reach 30% in 2030, compared to current levels of c.3%.

Our performance reflects strong demand for essensys' technology offering to the flexible workspace industry. We have deployed our IPO proceeds in line with our plans to support long-term organic growth and capture our market opportunity. As a result, we have significantly evolved our presence in the US, grown our product development capabilities and extended our European presence for Connect.

Growth in our existing customer base underpins future resilience and growth. This, aligned to a strengthening market backdrop and an encouraging pipeline from new customer wins, supports the Board's confidence in further progress in the 2020 financial year."

1 See Financial Review below for description and breakdown

2 PBT adding back IPO related costs and share based payment expenses

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About essensys plc

essensys is the leading global provider of mission-critical SaaS platforms and on-demand cloud services to the high growth flexible workspace industry. essensys' software is specifically designed and developed to help solve the complex operational challenges faced by multi-site flexible workspace operators as they grow and scale their operations. The Group's technology allows operators to deliver a range of differentiated, flexible and customer-specific services to a broad base of tenants across multiple locations and helps operators to manage the cost, operational and technological challenges they typically encounter.

essensys' two SaaS platforms, Connect and Operate, address these complex operational challenges, and reduce costs by simplifying the day-to-day management of flexible workspaces and the provision of on-demand IT, technology and infrastructure services to tenants. essensys' platforms automate key tasks and processes and help flexible workspace providers deliver highly efficient, customer-centric workspace solutions and member experiences with enterprise class services.

Chairman's Statement

I am delighted to present essensys' maiden results as a public company following its successful IPO in May of this year.

Our IPO has already delivered a number of strategic benefits to the Group, supporting our investment in product development and geographic expansion to drive long-term, sustainable growth. We are debt-free following the IPO, and as a listed business we offer a level of transparency which we know is important to our increasingly international customer base.

During the year, the management team has proactively implemented its plans to accelerate the Group's growth. Specifically, this has included:

·; opening a new West Coast US office to accelerate our growth in North America;

·; expansion of the essensysCloud network;

·; expansion of our offshore development centre in Vietnam;

·; recruitment of product and marketing senior leaders; and

·; further geographical expansion.

The Group is also making substantial progress in further development of its software product roadmap which includes the expansion of its Marketplace services over the next few months.

It was a strong maiden financial performance, with growth in revenue and profits. Revenue was up 26% to £20.6m, and Adjusted EBITDA (excluding IPO related costs and share based payment expense) was up 31% to £4.2m. As a consequence of the costs we incurred in achieving the IPO and the share based payment expense incurred as a result of the vesting of employee share options prior to the IPO, the Group made a loss before tax for the year of £1.4m (2018: profit of £0.4m).

essensys' growth is driven by winning new customers, expanding our product reach within existing customers, and by existing customers expanding their estates. We have performed well in all these areas.

Existing customers further accelerated the Group's international expansion. The Group's North American business has now expanded into Canada and has recently won a number of new customers there. Discussions are also underway regarding expansion opportunities within Europe following the Group's initial Connect customer site win in Germany during the year. Management expects to investigate the potential for expansion into the Asia Pacific region during FY20.

As mentioned in the IPO Admission Document, the Group intends to recruit a third independent Non-Executive Director. That process is underway, and an appointment is anticipated to be announced within the next two months.

I would particularly like to thank our staff for their hard work during the year. It is the commitment, tenacity and creativity of our people that drives our innovation and growth.

The combination of an exceptional team, a supportive investor base and a clear strategy positions essensys strongly to take advantage of expansion opportunities in the fast-growing flexible workspace operator market.

Jon Lee

Non-Executive Chairman

21 October 2019

CEO Report

2019 was a pivotal year for essensys with our IPO being the culmination of 13 years development of the business, its products and its international customer base. Our listing on AIM in May of this year provided the Group with the resources to accelerate our product development and our 'go-to-market' strategy; the financial solidity and transparency which our increasingly international customer base values; and gives us the opportunity and platform to further expand geographically.

Strong revenue growth

This overall growth in Connect site numbers and Operate pricing drove revenue growth with total recurring revenue for the year of £16.3m, up 26% from £12.9 in FY18. Run rate Annual Recurring Revenue (ARR), a key metric for the continued growth of the business, grew to £17.3m at July 2019 from £13.6m at July 2018, an increase of 27%.

Customer expansion

The expansion that we saw in FY18 continued in FY19 with the addition of 39 new customers to the business, our best year ever for the expansion of the customer base. An increasing number of customers now take both Connect and Operate, proving the worth of both products to new entrants into the market and supporting our strategy of increased integration between them. I am particularly pleased about the breadth and quality of our new customers which range across global real estate owners and commercial real estate companies entering the market; existing, established operators moving to become essensys customers for the first time; and new, well-funded market entrants.

Accelerated growth in Connect sites

This new customer growth combined with our existing customer expansion resulted in the number of Connect sites growing by 98 to 358, an increase of 38%. Although growth in North America was very strong, UK growth also continued and new sites live in FY19 were split 57:41 between North America and UK. By site numbers the Connect business has nearly doubled in size over the last two years.

That growth continues and we now have contracted commitments from customers for a further 64 Connect sites, the majority of which will be delivered in the first half of FY20.

Good progress with Operate

I am pleased to report that the number of countries where Operate is now being used has grown to 18 including a number of customers in both Continental Europe and Canada, both key growth areas for the Group as a whole.

Our strategic decision to retire the acquired CentreCharge product, migrate customers to Operate and increase pricing in order to better serve our target audience resulted in the loss, as expected, of a number of lower value customers during the year. This led to total Operate site numbers reducing slightly, by 4% to 508, however the benefit of this strategy has delivered a 40% increase in monthly recurring revenue, which is now at £125k per month with average revenue per site increasing by 43%.

Operational review

We have made good progress implementing our strategic plans.

Immediately prior to the IPO we significantly enhanced our leadership team with two new senior recruits. James Shannon joined us as Chief Product Officer. With extensive experience in enterprise SaaS, mobile and hardware, James brings a unique skill-set to the business and will be instrumental in driving our product roadmap in the years ahead. Meyer Prinsloo also joined the business as Chief Marketing Officer to help accelerate growth, increase our brand awareness and drive demand. Before essensys, Meyer led the marketing function at industry focussed enterprise SaaS business Fourth Ltd and was also previously at global advisory company Gartner.

From a geographical reach perspective we started the process of establishing our West Coast USA operation prior to the IPO which is now fully operational and provides an improved customer experience to our US customers and allows us greater access to the fast growth West Coast flexible workspace market. In addition, we have extended the essensysCloud private network with a further data centre location in Dallas, Texas which provides greater, and more cost effective, geographical coverage within the US market.

Following the IPO, we expanded the capacity of the Group's external offshore development centre in Vietnam and now have an additional 59 external software developers supporting our UK based R&D team. Those personnel are now predominantly focussed on accelerating the integration of our two software platforms and the introduction of new Marketplace services and we are pleased with the return that this increased level of investment has delivered to date.

Investment case

We believe essensys is well placed for future growth because of the following key strengths:

·; essensys is the established market leader in software and technology services to the flexible workspace sector;

·; We have a high-quality customer base delivering high quality recurring revenues, underpinned by long-term contracts;

·; We run an efficient, disciplined business focussed on delivering efficient profitable long-term growth;

·; We are at the early stages of flexible workspace adoption in the commercial real estate sector; and

·; We are deeply embedded within our customers and the industry.

Current trading and outlook

FY19 ended well, slightly ahead of expectations; FY20 has started well; and we remain ambitious for the future.

We continue to see ambitious and successful flexible workspace operators using essensys as a key enabler of their growth. New customer wins and site growth have continued since the year end and we are seeing increased engagement with traditional landlords and major commercial real estate companies entering the flexible workspace market. We are seeing this in both our main territories and in other geographies.

Geographically, our US business continues to make excellent progress and our recent establishment on the West Coast is already supporting our growth ambitions. Recent customer wins in Canada will allow us to expand our geographical reach with relatively little capital investment or risk. Whilst we anticipate that North America will remain a key engine of growth for the Group, we are seeing increasing demand from Continental Europe (which we can service from the UK) following our launch of Connect in Germany, and growth in Operate customers there, and expect to deliver further expansion there during FY20. In the latter half of FY20 we expect to investigate opportunities for expansion in Asia-Pacific.

In the UK, whilst growth in FY19 was pleasing, and continues, the possible impact of political and economic uncertainty s inevitably difficult to assess for the UK economy. What is clear is that the structural 'shift' to flexible working will continue. The Group's supply chain is international, with no material exposure to European suppliers. Our US business is operationally self-sufficient and underpins the Group's growth ambitions. Our European business, whilst growing, is modest and, we are in the early stages of establishing an EU based operation to support that growth and market entry there with existing customers.

By design, our largest customers are well funded, established multi-site operators and we also have a spread of customers, whilst our Connect business globally is underpinned by three year contracts. Furthermore, our software and services are mission critical and provide operational efficiencies and savings to our customers that are, in turn, crucial to the delivery of service to their own occupiers.

The growth in our existing customer base underpins the resilience and expansion of the Group both in our existing territories and internationally. At the same time, we continue to win new customers - both new entrants to the market and established operators who share our vision of technology supporting the flexible workspace environment. This, aligned with the continued strength of the flexible workspace market and an encouraging pipeline, supports our confidence for further progress in our 2020 financial year.

Mark Furness

Chief Executive Officer

21 October 2019

Financial Review

This is the first annual report and accounts issued by essensys plc following a corporate reorganisation implemented shortly prior to the Admission to trading on AIM on 29 May 2019 (the "IPO").

IPO Outcome

The fundraising undertaken by essensys plc (the "Company") as part of the IPO was more successful than anticipated, raising £14m for the Company (prior to expenses of £2.3m). This allowed the Group to repay in full all its bank debt and leaves us with a healthy cash position.

Incorporation, Group reorganisation & scope of financial results

The Company was incorporated as Essensys Group Limited on 22 January 2019 as a private limited company. On 16 May 2019, the Company acquired all the issued share capital of essensys (UK) Limited (formerly Essensys Limited), the Group's main trading company, by way of a share for share exchange with the shareholders of essensys (UK) Limited at that time. On 17 May 2019 the Company changed its name to essensys Limited and immediately re-registered as a public limited company in the name of essensys plc. This was undertaken in anticipation of the IPO.

The financial results included in this annual report cover the Group's combined activities for the 12 months ended 31 July 2019 and have been prepared on a merger accounting basis with the comparatives for the previous 12 months being those of essensys (UK) Limited and its subsidiaries (prepared in accordance with applicable International Financial Reporting Standards).

Financial Key Performance Indicators

3 See Revenue section below for explanation

4 See Adjusted EBITDA explanation below

Revenue

Group total revenue grew by 26% to £20.6m in the year driven primarily by an increase in Connect revenue within the Group's US business where total live Connect sites grew to 164 at the year end from 107 (as at 31 July 2018). Notwithstanding the slight reduction in overall Operate site numbers, monthly Operate revenue grew by 40% from July 2018 to July 2019 and by 47% in the full year.

Recurring revenue comprises income invoiced for services that are repeatable and consumed and delivered on a monthly basis over the term of a customer contract. Run Rate Annual Recurring Revenue (Run Rate ARR) is an annualisation of the recurring revenue for the month identified (July 2019) and is an indication of the annual value of the recurring revenue for that month and is used by management to monitor long term revenue growth of the business.

Recurring revenue grew by 26% driven by the increase in number of Connect sites and pricing increases in the Operate business. Run Rate ARR grew 27% to £17.3m again driven primarily by the overall increase in Connect sites by 38% to 358 at year end (2018: 260).

Gross margins

Gross margins in the year were in line with FY18 with an increase in the recurring revenue margins to 70% being offset by reductions in non-recurring revenue. During the year UK recurring revenue margins increased to 77% as the benefit of cost reductions was experienced in the second half of the year. In the US, recurring revenue margins improved by three percentage points to 57% as that business' scale increased.

Administrative expenses

Excluding depreciation charges administrative expenses grew by £1.6m in the year, a 23% increase year on year, in line with our strategic investment plan. This was primarily driven by increases in staff costs resulting from increases in overall headcount, the strengthening of the senior management team that took place during 2018 and 2019 and increased employee bonus levels as the business has grown. In addition, the Group increased marketing expenditure significantly in 2019 over relatively modest expenditure in 2018.

Statutory (loss)/ profit for the year

As a consequence of the costs we incurred in achieving the IPO and the share based payment expense incurred as a result of the vesting of employee share options prior to the IPO, the Group made a loss before tax for the year of £1.4m (2018: profit of £0.4m), analysed as follows:

The Group's UK operation currently bears all the central management and governance costs of the business and as such the underlying performance of the UK business itself is understated. As noted above, the Group strengthened its senior management team during 2018 and 2019 which has resulted in additional, central payroll costs in the UK.

Following the IPO and year end, these central costs are now borne by the Company and in future will be identified separately.

The Group's US operation moved to break even during 2018 and was profitable during 2019.

The Pre-IPO Share based payment expense relates to share options in essensys (UK) Limited that were in existence prior to the IPO which vested and were exercised immediately prior to the IPO.

Adjusted EBITDA

Adjusted results are prepared to provide a more comparable indication of the Group's core business performance by removing the impact of certain items including exceptional items (material and non-recurring), and other, non-trading, items that are reported separately. Adjusted results exclude adjusting items as set out in the statement of consolidated loss and below, with further details given in Notes 7, 14, 15, 16 and 28 of the financial statements. In addition, the Group also measures and presents performance in relation to various other non-GAAP measures, such as recurring revenue, run-rate annual recurring revenue and revenue growth.

Adjusted results are not intended to replace statutory results. These have been presented to provide users with additional information and analysis of the Group's performance, consistent with how the Board monitors results.

Adjusted EBITDA (being EBITDA prior to exceptional costs) is calculated as follows:

Taxation

The Group incurred a small accounting tax expense in the year due to deferred tax charges arising in the UK. There was no current year corporation tax charge due to accumulated start-up losses in the US business combined with the overall current year loss made in the UK.

Cash

Net cash at year end was £2.7m (2018: net debt of £3.8m) following the receipt of the proceeds of the IPO and the repayment of bank debt. The Group's current cash reserves provide sufficient capital to fund current planned product and software development, any expected short-term geographic expansion and working capital as the business continues to grow.

Capital Expenditure

Software development costs aside, the Group's ongoing capital expenditure requirements are expected to be modest and focussed on extending the geographic reach of Connect with the expansion of the essensysCloud private network. During the year the Group invested £460,000 specifically in expanding and upgrading that network (2018: £nil). Other than capitalised software development costs (see below) and Right of Use Asset ("ROUA") additions, the Group incurred other capital expenditure of £262,000 related primarily to the establishment of its West Coast US operation and the implementation of new internal systems (2018: £176,000).

Capitalised Software Development Costs

The Group continues to invest in software development resulting in ongoing improvements in its two software platforms, Connect and Operate. During the year the Group established an outsourced offshore development centre with an external provider in Hanoi, Vietnam to accelerate this work. Where such work is expected to result in future revenue, costs incurred that meet the definition of software development in accordance with IAS38, Intangible Assets, are capitalised in the statement of financial position. During the year the Group capitalised £0.8m in respect of software development (2018: £0.6m).

In implementing its product development strategy following the IPO the Group anticipates capitalising software costs at a higher rate over the next few years during a period of accelerated product investment.

IFRS 16 Adoption & Right of Use Assets

In anticipation of the IPO, the Group adopted IFRS 16 for the production of the Historical Financial Information contained within the Group's Admission Document. This has altered the treatment of the following elements of the Group's operations, the future value of which are capitalised as Right of Use Assets and the annual costs of which are now treated as depreciation and interest:

·; Costs associated with the use of the Group's third party provided data centre locations which support the essensysCloud private network which were previously shown in cost of sales under UK GAAP; and

·; Costs associated with the leases of the Group's offices in London and New York which were previously included within administrative expenses under UK GAAP.

Dividend policy

The Group's intention in the short to medium term is to invest in development of the business order to deliver capital growth for shareholders. The Board has not recommended a dividend in respect of the year ended 31 July 2019.

Alan Pepper

Chief Financial Officer

21 October 2019

essensys plc

Consolidated Statement of Comprehensive Income

for the year ended 31 July 2019

essensys plc

Consolidated Statement of Financial Position

as at 31 July 2019

The financial statements were approved by the Board of Directors and authorised for issue on 21 October 2019.

Alan Pepper

Director

essensys plc

Consolidated Statement of Changes in Equity

for the Year Ended 31 July 2019

Consolidated Statement of Changes in Equity

For the Year Ended 31 July 2018

essensys plc

Consolidated Statement of Cash Flows

for the Year Ended 31 July 2019

essensys plc

Notes to the financial statements

for the year ended 31 July 2019

essensys plc (the "Company") is a public limited company, incorporated in the United Kingdom under the Companies Act 2006 (registration number 11780413). The Company is domiciled in the United Kingdom and its registered address is Aldgate Tower 7th Floor, 2 Leman Street, London. E1 8FA. The Company's ordinary shares are traded on the Alternate Investment Market (AIM) of the London Stock Exchange.

The Group's principal activities are the provision of software and technology platforms that manage the critical infrastructure and business processes, primarily of operators in the flexible workspace industry. These activities are carried out by the Group's wholly owned subsidiaries.

The Company's principal activity is to provide management services to its subsidiaries.

The financial statements for the year ended 31 July 2019 were authorised for issue by the Board of Directors and the Statements of Financial Position were signed on the Board's behalf by Mark Furness and Alan Pepper on 21 October 2019.

The Group's financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and the Financial Reporting Interpretations Committee (IFRIC) interpretations as endorsed by the European Union and bearing in mind those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

The financial statements of the Company have been prepared in manner consistent with those of the Group.

These financial statements have been prepared under the historical cost basis and are presented in Sterling and all values are rounded to the nearest thousand pounds (£000) except when otherwise indicated.

Publication of non-statutory accounts

In accordance with section 435 of the Companies Act 2006, the Directors advise that the financial information set out in this announcement for the years ended 31 July 2019 and 31 July 2018 do not constitute the Group's statutory financial statements for those years but is derived from those financial statements.

The statutory financial statements for the year ended 31 July 2018 have been audited and filed with the Registrar of Companies. The statutory financial statements for the year ended 31 July 2019 have been audited and will be delivered to the Registrar of Companies in due course.

The Independent Auditor's Reports on the Group's financial statements for the years ended 31 July 2019 and 31 July 2018 were unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

Going concern

The Group carefully manages financial resources, closely monitoring the working capital cycle. The Group has long term contracts with a number of customers and suppliers across different geographical areas and industries. Consequently, the Directors believe that the Group is well placed to manage its business risks successfully.

The Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. As part of their enquiries in this regard the Directors reviewed budgets, projected cash flows and other relevant information for the 12 months from the date of approval of the financial statements. The financial statements are prepared on a going concern basis which the Directors believe to be appropriate for the above reasons.

Basis of consolidation

The consolidated financial statements incorporate the results of essensys plc and all of its subsidiary undertakings.

essensys plc was incorporated on 22 January 2019, and on 16 May 2019 it acquired the issued share capital of essensys (UK) Ltd, previously essensys Limited, by way of a share for share exchange. The latter had four wholly owned subsidiaries:

·; essensys, Inc

·; Hubcreate Limited

·; TVOC Limited

·; Spacebuddi Limited

The consideration for the acquisition was satisfied by the issue of 38,836,044 ordinary shares in essensys plc to the shareholders of essensys (UK) Limited.

The accounting treatment in relation to the addition of essensys plc as a new UK holding company of the Group falls outside the scope of IFRS 3 'Business Combinations'. The share scheme arrangement constituted a combination of entities under common control due to all shareholders of essensys (UK) Ltd being issued shares in the same proportion, and the continuity of ultimate controlling parties. The reconstructed group was consolidated using merger accounting principles which treated the reconstructed group as if it had always been in existence. Any difference between the nominal value of shares issued in the share exchange and the book value of the shares obtained are recognised in a merger reserve.

The company has applied the statutory relief as prescribed by Companies Act 2006 in respect of the share for share exchange as the issuing company has secured more than 90% equity in the other entity. The carrying value of the investment is carried at the nominal value of the shares issued.

Revenue

The Group generates revenue in the UK and the United States of America (USA). Turnover represents services provided in the normal course of business, net of value added tax. Services provided to clients during the year, including any amounts which at the reporting date have not yet been billed to the clients, have been recognised as revenue.

(a) Invoicing

Set up and installation costs are partially invoiced once the customer contract is signed with the remaining balance invoiced when the service goes live. Fixed monthly costs are invoiced one month in advance and revenue is recognised in the month the service is provided. Deferred revenue is recognised for the Group's obligation to transfer services to customers for which they have already received consideration (or an amount of consideration is due) from the customer. Variable monthly costs (including internet usage and telephone call charges) are invoiced monthly in arrears and accrued revenue is recognised in the month that the services were consumed.

(b) Contracts and obligation

The majority of customer contracts have two main services that the Group provides to the customer:

·; Set up / installation

·; Ongoing monthly software, services and support

Where a contract is modified and the remaining services are distinct from the services transferred on or before the date of the contract modification, then the Group accounts for the contract modifications as if it were a termination of the existing contract and the creation of a new contract.

The amount of consideration allocated to the remaining performance obligations is the sum of the consideration promised by the customer and the consideration promised as part of the contract modification.

(c) Determining the transaction price

The transaction price is determined as the fair value of the consideration the Group expects to receive over the course of the contract. There are no incentives given to customers that would have a material effect on the financial statements.

(d) Allocate the transaction price to the performance obligations in the contract

The allocation of the transaction price to the performance obligations in the contract is non-complex for the Group. There is a fixed unit price for each product sold. Therefore, there is limited judgement involved in allocating the contract price to each unit ordered.

(e) Recognise revenue when or as the entity satisfies its performance obligations

The contracts may cover multiple sites, but the overarching terms are consistent in each contract. The set up/installation is seen as a distinct performance obligation and revenue is recognised at a point in time, when the installation is completed, and any hardware is provided to the client for their use. The customer can benefit from the set up / installation such as new internet connectivity or new hardware provided, and therefore revenue is recognised in full when these services are provided.

The second performance obligation is the provision of software, infrastructure and on-demand services over the term of the contract, and the Group recognises the revenue each month as it provides these services for the duration of the contract, i.e. over time.

Finance income

Finance income comprises interest receivable on funds invested and loans to related parties. Interest income is recognised in profit or loss as it accrues using the effective interest method.

Finance costs

Finance costs comprise interest on bank loans, lease obligations and other interest payable. Interest on bank loans and other interest is charged to the consolidated statement of comprehensive income over the term of the debt using the effective interest rate method so that the amount charged is at a constant rate on the carrying amount. Issue costs are initially recognised as a reduction in the proceeds of the associated capital instrument.

Intangible assets

(a) Internal software development

Research expenditure is written of in the year in which it is incurred.

Expenditure on internally developed products is capitalised if it can be demonstrated that:

·; it is technically and commercially feasible to develop the asset for future economic benefit;

·; adequate resources are available to maintain and complete the development;

·; there is the intention to complete and develop the asset for future economic benefit;

·; the company is able to use the asset;

·; use of the asset will generate future economic benefit; and

·; expenditure on the development of the asset can be measured reliably.

Where the costs are capitalised, they are written off over their economic life which is considered by the directors to be 5 to 7 years.

(b) Goodwill

Goodwill arising on the acquisition of a business represents the excess of the fair value of the consideration and the fair value of the Group's share of the identifiable assets and liabilities acquired. The identifiable assets and liabilities acquired are incorporated into the consolidated financial statements at their fair value to the Group.

Subsequent to initial recognition, goodwill is measured at cost less accumulated impairment losses. Goodwill is tested for impairment annually. Any impairment is recognised immediately in the Consolidated Statement of Comprehensive Income and is not subsequently reversed. On disposal of a business, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

(c) Other intangible assets

Other intangible assets are initially recognised at cost or, if recognised as part of a business combination, at fair value. After recognition, intangible assets are measured at cost or fair value less any accumulated amortisation and any accumulated impairment losses. Amortisation is calculated to write off the cost or fair value of intangible assets in equal annual instalments over their estimated useful lives and is included within administrative expenses.

The estimated useful lives for other intangible fixed assets range as follows:

Property, plant and equipment

Property, plant and equipment is carried at historical cost less accumulated depreciation and any accumulated impairment losses. Historical cost comprises the aggregate amount paid to acquire assets and includes costs directly attributable to making the asset capable of operating as intended.

At each reporting date the Group assesses whether there is an indication of impairment. If such indication exists, the recoverable amount of the asset is determined which is the higher of its fair value less costs to sell and its value in use. An impairment loss is recognised where the carrying value exceeds the recoverable amount.

Depreciation is charged so as to allocate the cost of assets less their residual value over their estimated useful lives or, if held under a finance lease, over the shorter of the lease term and the estimated useful life, using the straight line method. Depreciation is provided at the following annual rates:

The assets' residual values, useful lives and depreciation methods are reviewed, and adjusted prospectively if appropriate, if there is an indication of a significant change since the last reporting date.

Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within 'other operating income or losses' in the statement of comprehensive income.

Leasehold improvements include security equipment purchased.

Foreign currency translation

(a) Functional and presentation currency

Items included in the financial information of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ("the functional currency"). The consolidated financial information is presented in 'sterling', which is essensys plc's functional and the Group's presentation currency.

On consolidation, the results of overseas operations are translated into sterling at rates approximating to those ruling when the transactions took place. All assets and liabilities of overseas operations are translated at the rate ruling at the reporting date, including any goodwill in relation to that entity. Exchange differences arising on translating the opening net assets at opening rate and the results of overseas operations at actual rate are recognised in other comprehensive income.

(b) Transactions and balances

Foreign currency transactions are translated into essensys plc's functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss.

Foreign exchange gains and losses that relate to borrowings and cash and cash equivalents are presented in profit or loss within 'finance income or costs. All other foreign exchange gains and losses are presented in the statement of comprehensive income within 'other operating income or expense'.

Inventories

Inventories are valued at the lower of cost and net realisable value. Inventories consist exclusively of work in progress, which are items that have been purchased and allocated to satisfy specific customer contracts. As the items have yet to be installed at the customer location, and where title has not yet passed, they remain on the statement of financial position until title has passed.

Trade and other receivables

Trade receivables, which are generally received by the end of the month following terms, are recognised and carried at the lower of their original invoiced value less provision for expected credit losses.

Cash and cash equivalents

All cash and short-term investments with original maturities of three months or less are considered cash and cash equivalents, since they are readily convertible to cash. These short-term investments are stated at cost, which approximates fair value.

Trade and other payables

Trade payables are obligations to pay for goods and services that have been acquired in the ordinary course of business from suppliers. Trade and other payables are recognised at original cost.

Exceptional items

Exceptional items are those that, in the Directors' view, are required to be separately disclosed by virtue of the size or incidence to enable a full understanding of the Group's financial performance.

Taxation

The tax expense for the period comprises current and deferred tax. Tax is recognised in the consolidated statement of comprehensive income, except that a charge attributable to an item of income or expense recognised as other comprehensive income or to an item recognised directly in equity is also recognised in other comprehensive income or directly in equity respectively.

The current income tax charge is calculated on the basis of tax rates and laws that have been enacted or substantively enacted by the reporting date in the countries where essensys plc's subsidiaries operate and generate taxable income.

Deferred tax balances are recognised in respect of all timing differences that have originated but not reversed by the statement of financial position date, except:

·; The recognition of deferred tax assets is limited to the extent that it is probable that they will be recovered against the reversal of deferred tax liabilities or other future taxable profits;

·; Any deferred tax balances are reversed if and when all conditions for retaining associated tax allowances have been met; and

·; Where timing differences relate to interests in subsidiaries, associates, branches and joint ventures and the Group can control their reversal and such reversal is not considered probable in the foreseeable future.

Deferred tax balances are not recognised in respect of permanent differences except in respect of business combinations, when deferred tax is recognised on the differences between the fair values of assets acquired and the future tax deductions available for them and the differences between the fair values of liabilities acquired and the amount that will be assessed for tax. Deferred income tax is determined using tax rates and laws that have been enacted or substantively enacted by the reporting date.

Share capital

Ordinary shares are classified as equity. There is one class of ordinary share in issue, as detailed in note 20.

Reserves

The Group and Company's reserves are as follows:

·; Called up share capital reserve represents the nominal value of the shares issued;

·; The share premium account includes the premium on issue of equity shares, net of any issue costs;

·; Share based payment reserve represents the cost of the shares issued under the relevant share option schemes;

·; Merger reserve arose on the business combination that was accounted for as a merger in accordance with FRS 102;

·; Retained earnings represents cumulative profits or losses, net of dividends paid and other adjustments.

Financial assets

The Group classifies all of its financial assets at amortised cost. Financial assets do not comprise prepayments. Management determines the classification of its financial assets at initial recognition.

The Group's financial assets held at amortised cost comprise trade and other receivables and cash and cash equivalents in the consolidated statement of financial position. These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise principally through the provision of goods and services to customers (e.g. trade receivables), but also incorporate other types of financial assets where the objective is to hold their assets in order to collect contractual cash flows and the contractual cash flows are solely payments of the principal and interest. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment.

Impairment provisions for trade receivables are recognised based on the simplified approach within IFRS 9 using the lifetime expected credit losses. During this process the probability of the non-payment of the trade receivables is assessed. This probability is then multiplied by the amount of the expected loss arising from default to determine the lifetime expected credit loss for the trade receivables. For trade receivables, which are reported net; such provisions are recorded in a separate provision account with the loss being recognised within administrative expenses in the consolidated statement of comprehensive income. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision.

The expected loss rates are based on the Group's historical credit losses experienced over the last three periods prior to the period end. The historical loss rates are then adjusted for current and forward-looking information on macroeconomic factors affecting the Group's customers. The Group has identified the gross domestic product (GDP), unemployment rates and inflation rate as the key macroeconomic factors in the countries that the Group operates.

Impairment provisions for other receivables are recognised based on the general impairment model within IFRS 9. Under the General approach, at each reporting date, the Group determines whether there has been a significant increase in credit risk (SICR) since initial recognition and whether the loan is credit impaired. This determines whether the loan is in Stage 1, Stage 2 or Stage 3, which in turn determines both the amount of ECL to be recognised i.e. 12-month ECL or Lifetime ECL.

Financial liabilities

The Group classifies its financial liabilities in the category of financial liabilities at amortised cost. All financial liabilities are recognised in the statement of financial position when the Group becomes a party to the contractual provision of the instrument.

Financial liabilities measured at amortised cost include:

·; Trade payables and other short-dated monetary liabilities, which are initially recognised at fair value and subsequently carried at amortised cost using the effective interest rate method.

·; Bank and other borrowings are initially recognised at fair value net of any transaction costs directly attributable to the issue of the instrument. Such interest-bearing liabilities are subsequently measured at amortised cost using the effective interest rate method, which ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the consolidated statement of financial position. For the purposes of each financial liability, interest expense includes initial transaction costs and any premium payable on redemption, as well as any interest or coupon payable while the liability is outstanding.

Unless otherwise indicated, the carrying values of the Group's financial liabilities measured at amortised cost represents a reasonable approximation of their fair values.

Impairment of assets

Assets that are subject to depreciation or amortisation are assessed at each reporting date to determine whether there is any indication that the assets are impaired. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units or CGUs).

Where there is any indication that an asset may be impaired, the carrying value of the asset (or CGUs to which the asset has been allocated) is tested for impairment. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's (or CGU's) fair value less costs to sell and value in use. Non-financial assets that have been previously impaired are reviewed at each reporting date to assess whether there is any indication that the impairment losses recognised in prior periods may no longer exist or may have decreased. Goodwill is reviewed for impairment on an annual basis, with any impairment to goodwill not reversed at a later period.

Business combinations

The acquisition method of accounting is used to account for all business combinations, regardless of whether equity instruments or other assets are acquired.

The consideration transferred for the acquisition of a subsidiary comprises the:

·; fair values of the assets transferred

·; liabilities incurred to the former owners of the acquired business

·; equity interests issued by essensys plc Group

·; fair value of any asset or liability resulting from a contingent consideration arrangement, and

·; fair value of any pre-existing equity interest in the subsidiary.

Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. Acquisition related costs are expensed as incurred.

The excess of the consideration transferred and acquisition-date fair value of any previous equity interest in the acquired entity over the fair value of the net identifiable assets acquired is recorded as goodwill.

Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity's incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions.

Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability are subsequently remeasured to fair value with changes in fair value recognised in profit or loss.

Share-based payments

Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date.

The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group's estimate of the number of equity instruments that will eventually vest. At each reporting date, the Group revises its estimate on the number of equity investments expected to vest. The impact of the revision of the original estimates, if any, is recognised in the Statement of Comprehensive Income over the remaining vesting period, with a corresponding adjustment to the Share Based Payment Reserve.

Leases

All leases are accounted for by recognising a right-of-use asset and a lease liability except for leases of low value assets; and leases with a duration of twelve months or less, in line with the requirements of IFRS 16.

Lease liabilities are measured at the present value of the contractual payments due to the lessor over the lease term, with the discount rate determined by reference to the rate inherent in the lease unless (as is typically the case) this is not readily determinable, in which case the Group's incremental borrowing rate on commencement of the lease is used. Variable lease payments are only included in the measurement of the lease liability if they depend on an index or rate. In such cases, the initial measurement of the lease liability assumes the variable element will remain unchanged throughout the lease term. Other variable lease payments are expensed in the period to which they relate.

On initial recognition, the carrying value of the lease liability also includes:

·; Amounts expected to be payable under any residual value guarantee;

·; The exercise price of any purchase option granted in favour of the Group if it is reasonable certain to assess that option;

·; Any penalties payable for terminating the lease, if the term of the lease has been estimated on the basis of termination option being exercised.

Right-of-use assets ("ROUA") are initially measured at the amount of the lease liability, reduced for any lease incentives received, and increased for:

·; Lease payments made at or before commencement of the lease;

·; Initial direct costs incurred; and

·; The amount of any provision recognised where the Group is contractually required to dismantle, remove or restore the leased asset.

Subsequent to initial measurement lease liabilities increase as a result of interest charged at a constant rate on the balance outstanding and are reduced for lease payments made. Right-of-use assets are amortised on a straight-line basis over the remaining term of the lease or over the remaining economic life of the asset if, rarely, this is judged to be shorter than the lease term.

When the Group revises its estimate of the term of any lease (because, for example, it re-assesses the probability of a lessee extension or termination option being exercised), it adjusts the carrying amount of the lease liability to reflect the payments to make over the revised term, which are discounted at the same discount rate that applied on lease commencement. The carrying value of lease liabilities is similarly revised when the variable element of future lease payments dependent on a rate or index is revised. In both cases an equivalent adjustment is made to the carrying value of the right-of-use asset, with the revised carrying amount being amortised over the remaining (revised) lease term.

When the Group renegotiates the contractual terms of a lease with the lessor, the accounting depends on the nature of the modification:

·; If the renegotiation results in one or more additional assets being leased for an amount commensurate with the standalone price for the additional rights-of-use obtained, the modification is accounted for as a separate lease in accordance with the above policy;

·; In all other cases where the renegotiated increases the scope of the lease (whether that is an extension to the lease term, or one or more additional assets being leased), the lease liability is remeasured using the discount rate applicable on the modification date, with the right-of-use asset being adjusted by the same amount;

·; If the renegotiation results in a decrease in the scope of the lease, both the carrying amount of the lease liability and right-of-use asset are reduced by the same proportion to reflect the partial or full termination of the lease with any difference recognised in profit or loss. The lease liability is then further adjusted to ensure its carrying amount reflects the amount of the renegotiated payments over the renegotiated term, with the modified lease payments discounted at the rate applicable on the modification date. The right-of-use asset is adjusted by the same amount.

For contracts that both convey a right to The Group to use an identified asset and require services to be provided to The Group by the lessor, The Group has elected to account for the entire contract as a lease, i.e. it does allocate any amount of the contractual payments to, and account separately for, any services provided by the supplier as part of the contract.

Retirement benefits

The Group operates a number of defined contribution plans. A defined contribution plan is a pension plan under which the employer pays fixed contributions into a separate entity. Contributions payable to the plan are charged to the income statement in the period in which they relate. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods.

Holiday pay accrual

All employees accrue holiday pay during the calendar year, the Board encourages all employees to use their full entitlement throughout the year. A liability is recognised to the extent of any unused holiday pay entitlement which has accrued at the statement of financial position date and carried forward to future periods. This is measured at the undiscounted salary cost of the future holiday entitlement so accrued at the balance sheet date.

Standards adopted in the year

 (a) IFRS 9 Financial Instruments (IFRS9)

IFRS 9 has replaced IAS 39 Financial Instruments and Measurement (IAS 39), and contains the requirement for:

·; the classification and measurement of financial assets and financial liabilities

·; impairment methodology, and

·; general hedge accounting

The Group applies the IFRS 9 simplified approach to measuring expected credit losses using a lifetime expected credit loss provision for trade receivables and contract assets. To measure expected credit losses on a collective basis trade receivables and contract assets are grouped based on similar credit risk and aging. The contract assets have similar risk characteristics to the trade receivables for similar types of contracts.

The expected loss rates are based on the Group's historical credit losses experienced over the last three periods prior to the period end. The historical loss rates are then adjusted for current and forward-looking information on macroeconomic factors affecting the Group's customers. The Group has identified the gross domestic product (GDP), unemployment rates and inflation rate as the key macroeconomic factors in the countries that the Group operates.

Given the nature of the Group's financial assets and liabilities and the limited bad debt history, the adoption of IFRS 9 has had no material impact on the financial statements.

 (b) IFRS 15 Revenue from Contracts with Customers (IFRS 15)

IFRS 15 is a prescriptive standard which requires a business to identify the performance obligations which are contracted with its customer base. The Directors have reviewed the requirements of IFRS 15 and updated the accounting policies as appropriate. The changes have been both narrative and required adjustment to prior periods. The financial statements have been presented as such that the comparatives already include the adjustments required under IFRS 15.

 (c) IFRS 16 Leases (IFRS 16)

The Group chose to adopt IFRS 16 in advance of its mandatory introduction date for accounting periods commencing on or after 1 January 2019. The standard has been applied fully retrospectively and so comparatives are accounted for under IFRS16.

IFRS 16 supersedes International Accounting Standard (IAS) 17 Leases and introduces new single lessee accounting model which eliminates the current distinction between operating and finance leases for lessees. The primary impact on the Group's financial statements are due to the required changes of the Group's operating leases. The new standard requires that the obligations to pay future lease rentals over the expected lease term be recognised as a lease liability (current and non-current) discounted at the incremental borrowing rate with a corresponding RoUA also being recognised in the Statement of Financial Position. The impact has been a material change in the gross assets and liabilities, as a result of recognising the leases as RoUA and liabilities, for the change in accounting policy, however there has not been a material impact in the value of the Group's net assets. Additionally, whilst the depreciation on the RoUA and the interest on the finance liability would be different to the present operating charges, there is not a material impact on the financial statements.

Standards, amendments and interpretations not yet effective

There are no standards issued not yet effective that will have a material effect on the Group's financial statements. The Group has not early adopted any standards, interpretations or amendments that have been issued but are not yet effective. The Group does not expect any of the following standards issued by the IASB, but not yet effective, to have a material impact on the Group:

·; IFRS 9 (2014) Financial Instruments (Amendment - Prepayment Features with Negative Compensation and Modification of Financial Liabilities);

·; IFRIC 23 Uncertainty over Income Tax Treatments;

·; IAS 28 Investments in Associates and Joint Ventures (Amendment - Long-term Interests in Associates and Joint Ventures);

·; Annual Improvements to IFRSs 2015 - 2017 Cycle; and

·; IAS 19 Employee Benefits (Amendment - Plan Amendment, Curtailment or Settlement).

The Group makes certain estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based on historical experience and other factors, including the expectation of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. The estimates and judgements that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are detailed below.

Capitalisation of development costs

Costs are capitalised in relation to the development of the underlying software utilised within the Group. The most critical judgement is establishing whether the costs capitalised meet the criteria set out within IAS 38. Further, the most critical estimate is how the intangible asset can generate future economic benefit. Projects that are maintenance in nature are expensed as incurred whereas development that generates benefits to the group are capitalised. After capitalisation management monitors whether the recognition requirements continue to be met and whether there are any indicators that the capitalised costs are required to be impaired. See note 14 for details of amounts capitalised.

Measurement and impairment of goodwill and intangible assets

As set out in note 4 above the carrying value of goodwill is reviewed for impairment at least annually and for other intangible assets when an indication of impairment is identified. In determining whether goodwill or intangible assets are impaired, an estimation of the value in use of the Group is required. This calculation of value in use requires estimates to be made relating to the timing and amount of future cash flows expected and suitable discount rates based on the Group's weighted average cost of capital, in addition to the estimation involved in preparing the initial projected cash flows for the next 5 years.

These estimates have been used to conclude that no impairment is required to either goodwill or intangible assets but are judgemental in nature. See note 14 for details of the key assumptions made.

Accounting for IPO

During the year the Group incurred a total £2.3m of costs associated with its listing on the Alternative Investment Market of the London Stock Exchange (the "IPO"). Of this, £0.8m has been deducted against the share premium that resulted from the funds raised at IPO with the balance of £1.5m being expensed in the year. In assessing the appropriate treatment of the overall expenditure, the Group has reviewed the IPO related expenditure in detail and only deducted from the share premium account those costs that can, in management's judgement, be directly or reasonably proportionately attributed to the share proceeds raised for the Group at IPO.

Valuation of Share Options

During the year the Group incurred a share-based payment charge of £979,000, of which £897,000 was in relation to share options in existence in essensys (UK) Limited (formerly Essensys Limited) issued prior to the IPO which were exercised shortly before the IPO. The balance of £82,000 comprised the amount chargeable to the year ended 31 July 2019 in respect of options in the Company issued on 28 May 2019, immediately prior to the IPO.

The charge in respect of the pre-IPO options in essensys (UK) Limited was based on valuations undertaken at the time of grants of options using a discounted cash flow valuation of that business. That valuation took into account recent financial performance at that time together with management's estimate then of future financial performance, that company's cost of capital and expected long term growth rate. As the pre-IPO option scheme was a 'exit only' scheme, the entire charge relating to that option scheme was expensed during the year ended 31 July 2019 as all outstanding options vested and were exercised shortly prior to the IPO.

The charge related to options in the Company at IPO was based on valuations undertaken using a Black Scholes or Monte Carlo Simulation option pricing models, depending on the type of option. In assessing that valuation judgements were made as to likely share price volatility, the expected life of the options issued, the proportion that would be exercised, the risk free rate applicable and the likely achievement of performance targets where applicable. The valuation of those options issued at IPO is spread over the vesting period and there will, therefore, be further share based payment expenses in future years in relation to those options issued as part of the IPO process.

The Group generates revenue largely in the UK and the USA. The majority of the Group's customers provide flexible office facilities together with ancillary services (e.g. meeting rooms and virtual services) including technology connectivity.

The Group generates revenue from the following activities:

·; Establishing services at customer sites (e.g. providing and managing installations, equipment and training on software);

·; Recurring monthly fees for using the Group's software platforms;

·; Revenue from usage of on demand services such as internet and telephone usage and other, on demand, variable services; and

·; Other ad-hoc services.

The Group has one single business segment which is the provision of software and technology platforms that manage the critical infrastructure and business processes, primarily to the flexible workspace industry. The Group has two revenue segments and two geographical segments, as detailed in the tables below.

Contract assets are included within 'trade and other receivables' and contract liabilities is shown respectively on the face of the statement of financial position. Contract assets arise from the Group's revenue contracts, where work is performed in advance of invoicing customers, and where revenue is received in advance of work performed. Cumulatively, payments received from customers at each balance sheet date do not necessarily equal the amount of revenue recognised on the contracts. Commission costs capitalised on contracts represents internal sales commission costs incurred on signing of customer contracts and, in line with the requirements of IFRS15, spread over the life of the customer contract. Prior to the current year the Group expensed these costs in the year of the relevant contract started.

The tax assessed for the year is higher than the standard rate of corporation tax in the UK applied to profit before tax. The differences are explained below: