Gattaca Regulatory News (GATC)

27 March 2020

Gattaca plc

 ("Gattaca" or "the Group")

Interim Results for the six months ended 31 January 2020

Gattaca plc, the specialist Engineering and Technology (IT & Telecoms) recruitment solutions business, today announces its Interim Results for the six months ended 31 January 2020.

Financial Highlights

Financial Performance

Operational Performance

Improvement Plan

During H1 2020, further progress was made in our Group-wide Improvement Plan. Key workstreams include:

Outlook

The Board of Gattaca recognises that these are unprecedented times and that the necessary actions the Government is taking to control COVID-19 is inevitably causing disruption to the economy. As with all businesses, we are not immune to this and are currently experiencing a significant reduction in permanent placements and a reduction in active contractors, our core business, of approximately 20% from pre-COVID-19 levels. We anticipate further reductions in contractors and permanent placements in due course.

The Group is implementing mitigating actions, including placing over a third of its UK workforce into the Government Coronavirus Job Retention Scheme (based on our understanding of it at this time), deferring HMRC payments to the end of the tax year which will provide a significant increase in short term liquidity; and we are temporarily reducing working hours and pay of the remaining workforce by 20%.

Nonetheless, the current situation will inevitably have a material impact on Group profitability for the year. Given the evolving and dynamic nature of the situation, we will not be in a position to provide meaningful guidance on FY20 until there is greater clarity around the broader economic situation and how it will impact on our business.

The Group is in constructive dialogue with its bank and the Board expects to reach an agreement on revised terms that will address any covenant issues.

Commenting on the results, Kevin Freeguard, Chief Executive Officer said:

"Gattaca experienced a challenging environment across the staffing market, driven by economic and political uncertainty in the UK for the first five months of FY20 (August to December 2019). Subsequently, the COVID-19 pandemic has brought significant uncertainty to our business and we have implemented our business continuity plans accordingly, with the entirety of our staff working remotely, enabling the business to remain fully operational. The response from the Gattaca team has been exceptional. In addition, Government support including the Job Retention Scheme and HMRC payment deferrals, is welcome and increases our financial resilience.

The Board is acutely aware of its responsibility to all stakeholders in these difficult circumstances and is committed to providing the best support it can to protect staff, contractors and clients.

As a core provider of engineering and technology skills which remain critical at this time, we continue to fulfil client requirements both on existing and new projects. The coming months will be very challenging for our business but we believe that the actions we are taking will position us well for when the economy begins to recover."

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014. Upon the publication of this announcement via a Regulatory Information Service, this inside information is now considered to be in the public domain.

The following footnotes apply, unless where otherwise indicated, throughout these Interim Results:

1 NFI is calculated as revenue less contractor payroll costs

2 Continuing underlying results exclude the NFI and trading (losses) / profits before taxation of discontinued businesses being the contract Telecoms Infrastructure markets in Africa, Asia and Latin America as well as operations in Dubai, Malaysia and Qatar (2020 1H: £(1.0)m, 2019 1H: £(2.6)m), non-underlying items within administrative expenses in 2020 1H primarily related to restructuring and gains on sale of investments (2020 1H: £0.1m, 2019 1H: £0.8m), amortisation of acquired intangibles (2020 1H: £0.3m, 2019 1H: £0.6m), and exchange (losses) / gains from revaluation of foreign assets and liabilities (2020 1H: £(1.5)m, 2019 1H: £0.0m).

3 Included within Net Debt are Capitalised Financing costs (31 January 2020: £0.3m, 31 July 2019: £0.2m)

For further information please contact:

Operational Performance

UK Engineering

UK Engineering was down -7% on H1 2019. This reflects challenging market conditions primarily driven by political uncertainty within the UK and the upcoming IR35 regulatory changes which have now been postponed to April 2021.

Infrastructure NFI declined -4% year-on-year. Demand remained particularly strong within the Highways and Civil Engineering market driven by the 'Routes to Market' initiative and increased funding for smart motorway schemes. However, the Buildings sector continued to see delays in investment for large private projects. In two of our key contract markets, Water and Rail, the markets were working through the end of current funding cycles tempering demand in the short term, although the AMP 7 Water cycle starts on 1 April 2020 and the Rail CP6 cycle started in November 2019.

Engineering Technology, operating in the area of convergence between traditional engineering and IT skill sets, achieved 3% growth. This was due to increasing demand for niche skills across all sectors, (particularly defence and rail), alongside technological advances bringing the opportunity for greater connectivity and smart infrastructure. We are aligning this business more closely with our Technology business unit in order to maximise the opportunities within this area.

NFI within our mobility markets declined by -23% as the Auto and Maritime business units in particular struggled in the face of uncertainty and lack of investment by end customers; we are yet to see any sign of recovery in these markets.

UK Technology

UK Technology was down -25% on H1 2019, as the restructure of the UK technology division continued. We have a new leadership team in place and have aligned the business to market sectors. There are indications that the UK Technology division is stabilising, with NFI during the second quarter increasing by 6% on the first quarter.

We continue to see significant UK opportunities for technology skills and seek to place ourselves in those markets with high demand, particularly Data Science, Cloud, AI, Cyber and all Java, Python and Javascript programming languages.

International

International NFI was down 21% on H1 2019 at £4.0m (2019 H1: £5.1m). Excluding China, International NFI was down 14% year-on-year.

The Americas region, in particular the US again underperformed against expectations with NFI down 17% against the prior year. We continue to focus on shifting the balance towards providing contract recruitment services, specifically to clients that are particularly focused across the Energy and Infrastructure markets for engineering skills, and across the Financial Services and Technology markets for technology skills. This move towards the contract market has yet to flow through into NFI growth, whilst permanent recruitment has declined.

£0.5m of the NFI decline related to the China business; we announced our intention to cease operations in China after the period end.

Global Contractor and Permanent mix

Our sales mix remained relatively stable with Permanent Fees accounting for 29% of NFI in H1 2020 (H1 2019: 30%).

People

Gattaca's permanent FTE headcount at 31 January 2020 was 681, a reduction of 55 from 31 January 2019. The ratio of sales to support staff was 73:27, consistent with the ratio at 31 January 2019.

Improvement Plan

Further progress was made in our Group-wide Improvement Plan. Key workstreams include:

Financial Overview

Revenue for the period was -8% versus H1 2019 at £297.9m (H1 2019: £322.3m), on a continuing basis.

NFI of £32.2m represented a -12% year on year decline on a continuing basis. Contract NFI margin was 7.9% (2019 full year: 8.0%) partly impacted by the increased mix of Solutions business which can be at lower margins but is a more profitable business area.

Underlying EBITDA for the period at £5.2m (H1 2019: £8.4m) was -39% lower than H1 2019 on a continuing reported basis. This reflects the decline in NFI from both UK and International operations with a flat administrative cost base following further headcount actions taken to mitigate investment and cost inflation.

On an underlying continuing basis the effective tax rate was 32.8% (H1 2019: 24.3%). The Group's continuing underlying effective tax rate reported at 31 July 2019 was 22.0%. This increase in the effective tax rate for the continuing business is due overseas losses cannot be offset against UK profits.

Basic underlying earnings per share from continuing operations were 5.7p (H1 2019: 16.0p) and adjusted underlying diluted earnings per share from continuing operations were 5.5p (H1 2019: 15.8p).

Administrative costs

Underlying administrative costs of £28.6m are flat on H1 2019 as we continue to maintain our focus on cost reduction initiatives whilst investing in those areas where we see strategic long-term value.

Non-underlying costs and discontinued operations

The principle elements of 2020 H1 continuing non-underlying costs of £0.1m (H1 2019: £0.8m) are as follows:

The gain on disposal of investment relates to the sale of Gattaca's 10% holding in Concillium Search Limited on 27 November 2019.

In our 2020 full year accounts, China is expected to be disclosed within discontinued operations. Loss before tax in H1 2020 for Chinese operations was £0.5 million (H1 2019: £0.2 million).

Financing costs

Net financing costs of £2.3m (H1 2019 £1.0m) were £1.3m higher primarily due to a £1.4m increase in foreign exchange impacts on translation of foreign currency balances within local entities (treated as non-underlying) compared to prior year. Bank interest payable was £0.2m lower due to the lower average net debt balance through the period compared to H1 2020 and the benefit of reduced borrowing costs following the refinancing in November 2019.

Pro forma Group continuing PBT excluding China operations

On 9 March 2020, the Group commenced communications with the management and employees of its Chinese subsidiary, announcing the closure of our China operations. It was expected that we would see a significant reduction in the losses in 2020 but that was not the case, even before the impact of the COVID-19 pandemic, and the decision was accordingly made to direct our resources to better performing areas of the business.

Consequently, in our 2020 full year accounts, China will be disclosed within discontinued operations.

The pro-forma results for the 6 month period to 31 January 2020 and comparatives, excluding the results of the Chinese operations, would be as follows:

Debtors, cash flow, net debt and financing

Net debt reduced to £3.1m (31 July 2019: £24.8m; 31 January 2019: £27.8m) driven by further working capital improvements and the introduction of non-recourse invoice financing facilities (£16.0m).

Our Days Sales Outstanding ('DSO'), stands at 39 days, an improvement from 31 July 2019 (45 days) and from the prior year (31 Jan 2019: 46 days). This development represents an improvement of approximately £12.0m in working capital.

Capital expenditure in the period of £1.3m H1 (2019: £1.1m) was primarily investment in software related to our Primary Business Systems initiative where we are replacing our in-house built legacy systems with standardised industry leading third party systems. This should lead to improvements in productivity, agility and effectiveness.

On 31 October 2019, the Group renewed its financing facilities with HSBC, extending the term loan out to October 2022. The three-year facility agreement includes a £15m Revolving Credit Facility (RCF) and a £75m Invoice Financing Facility. On 19 January 2020 the Group's invoice financing facility was restructured from a recourse only basis to be split between a recourse and a non-recourse basis. This has enabled the Group to achieve a lower cost of borrowing and has also resulted in the non-recourse element of the facility being derecognised as Group debt under IFRS.

Dividend

The Board is not recommending an interim dividend given the uncertainty surrounding COVID-19 and the subsequent economic headwinds in the UK. 

Risks

The Board considers strategic, financial and operational risks and identifies actions to mitigate those risks. Key risks and their mitigations were disclosed on pages 38 to 41 of the Annual Report for the year ended 31 July 2019. 

We continue to manage a number of potential risks and uncertainties including contingent liabilities as noted in the interim accounts - many of which are common to other similar businesses - which could have a material impact on our longer-term performance.

In addition to the risks set out in our last Annual Report, there is the additional risks caused by the COVID-19 pandemic and its onward consequences. This impacts all companies in the UK and across most of the globe. In addition to the potential impact on the UK economic performance and loss of revenue to our business, our concern would be of any significant extension in debtor days as a result of cash flow problems at our clients, although there are actions that the Group could quickly implement to mitigate such risks. We are closely monitoring all our clients. A significant deterioration in payment terms would significantly impact the Group's liquidity.

Outlook

The Board of Gattaca recognises that these are unprecedented times and that the necessary actions the Government is taking to control COVID-19 is inevitably causing disruption to the economy. As with all businesses, we are not immune to this and are currently experiencing a significant reduction in permanent placements and a reduction in active contractors, our core business, of approximately 20% from pre-COVID-19 levels. We anticipate further reductions in contractors and permanent placements in due course.

The Group is implementing mitigating actions, including placing over a third of its UK workforce into the Government Coronavirus Job Retention Scheme (based on our understanding of it at this time), deferring HMRC payments to the end of the tax year which will provide a significant increase in short term liquidity; and we are temporarily reducing working hours and pay of the remaining workforce by 20%.

Nonetheless, the current situation will inevitably have a material impact on Group profitability for the year. Given the evolving and dynamic nature of the situation, we will not be in a position to provide meaningful guidance on FY20 until there is greater clarity around the broader economic situation and how it will impact on our business.

The Group is in constructive dialogue with its bank and the Board expects to reach an agreement on revised terms that will address any covenant issues.

CONDENSED CONSOLIDATED INCOME STATEMENT

for the period ended 31 January 2020

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the period ended 31 January 2020

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the period ended 31 January 2020

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

for the period ended 31 January 2020

The notes of pages 6 to 17 are an integral part of these interim financial statements.

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

for the period ended 31 January 2020

(1) Included in Cash and cash equivalents is £894,000 of restricted cash which meets the definition of cash and cash equivalents but is not available for use by the Group. These balances arise from the Group's non-recourse working capital arrangements.

NOTES

forming part of the financial statements

1 THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES

i The Business of the Group

Gattaca plc (the Company) and its subsidiaries (together the Group) is a human capital resources business providing contract and permanent recruitment services in the Private and Public Sectors. The Company is a public limited company, which is listed on the Alternative Investment Market (AIM) and is incorporated and domiciled in England, United Kingdom. The Company's address is: 1450 Parkway, Solent Business Park Whiteley, Fareham, Hampshire, PO15 7AF. The registration number is 04426322.

ii Basis of preparation of interim financial information

These condensed consolidated interim financial statements are for the six months ended 31 January 2020. They have been prepared in accordance with IAS 34 "Interim Financial Reporting". They do not include all of the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements for the year ended 31 July 2019 which have been filed with the Registrar of Companies. The auditor's report on those financial statements was unqualified and did not contain a statement under section 498 of the Companies Act 2006.

These condensed consolidated interim financial statements (the interim financial statements) have been prepared in accordance with the accounting policies set out below which are based on the recognition and measurement principles of IFRS in issue as adopted by the European Union (EU) and are effective at 31 January 2020 or are expected to be adopted and effective at 31 January 2020.

These financial statements have been prepared under the historical cost convention. The accounting policies have been applied consistently throughout the Group for the purposes of preparation of these condensed interim financial statements. A summary of the principal accounting policies of the Group are set out below.

iii Going concern

The Directors have reviewed forecasts and budgets for the coming year, which have been drawn up with appropriate regard for the current macroeconomic environment and the particular circumstances in which the Group operates.

There is significant uncertainty regarding the potential future impact of the COVID-19 outbreak on our clients and resultant trading activity, and any potential disruption to our own operations. We continue to monitor any changes and have regular management and weekly Board meetings to assess the situation. We have a wide spread of customers across multiple sectors but recognise that COVID-19 could impact many of our customers.

All of our staff have now been working remotely for over a week and there has not been any significant impact to our ability to operate effectively. A reduction in contractor numbers whilst impacting profitability, generally results in reduced working capital requirements and will create further liquidity. Our concern would be any significant extension in debtor days as a result of cash flow problems at our clients although there are actions that the Group could quickly implement to substantially mitigate such risks. A significant deterioration in payment terms would significantly impact the Group's liquidity.

We have modelled the impact of a number of scenarios including a loss of almost all of our permanent income for six months and a 50% reduction in contractor income over the same period. This model also includes a significant proportion of the UK workforce moving into the Government Coronavirus Job Retention Scheme for six months (based on our understanding of it at this time) and deferment of HMRC payments to the end of the tax year which provides a significant increase in short term liquidity.

Our current bank facilities comprise the following:

Note 1: The current revolving credit facility has scheduled repayments of £2.5m on 31 July 2020 and £2.5m on 31 October 2020.

Cash at 31 January 2020 was £19.4m, of which £0.9m was restricted.

The Group is in constructive dialogue with its bank and the Directors expect to reach agreement on revised terms that will address any potential covenant issues.

At this point, whilst recognising that we are in unprecedented times, the Directors consider that it is appropriate to adopt the going concern basis in the preparation of the Financial Statements. As with all business forecasts, the Directors cannot guarantee that the going concern basis will remain appropriate given the inherent uncertainty about future events.

iv New standards and interpretations

The following are new standards or improvements to existing standards that are mandatory for the first time in the Group's accounting period beginning on 1 August 2019 and no new standards have been early adopted. The Group's January 2020 interim financial statements have adopted these amendments to IFRS. Apart from IFRS 16 Leases, none of these have had any material impact on the Group's results or financial position:

• IFRS 9 (amendments) Financial Instruments (effective 1 January 2019)

• IFRS 16 Leases (effective 1 January 2019)

• IFRIC 23 Uncertainty over Income Tax Treatments (effective 1 January 2019)

• Annual Improvements to IFRSs 2017 (effective 1 January 2019)

Apart from IFRS 16 Leases there have been no alterations made to the accounting policies as a result of considering all of the other amendments above that became effective in the period, as these were either not material or were not relevant.

Under IFRS 16 Leases, the Group has recognised within the Consolidated Balance Sheet a right-of-use asset and a lease liability for all applicable leases. Within the Consolidated Income Statement, operating lease rental charges have been replaced with depreciation and interest expense. The impact of this change has been disclosed in Note 8 to the interim financial statements.

IFRIC 23 Uncertainty over Income Tax Treatments, clarifies how to measure current and deferred tax assets and liabilities where there is uncertainty that affects the application of IAS 12 Income Taxes. The Group has undertaken a review of the current tax position and assessed that the adoption of IFRIC 23 does not have a material impact on the Group's results.

The Group has not yet adopted certain new standards, amendments and interpretations to existing standards, which have been published but which are only effective for the Group accounting periods beginning on or after 1 August 2020. These new pronouncements are listed as follows:

• Amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors - Definition of material (effective 1 January 2020)

• IFRS 3 (amendments) Business Combinations - Definition of a business (effective 1 January 2020)

The directors are currently evaluating the impact of the adoption of all other standards, amendments and interpretations but do not expect them to have a material impact on the Group operation or results.

v Basis of consolidation

Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date on which that control ceases.

The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred to the former owners of the acquiree, and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangements. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair value at the acquisition date. The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest's proportionate share of the recognised amounts of the acquiree's identifiable net assets.

Acquisition-related costs are expensed as incurred.

Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated. Where necessary, amounts reported by subsidiaries have been adjusted to conform to the Group's accounting policies.

vi Revenue

Revenue is measured by reference to the fair value of consideration received or receivable by the Group for services provided, excluding VAT and trade discounts.

Temporary placements

Revenue from temporary, or contract, placements is recognised at the point in time when the candidate provides services, upon receipt of a client-approved timesheet or equivalent proof of time worked. Timing differences between the receipt of a client-approved timesheet and the raising of an invoice are recognised as accrued income. The Group has assessed its use of third party providers to supply candidates for temporary placements under the agent or principal criteria and has determined that it is the principal on the grounds that it retains primary responsibility for provision of the services.

A number of contractual rebate arrangements are in place in respect of volume and value of sales; these are accounted for as variable consideration reducing revenue and estimated in line with IFRS 15.

Any consideration payable at the start of contracts to customers is recognised as a prepayment and released to profit or loss over the terms of the contract it relates to, as a reduction to revenue.

Permanent placements

Revenue from permanent placements, which is based on a percentage of the candidate's remuneration package, is recognised when candidates commence employment which is the point at which the performance obligation of the contract is considered met. Some permanent placements are subject to a 'claw-back' period whereby if a candidate leaves within a set period of starting employment, the customer is entitled to a rebate subject to the Group's terms and conditions. Provisions as a reduction to revenue are recognised for such arrangements if material. Based on historical data, such rebates are infrequent and immaterial.

Other

Other revenue streams are generated from provision of engineering services and other fees. Revenue from the provision of engineering services is recognised either over a period of time when the performance obligations are satisfied over the course of project milestones or at a point in time upon receipt of client-approved timesheets. Other fees mainly relate to account management fees for providing recruitment services. Revenue from other fees is recognised on confirmation from the client committing to the agreement and either at a point in time or over time in accordance with terms of each individual agreement as performance obligations are met.

vii Non-underlying items

Non-underlying items are income or expenditure that are considered unusual and separate to underlying trading results because of their size, nature or incidence and are presented within the consolidated income statement but highlighted through separate disclosure. The Group's Directors consider that these items should be separately identified within the income statement to enable a better understanding of the Group's results.

Items which are included within this category include:

• costs of acquisitions;

• integration costs following acquisitions; and

• significant restructuring costs including related professional fees and staff costs.

viii Property, plant and equipment

Property, plant and equipment is stated at cost, net of depreciation and any provision for impairment.

Depreciation is calculated so as to write off the cost of an asset, less its estimated residual value, over the useful economic life of that asset in terms of annual depreciation as follows:

The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.

An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount.

When revalued assets are sold, the amounts included in other reserves in respect of those assets are transferred to retained earnings.

ix Goodwill

Goodwill arises on the acquisition of subsidiaries and represents the excess of the fair value of the consideration given for a business over the Company's interest in the fair value of the net identifiable assets, liabilities and contingent liabilities of the acquiree. Goodwill is stated at cost less accumulated impairment.

x Intangible assets

Customer relationships

Customer relationships comprise principally existing customer relationships, which may give rise to future orders (customer relationships), and existing order books. They are recognised at fair value at the acquisition date, and subsequently measured at cost less accumulated amortisation and impairment. Customer relationships are determined to have a useful life of ten years and are amortised on a straight-line basis.

Trade names and trademarks

Trade names and trademarks have either arisen on the consolidation of acquired businesses or have been separately purchased and are recognised at fair value at the acquisition date. They are subsequently measured at cost less accumulated amortisation and impairment. Trade names and trademarks are determined to have a useful life of ten years and are amortised on a straight line basis.

Software and software licences

Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring into use the specific software. These costs are amortised using the straight-line method to allocate the cost of the software licences over their useful lives of between two and five years. Subsequent licence renewals are expensed to profit or loss as incurred. Software licenses are stated at cost less accumulated amortisation and impairment.

Internally generated intangible assets

Development costs that are directly attributable to the design and testing of identifiable and unique software products are capitalised as part of internally generated software and include employee costs and professional fees attributable to the development of the asset. Other expenditure that does not meet these criteria are recognised as an expense to profit or loss as incurred. Software development costs recognised as assets are amortised on a straight-line basis over their estimated useful lives of between two and ten years.

Expenditure on internally generated brands and other intangible assets is expensed to profit or loss as incurred.

Other

Other intangible assets acquired by the Group have a finite useful life between five and ten years and are measured at cost less accumulated amortisation and accumulated losses.

Amortisation of intangible assets and impairment losses are recognised in profit or loss within administrative expenses.

Intangible assets are tested for impairment either as part of a goodwill-carrying cash-generated unit, or when events arise that indicate an impairment may be triggered. Provision is made against the carrying value of an intangible asset where an impairment is deemed to have occurred. Impairment losses on intangible assets are recognised in the income statement under administrative expenses.

xi Disposal of assets

The gain or loss arising on the disposal of an asset is determined as the difference between the disposal proceeds and the carrying amount of the asset and is recognised in the income statement.

xii Leases

The Group has applied IFRS 16 using the modified retrospective approach and therefore the comparative information has not been restated and continues to be reported under IAS17 and IFRIC 14.

At inception of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Group assesses whether:

• the contract involves the use of an identified asset either explicitly or implicitly and should be physically distinct or represent substantially all of the capacity of a physically distinct asset.

• the Group has the right to obtain substantially all of the economic benefits from use of the asset throughout the period of use; and

• the Group has the right to direct the use of the asset. The Group has this right when it has the decision-making rights that are most relevant to changing how and for what purpose the asset is used.

This policy is applied to contracts entered into, or changed, on or after 1 August 2019.

For contracts entered into before 1 August 2019, the Group determined whether the arrangement was or contained a lease based on the assessment of whether:

• fulfilment of the arrangement was depended on the use of a specific asset or assets; and

• the arrangement had conveyed a right to use the asset.

The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset, less any lease incentive received.

Advantage has been taken of the practical expedients for exemptions provided for leases with less than 12 months to run, for leases of low value, to account for leases with similar characteristics as a portfolio with a single discount rate and to present existing onerous lease provisions against the carrying value of right-of-use assets.

Depreciation on right-of-use lease assets is charged on a straight line basis over the term of the lease, and is recognised in profit or loss.

Interest expense on the lease liability is recognised in profit or loss within finance costs.

xiii Taxation

The tax expense for the period comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively.

The current tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the statement of financial position date in the countries where the company and its subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions, where appropriate, on the basis of amounts expected to be paid to the tax authorities.

Deferred income taxes are calculated using the liability method on temporary differences. Deferred tax is generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases. However, deferred tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit.

Deferred tax liabilities are provided in full, with no discounting. Deferred tax assets are recognised to the extent that it is probable that the underlying deductible temporary differences will be able to be offset against future taxable income. Current and deferred tax assets and liabilities are calculated at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the Statement of Financial Position date.

Deferred tax on temporary differences associated with shares in subsidiaries is not provided for if these temporary differences can be controlled by the Group and it is probable that reversal will not occur in the foreseeable future.

Changes in deferred tax assets or liabilities are recognised as a component of tax expense in the income statement, except where they relate to items that are charged or credited directly to equity (such as share-based payments) in which case the related deferred tax is also charged or credited directly to equity.

xiv Pension costs

The Group operates a number of country-specific defined contribution plans for its employees. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. Once the contributions have been paid, the Group has no further payment obligations. The contributions are recognised as an expense when they are due. Amounts not paid are shown in other creditors in the Statement of Financial Positions. The assets of the plan are held separately from the Group in independently administered funds.

xv Share-based payments

All share-based remuneration is ultimately recognised as an expense in the income statement with a corresponding credit to the share-based payment reserve. All goods and services received in exchange for the grant of any share-based remuneration are measured at their fair values. Fair values of employee services are indirectly determined by reference to the fair value of the share options awarded. Their value is appraised at the grant date and excludes the impact of non-market vesting conditions (for example, profitability and sales growth targets).

If vesting periods or other non-market vesting conditions apply, the expense is allocated over the vesting period, based on the best available estimate of the number of share options expected to vest. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates. Any cumulative adjustment prior to vesting is recognised in the current period. No adjustment is made to any expense recognised in prior periods if share options ultimately exercised are different to that estimated on vesting. Upon exercise of share options, proceeds received net of attributable transaction costs are credited to share capital and share premium.

The Company is the granting and settling entity in the Group share-based payment arrangement where share options are granted to employees of its subsidiary companies. The Company recognises the share-based payment expense as an increase in the investment in subsidiary undertakings.

The Group operates two long-term incentive share option plans. The Zero Priced Share Option Bonus covers all share options issued with an exercise price of £0.01; the Long-Term Incentive Plan Options have an exercise price above £0.01. Grants under both categories have been made as part of a CSOP scheme, depending on the terms of specific grants.

The Group also operates a Share Incentive Plan ('SIP'), the Gattaca plc Share Incentive Plan ('The Plan'), which is approved by HMRC. The Plan is held by Gattaca plc UK Employee Benefit Trust ('the EBT'), the purpose of which is to enable employees to purchase Company shares out of pre-tax salary. For each share purchased the Company grants an additional share at no cost to the employee. The expense in relation to these 'free' shares is recorded as employee remuneration and measured at fair value of the shares issued as at the date of grant. The assets and liabilities of the EBT are included in the Consolidated Statement of Financial Position.

xvi Business Combinations Completed Prior to Date of Transition to IFRS

The Group has elected not to apply IFRS 3 'Business combinations' retrospectively to business combinations prior to 1 August 2006. Accordingly the classification of the combination (merger) remains unchanged from that used under UK GAAP. Assets and liabilities are recognised at date of transition if they would be recognised under IFRS, and are measured using their UK GAAP carrying amount immediately post-acquisition as deemed cost under IFRS, unless IFRS requires fair value measurement. Deferred tax is adjusted for the impact of any consequential adjustments after taking advantage of the transitional provisions.

xvii Financial instruments

Financial assets

IFRS 9 contains a classification and measurement approach for financial assets that reflects the business model in which assets are managed and their cash flow characteristics. Under IFRS 9, all financial assets are measured at either amortised cost, fair value through profit and loss (FVTPL) or fair value through other comprehensive income (FVOCI).

Financial assets: debt instruments

The Group classifies its debt instruments in the following measurement categories depending on the Group's business model for managing the asset and the cash flow characteristics of the asset:

(i) those to be measured subsequently at fair value through other comprehensive income (OCI): Assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets' cash flows represent solely payments of principal and interest, are measured at FVOCI. Movements in the carrying amount are taken through OCI, except for the recognition of impairment gains or losses, interest revenue and foreign exchange gains and losses which are recognised in profit or loss. When the financial asset is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to profit or loss and recognised in other gains/(losses). Interest income from these financial assets is included in finance income using the effective interest rate method. Foreign exchange gains and losses are presented in other gains/(losses) and impairment expenses are presented as separate line item in the income statement.

(ii) those to be measured subsequently at FVTPL: Assets that do not meet the criteria for amortised cost or FVOCI are measured at FVTPL. A gain or loss on a debt investment that is subsequently measured at FVTPL is recognised in profit or loss and presented net within other gains/(losses) in the year in which it arises.

(iii) Those to be measured subsequently at amortised cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortised cost. Interest income from these financial assets is included in finance income using the effective interest rate method. Any gain or loss arising on derecognition is recognised directly in profit or loss and presented in other gains/(losses), together with foreign exchange gains and losses. Impairment losses are presented as a separate line item in the income statement. The Group reclassifies debt investments when and only when its business model for managing those assets changes.

Financial assets: equity instruments

The Group subsequently measures all equity investments at fair value. Where the Group's management has elected to present fair value gains and losses on equity investments in OCI, there is no subsequent reclassification of fair value gains and losses to profit or loss following the derecognition of the investment. Dividends from such investments continue to be recognised in profit or loss as other income when the Group's right to receive payments is established.

Impairment losses (and reversal of impairment losses) on equity investments measured at FVOCI are not reported separately from other changes in fair value.

Impairment of financial assets

IFRS 9 replaces the incurred loss model of IAS 39 with an 'Expected Credit Loss' model (ECL). This applies to all financial assets measured at amortised cost or FVOCI, except equity investments.

The Group assesses on a forward looking basis the expected credit losses associated with its debt instruments carried at amortised cost and FVOCI.

The Group has reviewed each category of its financial assets to assess the level of credit risk and ECL provision to apply:

• Trade receivables: the Group has chosen to take advantage of the practical expedient in IFRS 9 when assessing default rates over its portfolio of trade receivables, to estimate the ECL based on historical default rates specific to groups of customers by industry and geography that carry similar credit risks. Separate ECL's have been modelled for UK construction customers, rest of UK customers, and customers in the Americas, Europe, Asia and Africa.

• Accrued income is in respect of temporary placements where a client-approved timesheet has been received or permanent placements where a candidate has commenced employment, but no invoice has been raised. Default rates have been determined by reference to historical data.

• Cash and cash equivalents are held with established financial institutions. The Group has determined that based on the external credit ratings of counterparties, this financial asset has a very low credit risk and that the estimated expected credit loss provision is not material.

At each reporting date, the expected credit loss provision will be reviewed to reflect changes in credit risk and historical default rates and other economic factors. Changes in the ECL provision are recognised in profit or loss.

Financial Liabilities

Financial liabilities are obligations to pay cash or other financial assets and are recognised when the Group becomes a party to the contractual provisions of the instrument and comprise trade and other payables and bank loans. Financial liabilities are recorded initially at fair value, net of direct issue costs and are subsequently measured at amortised cost using the effective interest rate method.

A financial liability is derecognised only when the obligation is extinguished, that is, when the obligation is discharged, cancelled or expires.

xviii Cash and cash equivalents

In the consolidated cash flow statement, cash and cash equivalents include cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less and bank overdrafts. In the Statement of Financial Position and Cash Flow Statement, bank overdrafts are netted against cash and cash equivalents where the offsetting criteria are met.

Cash in transit inbound from, or outbound to, a third party is recognised when the transaction is no longer reversible by the party making the payment. This is determined to be in respect of all electronic payments and receipt transactions that commence before or on the reporting date and complete within one business day after the reporting date.

Restricted cash and cash equivalent balances are those which meet the definition of cash and cash equivalents but are not available for wider use by the Group. These balances arise from the Group's non-recourse working capital arrangements.

xix Provisions

Provisions are recognised where the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are recognised in respect of asset retirement obligations for leased properties at the start of the lease, with a corresponding tangible asset recognised which is subsequently depreciated to profit or loss over the lease term. Where onerous contract arrangements are identified, such as ongoing leases for properties that are no longer in use, provisions are recognised for the costs expected to fulfil the Group's future obligations under the contract. Provisions are not recognised for future operating losses.

xx Dividends

Dividend distributions payable to equity shareholders are included in "other short term financial liabilities" when the dividends are approved in general meeting prior to the financial position date.

xxi Foreign currencies

Items included in the Financial Statements of each of the Group's entities are measured using the currency of the primary economic environment in which each entity operates ('the functional currency'). The consolidated Financial Statements are presented in 'currency' (GBP), which is the Group's presentation currency.

Transactions in foreign currencies are translated at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities in foreign currencies are translated at the rates of exchange ruling at the Statement of Financial Position date. Non-monetary items that are measured at historical cost in a foreign currency are translated at the exchange rate at the date of the transaction. Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Income and expenses are translated at the actual rate.

Any exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were initially recorded are recognised in the Income Statement in the year in which they arise.

The assets and liabilities in the Financial Statements of foreign subsidiaries are translated at the rate of exchange ruling at the Statement of Financial Position date.

For consolidation purposes, the assets and liabilities of foreign operations are translated at closing exchange rates. Income Statements of such undertakings are consolidated at average rates of exchange as an approximation for actual rates during the year. Exchange differences arising on these translations are accounted for in the translation reserve in Other Comprehensive Income (OCI). On divestment, these exchange differences are reclassified from the translation reserve to the Income Statement.

xxii Equity

Equity comprises the following:

• 'Share capital' represents the nominal value of equity shares.

• 'Share premium' represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the share issue.

• 'Merger reserve' represents the equity balance arising on the merger of Matchtech Engineering and Matchmaker Personnel and to record the excess fair value above the nominal value of the share consideration on the acquisition of Networkers International plc.

• 'Share-based payment reserve' represents equity-settled share-based employee remuneration until such share options are exercised or lapse.

• 'Translation reserve' represents the foreign currency differences arising on translating foreign operations into the presentational currency of the Group.

• 'Treasury shares reserve' represents Company shares purchased directly by the Group to satisfy obligations under the employee share plan.

• 'Retained earnings' represents retained profits.

xxiii Critical accounting judgements and key sources of estimation uncertainty

Critical accounting judgements

The Directors are of the opinion there are no critical accounting judgements.

Key sources of estimation uncertainty

The key assumptions concerning the future and other key sources of estimation uncertainty at the Statement of Financial Position date that carry a risk of causing a material adjustment within the next 12 months are discussed below:

ECL provisions in respect of trade receivables

The Group's policy for default risk over receivables is based on the on-going evaluation of the credit risk of its trade receivables. Estimation is used in assessing the ultimate realisation of these receivables, including reviewing the potential likelihood of default, the past collection history of each customer and the current economic conditions. As a result, expected credit loss provisions for impairment of trade receivables have been recognised, as discussed in Note 7.

Valuation of goodwill and intangible assets

Goodwill and intangible assets (including acquired intangibles) are tested for impairment on an annual basis or otherwise when changes in events or situations indicate that the carrying value may not be recoverable. This requires an estimate to be made of the recoverable amount of the cash-generating unit to which the assets are allocated, including forecasting future cash flows of each cash-generating unit and forming assumptions over the discount rate and long-term growth rate applied. These assumptions are set out in detail in the consolidated financial statements for the year ended 31 July 2019.

2 SEGMENTAL INFORMATION

An operating segment, as defined by IFRS 8 'Operating segments', is a component of the Group that engages in business activities from which it may earn revenues and incur expenses. The Group is managed through its three reporting segments, UK Engineering, UK Technology and International, which form the operating segments on which the information below is prepared. The Group determines and presents operating segments based on the information that is provided internally to the chief operating decision maker, which has been identified as the Board of Directors of Gattaca plc.

A segmental analysis of total assets has not been included as this information is not available to the Board; the majority of assets are centrally held and are not allocated across the reportable segments.

Revenue and non-current assets are allocated to the geographic market based on the domicile of the respective subsidiary.

3 REVENUE FROM CONTRACTS WITH CUSTOMERS

Revenue from contracts with customers is disaggregated by major service line and operating segment, as well as timing of revenue recognition as follows:

Major service lines - continuing operations

Timing of revenue recognition - continuing operations

No single customer contributed more than 10% of the Group's revenues (2019: none).

The Group has determined that its contract assets from contracts with customers are trade receivables and accrued income which are set out below:

Accrued income relates to the Group's right to consideration for temporary and permanent placements made but not billed by the year end. These transfer to trade receivables once billing occurs. All accrued income at a given reporting date is billed within the following financial year.

4 TAXATION