GRA.L Regulatory News (GRA)

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the UK Market Abuse Regulation. With the publication of this announcement via a Regulatory Information Service, this inside information is now considered to be in the public domain.

26 July 2023

Grafenia plc

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

Preliminary Results for the year ended 31 March 2023

Grafenia plc (AIM: GRA) announces its full year audited results for the year ended 31 March 2023.

Financial highlights

*Earnings before interest, tax, depreciation and amortisation

**Including discontinued operations

Operational highlights

● Completed the sale and separation of Works Manchester

● Acquired four software companies

● Raised £9.52m through additional bond issue to fund acquisitions

For further information:

Chairman's Statement

I started last year's Chairman' Statement by saying: "Going forward, we will double down on the software & systems part of our business."

And double down we did!

Today, a total of five software businesses are part of the Group. Importantly, our executive team built this from our nucleus: the Nettl Systems business. As explained last year, the heritage of our firm is to use software and systems to help clients. That DNA has provided the right base to welcome several VMS companies into the Grafenia family over the course of the last fiscal year.

But first things first: here is our scorecard of the 2022/23 financial year:

Operational Performance

In the last financial year, our turnover increased by 1.5% to £12.55m (2022: £12.36m). Of this, £11.68m (2022: £8.92m) related to continuing operations with £2.15m coming from our new acquisitions. Overall gross profit decreased by 4.6% to £6.39m (2022: £6.70m) following the sale of Works Manchester and the resulting reduction in product sales margin. On continuing operations, gross profit increased 62.4% to £5.75m (2022: £3.54m), an improved margin of 49.2% (2022: 39.7%) from the addition of high margin software licence fees from the acquired companies.

The year showed EBITDA, which is earnings before interest, tax, depreciation and amortisation, of £0.46m (2022: £0.33m). Our total comprehensive loss for the year reduced to £1.61m versus £1.84m last year.

We finished the fiscal year with cash of £1.99m (2022: £1.59m of which £0.13m related to discontinued operations) and net debt of £16.72m (2022: net debt £5.25m). We invested £8.37m, net of cash, on the acquisition of software companies, and capitalised £0.39m in development expenditure (2022: £0.55m).

These figures are still very much influenced by the transition that the business has been undergoing. In the CEO's report, we are going to provide some additional colour on the underlying revenues and profits of the Group. I fully expect next year's Operational Performance section in the Chairman's Statement to reflect the company operating as a simpler and tidy software group.

People at Grafenia

During the last financial year under review, we welcomed the teams of Vertical Plus, Watermark Technologies, Care Management Systems and Topfloor Systems to our Group. 71 new team members joined us.

Sometimes you have to get smaller to grow bigger. At the beginning of the financial year, our team drastically reduced after the sale of our former manufacturing business. That has allowed us to focus and subsequently, scale again.

Many people deserve praise for this execution. In general, transformations are never easy. Transformations in public companies - where each step needs to be communicated and receives public scrutiny - can be particularly tough.

On behalf of my other non-executive Board members and all shareholders, I would like to express my sincere appreciation for the hard work that our executive team has put into this transformation.

We can be proud of the reliability and efficiency of our FD, Iain and our Company Secretary, Richard. Large parts of the heavy lifting in the transformation have been their workstreams. Both executed this very well.

Roman, our M&A director, has excelled at finding and analysing potential software businesses to join our Group. The speed of acquisition while not compromising on business and team quality has been a true success story. Thank you, Roman.

On 3 May, we named Gavin as CEO after a thorough evaluation process of the Board. We are really proud of the work Gavin has done reshaping the organisation through the last year. We are keen to see him lead the Group during the scale up over the coming years!

Outlook and Current Priorities

In the next few years, our priorities will be all about scaling our acquisition and management processes to become the best owner for the right software companies, their founders, teams and customers. The current focus is the UK and Ireland.

As announced in our Pre-Close Statement on 3 May, we are currently exploring funding options to support our growth strategy, both in terms of new acquisitions and funding existing obligations. We will update the market in due course on what course of action we propose to that end.

In past Chairman's Statements I repeatedly said: "The success of my tenure should be measured by whether we figure out a way to make better use of our public listing."More than ever, I want to be held accountable to that statement and to the ambition to use our public listing in a more sensible manner. Very clearly, I haven't been successful yet but feel more positive than ever that our strategy of acquiring software companies is the best route forward to sustainable value creation. Several successful public peers in VMS come to mind. If Grafenia only achieves a small share of their success, shareholders will be greatly rewarded.

We have the right team, the right operating model and, hopefully soon, the right funding strategy in place to win. I want to thank all of our shareholders for their patience and support over the years and our transformative last financial year in particular.

Our AGM will take place in September 2023. I hope to see you there and to get the opportunity to discuss our strategy in more detail!

Jan-Hendrik Mohr

Chairman

Chief Executive's Statement

Dear Shareholders,

It has been a year of progress for the Company. Previously, we reported on the efforts and energy that had gone into preparing the business for its transition. In order to grow the size of our Group. To become a serial acquirer of VMS businesses.

As we've executed our plans, although it is early days, we've started to see those efforts bear fruit. It's important to say at the outset that our newly expanded portfolio of companies not only represents a change in our operational approach, but also fundamentally alters the way we understand our identity, communicate our progress, and report our performance.

First of all, as always, we'd like to sincerely thank our teams for their hard work and dedication throughout our evolution. We've welcomed a great number of new people into the Group this year. We recognise and appreciate the efforts of each and every partner and team member across all of our operating companies.

We've grown again this year, ending the full year with sales from continuing operations of £11.7m (2022: £8.9m). An addition of £2.8m.

£0.6m (7%) came from organic growth of our Nettl Systems business unit and £2.2m (25%) from the addition of four newly acquired business units.

Historically, Grafenia has been known predominantly within the graphics sector. As the market changed, we changed with it. Over the years, moving from a franchise model with printing.com to a software and brand licensing model with Nettl Systems. In both cases, the 'secret sauce' was always the software. We've built software our entire life. It runs our business and we licence it around the world.

Given the Company's background in software, in 2021, we announced a change in our acquisition plans. To focus on and invest in building the structure required to become a serial acquirer of VMS businesses.

The first step in the transformation was the sale of our production facility Works Manchester. That moved our business away from asset-heavy manufacturing, enabling us to focus on software and systems.

This did not change the Nettl Systems offering to our partners. Works Manchester became the largest Works Maker, supplying printed product via our platforms. What it meant was, our Nettl Systems business became a software operation, with a significantly reduced cost base. But as a group, we became smaller as a result of the divestment, with the same central costs. Growing the size of the Group, faster, became the priority.

The next step in the transformation was to ramp up our acquisition activity with the aim of achieving that growth. We now have a well developed deal process and acquisition 'flywheel' which has resulted in four new acquisitions during the previous financial year and a healthy pipeline of deal flow. This will be the continuing focus of the Group moving forward with the aim of driving long-term shareholder value.

To date we've funded the initial consideration of the acquisitions through the issue of bonds. During the year we issued £11.2m of bonds, at nominal value, raising £9.5m before expenses. We deployed £9.6m of capital, including £0.3m of deal costs.

Bond Utilisation

*EUR to GBP conversion as at 17/02/23 = 0.89

Our method

Software Circle is the name we give our specialist M&A team. Led by M&A Director, Roman Rothenberg, we're continually reaching out to and evaluating VMS business targets, as owners look to retire, succession plan or be part of something bigger. We find potential acquisitions through our outreach program, engaging with niche, business-to-business, and mission-critical platforms.

We look for businesses where the majority of revenues are recurring in nature and logo churn is low. The sustainability of our strategy is underpinned by the recurring revenue model. This approach allows for a more reliable revenue stream, promoting long-term stability.

Take a look at www.grafenia.com/acquisition to see the full detail. The businesses we have acquired - and our current targets - have been stable or shown growth over the past three years.

We've invested in building our acquisition 'flywheel'. A structured approach to drive leads and identify potential acquisition targets.

To help us find and prioritise the right kind of deals, we have a framework, a set of what we call 'Guard Rails'. For example:

● Target is UK/IE based

● Has a clearly defined niche market

● Majority of revenues are recurring in nature, a minimum of £500k per annum

● Valuation Multiple within range (adj EBITDA)

● Logo Churn < 10%

● Customer Concentration as % of Recurring Revenue is low

● Number of Customers > 30

Once acquired, each business is run in a decentralised way by its own senior management team, supported by the Grafenia Board. Including Nettl Systems, where Chris Lowe has been promoted to become managing director, having led our Licensed Partner teams for over six years.

When operating our business units, we actively avoid any centralisation where possible. Keeping the entrepreneurial spirit and culture that exists in the businesses we acquire. Avoiding the inherent risks associated with integration.

Our aim is to become the permanent home for those businesses and their management talent. Depending on the reason for the sale, sometimes the owners remain. Sometimes the owners leave as part of the deal but have an existing management team in place. Other times, we'll hire a managing director to replace the owners during a transition period.

Once there is mutual conviction that a target is right, we value a business based on a multiple of its adjusted earnings. Our experience from the first four deals we've completed suggests we are able to acquire VMS businesses within our targeted adjusted EBITDA range.

Our progress so far

Over the last 12 months, we set out to prove three things. That we can find and buy businesses that meet our criteria within the valuation metrics that we set. That we can complete those deals quickly and efficiently. And of course, that we can successfully operate those businesses.

A year on, we've made four acquisitions and Grafenia is now home to five software business units (including Nettl Systems) that match our criteria, across multiple sectors. The Group looks a little different today. We no longer own the production facility Works Manchester and Grafenia no longer exists solely in the graphics space. Our portfolio of businesses now operate primarily within the following sectors: Graphics and Ecommerce, Finance, Property and Care Management. Further information on the acquisitions made during the year can be found in note 14.

Vertical Plus Limited (Vertical Plus)

In October 2022, we acquired Vertical Plus, an E-commerce storefront and Inventory management platform operating in the UK, for a consideration of £2.25m plus an earnout of up to £0.63m. Recurring revenues are generated through licence fees to access the software and royalties from sales generated via the platform.

Two owner managers left the business, one remaining for a transition period as a consultant and sales director, Justin Smith, formerly also an owner, was promoted to managing director upon completion.

Watermark Technologies Limited (Watermark)

In December 2022, we acquired Watermark, a document management platform optimised for independent financial advisors and other financial services operating in the UK, for a consideration of £2.5m. Watermark provide services through both its office-based 'Volume' system and its cloud-based 'Papercloud' platform. Recurring revenues are generated through licence fees to access the software.

Two founder managers left the business, both remaining for a transition period as consultants. James Hughes, involved during the acquisition process, moved from our Software Circle team to become managing director and drive the business forward.

Care Management Systems Limited (Care Docs)

In January 2023, we acquired Care Management Systems t/a Care Docs, a care home management platform operating in the UK, for a consideration of £3.5m. Recurring revenues are generated through licence fees to access the software on each device required.

Two founder managers left the business, one remaining for a transition period as a consultant. A management team was already in place, Alan Pocock (General Manager), Sarah Conn (Sales Director) and James Leyland (Customer Engagement and Marketing Director). All remain post completion.

Topfloor Systems Limited (Topfloor)

In February 2023, we acquired Topfloor, a property management platform operating in the UK and Ireland, for a consideration of €4.8m plus an earnout of up to €1.4m. Topfloor provide software services for property management through its 'Blockman' and 'Letman' platforms. Blockman - a web based application for apartment blocks and estate managing agents and Letman - a web based application for lease administration and client rent accounting of residential property units. Recurring revenues are generated through licence fees to access the software.

One of three founder managers left upon completion. Two remain, the CEO Niall Wrafter and CTO Cathal Browne.

Historic Performance - Sales in last 3 financial years* (unaudited):

*Respective financial year for each business

**EUR to GBP conversion as at 17/02/23 = 0.89

We have successfully onboarded our newly acquired businesses and they are contributing to profitability.

Our five operating businesses generated a positive EBITDA of £0.8m after Group central costs of £0.9m. Central costs include our Executive and Non-Executive teams, Software Circle and other central salaries, audit fees, other advisor fees, bond fees and AGM costs.

After deducting the associated non-recurring deal costs of £0.3m involved in the acquisitions, the EBITDA for the year was £0.5m (2022 £0.3m).

The four acquisitions have a combined annualised turnover of over ~£7.0m. £2.2m of total sales in the financial year were generated by these acquisitions, having been acquired during the latter stages of the financial year.

We plan to drive organic growth across the Group by benchmarking key performance metrics, providing focus, structure and know-how around operational best practice. Ultimately, we acquire these businesses for what they can do for the Company i.e. bring recurring revenues and profit.

Nettl Systems

Our Nettl Systems business today, is what you may have known the Grafenia Group to be this time last year. Licencing software and brands to graphic professionals. Nettl Systems licences printing.com and Nettl directly in the UK and Ireland. Also licencing Nettl in Belgium, France, the Netherlands and in the USA. In Australia and New Zealand, we master licence to our partner.

Operating Nettl company stores and online print stores also remains part of the Nettl Systems business. Collectively contributing £4.5m of total sales (2022: £4.3m).

Overall, Nettl Systems generated £9.5m of sales (2022: £8.9m). A 7% year-on-year increase. That's a welcome result, but it was coming off a year still impacted by the COVID pandemic. We expect Nettl Systems to grow organically, as we continually develop the platform to future-proof our partners and increase the product range to help them say yes to clients, more often. But that growth may be more modest, and may not significantly 'move the needle' in terms of Group size. Our focus at Group level, is therefore on scaling by way of acquisition.

Operating Business Unit Sales:

Below you'll see a breakdown of the sales contribution of our five operating business units for the period since acquisition.

Current trading and outlook

Our new financial year started in April. We're currently trading in line with our internal forecasts and newly acquired business units are performing as expected. With the acquisitions we've added to the Group, on a run-rate basis, annualised sales would be approximately £17m. We're therefore cautiously optimistic about the upcoming year. With a full year's trade from our newly acquired businesses, our goal of achieving EBITDA at 10-15% of sales, after central costs, remains a realistic target.

As we further reposition our business, the search for VMS businesses continues and our deal flow looks healthy. As previously announced, we are looking to raise additional funds to continue the execution of our acquisition strategy, both in terms of new acquisitions and funding existing obligations, and the growth of the Group.

Thank you for your continued support. I hope to see you in person at our AGM.

Gavin Cockerill

Chief Executive Officer

Financial Review

Revenue

Group revenue for the year was £12.55m, (2022: £12.36m), an increase of 1.5% year-on-year. That change is best visualised in the following table:

Our Graphics and Ecommerce division contains the pre-existing Nettl Systems business plus the newly acquired business of Vertical Plus. Like-for-like Nettl Systems revenue grew to £9.53m (2022: £8.92m), a 7% increase as product volumes continued to recover from the pandemic impacted years and inflationary price increases were applied. The addition of Vertical Plus added an additional £1.01m of revenue in the second half of the year.

Additional divisions have been created for the three other acquisitions, further contributing a combined £1.14m of predominately recurring revenue. As a result, Licence and subscription revenue generated by the Group rose to £4.10m (2022: 2.14m).

Gross profit

Gross profit of the Group decreased to £6.39m (2022: £6.70m). The fall results from the sale of the discontinued operation, Works Manchester, on 31 May 2022 with gross profit from discontinued operations reducing to £0.64m (2022: £3.16m). When we sold Works Manchester we entered into a 5 year supply agreement to provide products to our Company stores and Partners. This change in how we operate reduces the gross profit percentage of the Group, but at the same time reduces staff costs and overheads.

Gross profit from continuing operations was £5.75m (2022: £3.54m) and a gross margin percentage increase of 49.2% (2022: 39.7%) reflects the increase in recurring licence fee based revenue. For the newly acquired businesses, the directly related costs of providing the service tend to be a low percentage of revenue, mainly consisting of the server costs required to run the different platforms. Like-for-like, the gross margin within our Nettl Systems operations was 41.1% (2022: 39.7%) reflecting the impact in the year of inflationary price rises made in both this and the prior financial year as production costs have continued to rise. Unfortunately, costs continue to rise and we continue to monitor our selling prices accordingly.

Other operating costs

Overall staff costs decreased by 8% to £3.89m (2022: £4.24m) whilst the average number of persons employed fell by 37% to 92 (2022: 146). An element of this mis-match relates to wage inflation, but the primary driver is due to the change in the make-up of the staff base, with traditionally lower paid manufacturing roles leaving the Group on the sale of Works Manchester and higher paid software engineering roles coming in.

Other operating charges were £1.96m (2022: £2.09m) with significant overheads removed as a result of the sale of the primary production facility in Manchester. The acquisitions are comparatively light in overheads, we have however incurred acquisition related costs in the year, comprising legal and professional fees plus associated stamp duty. Across the four acquisitions these totalled £0.35m in the year under review.

Profitability

This has been impacted in the year following a writedown of £0.81m against consideration receivable following a missed instalment from Rymack Signs Solutions limited on 31 May 2023. This, combined with the factors discussed above, resulted in a pre-tax loss of £2.62m (2022: £1.71m) and a loss per share of 1.41p (2022: 1.60p). Our earnings before interest, tax, depreciation and amortisation (EBITDA) was £0.46m (2022: £0.33m). Excluding Works Manchester, EBITDA was £0.41m (2022: 0.17m). Within this, the newly acquired subsidiaries, excluding the related costs of acquisition, have contributed £0.72m. The Parent Company result for the year was a loss of £2.21m (2022: loss £0.41m).

Operating Cash Flow

The Group generated £0.30m of cash through operating activities (2022: generated £0.13m). The sale of Works Manchester has impacted working capital in the year as more favourable terms with multiple suppliers could not be supported under one credit arrangement when Works Manchester became the primary supplier to Nettl Systems.

Investment activity

We continued our investment in the Group's software platforms, totalling £0.39m (2022: £0.55m), with continued enhancements and new features to the Group's SaaS platforms. The primary investment activity in the year has been that of new subsidiaries, with £8.37m deployed, net of cash acquired.

Financing activity

In order to finance the investment above, as well as the associated legal and professional fees and stamp duty, we have issued £11.20m nominal value of bonds, raising £9.52m before expenses. Interest payments on this facility do not commence until August 2024.

Loan repayments related to our CBILS facility totalled £0.31m (2022: 0.20m). Monthly payments on this facility continue until April 2025.

We finished the financial year with cash of £1.99m (2022: £1.59m of which £0.13m related to discontinued operations). Net debt rose to £16.72m (2022: net debt of £5.25m) on account of the additional bonds issued and future consideration payments for the acquired businesses.

KPIs

Management monitors a number of KPIs, which underpin the performance of the Group and its operating businesses. The financial KPIs are Revenue, Recurring Revenue from licence and subscriptions, EBITDA and overall profit or loss for the year. These metrics can be found in the Summary section at the front of this financial report, and also within the Consolidated statement of comprehensive income.

There are also a number of non-financial KPIs which management monitors, that ultimately drive the financial performance of our operating businesses. We use these KPIs when assessing the suitability of acquisition targets as well as benchmarking post acquisition performance. We track changes in monthly recurring revenues (MRR) in order to measure Logo Churn percentage - the rate at which a SaaS or subscription company is losing customers, on an ongoing basis. Although acquiring new customers is a core goal of any SaaS company, ensuring the retention of subscribing customers is just as important. We also measure a number of cost base categories as a percentage of Annual Recurring Revenues (ARR) to benchmark operational efficiencies.

Outlook

Whilst this year has been very different from the last, next year we expect more of the same. As the acquired businesses contribute a full financial year, we expect more recurring revenue growth and more growth in EBITDA. With the acquisitions we've added to the Group, on a run-rate basis annualised revenue would be approximately £17m. Our stated goal for a number of years has to reach 10%-15% EBITDA in the mid-term, we now believe this is a realistic target for the upcoming year. Our search for software businesses continues, our deal flow looks healthy and we are currently considering raising additional funds to continue the execution of our acquisition strategy, and the growth of the Group.

Principal Risks and Uncertainties

The following are the principal risks relating to the Group's operations:

Treasury Policies

Surplus funds are intended to support the Group's short-term working capital requirements and fund future acquisitions. These funds are invested through the use of short-term deposits and the policy is to maximise returns as well as provide the flexibility required to fund ongoing operations. The Board has developed a model to establish a fair value for the Company's shares and will only purchase shares when the offer price is materially below that value and funds are available. It is not the Group's policy to enter into financial derivatives for speculative or trading purposes.

Iain Brown

Group Finance Director

Consolidated statement of comprehensive income

Consolidated statement of financial position

Consolidated statement of changes in shareholders' equity

Consolidated statement of cash flows

Notes to the financial statements

1 BASIS OF PREPARATION

GENERAL INFORMATION

Grafenia plc (the "Company") is a public limited company incorporated and domiciled in the UK. The company's registered office is Third Avenue, The Village, Trafford Park, Manchester M17 1FG.

This financial information does not include all information required for full annual financial statements and therefore does not constitute statutory accounts within the meaning of section 435(1) and (2) of the Companies Act 2006 or contain sufficient information to comply with the disclosure requirements of International Financial Reporting Standards. These should be read in conjunction with the Financial Statements of the Group as at and for the year ended 31 March 2022.

The comparative figures for the year ended 31 March 2022 are also not the Company's statutory accounts for that financial year. Those accounts have been reported on by the Company's auditors and delivered to the Registrar of Companies. The report of the auditors was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The preliminary financial information was approved by the Board of Directors on 25 July 2023.

GOING CONCERN

As part of the consideration of the appropriateness of adopting the going concern basis of accounting, the Directors have prepared a forecast and applied reasonable sensitivities. The primary cash flow impact identified in the sensitivity analysis is a significant reduction in cash collections driven by lower customer demand. The Directors recognise the need to raise additional funds in order to meet both liabilities for consideration payable in respect of past acquisitions and ongoing working capital. Whilst this creates a material uncertainty, we anticipate being able to raise such funds through the issue of new share capital and/or by raising additional debt finance. The Directors have also considered the potential levers at their discretion to improve the cash position, including a number of further reductions in operating expenditure across the Group and negotiating the timing of future payment obligations.

Based on the above the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future and is well placed to manage its business risks successfully. Accordingly, the Directors continue to adopt the going concern basis in preparing the annual report and financial statements.

CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the application of the accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.

Significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements are described below:

INTANGIBLES - CAPITALISATION AND VALUATION OF SOFTWARE AND DEVELOPMENT COSTS AND ACQUIRED INTANGIBLES

The Board considers that the Group's key differentiators stem from its proprietary software. It is essential to continue investing in these assets. Separate projects are defined for new initiatives as they are identified. Development costs are capitalised where a project has been defined, tested and expected to realise future economic benefits. Programming is carried out to a detailed specification and schedule. The Board exercises judgement in determining the costs to be capitalised and determine the useful economic life to be applied typically 3 years or whilst the asset in question remains in use.

Acquired intangibles have been identified as the customer base and technology. The valuation is based upon future discounted cash flows and expectations for the business. For VMS businesses acquired in line with the Group's stated strategy, the expected useful lives of the customer base has been determined by reviewing the existing Logo churn at the time of acquisition whilst the Technology's expected useful life is estimated based on the expected requirement for ongoing development.

IMPAIRMENT OF INTANGIBLE ASSETS AND INVESTMENT IN SUBSIDIARIES.

In assessing impairment, Management estimates the recoverable amount of cash generating units based on expected future cash flows and uses the weighted average cost of capital to discount them. At the end of each reporting period the Management reviews a five year forward looking financial projection including a terminal value for the Group. The Management has further evaluated the terminal growth expectations and the applied discount rate applicable to derive a Net Present Valuation (NPV) of the Group. If the NPV of the Group shows a lower valuation than the net assets or the Company cost of investment in subsidiaries plus intercompany balances due, an impairment will be made. Based on this evaluation, including management estimates and assumptions, no impairment was made during the reporting period. Estimation uncertainty relates to assumptions about future operating results in particular sales volumes and the determination of a suitable discount rate.

ESTIMATION OF THE EXPECTED CREDIT LOSSES ON TRADE AND INTERCOMPANY RECEIVABLES

In assessing the expected credit losses, in respect of the trade and intercompany receivables under IFRS 9, the Group considers the past performance of the receivable book along with future factors that may affect the credit worthiness of the receivables. Estimations have therefore been made within these assumptions which could affect the carrying value of the trade and intercompany receivables.

BEARER BONDS

The bearer bonds issued by the Company have no fixed maturity. In order to establish an effective interest rate, management is required to determine the expected life of the bonds and does this for each tranche of bond issued. The expected life of bond tranches issued to date ranges from 9 months to 20 years. In assessing the fair value of the embedded derivative relating to the exclusive one way call option, judgement is required in order to assess the likelihood of the business exercising this option.

2 REVENUE AND SEGMENTAL INFORMATION

Following the change in strategy of the Group the format of the segmental reporting has been updated. The Group's operating and reporting segments in the current year corresponds with the acquisition activity, see note 14 for further details on acquisitions made during the year. This disclosure correlates with the information which is presented to the Board, which reviews revenue and EBITDA by segment. The Group's costs, finance income, tax charges, non-current liabilities, net assets and capital expenditure are only reviewed by the Board at a consolidated level and therefore have not been allocated between segments in the analysis below.

Revenue generated outside the UK is attributable to partners in Belgium, France, New Zealand, The Netherlands and the USA within the Nettl Systems business segment.

No single customer provided the Group with over 3% of its revenue.

DISAGGREGATION OF REVENUE

The disaggregation of revenue from contracts with customers is as follows:

Of the Group's non-current assets (excluding deferred tax) of £17,650,000 (2022: £2,468,000), £12,907,000 (2022: £2,475,000) are located in the UK. Non-current assets located outside the UK are in Ireland £5,802,000 (2022: £11,000).

3 TAXATION

RECONCILIATION OF EFFECTIVE TAX RATE

Factors affecting the tax charge for the current period:

The current tax charge for the period is lower (2022: lower) than the standard rate of corporation tax in the UK of 19% (2022: 19%).

The Group tax debtor amounts to £155,000 (2022 Debtor: £167,000). The deferred tax liabilities as at 31 March 2023 have been calculated using the tax rate of 25% which was substantively enacted at the balance sheet date.

In the budget on 3 March 2021, the UK Government announced an increase in the main UK corporation tax rate from 19% to 25% with effect from 1 April 2023. The change in rate was substantively enacted on 24 May 2021.

4 EARNINGS PER SHARE

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company.

The holders of deferred shares shall not be entitled to any participation in the profits or the assets of the Company and the deferred shares do not carry any voting rights.

5 DEFERRED TAX ASSETS AND LIABILITIES

The Group has recognised a deferred tax asset in respect of carried forward trading losses up to the value of the deferred tax liability, to the extent that there are available tax losses within the same UK tax group. The Group has unrecognised deferred tax assets in respect of carried forward losses of £nil (2022: £1,526,000).

6 PROPERTY, PLANT AND EQUIPMENT

Right-of-use assets are included within the same asset categories as they would have been if they were owned. As of 31 March 2023 the Group has right-of-use assets with a carrying value of £982,000 (2022: £3,453,000). Right-of-use of assets from discontinued operation is £nil (2022: £2,540,000). A table showing the net book value of right-of-use assets within property, plant and equipment at 31 March 2023 and 31 March 2022, split by category, is disclosed in note 11.

7 INTANGIBLE ASSETS

IMPAIRMENT TESTING

The recoverable amount of goodwill and intangible assets is determined from value in use calculations.

The Group prepares cash flow forecasts derived from budgets and five-year business plans. The sales growth relates to all key revenue streams of the business and have been determined based on the experience to date of operating these sales channels and ranges from 0% to 9%. Costs have been assumed to increase in line with an inflationary rate of 5%.

For the purposes of impairment testing inflationary growth of 0.5% is assumed beyond this period. A pre-tax discount factor of 8.59% (2022: 6.8%) was applied.

Following the impairment review, the intangible assets are not considered to be impaired. Increasing the pre-tax discount factor to 12.0% would not result in an impairment charge against intangible assets.

Amortisation and impairment charge

The amortisation charge of £1,321,000 (2022: £936,000) is recognised in profit or loss within depreciation and amortisation expenses. £nil (2022: £225,000) from discontinued operation, £1,321,000 (2022: £711,000) from continuing operation. An impairment charge of nil (2022: £nil) was recognised during the year.

8 TRADE AND OTHER RECEIVABLES

At 31 March 2023 trade receivables are shown net of an impairment allowance of £1,153,000 (2022: £1,089,000).

Trade and other receivables denominated in currencies other than sterling comprise £899,000 (2022: £114,000) of trade receivables.

The carrying value of trade and other receivables classified at amortised cost approximates fair value.

Trade and other receivables represent financial assets and are considered for impairment on an expected credit loss model. The Group continues to trade with the same customers and in the same marketplace and therefore the future expected credit losses have been considered in line with the past performance of the customers in the recovery of their receivables.

The Group applies the IFRS 9 simplified approach to measuring expected credit losses using a lifetime expected credit loss provision for trade receivables. The expected loss rates are based on the Group's historical credit losses experienced over the three-year period prior to the period end. The historical loss rates are then adjusted for current and forward-looking information on factors affecting the Group's customers including the area of operations of those debtors and the market for the Group's products. The assessment of the expected credit risk for the year has not increased, when looking at the factors affecting the risk noted above. There are no trade receivables outside of credit terms without an impairment provision.

Of the total impairment provision £115,000 (2022: £36,000) relates to Partners that have ceased trading.

There is no material difference between the net book value and the fair values of trade and other receivables due to their short-term nature.

Other classes of financial assets included within trade and other receivables do not contain impaired assets.

Of the net trade receivables £nil (2022: £512,000) was pledged as security for the invoice discounting facility. The Group is committed to underwrite any of the debts transferred and therefore continues to recognise the debts sold within trade receivables until the debtors repay or default. Since the trade receivables continue to be recognised, the business model of the Group is not affected. The proceeds from transferring the debts are included in other financial liabilities until the debts are collected or the Group makes good any losses incurred by the service provider.

9 TRADE AND OTHER PAYABLES

Trade payables denominated in currencies other than Sterling comprise £87,000 (2022: £72,000) denominated in Euro.

There is no material difference between the net book value and the fair values of current trade and other payables due to their short-term nature.

10 BORROWINGS