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.

24 November 2022

Grafenia plc

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

Unaudited Interim Results for the period ended 30 September 2022

Financial highlights

*Earnings before interest, tax, depreciation and amortisation

Operational highlights

● Completed the sale and separation of Works Manchester

● Revenue from continuing operations up by £0.58m, a 13% increase

● Licence fees and subscriptions up by £0.04m, a 4% increase

● Partner product spend saw 31% increase, up by £0.36m

● Revenue from online and trade up by £0.25m, a 27% increase

● Investment in Software Circle - our acquisition strategy, is bearing fruit

● Raised £4.25m through additional bond issue to fund acquisitions

Interim Statement

Our team has spent the past six months laying the foundations for the next part of our journey. In our Annual Report, we discussed the ongoing transition of our business and the sale of our manufacturing hub Works Manchester, announced on 19 May 2022. Our teams have worked hard to ensure that transition has been smooth. We'd like to thank everyone involved for successfully managing the process. Simplifying our business and completing the transition to one focussed on software and systems.

Previously we divided our reporting structure into two business units: everything software and licence (we call this business unit Nettl Systems); and everything production (we called that Works Manchester). Given the sale of Works Manchester on 31 May 2022, you'll see below that we are reporting results from "continuing" and "discontinued" operations, as we did in our full year results released in July. In plain English, "continuing" are the figures for the period as if we had sold Works Manchester at the beginning of the comparative periods. "Discontinued" is everything else.

Trading Results and Cash

Revenue from continuing operations rose to £4.97m (2021: £4.39m). Total revenue reduced to £5.84m (2021: £6.31m) following the disposal of Works Manchester at the end of May 2022, meaning discontinued operations only contributed revenue of £0.87m (2021: £1.92m).

Total gross profit fell to £2.66m (2021: £3.44m), again as a result of the sale of Works Manchester. Our overall Gross margin percentage fell to 45.5% (2021: 54.5%) as, following the sale, Works Manchester became our largest Works Maker and we entered into a five-year supply agreement to provide products through our platforms for our Company stores and Partners. This change reduces the gross profit percentage of the Group, but at the same time reduces staff costs and overheads. To accurately reflect the performance of continuing operations, the financials have been presented to show the results had the disposal and new supply agreement been in effect for both the current and the comparative financial years. Gross Profit from continuing operations was £2.02m (2021: £1.83m). It fell slightly as a percentage of revenue, 40.6% (2021: 41.7%), as a greater proportion of revenue has been generated through our brand partners in the first six months of this financial year compared to last.

Total operating costs reduced in total following the Sale of Works Manchester, with total staff costs of £1.60m (2021: £1.91m) and total other operating charges of £1.00m (2021: £1.04m). Our continuing operations have however experienced increases. Covid related employee wage support schemes ended, and we invested in both people and professional fees in our pursuit of additional software companies to bring into the Grafenia group. Alongside this, as with most other businesses, we experienced inflationary pressures, particularly on wages with higher costs of living, and a higher rate of national insurance. As a result, staff costs for continuing operations increased to £1.18m (2021: £0.84m) and other operating charges increased to £0.85m (2021: £0.64m). This led to EBITDA from continuing operations falling to a loss of £0.05m (2021: profit £0.27m) and an operating loss from continuing operations of 0.49m (2021: loss of £0.23m). With the sale of Works Manchester, the overall operating loss reduced to £0.44m (2021: 0.53m).

At 30 September 2022, the Company had cash of £5.01m (2021: £2.67m) and debt of £8.29m (2021: £7.16m). An additional £4.25m of cash was raised from a bond issue on 27 September 2022 to fund the acquisition of Vertical Plus Limited in October 2022, along with further acquisitions that are expected to be announced in the near future. Our operating activities utilised £0.29m of cash (2021: generated £0.43m) as we transitioned to our new operating model.

Capital expenditure was £0.18m (2021: £0.34m). Almost all of this amount was invested in the ongoing development of our platform which underpins our operations and is licensed to our partners.

Trading Review

We've improved the revenue performance of Nettl Systems. Our investment in Software Circle is beginning to bear fruit and we continue to make progress building the best operating model for our new focus.

Nettl Systems

Our Nettl Systems business operates within the Graphics sector. Licencing software and brands to graphic professionals. Designers, printers, signmakers, marketing agencies and other graphic professionals use our marketing tools, workflow management system and supply chain to deliver the best service to their clients. We also own five Nettl company stores in Birmingham, Dublin, Exeter, Liverpool and Manchester all utilising our software platform. We use these to train new people, refine new software initiatives and develop best practice.

We have hundreds of partners who utilise this best practice and licence our systems. Partners pay us a monthly subscription which gives them access to our systems, training and support. Using the Nettl system, they're able to buy factory-direct print and display that is seamlessly integrated from multiple suppliers. We call them Works Makers. Partners resell these products to clients.

Increasingly, partners are also reselling recurring subscriptions for centralised digital marketing services like SEO, Social Media and Paid Search. We expect to extend these centralised service offerings to help partners increase the recurring revenues they generate.

An example of this is the launch of SEO Console. A platform for clients available through the Nettl system, to help get found in online searches. Clients have access to a portal that enables them to optimise their website and manage listings and reviews. Working alongside our current SEO service offering, our partners can resell SEO Console as recurring subscriptions to their clients.

Partners that use the Nettl or printing.com brand in conjunction with their own, we call 'brand partners'. They're our exclusive partner in their neighbourhood. We licence printing.com and Nettl directly in the UK and Ireland. We also licence Nettl in Belgium, France, the Netherlands and in the USA. In Australia and New Zealand, we have a master licence agreement.

In the interim period, revenue from Nettl Systems increased by 13% to £4.97m (2021: £4.39m). Within this segment, company stores decreased by 5% to £1.18m (2021: £1.24m). This decrease was due to team transitions in two store locations. Licence fee and subscription income increased to £1.07m (2021: £1.04m). We continue to listen to feedback from our partners and extend the capabilities of our platform. This has helped us improve partner retention rates during the period. Most recently we've improved enquiry management with 'The Pipeline' and made it easier for partners to build proposals, estimates, jobs and orders using their own Standard Price List items. We're currently working on improving the User Interface of key order screens. Our aim is to equip our partners with the tools they'll need in the studio of tomorrow.

Along with the successful transition of Works Manchester to new owners PFI, we've continued to add new Works Makers to widen the product range available to our partners. The products our partners buy from us at wholesale prices - like signage, printing and promo goods - has increased by 31% to £1.53m (2021: £1.17m).

We also sell print and signs to professional buyers through Marqetspace and a few other online channels. We utilise our w3shop software module, available as part of the Nettl System. It is a fertile ground for cultivating Nettl partners and gives us insight into where gaps in our product range are. That knowledge has been used to find new Works Makers to improve the product range available throughout our software systems. We continue to see an increase in Marqetspace revenues to £1.19m (2021: £0.94m)

Software Circle

With our renewed focus on Software & Systems, as detailed in our Annual Report, our acquisition strategy is now aimed at software businesses. To extend our scale, capability and resilience. We have continued to invest in building the structure required for us to be a serial acquirer and permanent home for software businesses and management talent.

Our team of analysts and searchers actively look for software businesses that match our criteria, for us to acquire and become part of the Group. We've made progress in building a scalable, acquisition flywheel.

We're particularly interested in Vertical Market Software (VMS) businesses. Niche, mission critical platforms, where revenues are recurring in nature. The kind of software that is the glue holding a business together. Keeping clients using it, year after year. Perhaps where the owner is thinking about retirement planning or a change of pace. Often looking for a commercial partner to take care of their IP, team and client base for the long term. We're an ideal permanent home. Providing continuity of support and helping maintain relationships.

We'll retain their brands but we're not planning to integrate or migrate them to our platform. They'll keep their technology stack and be run in a decentralised way.

The investment in our Software Circle team and progressing ongoing potential deals, has impacted the EBITDA for this period. However, that investment is starting to bear fruit with the acquisition of Vertical Plus Ltd detailed in our announcement on 22 September 2022. Having raised funds for other acquisitions in the pipeline, detailed in our update of 27 September 2022 we're hopeful of adding other businesses to the Group. We will provide further updates as things come to fruition.

If you own a vertical market software business or get talking with someone who does, please hop to www.grafenia.com/acquisition or email letmein@grafenia.com.

Outlook

Trading continues to outperform the same period last year. November looks set to continue that trend. It is difficult to foresee how business confidence will be impacted by the economic climate. However, sales are in line with current internal forecasts.

Our attention is focussed on building our recurring revenue streams. That's by a mix of buying and successfully running software companies through Software Circle. And by building tools to licence to professionals in the graphic arts, print and sign sectors with Nettl Systems.

In the last few announcements, we've discussed our goal of achieving 10-15% EBITDA. With reducing the size of the group in May 2022 following the disposal of Works Manchester, whilst retaining the central costs of operating a publicly listed business and investing in our acquisition strategy, these levels of return have not yet been possible. However, given our improved trading to date, alongside the acquisition of Vertical Plus, and other acquisitions expected to follow, we firmly believe that this goal remains achievable in the mid-term.

Jan Mohr Gavin Cockerill

Chairman Acting Chief Executive Officer

23 November 2022

Unaudited Interim Results for the period ended 30 September 2022

Consolidated Statement of Comprehensive Income

for the six months ended 30 September 2022

Consolidated Statement of Financial Position

at 30 September 2022

Consolidated Statement of Changes in Shareholders Equity

for the six months ended 30 September 2022 (unaudited)

Consolidated Statement of Cash Flows

for the six months ended 30 September 2022

Comprises of:

Notes

(forming part of the interim financial statements)

1 Basis of preparation

Grafenia plc (the "Company") is a company incorporated and domiciled in the UK.

These financial statements do not include all information required for full annual financial statements and should be read in conjunction with the financial statements of the Company as at and for the year ended 31 March 2022. 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.

These interim financial statements are prepared on the same basis as the financial statements for the year ended 31 March 2022, in which our full set of accounting policies, including critical judgements and key sources of estimation uncertainty, can be found.

The Directors review a two-year forecast when approving the interim financial statements to ensure that adequate cash resources are in operational existence to support trading for the foreseeable future.

These condensed consolidated interim financial statements were approved by the Board of Directors on 23 November 2022.

2 Significant accounting policies

The accounting policies applied by the Company in these condensed consolidated interim financial statements are the same as those applied by the Company in its consolidated financial statements for the year ended 31 March 2022.

3 Segmental information

The Company's primary operating segments are geographic being UK & Ireland, Europe and others. The secondary segmental analysis is by nature of sales channel and service. 

This disclosure correlates with the information which is presented to the Acting Chief Executive (CEO), the Chief Operating Decision Maker pursuant to IFRS 8, who reviews revenue (which is considered to be the primary growth indicator) by segment. The Company's costs, finance income, tax charges, non-current liabilities, net assets and capital expenditure are only reviewed by the CEO at a consolidated level and therefore have not been allocated between segments.

Analysis by location of sales

Revenue generated outside the UK is attributable to partners in Belgium, France, Ireland, New Zealand, The Netherlands and the USA. No single customer provided the Group with over 10% of its revenue.

DISAGGREGATION OF REVENUE

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

4 Trade and other receivables

5 Trade and other payables

6 Borrowings

On 27 September 2022 the Company issued further bonds via the perpetual bond facility put in place in July 2020. The Company issued £5.00m of the Bonds, at nominal value, to investors, raising £4.25m before expenses.

7 Earnings per share

The calculations of earnings per share are based on the following profits and numbers of shares:

Share options had no dilutive effect on the weighted average number of shares and therefore no diluted earnings per share have been stated.

8 Deferred consideration receivable

The total discounted cash consideration still to be received for disposal of the manufacturing operation based in Manchester referred to as 'Works Manchester' is £2.42m (£2.81m gross consideration).

9 Dividend

The Directors are not declaring an Interim Dividend (2021: Nil).

10 Post Balance Sheet Events

On 1 October 2022 the Company completed the acquisition of Vertical Plus Limited, an ecommerce software business, for total consideration rising to £2.88m. The acquisition is expected to be cash flow generative and earnings enhancing in the first year after acquisition.

11 Related Party Transactions

As part of the Bond issue on 27 September 2022, Mediqon Group AG, where our Chairman, Jan-Hendrik Mohr, is CEO, were issued £4.2m nominal nominal value of the bonds, at the same discount rate as other participants.

12 Discontinued operation

On 31 May 2022, the group sold its manufacturing operation based in Manchester. The manufacturing operation, referred to as 'Works Manchester' consists of the legal entity, Works Manchester Limited, along with the Manchester based production assets, related leases and staff contracts of Grafenia Operations Limited. Accordingly, these assets and liabilities have been designated as held for sale and separately disclosed in the statement of financial position and the financial impact of the discontinued operation is separately disclosed in the Statement of comprehensive income.

Following the disposal, Grafenia entered into a five-year supply agreement with Works Manchester Limited to provide products to our Company stores and Partners. This change reduces the gross profit percentage of the group, but at the same time reduces staff costs and overheads. To accurately reflect the performance of continuing operations, the Statement of comprehensive income has been presented to show the results had the disposal and new supply agreement been in effect for both the current and the comparative financial years.

Following preparation of the Completion Accounts, the total discounted cash consideration to be received was reduced from £2.70m (£3.16m gross consideration) to £2.47m (£2.91m gross consideration), with the final instalment due in May 2026. The £0.23m impairment has been recognised within discontinued operations in the current period.