K3 Business Technology Group Regulatory News (KBT)

AIM: KBT

K3 BUSINESS TECHNOLOGY GROUP PLC

("K3" or "the Group" or "the Company")

Provider of business-critical software solutions focused on fashion and apparel brands.

Final results for the 12 months to 30 November 2022

Key Points

1 Refer to note 12 for definitions

2 Exceptionals include an impairment charge of £1.6m (2021: £1.4m) and reorganisation costs of £0.70m (2021: £1.5m)

Financial

· Revenue increase driven by strong growth in Third-party Solutions division and higher contribution from strategic products in K3 Products division

· Recurring and predictable income now accounts for 79% of Group revenue (2021: 76%)

o  Group Annualised Recurring Contracts ("ARC") at year-end up 11% to £22.9m (2021: £20.7m)

o  Strategic products ARC at year-end up 32% to £5.7m (2021: £4.3m), with the K3 fashion Enterprise product up 55%

· Adjusted EBITDA from continuing activities up 16% to £5.1m (2021: £4.4m)

· Healthy net cash of £7.1m (2021: £9.0m), and Group is expected to generate net cash in FY 2023

Operational

· K3 Products division - encouraging underlying performance; good progress across our fashion and apparel offering (strategic products) masked by managed run-off of legacy products

o  Divisional revenue decreased by £1.3m to £13.5m (2021: 14.8m); adjusted EBITDA at £0.7m (2021: £1.1m)

o  Gross profit margin up to 78.3% (2021: 75.3%)

o  Managed run-off of legacy products customer base in line with management expectations

o  Strategic products' ARC up 32% to £5.7m, with new customer wins and existing customers increasing contracted software licences

o  Viji acquisition is integrating well and has enhanced sustainability offering

o  Largest software licence contract for flagship strategic product (K3 fashion) signed post period.

· Third-party Solutions division - strong growth and highly cash generative

o  Divisional revenue up 11% to £34.0m (2021: 30.5m) and adjusted EBITDA up 12% to £12.8m (2021: £11.4m)

o  Gross profit margin constant at 51.6%

o  Aggregate ARC growth of 8.4%

o  NexSys software licence and maintenance contract renewals remained high at 98% (2021: 98%)

Prospects

· Encouraging start to trading in FY 2023 with good fashion product ARC growth

· Board expects continued improvement across both divisions

Marco Vergani, Chief Executive Officer of K3 Business Technology Group plc, said:

"K3 has made very encouraging progress in its first full year of executing its new growth plan. Against a challenging trading backdrop, we have delivered good growth in revenue, recurring income and profitability, and cash generation is on an upward trend.

"Our focus on driving the growth of our strategic fashion products is yielding very encouraging results and we have enhanced our sustainability offering. This is an increasingly important area for the fashion and apparel sector, with legislation also driving the adoption of sustainability solutions. Our Third-party Solutions division grew strongly and continues to generate high cash flows.

"The new financial year has started encouragingly, with our largest ever software licence contract for our flagship fashion product. The Board is confident that this progress will continue and expects the Group to become cash generative this year."

Enquiries:

CHAIRMAN'S STATEMENT

Overview

In the previous financial year, the Board reviewed market opportunities for the Group and established a new growth plan for the business. This has sharpened our focus on our products for the fashion and apparel sectors. At the same time, we have identified new growth opportunities for our Third-party Solutions business. We also restructured significantly by selling two businesses, reallocated investment and made organisational changes. We therefore started the financial year under review with a strengthened balance sheet, reduced costs and a better focus on our core strengths.

The trading backdrop continued to be challenging, nonetheless I am pleased to report that the Group has made encouraging progress over the year, strategically, financially, and operationally. Revenue from continuing operations is up by 5% to £47.5m (2021: £45.3m), with recurring and predictable revenue up 9% to £37.6m (2021: £34.5m). Adjusted EBITDA from continuing activities has increased by 16% to £5.1m (2021: £4.3m). The Group's net cash position at the year-end stood at £7.1m (2021: £9.0m), after making strategic investments. Underlying cash generation improved and this trend is expected to continue.

The Third-party Solutions division continues to generate high levels of recurring and predictable revenue, as well as strong levels of cash, from its large customer base. This includes IKEA Concept franchisees globally and UK manufacturers and distributors. Software licence and support and maintenance contract renewals generated by our UK manufacturing customer base, which drive the division's significant cash generation, remained very high at 98% (2021: 98%). The division's gross margin was steady at 51.6% (2021: 51.5%).

The K3 Products division, which includes both our strategic and legacy products, continues to focus on building recurring cash flows. Recurring contracted revenue from our strategic products, which serve the fashion and apparel markets, grew strongly, with the annualised contract value up by 32% to £5.7m year-on-year. This reflected increased uptake of software licences by existing customers and new customer wins. We expect strategic products to continue to grow strongly in the new financial year. At the same time, the division is managing the ongoing decline in the legacy product customer base. This managed run-off mainly accounted for the reduction in the division's revenue, though gross margin increased significantly to 78.5% (2021: 75.3%). The improvement in gross margin reflected increased income from strategic products, price increases and cost reduction. The division's EBITDA continued to improve, moving to £(0.7)m (2021: £(1.7)m) with significantly less cash spend on capitalised development. The acquisition in January 2022 of Viji, a software developer with proven sustainability software solutions for fashion retailers, has added valuable new IP in an important area for us. This new IP now operates alongside our fashion products and will be more deeply integrated in 2023.

Financial Results

Total revenue from continuing operations for the 12 months ended 30 November 2022 increased by 5% to £47.5m (2021: £45.3m). On a constant currency basis, revenue was up by 6%. Recurring and predictable revenue rose by 9% to £37.6m (2021: £34.5m), and accounted for 79% of Group revenue (2021: 76%). Third-party Products continued to generate a significant proportion of recurring and predictable revenue at £28.0m (2021: £25.4m). Recurring and predictable income from strategic products (in the K3 Products division) is growing fast, with annualised recurring contracts ("ARC") up 32% to £5.7m.

The Group generated a gross profit for the financial year of £28.1m (2021: £26.8m), and Group gross margin was constant at 59.2% (2021: 59.3%). This reflected the balance of contributions from lower-margin Third-party Products and higher-margin K3 products.

Support/administrative expenses rose to £23.0m (2021: £22.3m), with a further of £1.7m of capitalised development costs, reduced by £1.1m as a result of streamlining operations. Adjusted EBITDA1 from continuing activities rose by 16% to £5.1m (2021: £4.3m), with the main driver being Third-party Solutions gross profit. The loss before tax from continuing activities reduced by £4.0m to £3.8m, (2021: loss of £7.8m) and adjusted loss per share from continuing operations reduced by 10.8p per share to 2.6p (2021: loss of 13.6p).

Net cash at 30 November 2022 stood at £7.1m (2021: £9.0m). This is after Viji acquisition costs and software and systems investment. Operating cashflow from continuing operations normalised for Government coronavirus support was £3.0m (2021: £3.2m).

Growth Strategy

Third-party Solutions contributes significantly to the Group's recurring income and cash flows. The division has a well-established track record in SYSPRO ERP solutions for manufacturers and distributors in the UK, and our objective is to secure higher-value projects and to address adjacent verticals. The Global Accounts business remains a critical partner in the support and ongoing international expansion of the Inter IKEA Concept via its franchisees.

The K3 Products division offers significantly higher-margin growth potential. This reflects the fact that its solutions are based on K3 intellectual property ("IP"). We believe that there are substantial growth prospects for the Group's core strategic fashion products, which offer a powerful set of solutions for fashion and apparel brands. We have further enhanced these products with the introduction of Viji IP for supply chain traceability, which supports customers' sustainability objectives. Sustainability and environmental considerations have become greater priorities for customers, and EU and national legislation is also driving this trend. However, the area remains underserved, and we believe there is a significant opportunity for us to assist brands in addressing their sustainability issues.

Legacy solutions, which are also part of the K3 Products division, are mostly point-of-sale ("POS") products. Our focus is on providing key accounts with a migration pathway to other K3 products, while managing the ongoing decrease in revenue from these POS solutions.

People

Jonathan Manley, Non-Executive Director, retired from the Group at the AGM in May 2022, and we take this opportunity to thank him again for his contribution to K3 during his six years on the Board. In July 2022, we were delighted to appoint Pernille Fabricius, ACA, as Jonathan's successor. She also now heads the Company's Audit Committee. Pernille has extensive board and senior-level financial and commercial experience across a number of sectors, including IT services. She is currently Chief Financial Officer and Executive Vice President of NNIT A/S, one of Denmark's leading IT and consulting services providers, and Non-executive director of Gabriel Holding A/S, the fabrics manufacturer, and of Brødrene Hartmann A/S, the packaging manufacturer. 

Summary and Outlook

We have made encouraging progress under the new growth plan. Contracted revenue from strategic fashion products is growing strongly and contributing to the overall increase in recurring or predictable income. The new financial year has started well with strategic fashion products significantly expanding software licence income, which further increases ARC growth. Third-party Solutions has a solid order book from existing clients and is focused on margin improvement for new projects and upgrades.

The Group had net cash balances of £7.1m at the financial year-end and the first quarter of the new financial year shows a further material improvement in cash generation. We expects the business to generate net cash in the current financial year.

The Board remains confident that the Group will make further progress over the current financial year and beyond.

T Crawford

Chairman

CHIEF EXECUTIVE OFFICER'S Review

Introduction

Last year's review of Group strategy and addressable markets identified growth opportunities across all core activities. Our Third-party Solutions division is an important engine of recurring income and generates high levels of cash, and we are now focusing on enhancing margins. However, there is even greater scope to drive the quality of the Group's income by leveraging the growth of K3 Products. The opportunities for K3's high-margin products in fashion and apparel brands are extremely attractive, and their growth will drive recurring revenues, profitability and cash flows.

We have made very encouraging progress with our strategy and growth plans although the financial benefits are not yet fully apparent in these results. At the same time, over the course of the financial year, we continued to streamline operations and to invest in our central systems and software products.

Strategic Direction

K3 Products - Focus on Fashion & Apparel

K3 has a well-established track record in the delivery of Enterprise Resource Planning ("ERP") and Point of Sales ("POS") solutions for retail businesses. Our expertise extends across all the core "concept-to-consumer" processes. This includes product design, product manufacturing, and product supply and returns. We also understand the challenges that our customers are contending with, including new regulations, changing consumer behaviour and technological innovation. The adoption of digital technology is driving the need for solutions that support strong supply chain collaboration and smarter, more integrated sales engagement with customers. New products are data-led and cloud-based Software-as-a-Service ("SaaS") solutions.

Our focus is now on capitalising on our existing position and reputation in the fashion and apparel and related large retail markets, which includes brands that are developing their direct-to-consumer routes to market.

'Transforming retail for good' summarises the direction we are taking; that is to provide solutions that support innovation and transformation of core business processes, including in relation to environmental and ethical priorities. The growth areas we are focusing on are:

The addition of Viji, the sustainability-focused software developer, has extended our existing sustainability offering with products that address supply chain transparency. This is a growth area, which is now subject to increasing regulation and consumer awareness.

Third-party Solutions

NexSys (previously called SYSPRO)

Customers in manufacturing and distribution are embracing digital transformation, smart manufacturing and direct machine integration, and moving away from first-generation, monolithic ERPs or legacy applications, which are often not integrated. This shift provides us with significant growth opportunities, and we are targeting larger-scale projects for customers in growth sectors.

We continue to invest in our relationship with SYSPRO as well as in software development to enrich the SYSPRO offering with our own modules, capabilities and add-ons. We are also strongly focused on customer support and our end-to-end support service remains unrivalled in the marketplace. In the period, we rebranded this operation in order to position our capabilities more effectively.

Global Accounts

The Global Accounts unit includes our relationship with Inter IKEA Systems B.V. (the owner and franchisor of the IKEA concept) and the Inter IKEA Concept franchisees. The backbone of our activity is the development, enhancement and maintenance of the core IKEA solution for franchisees as well as integrations, software customisation and support. This support encompasses the core infrastructure behind IKEA franchisee stores and back-office solutions. We also develop and implement complementary new solutions such as our 'Mobile Goods Flow' and 'Self-ordering Kiosk' applications, to extend the core IKEA solution.

The IKEA Concept and IKEA stores continued to expand rapidly in 2022, with new store openings in Chile, Indonesia, Taiwan and other locations. We maintain a solid backlog of enhancement projects although fewer new IKEA stores are planned in 2023 than in 2022.

Organisational and operational changes

We continued to streamline the Group and to strengthen our sales approach. In allocating investment, we have prioritised our strategic partnerships. These include Microsoft and channel partners responsible for reselling our fashion offerings. Our relationship with Microsoft remains close, and K3's inclusion as part of Microsoft Retail Cloud is testimony to the strength of our products in the fashion and apparel sector. Our K3 fashion product remains Microsoft's recommended 'add-on' solution for the fashion and apparel sector globally.

During the financial year, we invested in enhancing channel partner sales support, and in delivery and customer support as well as in knowledge management practices We have also developed the new sales team in North America, which is an important region for us, working in conjunction with Microsoft. 

Review of Performance

K3 Products

K3 Products provides software products and solutions that are powered by our own IP. They comprise:

· strategic products focused on the fashion and apparel markets, including K3 fashion and K3 pebblestone, K3 Viji and K3 Imagine;

· solutions for the visitor attraction market; and

· stand-alone point solutions, which are mainly our legacy point-of-sale ("POS") products.

Divisional revenue decreased by £1.3m to £13.5m (2021: £14.8m). Approximately £1.1m of this reduction reflected continued managed run-off of from legacy products, which was in line with management expectations. However, it masks the very good progress made with strategic fashion products, especially K3 fashion. By the financial year end, the annualised value of recurring revenue (or Annualised Recurring Contracts ("ARC")) from strategic product software licences had increased significantly, driven both by new customer additions and increased software licence sales to existing customers.

ARC is a key measure of our strategic products (including K3 fashion and K3 pebblestone, which are focused on the fashion and apparel brands). This metric does not use IFRS15's 'point-in-time' revenue recognition approach to term contracts, but instead recognises revenue over the term of the contract. ARC from our strategic products increased by 32% to £5.7m, with 25% of this driven by existing customers taking up further software licences. Importantly, ARC from our flagship product, K3 fashion, increased by 55%.

Legacy product managed run-off impacted the division's overall gross profit, which was down by £0.6m to £10.5m. However, gross margin improved significantly to 78.3%, from 75.3% in the prior year. This reflected the change in revenue mix, increased pricing, as well as cost reductions.

A total of £2.1m of major new contracts were secured for K3 fashion and K3 pebblestone, with a strong close at the end of the financial year (2021: £3.1m, which included a number of multi-year contracts). The £2.1m of new contracts signed in 2022 were mostly one-year contracts, which typical roll-on and expand significantly, driving growth in ARC. As an illustration, a major new customer signed in 2020 implemented c. £0.02m of software in its first year. Since then, its software contract value has grown more than ten-fold to c. £0.25m per annum. New contracts included eight major new customer wins as well as increased software licence sales to existing customers. The major new customers included a premium outdoor-clothing company, a luxury Swiss watch brand, a leading French youth-fashion brand, a Spanish fashion brand, a large UK clothing & footwear brand and a major Nordics fashion and apparel brand. 

We were pleased with the expansion in revenues from existing clients, which demonstrates the continuing success of our 'land and expand' strategy. Typically customers use our fashion products for their centralised functions (including purchasing, catalogue management, and pricing) and then adopt it across the rest of their operations (particularly with increasing use of hand-held devices in distribution centres and stores).

We initiated the migration of our K3 pebblestone clients from an existing 'on-premises' solution to a new cloud-based version, which is sold on a subscription basis. This migration is underpinned by Microsoft's push to move Dynamics Business Central clients to its cloud versions, and we expect the migration to accelerate in 2023 and beyond.

The principal route to market for K3 fashion and K3 pebblestone remains via selected Microsoft business partners. Microsoft's global endorsement of K3 fashion as its recommended 'add-on' solution for the fashion and apparel vertical continues to underline the quality of our solution. Our channel partner management team is working well with our business partners and will continue to support channel sales, including opportunities for our fashion products in the USA. Given the demand for our fashion solutions, we have further expanded the number of our business partners and created a team of experts to support them in initial engagements and showcase our thought leadership and best practices.

Our solutions for visitor attractions delivered an improved performance. This was driven by a combination of recovery in the UK visitor attractions segment after the coronavirus pandemic, but also the improvements we made to our offering over the last financial year. These included an enhanced reservation engine, improved online ticketing capability, and an upgraded user interface, all of which supported price increases to customers.

In January 2022, we made a strategic purchase of intellectual property, acquiring Viji, an innovative French software developer. Viji is wholly focused on enabling fashion retailers trace and authenticate more easily the environmental and social credentials of their supply chains. It has been developed as a fully-scalable software solution, covering the collection, verification and renewal of supplier certifications. It also includes a consumer-facing component, which enables fashion retailers to provide consumers with ethical and environmental information on their products.

Viji's exciting new products complement our existing offering and have accelerated the development of our sustainability offering, in particular for supply chain transparency. We are in the process of integrating the IP with our fashion products to create a market-exclusive and highly valuable, end-to-end sustainability solution, which covers supply chain transparency, the production of automated ESG reports, compliance documentation and authenticated information on customers' products. We successfully deployed K3 Viji into a select number of customers and are taking advantage of their input to prioritise new development. In parallel, we have created a substantial pipeline of opportunities, which reflects the increasing prioritisation of sustainability issues by customers, accelerated by a number of fast-approaching legislative deadlines and targets in Europe and the USA.

Third-party Solutions

Third-party Solutions comprises NexSys (previously called SYSPRO) and Global Accounts, which both resell Third-party Solutions. These are typically 'on-premise', and revenues are generated from implementation, software licence renewals, and ongoing maintenance and support contracts.

The division performed well, with total revenue increasing by 11% to £34.0m (2021: £30.5m) and adjusted EBITDA 11% higher at £12.8m (2021: £11.4m). Gross margin remained constant at 51.6% (2021: 51.5%)

Building on last year's progress, NexSys, the new name for our SYSPRO operations, which is focused on business-critical ERP for the UK manufacturing and distribution markets, delivered a good performance, implementing new software installations for new customers and servicing the order book from existing customers. Although a number of prospects delayed their purchasing decisions, against the background of rising energy costs, we won several important new customers. These included a distributor of diagnostics tools, a well-known brand of home furniture, a leading European manufacturer of axles and suspensions, and the Physics Department of a leading UK university. We therefore entered the new financial year with a good pipeline of projects. We have increased resource to support new business wins and to take advantage of the opportunities ahead.

The NexSys customer base generates strong cash flows from software licence and maintenance and support contract renewals. The majority of renewals takes place in the final quarter of the financial year and remained very high at c.98% (2021: 98%).

Global Accounts, which predominantly provides specialist software services to the Inter IKEA Concept franchisee network, also performed well. Our specialist services teams continued to support the roll-out of IKEA franchisee stores in the Far East and in Central and South America. We added delivery resource during the year, although the shortage of available skilled resource resulted in some cost inflation. We also continued to deliver K3 Product applications into IKEA franchisees, including 'Mobile Goods Flow'. We are focused on gross margin improvement over 2023, which will be helped by an easing of resource pressures and the good backlog of projects with franchisees. Revenue from framework contracts closed the year strongly, up 18% on an annualised basis.

Central costs

Central Support costs include our central IT, finance, legal, HR, insurance, marketing and PLC costs, which are not allocated to revenue generation. There was a £0.4m increase in Central costs to £8.5m (2021: £8.1m), which reflected our investments in upgrading our internal IT application landscape by adopting and deploying new financial, CRM and customer support systems.

Summary

Over the financial year, we made very encouraging progress in line with our new growth strategy. Our focus on and investment in our strategically important business areas have improved our market position, reinforced our thought leadership in key sectors, and enhanced our ability to drive strategic product growth. Our products are mission-critical and help customers unlock digital innovation thereby improving their ability to compete in the markets they serve. We expect to deliver further growth in the new financial year while also improving Group cash generation.

Marco Vergani

Chief Executive Officer

financial Review

Overview

It should be noted that the comparatives for the prior financial year consolidated income statement have been restated. This followed the classification of the certain Group-owned products that are sold exclusively into the Third-party Solutions customer bases being reclassified into the Third-party Solutions segment. 

The Group's reported segments are 'K3 Products' and 'Third-party Solutions', with central support costs reported separately, as previously. This aligns segmental reporting with the Group's growth strategy.

The Directors consider the key performance indicators by which they measure the performance of the Group by division to be:

The Group's results for the year end to 30 November 2022, together with comparatives for the same period in 2021, are summarised in the tables below.

Overall Group revenue was up 5% to £47.5m (2021: £45.3m) being driven by Third-party solutions. On a constant currency basis, underlying growth was £2.5m higher year-on-year. Third-party Solutions revenue increased by 11% to £34.0m (2021: £30.5m). K3 Products revenue was £13.5m (2021: £14.8m), down 9% or £1.3m. This reflected legacy decline of £1.4m, which was in line with expectations. Revenue from K3 Products' strategic products increased by £0.1m to £4.7m, with total deal closure in line with the prior year.

Gross profit mirrored revenue growth and increased by 4.7% to £28.1m (2021: £26.8m). Overall gross margin percentage was unchanged at 59.2% (2021: 59.3%) with K3 Products gross margin percentage increasing to 78.3% (2021: 75.3%). This was driven by an improving mix of higher-margin fashion products, more operational leverage in K3 imagine and price increases. Third-party Solutions margins remained constant at 51.6% (2021: 51.5%).

Group annualised recurring contracts ("ARC") grew by 11% to £22.9m from £20.6m, driven by strategic products growth of 32% to £5.7m (2021: £4.3m). Within strategic products, ARC for the enterprise product, K3 fashion, increased by 55%, driven by both new customers and existing customer expansion.

The key metric of adjusted earnings before interest, tax, depreciation, amortisation and exceptional items ("EBITDA") increased by 16% to £5.1m (2021: £4.1m), with lower capitalised development costs of £1.7m (2021: £2.8m) meaning that underlying operating margins are expanding.

Administrative expenses

Support/administration costs net of capitalised development costs *7 increased by £0.8m to £23.1m (2020: £22.3m), which reflected the investment in additional customer-facing staff.

Depreciation and amortization costs decreased in line with the reduced level of capitalised development in recent years. Exceptional costs in the year related to the impairment of some Retail POS amounting to £1.6m, acquisitions costs and restructuring costs of £0.6m. Exceptional costs in 2021 related to redundancy costs and onerous contracts following the Starcom disposal.

Earnings per share

The Group's adjusted loss per share from Continuing operations*6 reduced by 10.8p per share to 2.6p (2021: adjusted loss per share*6 of 13.6p). Reported loss per share was 9.0p (2021: earnings of 8.0p, which included profit from disposals).

Dividends

No dividend will be declared for the year ended 30 November 2022 (2021: nil).

Taxation

The corporation tax charge for the financial year was £0.1m (2021: £0.8m charge). This comprised a charge for current taxation of £0.1m (2021: £0.6m) relating to the non-UK businesses and a charge for deferred taxation of £nil (2021: £0.2m).

Balance sheet

Overall the Group balance sheet remains robust with net cash balances of £7.1m (2021: £9.1m). The Group has a bank facility with Barclays, its long-standing bankers, which provides for the draw down of up to £3.5m to support seasonal cash movements. At the year-end, £nil was drawn down (2021: £nil). After the financial year end, the Group's facility agreement was extended for a further year, until March 2024.

Goodwill increased to £25.0m (2021: £24.8m) as a result of acquisitions and FX charges. Development costs reduced to £3.0m (2021: £6.6m), reflecting the reduction in capitalised development costs and the impairment of £1.6m. The development cost balance of £3.0m is now heavily weighted, 80% to the strategic vertical of fashion & apparel. Property, plant and equipment decreased to £2.5m (2021: £3.3m) with depreciation exceeding additions.

Current assets increased in Contract Assets driven by multi-year longer term deals and in Trade Debtors with increased Third-party Solution revenues. Trade & Other Payables increased to £17.7m (2021: £14.5m), which reflected deferred income and contingent acquisition consideration and higher year-end commissions. Current leases obligations reduced to £0.8m (2021: £1.6m) following the reduction of the office footprint and car fleet.

Cash flow

Net cash balances at the year-end stood at £7.1m (2021: £9.0m). The underlying trend of cash generation is improving with an annualised £3.0m cash outflow1 as at 31 May 2022, reducing to £1.9m as at 30 November 2022 and with further material reduction in Q1 2023 on K3's path to cash generation. Cash outflow1 in the financial year amounted to £1.9m, including £0.3m of costs relating to the acquisition of Viji and £1.0m of investment in upgrading internal systems.

The comparison of cashflow in 2022 and 2021 is distorted by the disposals of the Sage and Starcom business units. The table below normalises the impact of the disposals and also the 2021 Government coronavirus support unwind on cash generated from operations.

Investing Activities included £0.3m for the consideration of the Viji acquisition in addition to associated deal costs. 2021 Investing Activities included the disposal proceeds of the Starcom and Sage businesses of £13.3m and £1.5m respectively.

Development expenditure capitalised for products was £1.7m (2021: £2.3m) with a further £1.0m invested in internal systems upgrade classified across capitalised development and purchase of property, plant and equipment. Development expenditure capitalised on product for external commercialisation was spread evenly across the core strategic products of K3 fashion, K3 pebblestone and K3 Viji.

Within 2021 Financing Activities, following the high level of Starcom and Sage disposal proceeds, these funds were used to pay down the bank facilities of £6.8m. In addition, 2021 indebtedness was further reduced by the non-cash debt-to-equity conversion of the £3m shareholder loan.

Finance expenses were higher in 2021 due to the charge for the conversion of shareholder loan notes into equity. Repayments of lease liabilities continued to decrease following the reduction of the office footprint and size of the car fleet.

Robert Price

Chief Financial Officer

K3 Business Technology Group plc

Consolidated income statement

for the year ended 30 November 2022

All the (loss)/profit for the year is attributable to equity shareholders of the parent.

Total comprehensive (expense)/income is attributable to equity holders of the parent.

All the other comprehensive income will be reclassified subsequently to profit or loss when specific conditions are met. None of the items within other comprehensive income/(expense) had a tax impact.

K3 Business Technology Group plc

Consolidated statement of financial position

as at 30 November 2022

K3 Business Technology Group plc

Consolidated Cash Flow Statement

for the year ended 30 November 2022

K3 Business Technology Group plc

Consolidated statement of Changes in Equity

NOTES

1 Basis of preparation

Statement of compliance

The Group financial statements from which this statement of Final Results is extracted have been prepared in accordance with UK endorsed IFRS in conformity with the requirements of the Companies Act 2006 ("IFRS"). The company financial statements have been prepared in accordance with Financial Reporting Standard 101, Reduced Disclosure Framework ("FRS101").

The financial information has been prepared under the historical cost convention except for derivative financial instruments which are stated at their fair value.

Whilst the financial information included in this statement of Final Results has been prepared in accordance with the recognition and measurement criteria of IFRS, this announcement does not itself contain sufficient information to comply with IFRS.

The Group's statutory financial statements for the year ended 30 November 2022, from which the financial information presented in this announcement has been extracted, were prepared using the accounting policies disclosed in the principal accounting policies set out in the Group's Annual Report. These policies have been consistently applied to all years presented.

The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results ultimately may differ from these estimates.

This statement of Final Results does not constitute the Company's statutory accounts for the years ended 30 November 2022 and 30 November 2021 within the meaning of Section 435 of the Companies Act 2006 but is derived from those statutory accounts.

The Group's statutory accounts for the year ended 30 November 2021 have been filed with the Registrar of Companies, and those for 2022 will be delivered following the Company's Annual General Meeting. The Auditor has reported on the statutory accounts for 2022 and 2021. Their report for 2022 was (i) unqualified, (ii) did not contain any material uncertainties and (iii) did not contain statements under Sections 498 (2) or 498 (3) of the Companies Act 2006 in relation to the financial statements.

Going Concern

The Group closely reviews its funding position throughout the year, including monitoring compliance with covenants and available facilities to ensure it has sufficient headroom to fund operations. The Group has extended its current Banking Facilities arrangements with its long-term Bank, Barclays, for a further year to 31 March 2024.

The capital structure of the Group has materially changed in the last two years with the disposal of the Starcom and Sage businesses for a combined £16.2m and the conversion of a £3.0m shareholder loans to equity. The Group therefore ended the year ended 30 November 2022 with a Net Cash position of £7.1m.

The Group has prepared cashflow forecast for a period of at least 12 months from the date of approval of the financial statements which show that the Group will have reasonably significant headroom and be in compliance with covenants. The forecast has undergone sensitivity analysis and stress testing and the Directors have concluded that there is no reasonable worst-case scenario that is likely which would mean the group would run out of cash or breach covenants.

The Directors therefore have a reasonable expectation that there are no material uncertainties that cast significant doubt about the Group's ability to continue in operation and meet its liabilities as they fall due for the foreseeable future, being a period of at least 12 months from the date of approval of the financial statements. For these reasons the financial statements have been prepared on a going concern basis.

2 Key Accounting policies for the Group financial statements

Goodwill

Goodwill is initially recognised and measured as set out above.

Goodwill is not amortised but is reviewed for impairment at least annually. For impairment testing, goodwill is allocated to each of the Group's subsidiaries or cash-generating units (or groups of cash-generating units) expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata based on the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period.

On disposal of a subsidiary or cash-generating unit, the attributable net book value of goodwill is included in the determination of the profit or loss on disposal.

Revenue recognition

The Group contracts for products and services in a variety of contractual forms and deployment methods which impact IFRS 15 revenue recognition. These include:

· Reselling of 3rd party products for which following contracting the Group has no continuing performance obligations for software and the customer controls the software. These are usually perpetual licenses with customer on premise installations. Since the Group is reselling these all already functional products, services are unbundled. Customers can also choose to take maintenance and support for these products or indeed obtain services, support, and maintenance from different suppliers.

· K3 bolt on own software IP (Intellectual Property) that adds incremental vertical functionality and bolts onto Microsoft Dynamics products and that is either sold directly to customer or via a channel partner. K3 does not control the software after the contract and issue of access code, which is contemporaneous. There is an ongoing performance obligation to maintain the product to ensure the functionality continues to bolt onto Microsoft Dynamics products.

· K3 own products for which K3 controls and has ongoing performance obligations. These products are typically SaaS (Software as a Service) based subscription products which include a right to access as the customer continuously consumes functionality. The product offer is a typical bundle of software access, maintenance, and support. The contracts typically have a low level of services.

Software license revenue:

Software licenses for 3rd party products are recognised at a point in time, on contract and issue of the initial license key which is contemporaneous.

K3 bolt on own software IP is recognised at a point in time, on contract and issue of the license key which is contemporaneous.

K3 own products which is SaaS based is recognised over time and not in software but rather in maintenance and support for the purposes of revenue disaggregation disclosures. Revenue is recognised over time as K3 controls the product, the license is not distinct, and the customer continually receives benefits.

Services revenues

Services are linked to implementation and set up of K3 own and 3rd party products, rather than product functionality build. Services are contracted for on a time and materials basis, the customer takes ownership of the work delivered and revenue is recognised as it is performed.

Hardware:

Hardware is peripheral to a number of contract implementations; the revenue is recognised when the customer takes control of the asset on delivery.

Maintenance and Support:

Maintenance refers to the maintenance of the products and ensuring a right to upgrade whilst Support refers to ongoing customer support including for example help desk access.

3rd party products maintenance is provided by the product's author K3 has no performance obligation and this is sold through K3 for a margin. Revenue is recognised for the term of the contract at a point in time when the contract is signed. Support of 3rd party products is provided by K3 over time over the term of the contract.

K3 bolt on own software IP is typically re-sold via channel partners who provide support. K3 has an ongoing performance obligation for the maintenance of the product and recognises a portion of revenue associated with that over time.

K3 own SaaS / subscription products and usually hosted by K3 and typically a bundled offer of maintenance and support is provided to customers which are both performance obligations for K3 and revenue is recognised over time.

Allocation of transaction price:

Transaction price is measured based on the consideration specified in a contract with a customer and, where applicable, the best estimate of any consideration related to modifications to the contract which has yet to be agreed. Any amounts expected to be paid to the customer, such as penalties for late delivery, are deducted from the consideration. Where a transaction price must be allocated between multiple performance obligations, this is generally achieved through allocating a proportion of total price against each using either standard list sales prices or an estimated cost methodology.

Critical accounting estimates and judgements

In applying the Group's accounting policies above the directors are required to make judgements (other than those involving estimations) that have a significant impact on the amounts recognised and to make estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The 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 if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

The directors are of the opinion that there are no significant judgements to be disclosed except those over going concern which are disclosed in detail in the basis of preparation accounting policy in note 1. The key sources of estimation that have a significant impact on the carrying value of assets and liabilities are discussed below:

Impairment of goodwill and other intangibles

Determining whether goodwill is impaired requires an estimation of the value in use of the cash generating units to which goodwill has been allocated. The value in use calculation requires an entity to estimate the future cash flows expected to arise from the cash generating unit. It also requires judgement as to a suitable discount rate in order to calculate present value, i.e., the directors' current best estimate of the weighted average cost of capital ("WACC"). Other intangibles are assessed annually for impairment as well as when triggers of impairment arise. An impairment review has been performed at the reporting date.

Capitalised development expenditure and subsequent amortisation

Where such expenditure meets the relevant criteria, the Group is required to capitalise development expenditure. In order to assess whether the criteria are met the Board is required to make estimates in relation to likely income generation and financial and technical viability of the relevant development projects and the period over which the Group is likely to benefit from such expenditure. Development projects are subject to an investment appraisal process with the product managers to assess the status of the development and the expected commercial opportunities. Development costs are assessed for impairment which requires an estimation of the future expected revenues to be generated from each product. This methodology, which is similar to that used to assess any impairment of goodwill. Expenditure is only capitalised when the investment appraisal process has assessed that the product is likely to benefit the Group in the future. 

Calculation of loss allowance

When measuring expected credit losses, the Group uses reasonable and supportable forward-looking information, which is based on assumptions for the future movement of different economic drivers and how these drivers will affect each other.

Loss given default is an estimate of the loss arising on default. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, taking into account cash flows from collateral and integral credit enhancements.

Probability of default constitutes a key input in measuring Expected Credit Losses (ECL). Probability of default is an estimate of the likelihood of default over a given time horizon, the calculation of which includes historical data, assumptions and expectations of future conditions.

If the rates on trade receivables more than 90 days past due had been 50 per cent higher as of November 2022, the loss allowance on trade receivables would have been £9k (2021: £16k) higher.

If the ECL rates on trade receivables between 61 and 90 days past due had been 50 per cent higher as of November 2022, the loss allowance on trade receivables would have been £7k (2021: £4k) higher.

Calculation of incremental borrowing rate and lease term in respect of IFRS 16

Lease liabilities are measured at the present value of the contractual payments due to the lessor over the lease term, with the discount rate determined by reference to the rate inherent in the lease unless (as is typically the case) this is not readily determinable, in which case the Group's incremental borrowing rate on commencement of the lease is used. The Group's incremental borrowing rate is calculated by reference to borrowing rates applicable to the Group's other borrowings/financial liabilities and then adjusted for the specifics of the lease and asset. For every 0.5% increase in the incremental borrowing rate the right of use asset and lease liability recognised would increase by approximately £4k, conversely an equivalent reduction in the incremental borrowing rate would decrease the right of use asset and liability by approximately £4k.

Lease term is ordinarily calculated by reference to the contractual terms of the Group's leases. Management may change their estimates in respect of the term of any lease if the probability of an extension or termination option, within the lease contract, being exercised changes. As a result of any change in estimate of the lease term the Group adjusts the carrying amount of the lease liability to reflect the payments to make over the revised term, which are discounted using a revised discount rate. An equivalent adjustment is made to the carrying value of the right-of-use asset, with the revised carrying amount being amortised over the remaining (revised) lease term. If the carrying amount of the right-of-use asset is adjusted to zero, any further reduction is recognised in profit or loss.

3 Segment information

The Group operates a streamlined organisation with management resource and central services focused on working across the Group in a more unified manner to increase the strategic focus on the level of our own product sales. Reporting is based on product split between K3 own products ('K3 Products') and Third-party reseller activities ('Third-party Solutions') across revenue and gross margin. Global Accounts and Third-party Products continue to be merged into Third-party Solutions. Overheads and administrative expenses are included as a central cost given resource works across these three segments. The activities and products and services of the operating segments are detailed in the Strategic Report.

Transactions between operating segments are on an arms-length basis.The CODM (Chief Operating Decision Maker, the Board) primarily assesses the performance of the operating segments based on product revenue, gross margin and Group adjusted EBITDA. The segment results for the year ended 30 November 2022 and for the year ended 30 November 2021, reconciled to loss for the year.

Year ended 30 November 2022

Year ended 30 November 2021 (restated*)

*FY2021 restated to reflect latest segment reporting, in which Revenue and Gross profit from "mobile goods flow" and "make tax digital" are reclassified from K3 Products to Third-party Solutions.

Segment assets and segment liabilities are reviewed by the CODM in a consolidated statement of financial position. Accordingly, this information is replicated in the Group consolidated statement of financial position included within this announcement. As no measure of assets or liabilities for individual segments is reviewed regularly by the CODM, no disclosure of total assets or liabilities has been made, in accordance with the amendment to paragraph 23 of IFRS 8.

The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. Transactions between segments are accounted for at cost.

The Group has one customer relationship which accounts for 46% (2021: 43%) of external Group revenue.

Analysis of the Group's external revenues (by customer geography) and non-current assets by geographical location are detailed below:

External revenue by end-customer geography

External revenue by revenue recognition category

Revenue to be recognised in the future, related to agreed performance obligations that are unsatisfied or partially satisfied as at 30 November 2022, was as follows:

External revenue by business unit geography

External revenue by revenue recognition category

Revenue to be recognised in the future, related to agreed performance obligations that are unsatisfied or partially satisfied as at 30 November 2021, was as follows:

Revenue recognised and included within contract assets can be reconciled as follows:

Revenue recognised and included within contract liabilities can be reconciled as follows:

4 Tax expense / (charge)

The March 2021 Budget announced an increase to the main rate of corporation tax to 25% from April 2023 and this rate was enacted on 10 June 2021. Deferred tax balances as at 30 November 2022 have been measured at 25%.

The reasons for the difference between the actual tax charge for the period and the standard rate of corporation tax in the UK applied to profits/(losses) for the year are as follows:

Deferred tax recognised directly in equity for FY2022 was £nil (2021: £nil). Current tax recognised in equity for FY2022 was £nil (2021: £nil). None of the items within other comprehensive income in the Consolidated Statement of Comprehensive Income have resulted in a tax expense or tax income.

5 Acquisition of a subsidiary - Viji

On 27 January 2022, the Group acquired 100 per cent of the voting shares of Viji, an innovative software developer with an exciting suite of products focused on sustainability, for an initial consideration of €0.25 million and agreed to an undiscounted deferred consideration of €0.1 million, due to be paid a year after date of acquisition. There is also contingent consideration of €0.7 million, dependent upon the achievement of agreed performance criteria over the next two years from the date of acquisition. The acquisition-related costs amounted to £0.1 million and are included in the Consolidated Income Statement.

The acquisition has been accounted for using the purchase method of accounting.

The following table summarises the recognised amounts of assets acquired and liabilities assumed at the date of acquisition:

The initial accounting for the acquisition of Viji has only been provisionally determined at the date of finalisation of these Consolidated Financial Statements based on Management's best estimates.

From the date of acquisition to 30 November 2022, Viji contributed £19 thousands to the Group's revenue and a profit of £0.1 million to the Group's loss after tax.

If the acquisition of Viji were completed on 1 December 2021, the Group's revenue for the year would have been £47,506k and the Group's loss after tax would have been £5,078k.

6 Discontinued operations

On 26 February 2021 the Group announced that a sale of the Starcom business for consideration of £14.7m had been approved and completed. Starcom had already been classified as a discontinued operation in the prior year as it represented a major line of business for the Group.

The post tax gain on disposal of the Starcom business was determined as follows:

Trade and other payables includes an onerous contract provision of £1,125k relating to higher than market pricing on the 3 year post completion service agreement with the buyer.

The results of the Starcom business for the year are presented below: