NAK.L Regulatory News (NAK)

10 September 2018

Nakama Group PLC

("Nakama" or "the Group")

"The AIM quoted recruitment consultancy working across the UK, Europe, Asia, USA and Australia providing staff for the Web, Interactive, Digital Media sectors, IT and Business Change"

Final results for the year ended 31 March 2018

Nakama Group plc (AIM: NAK), the AIM quoted recruitment consultancy working across UK, Europe, Asia and Australia providing recruitment and related services for the web, interactive, digital media, IT and business change sectors, announces its final results for the year ended 31 March 2018, together with the publication of its audited report and accounts (the "Annual Report").

The Annual Report is being posted to shareholders this week and will shortly be made available on the Company's website, www.nakamagroupplc.com.

Financial Highlights

· Group revenue decreased by 25.4 per cent. to £16.8m (2017: £22.5m)

· Net fee income reduced by 14.2 per cent. to £5.3m (2017: £6.19m)

· Net fee income percentage increased to 31.6 per cent. (2017: 27.5 per cent.)

Andrea Williams, CEO of Nakama Group Plc, commented:

"After ceasing to trade with a high-volume client in Australia that location has struggled to deliver meaningful results as replacing such a large contract for services has proven to be far more challenging than expected. This has reduced the revenues significantly.

"We will embark on a journey to improve the development of our people as well as raise expectations around achieving better quality outputs, increasing levels of accountability in each unit".

All references to notes in this announcement are to the notes to the financial statements contained in the report and accounts.

Enquiries:

Notes to Editors:

Nakama Group plc is a recruitment group of two branded solutions placing people into specialist and management positions;

· Nakama operates in the digital, creative, media, marketing and technology sectors all over the world from offices in the UK, Asia and Australia.

· The Highams brand specialises in the Financial Services sector, specifically Business Change and IT in Insurance and Wealth Management currently in the UK and Europe.

Nakama Group plc was created in October 2011 through the acquisition of Nakama Ltd UK and its subsidiaries in Hong Kong, Singapore and Sydney by AIM listed Highams Systems Services Group plc.

CHAIRMAN'S STATEMENT

Financial results

Group revenue for the year ended 31 March 2018 was lower by 25.4% compared to the prior year at £16.8m (2017: £22.5m) and Net Fee Income ("NFI") was 14.2% lower at £5.3m (2017: £6.19m). The results over the past year have been extremely disappointing at a Group level. The Group experienced significant change through this financial year at executive management level as well as at all other levels. Details of these changes are further explained in the CEO's report. This impacted the Group's ability to deliver any meaningful results.

Strategy

Nakama Groups strategy is to provide recruitment solutions to a broad range of clients across Europe and Asia Pacific geographies. Our teams have deep domain knowledge in the high growth areas of digital, creative, technology, analytics, marketing and project/change management. It is the strategy of the Board and management team to be a leading international specialist within staffing, delivering a quality service to our customers and candidates whilst creating a sustainable business for the long-term benefit of all stakeholders.

Over the past year, the company has experienced considerable change, both at Board and executive management level. A new Chief Executive was appointed in February 2018. A new non Board Finance Director was also appointed in May 2018 and a new Non-Executive Director was appointed in July 2018, to replace a number of long serving executive and non-executive directors. We believe the leadership team is now more focused on delivering acceptable returns for shareholders and better positioned to take advantage of the considerable opportunities in the sectors in which we operate. Going forward, the group will be more disciplined in its financial management and more focused on expanding from its core strengths. There are currently no new offices planned for the next financial year as the Board intends to concentrate on improving the performance of the current operations.

Executives and staff

Under the leadership of the new Chief Executive, we have a small but unified management team, responsible for delivering growth and profitability in the offices where we operate. Each manager has clear goals and budgets to achieve, and we expect to see gradual improvement at both top and bottom line. Any priority investment will be concentrated around improving and expanding our core service offering. The group has a number of strong managers and consultants, however, in order to deliver acceptable returns for shareholders, specific performance metrics will be implemented and upgrades recruited where necessary.

Outlook

Trading so far this year has been in line with expectations, however, exceptional costs will be incurred as we continue the restructuring of some local offices. Building a higher performance culture will take time to establish and therefore we remain cautious on achieving the long term operating profit margin set by the Board. Our objective is to focus on improving financial discipline and stabilizing revenues over the year ahead.

Chairman

07 September 2018

CEO'S REPORT

Financial review

* EBITDA - Earnings before interest, tax, depreciation and amortisation

Group revenue for the year ended 31 March 2018 decreased by 25.4% and Net Fee Income ("NFI") decreased on the prior year by 14.2%. This was a result of APAC revenue decreasing to £5.32m from £8.82m last year and UK revenues decreasing to £11.5m from £13.6m in FY 2017. The decrease in both markets was predominantly due to a slowdown in the contractor market, which is explained in more detail in the Operational Review below.

The NFI percentage has increased to 31.6% (2017: 27.5%). The improvement in NFI percentage is due to a change in the revenue mix coming from higher permanent revenue which this year accounts for 19% of total revenue (2017:15%). This was mainly due to the loss of a high volume, but low margin contracting account in Australia.

The EBITDA loss of £845,000 for the year (2017: profit £25,000) was mainly as a result of a slowdown in the UK and APAC markets, as set out above, where overheads didn't reduce in line with the decrease in revenue. The year-end balance sheet shows borrowings decreased from £1.5m to £1.2m, this is due to a lower requirement for invoice finance as contractor revenue slowed down during the period, and a reduction in the cash position by £100,000.

There was an operating loss for the year of £1,425,000 (2017: loss of £211,000). The Group has seen a loss on foreign exchange of £72,000 (gain 2017: £127,000) due to the weakening of sterling against the other currencies in the markets the Group has been trading in. The Directors undertook an impairment review of the Group. Goodwill was reduced in value by £487,000 as a result of the downturn in performance.

The Directors are not recommending the payment of a dividend for the year.

UK operations

The London unit continued to see existing markets come under pressure from in-house recruitment teams, recruitment process outsourcing (RPO) and managed service providers. The market continues to become more heavily brokered and fragmented and the ability to generate value in traditional digital sectors has been eroded. The business has attempted to diversify its recruitment offerings into data and analytics as well as show a decreasing reliance on digital agencies as a client base, where it has been difficult to create value. Throughout the year staff turnover has been an issue as the UK market has created so many opportunities for the best recruiters and it has proven difficult not only to attract quality candidates but also to retain the best talent. The business, therefore, did not meet its hiring targets and struggled to cover its cost base due to lack of new revenue growth.

There have been gains made with new corporate client accounts secured and we expect these to have greater impact for the future. In addition, it is evident that the increasing levels of competition requires an increased focus on key disciplines in order to drive more specialist/ niche services.

In contrast, the Highams business, which is already highly specialized in its services and client base (insurance market - project focus) had a pleasingly profitable year further consolidating its position as a recruitment partner of choice across General Insurance, Life & Pensions and Asset Management markets. This market sector has seen an increase in M&A activity throughout the year which has increased the demand for Project Managers. Added to this, the increasing volume of digital transformation projects being undertaken across the insurance sector has also resulted in higher contractual demand for talent. We expect this level of activity to continue.

APAC Operations

Operating conditions across the APAC region have not changed much over the last 12 months. We have remained focused on servicing high value verticals in each location. The businesses have continued to drive retained services where possible.

External competition has been increasing in each location and despite the brand being viewed as strong across Hong Kong and Singapore the increased competition for top recruitment talent has been fierce and the business has struggled to secure the quality talent required, especially in Singapore.

After ceasing to trade with a high-volume client in Australia that location has struggled to deliver meaningful results as replacing such large contract for services has proven to be far more challenging than expected. This has reduced the revenues significantly. In addition, the company has faced some leadership challenges in Australia resulting in the downsizing of the Sydney operations and the closure of the Melbourne office post year end. This has made staff retention quite challenging which has further eroded NFI. Added to this the hiring restrictions in the Australian market, due to changes in legislation, will put further pressure on salaries and attracting consultants to the business.

It has been decided to strip back the Australian operation to focus on areas of strength (customer experience/user experience, tech, service & product design) in order to stabilise the business and create a stronger platform for growth in the future. A new leader has also been identified from FY 2018/19 onwards.

The digital and technology disruption seen globally is beneficial to Nakama as we provide staff in these areas. Traditional, non-digital businesses have also taken, or have started to undertake, wholesale reviews of where to position themselves, resulting in increased demand for suitable qualified digital experts. This continues to increase the demand for talent by our clients.

We continue to leverage our global networks to deliver against these increasing demands. We believe the Australian market has positive growth opportunities over the coming years as long as we position ourselves appropriately as a highly specialised, quality provider of staffing solutions.

Singapore focuses on the South East Asian corridor into Malaysia and Thailand. Hong Kong continues to build market share and has experienced higher demands from China and the wider region. However, the main focus is into the local markets where quickest and best gains can be made in the shorter term. The businesses benefit from a collaborative approach to business development and creating opportunity throughout the region based on this approach. We see the growth of these business units as essential to our strategy in the region.

The market continues to be competitive and the business has seen a higher than expected turnover of staff this year (Australia and Singapore), with high quality replacements very difficult to find. In light of this we plan to change the focus of our talent attraction strategies to include a higher proportion of less experienced staff who we can train and develop to our own standards which should also result in greater loyalty to the business.

Retaining high performing staff, as well as creating a future supply of high performing staff is critical in all regions for the business. We will embark on a journey to improve the development of our people as well as raise expectations around achieving better quality outputs, increasing levels of accountability in each unit. We maintain the outlook that a strong understanding and passion for local and global technology, digital and consultancy markets is essential in achieving the growth we seek to deliver to our shareholders, and we aim to build stronger, more focused/ specialised teams in each location in order to deliver on this goal.

Post Financial Year 2017-18 actions

The Board has decided that the opportunities to grow the Melbourne operation are not as positive as they should be and this business unit has continued to struggle to cover its costs and operate at the levels required. In light of this, the decision has been taken to close this operation and a liquidator was appointed in July, 2018. We believe that this will relieve the Sydney operation of any obligations to back-up the Melbourne business and allow the use of its capital to be focused on growth in that larger and more lucrative location.

After undertaking the annual goodwill impairment review it was decided that, given the losses in the period, a goodwill impairment charge of £478,000 is to be recognised in the financial statements. This represents a complete impairment of all outstanding goodwill values in the business.

Andrea Williams

Chief Executive Officer

07 September 2018

CONSOLIDATED INCOME STATEMENT

FOR THE YEAR ENDED 31 MARCH 2018

All of the above relate to continuing operations.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 MARCH 2018

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

AS AT 31 MARCH 2018

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 MARCH 2018

Basis of Preparation

This announcement and the financial information were approved by the Board on 7 September 2018. The financial information set out in this announcement does not constitute the Company's statutory accounts for the years ended 31 March 2018 and 31 March 2017. Statutory accounts for the years ended 31 March 2018 and 31 March 2017 have been reported on by the Independent Auditors. The Independent Auditors' Report on the Annual Report and Financial Statements for the year ended 31 March 2018 included a material uncertainty in respect of going concern, in the event that should trading be below or at the lower end of expectations there would be a requirement for further funding in order for the group to continue as a going concern and that obtaining this additional funding cannot be guaranteed. The audit report for the year ended 31 March 2017 was unqualified and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

Statutory accounts for the year ended 31 March 2017 have been filed with the Registrar of Companies. The statutory accounts for the year ended 31 March 2018 will be delivered to the Registrar in due course.

The financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRS"), IFRIC interpretations and the parts of the Companies Act 2006 applicable to companies reporting under IFRS. The Financial Statements have been prepared under the historical cost convention.

The preparation of Financial Statements in conformity with IFRS require the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial information, including the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of current events and actions, actual results may ultimately differ from those estimates.

Copies of the statutory accounts for the year ended 31 March 2018 will be posted to all shareholders. Additional copies will be available from the Company Secretary, Nakama Group plc, Quadrant House, 33/45 Croydon Road, Caterham, Surrey CR3 6PB and will be available to download from the investor relations section on the Company's website www.nakamagroupplc.com.

Going concern

Based on the latest trading expectations and associated cash flow forecasts, the directors believe that the group and company will be able to trade within its existing facilities and therefore meet its liabilities as they fall due for a period of at least 12 months from the date of approval of these financial statements and have therefore prepared the accounts on a going concern basis. However, the directors recognise that if trading was below or at the lower end of expectations there could be a requirement for additional funding and that obtaining this additional funding cannot be guaranteed. This is considered to be a material uncertainty that may cast doubt over the group and company's ability to continue as a going concern.

1. Operating segments

Operating segments are reported on a geographical basis.

The Group has three main reportable segments based on the location revenue is derived from:

· Asia Pacific - This segment includes Australia, Hong Kong and Singapore.

· UK - The UK segment includes candidates placed in the UK and Europe.

· USA - This business is currently dormant.

These segments are monitored by the Board of Directors and are reported in a manner consistent with the internal reporting provided to them. The Board of Directors are considered to be the chief operating decision makers. All revenue is derived from the supply of recruitment and human resource services.

Factors that management used to identify the Group's reportable segments

The Group's reportable segments are strategic business units that, although supplying the same product offerings, operate in distinct markets and are therefore managed on a day to day basis by separate teams.

Measurement of operating segment profit or loss, assets and liabilities

The accounts policies of the operating segments are the same as those described in the summary of significant accounting policies.

The Group evaluates performance on the basis of profit or loss from operations before tax not including overhead costs incurred by the head office such as plc AIM related costs not recharged, exceptional items, amortisation and share based payments.

The Board does not review assets and liabilities by segment.

2. Revenue

The Group makes sales to Europe, Asia, USA and Australasia. All revenue is derived from the provision of services. An analysis of sales revenue by country is given below:

3. Operating loss

The profit on ordinary activities before taxation is stated after charging:

The analysis of auditor's remuneration is as follows:

4. Income tax expense

The relationship between the expected tax expense based on the effective tax rate of the Group at 19% (2017: 20%) and the tax expense actually recognised in the income statement can be reconciled as follows:

5. Loss per share

The weighted average number of shares excludes 183,953 (2017: 183,953) shares held by the Employee Share Benefit Trust.