Redcentric Regulatory News (RCN)

23 December 2016

Redcentric plc ("Redcentric" or "the Company")

Interim Results for the six months ended 30 September 2016

Redcentric plc (AIM: RCN), a leading UK IT managed services provider, today announces its interim results for the six months ended 30 September 2016.

FINANCIAL HIGHLIGHTS

· Revenue up 2.0% to £53.0m (H1 FY16 restated: £51.9m)

o 84.3% recurring revenue

o Recurring revenue up 5.9% (1.9% organic) to £44.7m

· Adjusted EBITDA* up 16.6% to £9.1m (H1 FY16 restated: £7.8m)

· Adjusted EBITDA* margin 17.1% (H1 FY16 restated: 15.0%)

· Statutory profit before tax £0.3m (H1 FY16 restated: £2.5m loss)

· Adjusted EPS** 2.48p (H1 FY16 restated: 2.53p). Statutory EPS 1.11p (H1 FY16 restated: (1.96p)).

· Net debt £34.4m (31 March 2016 restated: £37.8m)

* Earnings before interest, tax, depreciation, amortisation of acquired intangibles, transaction and integration costs and share based payments.

** Adjusted Earnings per Share excludes amortisation of acquired intangibles, transaction and integration costs and share based payments and replaces the reported tax credit with a notional tax charge at the full rate of corporation tax.

OPERATIONAL HIGHLIGHTS

· H1 sales target exceeded, 38 new client wins.

· Sales pipeline strong at approximately £93m

· New Hyderabad office in India has been opened with a 250 seat capacity, doubling the potential size of the operation

· City Lifeline technology platform is now integrated with the wider business

· Non-core fibre network asset disposal completed in September

REMEDIAL PLAN BEING EXECUTED - GOOD PROGRESS TO DATE

· Deloitte LLP ("Deloitte") and Nabarro LLP ("Nabarro") swiftly appointed in early November to lead the forensic review

· Appointment of Julian Llewellyn on 8 November 2016 as Interim CFO

· Appointment of Peter Brotherton on 23 November 2016 as new Chief Financial Officer

· Initial findings of the forensic review announced on 13 December 2016

· The forensic review identified a number of process and control failings which required prompt rectification action. Improvements have and are being made to the Company's finance function and internal policies and procedures. These include more robust internal controls around cash reconciliations and improvements to billing and credit control management systems and processes

· Planning underway for the replacement of multiple legacy back office systems with standard integrated Microsoft platform

· Improvements under the remedial plan will continue throughout the first half of 2017

· The forensic review and subsequent remedying actions will result in an exceptional charge of approximately £1m for the current financial year

· Banks remain fully supportive

· Customer and staff loyalty and support very much in evidence through this turbulent period

This announcement contains inside information. There will be a presentation for analysts held at 09:30hrs on 11 January 2016 at the offices of Tulchan Communications, 85 Fleet Street, EC4 1AE. Please contact redcentric@tulchangroup.com if you would like to attend.

Chris Cole, Chairman, commented:

"It has clearly been a very difficult period for the Company. A great deal of work has been carried out - supported by our independent external advisors - to complete and consider the conclusions of the forensic review, establish a remedial plan of action and report these interim results."

"While there is obviously more work to be done, we have made some important steps forward with the appointment of a strong and experienced Chief Financial Officer who is leading the ongoing strengthening of our internal processes. With the welcomed support of our banks, clients and colleagues, we are focused on taking a more robust business forward."

Fraser Fisher, Chief Executive, added:

"The past few weeks have obviously been very challenging. Through that time though, the Company has continued to deliver excellent services and support for its clients. I would like to thank our Redcentric team for their hard work and dedication toward that work."

"Our priority now is to take the necessary actions required to strengthen the business. With the opportunities ahead in our market - reflected by the strong sales pipeline and 38 client wins in the period - we are focused on taking a stronger, sustainable business forward."

Enquiries:

BUSINESS REVIEW

Accounting misstatements

As previously announced on 7 November 2016, following an internal review by the Company's Audit Committee in relation to the interim results for the six months ended 30 September 2016, misstated accounting balances in the Group's balance sheet were discovered. Redcentric promptly appointed Deloitte and Nabarro to carry out an independent forensic review. The main conclusions of this independent forensic review have been reported to the Board and were announced on 13 December 2016.

The forensic review and management's findings were as follows.

• Net assets impairment: The cumulative overstatement of net assets and profits after tax up to 30 September 2016 is approximately £20.8 million. The position is that approximately £5.9 million of this misstatement (£4.7 million at the EBITDA level) arose in the six months ended 30 September 2016. The remaining £14.9 million misstatement relates to periods prior to and including the year ended 31 March 2016 (£17.2m at the EBITDA level). A number of accounting policies and practices, specifically those in respect of cost accrual, cost deferment and revenue recognition had been incorrectly applied and other accounting errors and misstatements had been made. To date there has been no evidence of theft and the misstatements are attributable to profit overstatement over a number of years with revenues being overstated and costs understated in broadly equal proportions.

• Net debt: As previously reported, the net debt position for both 31 March 2016 and 30 September 2016 is materially higher than originally reported. The review uncovered misstatements regarding the timing of cash received and recognition against debtors post period end, along with delayed supplier and creditor payments. Following restatement of cash, trade creditor and trade debtor balances at 31 March 2016, net debt was £37.8 million. Net debt at 30 September 2016 was £34.4 million. Despite these adjustments the Group's restated net debt position as at these dates was not representative of the underlying position as although technically correct from an accounting perspective, there was significant stretching of creditor payments in particular around operating cost items. The average month end net debt position over the eight month period to 30 November 2016 was £42.0 million and better reflects the Group's underlying net debt position over the period.

The scale and complexity of the misstatements, along with the length of time over which the misstatement occurred, meant that the forensic review, with the assistance of the Company, took a significant time commitment to complete and a level of judgement has been applied to the allocation of net assets and profit reduction over a number of accounting periods. The forensic review focused on the 30 September 2016 and 31 March 2016 balance sheets and additional work has been undertaken by the Company to analyse and attribute the accounting misstatements back to 31 March 2015.

Prior year adjustments

As stated above, the independent forensic review undertaken by Deloitte and Nabarro confirmed the Board's expectation of a reduction to the previously reported net assets and profits after tax and an increase to the previously reported net debt.

The total amount by which cumulative net assets and reported profits after taxation up to 31 March 2016 have been restated is £14.9m, of which the Company has identified:

· £6.5m relates to the six month period ended 31 March 2016.

· £3.9m relates to the six month period ended 30 September 2015.

· £4.5m relates to the year ended 31 March 2015 and earlier.

As a result the key restated financial highlights for the year ended 31 March 2016 are:

· Revenue restated at £103.3m vs £109.5m (reduction of £6.2m)

· Adjusted EBITDA* restated at £13.0m vs £25.8m (reduction of £12.8m)

· Statutory operating loss restated at £4.4m vs a profit of £8.4m (reduction of £12.8m)

· Statutory loss after tax restated at £5.2m vs a profit of £5.2m (reduction of £10.4m)

The key restated financial highlights for the half year ended 30 September 2015 are:

• Revenue restated at £51.9m vs £54.0m (reduction of £2.1m)

• Adjusted EBITDA* restated at £7.8m vs £11.7m (reduction of £3.9m)

• Statutory operating loss restated at £2.5m vs a profit of £1.4m (reduction of £3.9m)

• Statutory loss after tax restated at £2.8m vs a profit of £1.1m (reduction of £3.9m)

Full restated and audited financial statements for the year ended 31 March 2016 will be included within the Company's audited results for the year ending 31 March 2017. Unaudited financial statements for the year ended 31 March 2016 have been included within this announcement which incorporate the adjustments for that period.

Group financial and operational performance

Revenue for the first six months of the financial year was broadly flat at £53.0m (H1 FY16 restated: £51.9m). Recurring revenue grew by 5.9% to £44.7m (H1 FY16 restated £41.8m). Profitability improved in the half, with EBITDA* up 16.7% to £9.1m (H1 FY16 restated: £7.8m), representing a margin of 17.1% (H1 FY16 restated 15.0%). The half year benefited from a revenue and EBITDA contribution from City Lifeline of £1.7m and £0.3m.

Redcentric's key revenue stream is its contracted recurring revenue base representing over 84% of total revenue in the period. Recurring revenue growth was 5.9%, driven largely by City Lifeline which was acquired in January 2016, and 1.9% on an organic basis. We continue to generate growth through selling additional services to existing customers. Against a background of softening market conditions, sales performance in the first six months was strong, with internal sales targets being achieved. 38 new name customers during the period, some of the significant contract wins amongst the 38 new clients include:

· Retail sector: a £6.0m five-year contract to help refresh the client's infrastructure and then provide managed services across over 400 UK sites

· Commodities sector: a £1.5m five-year contract to consolidate a number of services under one vendor for the client across 12 UK offices

· Property sector: a £1m three-year contract to upgrade the client's existing MPLS network, adding resilience and capacity across 12 offices in UK & Ireland.

Non-recurring project-based revenues fell by an aggregate of 17.8% to £8.3m (representing 16% of total revenue in the period) due to the managed decline of the low-margin product resale business and the move by customers towards higher margin managed services.

We continue to believe that ownership of our own managed infrastructure, the significant investment we maintain in security, training and a broad range of accreditations provides all of our customers with confidence that we will continue to deliver high quality services, and enables us to differentiate ourselves from others in the market.

Net debt and balance sheet 

The Group continues to operate within its banking facilities of £50m. Net debt (including finance leases) was £34.4m at 30 September 2016 (30 September 2015 restated: £32.9m). Net debt at 31 March 2016 was £37.8m (restated).

The Group's restated net debt position as at these dates was not representative of the underlying position as creditors had been significantly stretched at these dates. The average month end net debt position over the eight month period to 30 November 2016 was £42.0 million and better reflects the Group's underlying net debt position over the period. Management are focused on improving the Group's billing and debtor collections processes and it is expected that as this materialises net debt will reduce.

The net debt position at 30 September 2016 showed a £3.4m improvement from 31 March 2016. This was the result of an £8.1m inflow from continuing operations and an additional inflow of £5.0m from the sale of our fibre networks. These inflows have been offset by capital investment of £4.5m, payment of dividend of £4.4m, and other outflows of £0.9m (including debt servicing).

The Group consolidated balance sheets as at 30 September 2015 and 31 March 2016 have been restated to reflect the impact of the accounting restatement. The effect on the net assets of the Group of these accounting restatements was a cumulative reduction of £8.4m at 30 September 2015 to £84.9m, and a cumulative reduction of £14.9m at 31 March 2016 to £82.6m. As at 30 September 2016 net assets were £79.8m.

Dividend

Given the Company's net debt position, the Board has resolved not to declare an interim dividend. The Board will review the Company's dividend policy at the time of the full year results.

Bank facilities and covenants 

As noted in the announcement on 13 December 2016, the Company has recalculated its historic banking covenants due to the impact of various accounting adjustments. The Company is pleased to report that it has secured waivers from its Banks in relation to historic covenants such that it is fully compliant with its facilities. The Banks remain supportive of Redcentric and constructive discussions are ongoing in relation to the agreement of future covenant levels which reflect management's business plan and current operational performance.

City Lifeline

City Lifeline, which we acquired in January 2016, is performing in line with expectations and the technology integration is complete. It provides Redcentric with a fully connected, owned London data-centre, which is an integrated part of our accredited portfolio.

Network disposal

On 26 September 2016 we announced the disposal of our metropolitan area fibre networks in Cambridge, Portsmouth and Southampton to CityFibre Infrastructure Holdings Plc for a total consideration of £5.0m, paid in cash on completion. Ownership of the underlying fibre is not core to Redcentric's strategy, and this transaction allowed capital to be released for deployment in other areas of the business.

Board changes

On 23 November, 2016 the Company announced the appointment of Peter Brotherton ACA as Chief Financial Officer, Company Secretary and a Director of the Board, effective from 28 November 2016. Peter has over 25 years' experience across a number of senior roles. His two previous roles were as Chief Financial Officer of Gametech and Chief Financial Officer of PKR Group. Tony Weaver stepped down from the Board as Non-Executive Director on 1 November 2016. Tim Coleman resigned from the Board as CFO on 7 November 2016.

Summary and outlook

The Board and management have actioned a remedial plan to ensure that accounting balances cannot be misstated going forward and to further strengthen the finance function of the business. Some important first steps have been taken including the appointment of a new senior and experienced Chief Financial Officer and an Interim CFO. Initial improvements already made to internal systems include changes to billing and credit control management systems and processes and improvements will continue to be made in the first half of 2017.

The Company reported for the period ended 30 September 2016 revenue of £53.0 million and Adjusted EBITDA* of £9.1 million. Given the growth in the recurring revenues in the business through the first half of the year, now accounting for in excess of 84% of total Group revenue, the Board believes that this performance is indicative of the performance for the second half of the year.

The Company has been very encouraged and appreciative of the supportive response from its banks, employees, clients and prospective clients. The sales pipeline remains strong and the H1 sales targets were exceeded, incorporating 38 new client wins. With the remedial action plan underway, the focus of the Board and management is to take a more robust and sustainable business forward.

 Condensed consolidated Income Statement (unaudited)

*Earnings before interest, tax, depreciation, amortisation, transaction and integration costs and share-based payments.

The above condensed consolidated income statement should be read in conjunction with the accompanying notes.

Condensed consolidated Statement of Comprehensive Income (unaudited)

Condensed consolidated Statement of Changes in Equity (unaudited)

Condensed consolidated Balance Sheet (unaudited)

Condensed consolidated Cash Flow Statement (unaudited)

Notes to the Interim Financial Information

Six months ended 30 September 2016

1 General information and basis of preparation

The Interim Financial Information is unaudited.

Statutory accounts for Redcentric plc for the period ended 31 March 2016 were approved by the Board of directors on 16 June 2016 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under sections 498 (2) or (3) of the Companies Act 2006.

The consolidated financial statements of Redcentric plc have been prepared on the going concern basis and in accordance with EU adopted International Financial Reporting Standards (IFRS), IFRIC interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements for the year ended 31 March 2016 have been prepared under the historical cost convention and after restatement following completion of the forensic review.

The Directors are required to be satisfied that the Group has adequate resources to continue in business for the foreseeable future. The validity of this assumption depends on the ability of the Group to meet its cash flow forecasts and the continuing support of its bankers by providing adequate overdraft facilities and of its debt holders and shareholders. The Company is pleased to report that it has secured waivers from its Banks in relation to historic covenants such that it is fully compliant with its facilities. The Banks remain supportive of Redcentric and constructive discussions are ongoing in relation to the agreement of future covenant levels which reflect management's business plan and current operational performance. The Group's banking facilities run until 1 April 2020. A high proportion of the Group's revenue is recurring in nature, which provides good visibility of future cash flows. However, there can be no absolute certainty that the Group will achieve its EBITDA forecasts. Current indications are that the Group will be able to operate within its banking facilities for at least 12 months from the date of approval of this Interim Financial Information. For these reasons the Directors believe the going concern basis to be appropriate.

This condensed, consolidated interim report and financial information was approved by the Board on 22 November 2016.

2 Accounting policies

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies.

The accounting policies used in preparing the Interim Financial Information are unchanged from those disclosed in the Group's annual report and financial statements for the year ended 31 March 2016, and are those the Group expects to apply in its financial statement for the year ended 31 March 2017.

3 Segment reporting

Operating segments are reported in a manner consistent with the internal reporting to the Chief Operating Decision Maker ('CODM'). The CODM has been identified as the Group Chief Executive Officer and the Chief Financial Officer. The CODM are jointly responsible for resources allocation and assessing the performance of the operating segments. The operating segments are defined by distinctly separate product offerings or markets. All of the revenue derives from customers located in the United Kingdom. No single customer accounted for more than 10% of the revenue of any operating segment.

Recurring revenue is derived from the provision of the Group's services to customers under long-term agreements, including data, connectivity, hosting, cloud, and support services. Services revenue is derived from the provision of consultancy, or installation services regarding the provision and set-up of a new service. Product revenues are derived from the sale of third party products, which comprises mostly hardware.

Results for the six months ended 30 September 2016

Results for the six months ended 30 September 2015 (restated)

* Earnings before interest, tax, depreciation, amortisation, transaction and integration costs and share-based payments

Results for the year ended 31 March 2016 (restated)

4 Transaction and integration costs

In accordance with the Group's policy of separately identifying transaction and integration costs, the following charges were recognised in the period:

5 Net finance costs

6 Tax

7 Earnings per share 

Basic earnings per share have been calculated using a weighted average number of shares of 146,335,704 (2015: 144,761,349). The dilutive effect of share options in issue at 30 September 2016 increased the weighted average number of shares to 153,613,323 (2015: 152,713,413).

In addition, adjusted earnings per share have been calculated to reflect the underlying performance of the business. This measure is derived as follows:

8 Trade and other receivables

9 Trade and other payables

10 Borrowings

11 Called up share capital

Allotted, called up and fully paid share capital, comprising Ordinary shares of 0.1p each:

On 23 June 2016 the company issued 437,500 new Ordinary Shares of 0.1p each as a result of an employee option exercise.

On 30 June 2016 the company issued 225,000 new Ordinary Shares of 0.1p each as a result of an employee option exercise.

On 22 August 2016 the company issued 337,500 new Ordinary Shares of 0.1p each as a result of an employee option exercise.

On 9 September 2016 the company issued 285,000 new Ordinary Shares of 0.1p each as a result of an employee option exercise

12  Net Cash flows from continuing operating activities