Staffline Regulatory News (STAF)

23 September 2020

STAFFLINE GROUP PLC

('Staffline', the 'Company' or the 'Group')

UNAUDITED INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2020

Staffline Group plc, the recruitment and training group, announces its unaudited results for the six months ended 30 June 2020.

Key Highlights

· Revenue of £434.9m (H1 2019 restated: £523.3m)

o Unprecedented surge in food supply chain sector demand including supermarket customers during lockdown, where volumes were 64% higher than expected between April and May, although this did not offset the impact of COVID-19 in other sectors during H1

o Despite the shutdown of a number of services due to COVID-19 related social distancing measures, PeoplePlus maintained delivery of a number of core services. 100% of adult education classroom capacity was lost between April and June, which has now recovered to 42% because of social distancing

· Underlying* operating loss of £(0.8)m (H1 2019 restated: £4.4m profit, H2 2019: £(5.2)m loss) 

o The Board is encouraged with the underlying operating loss of £(0.8)m in H1 2020 which, despite the challenges presented by COVID-19, is a £4.4m improvement in performance at the underlying operating profit level compared with H2 2019

· Reported loss before tax of £(47.7)m (H1 2019 restated: £(12.3)m loss)

o Includes non-underlying items related to non-cash charges for goodwill impairment of £35.3m and amortisation of intangibles of £4.8m

· Pre-IFRS 16 basis net borrowings of £36.2m (H1 2019: £89.9m), benefitting from £45.8m of deferred VAT payments, which are due in March 2021

· Comprehensive credit facilities agreed in June 2020 with the Group's lenders providing restructured financing until July 2022

· Internal actions implemented and ongoing to improve working capital structure

· Albert Ellis, currently Non-executive Director, appointed Group Chief Executive Officer of the Group

* Underlying operating profit before goodwill impairment, amortisation of intangible assets arising on business combinations, reorganisation costs and other non-underlying costs.

** Underlying operating profit before depreciation and after operating lease payments.

Current Trading and Outlook

· In the short term, management continues to focus on maximising opportunities in the current environment whilst ensuring that the cost base is prudently managed

· Promising progress on working capital improvements and with mitigating actions to help alleviate the probable liquidity pressures in March 2021

· Current trading environment remains challenging, with the ongoing macroeconomic impact of COVID-19 uncertain, the Board is confident that the actions in the first half of 2020 have increased the resilience of the Group and placed it on a much improved strategic and financial platform to take advantage of opportunities in the future

· Whilst remaining cautious given the market backdrop with respect to the scale, and duration, of the ongoing impact of social distancing restrictions in the UK, the Board anticipates that the Group will perform in line with expectations for the full year

· The Group remains on track to achieve a positive result for 2020 on an underlying operating profit basis across each of the three divisions

Ian Lawson, Executive Chairman of Staffline, commented:

"Staffline continued to successfully service its customer base, and our business proved resilient in the first half of 2020 despite COVID-19 significantly impacting a number of the Group's key sectors. Our teams have worked tirelessly to not only support our customers in what has been a very challenging trading environment, but to ensure all of our workforce remains safe."

"Whilst we anticipate a stronger trading performance in H2 2020, there is a very high level of uncertainty across the market as a result of COVID-19."

Forward looking statements

Certain statements in this announcement are forward looking statements. By their nature, forward looking statements involve a number of risks, uncertainties or assumptions that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. These risks, uncertainties or assumptions could adversely affect the outcome and financial effects of the plans and events described herein. Forward looking statements contained in this announcement regarding past trends or activities should not be taken as representation that such trends or activities will continue in the future. Readers should not place undue reliance on forward looking statements, which apply only as of the date of this announcement.

Important notice 

This announcement does not constitute or form part of any offer or invitation to sell, or any solicitation of any offer to purchase any shares in the Company, nor shall it, or any part of it, or the fact of its distribution, form the basis of, or be relied on in connection with any contract or commitment or investment decisions relating thereto, nor does it constitute a recommendation regarding the shares of the Company. Past performance cannot be relied upon as a guide to future performance.

For further information, please contact:

Market Abuse Regulation

This announcement is released by Staffline Group plc and contains inside information for the purposes of the Market Abuse Regulation (EU) 596/2014 ("MAR") and is disclosed in accordance with the Company's obligations under Article 17 of MAR. The person who arranged for the release of this announcement on behalf of Staffline Group plc was Ian Lawson, Executive Chairman.

About Staffline - Recruitment, Training and Support

Enabling the Future of Work™

Staffline is the UK's market leading Recruitment and Training group. It has three divisions:

Recruitment GB

Staffline is the UK's leading provider of flexible blue-collar workers, supplying approximately 40,000 staff per day on average to around 450 client sites, across a wide range of industries including agriculture, supermarkets, drinks, driving, food processing, logistics and manufacturing.

Recruitment Ireland 

The recruitment Ireland business is a leading end to end solutions provider operating across 20 industries, 10 branch locations, 15 onsite customer locations and offering RPO, MSP, temporary and permanent solutions across the island of Ireland.

PeoplePlus Division

Staffline is the leading adult skills and training provider in the UK, delivering apprenticeships, adult education, prison education and skills-based employability programmes across the country.

Executive Chairman's Statement

Introduction

Trading in the first half of 2020 was dominated by the impact of the global COVID-19 pandemic, the associated restriction measures, and the trends that emerged. As previously flagged, across the Group's Recruitment divisions, there was an inevitable reduction in volumes in certain sectors including retail, automotive and manufacturing, whilst conversely, the Group experienced an unprecedented increase in food sector demand. In addition, PeoplePlus transitioned to predominantly digital delivery with funding support largely on a cost only basis. 

The Group has successfully undergone a restructuring in the year-to-date. This has been focused on reducing the cost base, implementing improved governance, securing a new financing agreement with the Group's lenders as well as strengthening the leadership team, which included refreshing the Board and adding to the executive leadership team, and appointing a Head of Internal Audit.

A number of initiatives were introduced to mitigate the financial impact of the pandemic across the Group. These included a working capital reduction programme, which saw customer debt which was more than 30 days overdue reduce by 78% from the beginning of April to the end of June, and a reduction in the Group's headcount of 13% between December 2019 and August 2020. Staffline also utilised the Government's job retention scheme in furloughing certain of its employees, ceasing to use the scheme significantly beyond July 2020. The Group is also benefitting from the deferral of £45.8m under HMRC's VAT deferral arrangements, which, in addition to the refinancing agreements, improves the Group's liquidity through to March 2021.

As workplace related lockdown restrictions have eased, trading is beginning to normalise at varying degrees across the Group, with the ultimate impact of COVID-19 on the wider economy and Staffline still remaining uncertain. However, management believes that Staffline is now in a much more resilient position following the refinancing of the Group's credit facilities in June 2020, which provided support to Staffline's ongoing business activities. Improvements are ongoing across the Group's corporate governance, financial processes, management information channels, as well as in cross-selling and communications.

A number of Board changes were made in the first half of 2020, which improved the corporate governance of the Group, with an Executive Management Team being established which includes myself, Daniel Quint, Interim Group CFO, and our three highly experienced divisional Managing Directors. In addition, today we have announced the appointment of Albert Ellis, currently a non-executive director of the Group, as Chief Executive Officer.

Operational review

As aforementioned, operations in the first half of 2020 were significantly impacted by COVID-19 with trading overall in the second quarter reduced as a result of lockdown restrictions. Each division has now begun the exercise of reshaping its structure to create a more robust business operation that will be profitable over the long term. 

Recruitment GB

The response from our Recruitment GB business in meeting the unprecedented demand arising from the food sector in March and April was very impressive and the Group was proud to support the national 'feed the nation' effort. However, this surge in demand was not sufficient to offset the decline in other sectors during the first half of the year and therefore divisional revenue was down 18.1%.

With demand in food now normalised, the Group is beginning to benefit from the reopening of certain sectors as lockdown measures have eased, with an overall increase in volumes and strong digital job application rates. Volumes are anticipated to increase month-on-month for the remainder of 2020, with our key customers engaged in planning for the traditional Q4 peak trading period.

However, the peak in 2020 is not expected to be as marked as previous years. It also remains too early to quantify steady-state demand levels in the short term.

Recruitment Ireland

The Ireland division experienced similar demand trends as the GB business, with food sector demand now stable and volumes from manufacturing customers increasing, albeit steadily. Overall, volumes are increasing but new normalised levels remain uncertain. The rebrand of the division as Staffline Recruitment Ireland has been well received by customers and demonstrates our ongoing progress in unifying our business divisions. Strategies to share best practice and in particular, new technologies are now underway.

PeoplePlus

The majority of services continued to operate during the pandemic, using digital operating models. However, the loss of classroom delivery impacted certain areas, and whilst this service has now restarted, it is not yet running at normal capacity. There was 100% loss of adult education classroom capacity between April and June, which is now at 42% capacity because of social distancing. Significant disruption was also experienced on apprenticeships with 37% of our learners still not having returned to their programme. On central and devolved government contracts, where delivery has not been possible, funding has largely been on a cost only basis.

In-year new business wins also weakened during the pandemic but with the rising levels of unemployment in the UK, new government funding for training and re-skilling is likely and PeoplePlus is well-placed to benefit from this. Management's response to the reduced volumes in its services generated run rate overhead reduction of c.55% between March and August.

Strategic Priorities

As outlined in the Group's full year 2019 results, the Board's core focus is to create a sustainable business, which in the current uncertain macroeconomic environment is more important than ever. The Board and management want Staffline to truly benefit from both its existing resources and talent, as well as capitalise on the significant opportunity that exists within our target markets. Pleasingly, we have begun to deliver against our strategic objectives, which are to:

1) Achieve operational excellence

· Ongoing progress in streamlining and sharing services across the Group

· Each division is being re-shaped to maximise profitability and cash generation

2) Optimise service delivery

· Continue to adhere to high standards of compliance

· High customer engagement crucial in the current environment

3) Leverage our brand

· Rebranded the Ireland division under 'Staffline' with additional divisions to be rebranded in due course

· Ongoing synergies and opportunities across all our divisions being realised

· Continue to attract strong levels of candidates

4) Develop and cultivate our talent 

· Commercial business model and working capital training to all key management to ensure all leaders fully understand the commercial hurdle framework for new business and what the Group's key opportunities and risks are

· Management focused on ensuring our leaders and talented people across all divisions are given access to a certain level of development and training

Outlook

In the short-term, Staffline are encouraged by the early actions, and remain focused on implementing mitigating measures, to ease the liquidity risk present when the deferred VAT becomes payable in March 2021. These include a reduction in days sales outstanding within the Recruitment divisions as well as working capital deployment decisions moving away from low profit generating and working capital intensive contracts. Additionally, cost saving and cost sharing initiatives are being expanded across the Group to reduce the overall cost base with a review of working capital also being undertaken. Staffline is a well-established business with market-leading divisions, which the Board believes will prove resilient in the medium to long-term and we will be able to navigate the current volatile market environment.

Whilst we anticipate a stronger trading performance in H2 2020, there is a very high level of uncertainty across the market as a result of COVID-19. We continue to focus on maximising trading and ensuring that the shape of the business is appropriate in order to drive future profitability. Consequently, the Board remains cautiously optimistic with regard to the outlook for the full year and anticipates that the Group will perform in line with expectations.

Finally, I would like to congratulate Albert on his appointment as Staffline's new Group CEO and also thank all of my colleagues in Staffline for their hard work, dedication and commitment over what has been an extraordinary period.

Ian Lawson

Executive Chairman

22 September 2020

Financial Review

Introduction

Trading in the first half of the 2020 was heavily impacted by the COVID-19 pandemic but is now starting to recover. In June 2020, the Group successfully refinanced its credit facilities, as described below.

Total revenue for H1 decreased by (16.9)% to £434.9m (H1 2019 restated: £523.3m).

The Group is split into three divisions: Recruitment GB, flexible blue-collar recruitment; Recruitment Ireland, generalist recruitment; and PeoplePlus, an adult skills and training provider.

Revenues in the Recruitment GB division declined by £(73.6)m or (18.1)% to £332.8m. The decrease is as a result of the volume decline in temporary recruitment in sectors such as retail and manufacturing, which more than offset the increase in trading in the food sector.

Revenues in the Recruitment Ireland division decreased by £(13.6)m or (18.0)% to £61.9m, with COVID-19 lockdowns occurring across both Northern Ireland and the Republic of Ireland, significantly impacting volumes.

PeoplePlus revenues decreased by £(1.2)m or (2.9)% to £40.2m. The business was supported by digital operating models which enabled operations to continue throughout the pandemic. However, classroom delivery of skills training along with prison education was negatively impacted by COVID-19 restrictions.

The sales mix between the operating divisions was unchanged compared with H1 2019, with the recruitment businesses accounting for 91% of revenue (2019: 92%).

Overall, gross profit decreased by 24.7% to £34.1m (H1 2019: £45.3m) with gross profit margins reducing to 7.8% (H1 2019: 8.8%). However, this is an increase compared to the H2 2019 gross profit margin of 7.3%.

The gross margin for Recruitment GB decreased year-on-year, from 7.0% in H1 2019 to 6.6% in H1 2020, following the increase in the National Minimum Wage in April 2019, from £7.83 to £8.21 per hour for over 25s. This does not impact absolute gross profit but does negatively impact the gross margin percentage achieved. This dynamic will continue with the increase in April 2020 to £8.72 per hour for over 25s.

The gross margin for Recruitment Ireland decreased from 10.7% in H1 2019 to 9.0% in H1 2020 driven by the reduction of permanent recruitment which delivers higher gross profit margin.

The gross margin for PeoplePlus decreased from 21.5% in H1 2019 to 17.2% in H1 2020 due to the impact of COVID-19 on revenues which were primarily supported by cost only recovery from Government contracts.

Reflecting the impact of the COVID-19 pandemic, underlying operating loss was £(0.8)m (H1 2019 restated: £4.4m profit), with £(4.0)m of the year on year decline being generated in Q2 as lockdown took hold. Total non-underlying charges before tax were £(44.8)m (H1 2019 restated: £(14.5)m) as described below. Finance charges were £(2.1)m (H1 2019 restated: £(2.2)m). These movements generated a reported loss before taxation of £(47.7)m in H1 2020 (H1 2019 restated: £(12.3)m).

The reported loss after tax for H1 2020 was £(46.8)m (H1 2019 restated: £(10.6)m).

Non-underlying administrative charges

Non-underlying charges before tax have increased to £44.8m in H1 2020 (H1 2019 restated: £14.5m), as shown below. They include reorganisation costs of £1.9m incurred in order to downsize and reduce the Group's headcount in line with the declines in revenue and gross profit, transaction costs of £0.6m related to the Group exploring strategic options, £2.1m of refinancing costs that could not be capitalised against the new financial liabilities, a £4.8m charge for the amortisation of intangible assets arising on business combinations, a £35.3m goodwill impairment charge based on forecasts which include the impact of COVID-19, and a share-based payment charge of £0.1m.

Taxation

The total tax credit for H1 2020 of £0.9m (H1 2019 restated: £1.7m), which amounts to 1.9% (H1 2019 restated: 13.8%) of the loss for the period, relates principally to the movement of deferred tax balances, together with certain non-underlying items being non-taxable.

Prior year restatements and review of internal controls

Following the extended 2018 audit, the Board continued with detailed reviews to further improve the Group's internal controls. As previously announced, these reviews identified accounting errors relating to the preparation of the 2018 annual results. The 2018 statement of financial position, being the 2019 opening reserves contains prior year adjustments. There are consequential adjustments to the income statement and cash flow statement for the six months ended 30 June 2019 and the statement of financial position at 30 June 2019 (presented as comparatives). See note 1 for further details.

Statement of financial position, cash generation and financing

The Group's total equity decreased by £(47.0)m over the six months from the 31 December 2019 restated position, following the total comprehensive loss for H1 2020 of £(47.0)m.

The movement in net debt is shown in the table below. The movement in working capital includes a decrease in trade and other receivables and accrued income of £9.1m, both due to the decline in trading as a result of COVID-19 as well as a focus on reduction in overdue debt, and an increase in trade and other payables and provisions of £12.1m, primarily due to the deferral of VAT payments between March and June 2020, in line with the provisions set out by HMRC.

The Group ended H1 2020 with pre-IFRS16 net debt of £36.2m compared to £89.9m at H1 2019. Post-IFRS16 net debt was £43.1m at H1 2020 compared to £98.8m at H1 2019.

The table below reconciles underlying EBITDA (earnings before interest, taxation, depreciation and amortisation), used in the net debt analysis above, to operating loss.

Note: Underlying operating profit before goodwill impairment, amortisation of intangible assets arising on business combinations, reorganisation costs and other non-underlying costs.

The Group's headroom relative to available committed banking facilities as at 30 June 2020 was £38.4m (30 June 2019: £28.9m) as set out below:

* excluded from headroom in H1 2019

Refinancing: Amendments to Credit Facilities June 2020

Following discussions with the lenders of the revolving credit facility, the Company and the lenders agreed on 26 June 2020 to a revised financing structure. In summary:

The key terms of the new facilities are below, with other terms of the RCF remaining in place:

i) Repayment and cancellation of RCF commitments by £10.0m on 31 July 2020;

ii) The RFF can initially be drawn down against the receivables of the Recruitment GB division and the Northern Ireland part of the Recruitment Ireland division;

iii) Interest on the RFF accruing at 3.50% plus Bank of England base rate;

iv) Minimum EBITDA and minimum liquidity covenants until a return to leverage and interest cover covenants in January 2022. The minimum EBITDA covenants have been calculated by reference to the Group's downside case;

v) Restrictions on new material share, business and asset acquisitions until July 2022; and

vi) No dividends to be declared by the Company until July 2022.

In consideration of these amendments, a fee was paid to the lenders of £0.7m.

The Group is also funded through customer financing agreements with some of its key customers. In addition, the Group has an uncommitted separate receivables financing facility with a maximum value of £25m.

Dividend policy

As a condition of refinancing the credit facility, no dividends will be declared by the Company for the 2020 financial year.

Going concern

The unaudited interim results have been prepared on a going concern basis. The Directors have reviewed this basis and made full disclosure in note 1, concluding that there is a material uncertainty which may cast significant doubt upon the Group's and the Company's ability to continue as a going concern and that, therefore, the Group and Company may be unable to realise their assets and discharge their liabilities in the normal course of business. Nevertheless, after engaging in dialogue with key stakeholders and considering the uncertainties described in note 1, as well as the mitigating actions available to the Group as described in note 1, the Directors have a reasonable expectation that the Group and Company have adequate resources to continue in operational existence for the foreseeable future.

International Financial Reporting Standards

There have been no new accounting standards or interpretations in the first half of 2020 which materially impact the Group's performance or financial position.

Daniel Quint

Interim Chief Financial Officer

22 September 2020

Consolidated statement of comprehensive income

For the six months ended 30 June 2020

*the non-underlying result includes amortisation of intangible assets arising on business combinations, reorganisation costs, exceptional NMW remediation and financial penalties, enhanced audit scope fees and the non-cash charge/credit for share-based payment costs.

The accompanying notes on pages 17 to 35 form an integral part of these financial statements

Consolidated statement of changes in equity

For the six months ended 30 June 2020

Consolidated statement of changes in equity

For the six months ended 30 June 2019

The accompanying notes on pages 17 to 35 form an integral part of these financial statements.

Consolidated statement of changes in equity

For the year ended 31 December 2019

The accompanying notes on pages 17 to 35 form an integral part of these financial statements.

Consolidated statement of financial position

As at 30 June 2020

The accompanying notes on pages 17 to 35 form an integral part of these financial statements.

Consolidated statement of cash flows

For the six months ended 30 June 2020

The accompanying notes on pages 17 to 35 form an integral part of these financial statements.

Notes to the summary financial statements

For the six months ended 30 June 2020

1 Interim accounts and accounting policies

Staffline Group plc, a Public Limited Company, is incorporated and domiciled in the United Kingdom.

The unaudited condensed interim Group financial statements for the six-month period ended 30 June 2020 (including the comparatives for the six-month period ended 30 June 2019 and the year ended 31 December 2019) were approved and authorised for issue by the Board of Directors on 23 September 2020.

It should be noted that accounting estimates and assumptions are used in the preparation of the interim financial information. Although these estimates are based on management's best knowledge and judgement of current events, actual results may ultimately differ from those estimates. The unaudited interim Group financial statements have been prepared using the accounting policies as described in the December 2019 audited year-end Annual Report and have been consistently applied. In addition, IFRS 16 ("Leases") has been implemented from 1 January 2019.

The interim Group financial information contained within this report does not constitute statutory accounts as defined in the Companies Act 2006, section 434. The full accounts for the year ended 31 December 2019 received an unqualified report from the auditors and did not contain a statement under Section 498(2) or (3) of the Companies Act 2006, but did contain a Material uncertainty related to going concern, which is more fully described on pages 60 to 62 of the 2019 Annual Report. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies.

Basis of preparation

The unaudited interim Group financial statements, which should be read in conjunction with the audited Annual Report for the year ended 31 December 2019, have been prepared in accordance with AIM Rules for Companies - Part One, Section 18 "Half-yearly reports".

The interim Group financial statements consolidate those of the parent company and all its subsidiaries as at 30 June 2020. Subsidiaries are all entities to which the Group is exposed, or has rights, to variable returns and has the ability to affect those returns through power over the subsidiary.

The unaudited Group financial statements have been prepared on a going concern basis using the significant accounting policies and measurement bases summarised in the December 2019 audited year-end Annual Report, and in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and with the Companies Act 2006, as applicable to companies reporting under IFRS. The financial statements are prepared under the historical cost convention except for contingent consideration and cash settled share options which are measured at fair value. The consolidated financial statements are presented in sterling, which is also the functional currency of the parent company.

Going concern

These financial statements are prepared on a going concern basis notwithstanding that the Group has reported an underlying loss before tax of £2.9m (H1 2019 restated: £2.2m underlying profit before tax) and an unadjusted loss before tax of £47.7m (H1 2019 restated: £12.3m loss before tax). As at 30 June 2020, the Group had net current liabilities (excluding restricted cash) of £36.3m (H1 2019 restated: net assets of £8.8m) and net assets of £28.9m (H1 2019 restated: £71.6m). The Group generated an underlying pre-IFRS 16 EBITDA profit (prior to exceptional and non-recurring items) of £1.0m (H1 2019: restated: £6.5m).

The Group meets its day to day working capital requirements from a £30.0m revolving credit facility, a £73.2m receivables financing facility, an uncommitted (non-recourse) invoice discounting facility with a limit of £25.0m, supply chain financing arrangements with certain customers and the Group's cash balances. The Group's revolving credit facility and receivables financing facility mature on 4 July 2022 and its £25.0m uncommitted (non-recourse) invoice discounting facility is currently on a rolling basis. The revolving credit facility reduced by £10.0m to £20.0m on 31 July 2020. The revolving credit facility and receivables financing facility are subject to covenants summarised below.

On 20 March 2020, the Government announced that no VAT payments due from businesses between 20 March 2020 and the end of June 2020 would be required to be made and that these would become payable on or before 31 March 2021. This payment delay provides the Group with an immediate and significant short-term liquidity improvement of £45.8m.

The net debt position of the Group (excluding unamortised transaction costs) has reduced during the period from £59.5m at December 2019 to £36.2m on a pre-IFRS 16 basis.

As at 30 June 2020, the Group had cash at bank of £32.3m (excluding £3.5m held in an escrow account to fund outstanding liabilities in relation to National Minimum Wage ("NMW")), available facility of £6.1m under its receivables financing facility, resulting in aggregate available liquidity of £38.4m.

Due to the sharp decline in profits in 2019 and the elevated net debt levels, a breach of lending covenants would have occurred in 2019 and 2020 were it not for flexibility shown by the Group's lenders by providing deferrals and amendments in respect of the Group's interest cover and leverage covenants until 30 June 2020. The Directors entered into discussions with the Group's lenders to amend and partially refinance its financing facilities and amend its covenants package through to 4 July 2022, culminating in the refinancing arrangement completed on 26 June 2020.

In order to commercially assess the Group's request to amend its financing facilities and covenants package, an independent business review was commissioned by the lenders. Following completion of this review and subsequent negotiations with the Group's lenders, the Group and the lenders subsequently agreed and implemented an amendment and partial refinancing of the Group's £103.2m revolving credit financing facilities on 26 June 2020, that resulted in £73.2m of the revolving credit facilities being replaced with a receivables financing facility and a £30.0m revolving credit facility being retained. As noted above, the revolving credit facility reduced by £10.0m to £20.0m on 31 July 2020.

The interest cover and leverage covenants included under the previous revolving credit facility have been replaced in the amended revolving credit facility and receivables financing facility with a minimum EBITDA covenant (tested quarterly from 31 December 2020 to 31 December 2021), reverting back to the original covenant package from 1 January 2022 to the end of the facilities, with the minimum look-forward liquidity covenant (tested weekly) being retained. The minimum EBITDA covenants have been calculated by reference to the Group's downside case.

The amended revolving credit facility and receivables financing facility now include a cross-default clause that is triggered if there is a withdrawal, or reduction in the facility size and/or advance rate, of the £25.0m uncommitted (non-recourse) invoice discounting facility. The Group has a 28-day cure period in relation to the cross-default clause.

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Executive Chairman's Statement on pages 4 to 6. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described on pages 7 to 11.

As described in the Executive Chairman's Statement above, the Group experienced challenging trading conditions across all divisions in the period, dominated by the impact of the global COVID-19 pandemic, and reported an operating loss for the period. The Directors consider that the outlook presents significant challenges in terms of sales volumes over the coming months. The unprecedented and ever-changing impact of COVID-19, uncertainties specifically related to post-Brexit transition arrangements, well documented issues within the non-food sectors (including retail, manufacturing and automotive) and a slowdown in new contracts and apprenticeship starts are all impacting on sales volumes. Whilst the Directors have instigated measures to manage liquidity (described below), these circumstances create material uncertainties over future trading results and cash flows.

The Directors have prepared base and sensitised cash flow information for the period ending 31 December 2021, which incorporates the Directors current view of the impact of the trading and economic risks and uncertainties noted above. Based upon a review of the Group's forecasts and associated cash flows for the period ending 31 December 2021, the Group's liquidity forecast (considering its available financing facilities) for this period is sufficient to cover the Group's and the Company's commitments during that period with the exception of a portion of the deferred VAT falling due on or before 31 March 2021, which represents a material uncertainty in relation to the Group's liquidity, although the Directors are working on options to mitigate this liquidity risk.

This potential liquidity issue may also result in a potential breach of the Group's minimum look-forward liquidity covenant under the recently amended revolving credit facility and receivables financing facility. In addition, it should be noted that there is a risk of a potential breach of the Group's new minimum EBITDA covenant if trading performance is sufficiently below forecast, although the minimum EBITDA covenants are set based on the Group's downside case. If required, the Directors will enter into discussions with its financing providers in respect of any potential covenant breaches. As noted above, the Group has been in active discussions with its financing providers and achieved covenant deferrals and amendments during 2019 and 2020.

It should also be noted that the uncommitted nature of the Group's £25.0m (non-recourse) invoice discounting facility, accompanied by the cross-default clause included in its amended revolving credit facility and receivables financing facility, represents a material uncertainty in respect of the Group's financing and liquidity during the period to 31 December 2021. If this cross-default clause were to be triggered, the Directors have a 28 day cure period to enter into discussions with its financing providers to commence actions to resolve this matter, which could include the reinstatement of the facility, replacement of the facility with new third party financing and/or an equity capital injection. Based on recent discussions with the provider of the Group's £25.0m (non-recourse) invoice discounting facility, the Directors understanding is that the provider presently remains supportive of the Group absent any unforeseen circumstances.

The Directors believe they can continue to operate within existing lending levels for the foreseeable future based on the following mitigating actions:

· The Group has changed the composition of the board of Directors and implemented improvements in corporate governance which will support more robust control, decision making and accountability within the Group leading to a considerably enhanced ability to drive, measure and deliver change.

· The Directors, with support from the senior leadership team, have commenced the implementation of a turnaround plan. The turnaround plan focuses on profit improvement and yield management measures (including contract renegotiations and exit from marginal or unprofitable contracts), cost reduction initiatives (including a reduction in non-critical business spend) and working capital improvement initiatives (including tight control over the timing of payments and a continued drive to further improve cash collections including a renegotiation of payment terms on certain contracts and the possible implementation of additional supply chain financing arrangements with certain customers) to ensure that lending limits and covenants are not breached.

· If required, the Directors will enter into discussions with HMRC to further defer some (or all) of the deferred VAT falling due on or before 31 March 2021.

· The Directors will explore other options to replace the Group's existing financing facilities and/or recapitalise the Group (including the possibility of a future equity capital raise, replacement third party financing and/or disposals).

Without successful implementation of the mitigating actions noted above, and the ongoing support from the Group's financing providers (including the uncommitted (non-recourse) invoice discounting facility), the Group would likely be unable to operate within its banking facilities.

The Directors have concluded that the combination of the circumstances mentioned above represents a material uncertainty which may cast significant doubt upon the Group's and the Company's ability to continue as a going concern and that, therefore, the Group and Company may be unable to realise their assets and discharge their liabilities in the normal course of business. Nevertheless, after engaging in dialogue with key stakeholders and considering the uncertainties described above as well as the mitigating actions available to the Group (including the turnaround plan), the Directors have a reasonable expectation that the Group and Company have adequate resources to continue in operational existence for the foreseeable future.

For these reasons, the Directors continue to adopt the going concern basis of accounting in preparing these financial statements. These financial statements do not include the adjustments that would result if the Group and Company were unable to continue as a going concern.

Prior period restatements

Following the extended 2018 audit, the Board continued with detailed reviews to further improve the Group's internal controls. These reviews identified accounting errors relating to the preparation of the 2018 annual results. The 2017 statement of financial position, being the 2018 opening reserves, and the 2018 income statement, 2018 statement of financial position and 2018 cash flow statement (presented as comparatives in the 2019 Annual Financial Statements) contained prior year adjustments. Overall, the 2018 opening reserves position was decreased by £0.9m and the total 2018 income statement impact was a £7.5m reduction in profit after tax. Certain of these adjustments have affected the statement of financial position at 30 June 2019 and the result for the six-month period then ended and, accordingly, the comparative results have been restated.

During the preparation of the Group's Annual Financial Statements for the year ended 31 December 2019, additional adjustments were made, which have been assessed as relating directly to the period ended 30 June 2019.

These adjustments are set out in the tables below.

Restatement of Consolidated statement of comprehensive income

For the six months ended 30 June 2019

Restatement of Consolidated statement of financial position

As at 30 June 2019

1) Adjustments from prior years

As shown above, the statement of financial position at 30 June 2019 has been adjusted for the aggregate effect of the prior year adjustments relating the years ended 31 December 2017 and 2018. Certain of these adjustments also have an effect on the result reported for the six months ended 30 June 2019 in the statement of comprehensive income. Full detail of all the adjustments was provided in the Group's Annual Report for the year ended 31 December 2019.

Partner Agency and overhead costs under-accrued - Accruals understated by £2.4m; Cost of sales understated by £1.7m and administrative expenses understated by £0.7m

Weaknesses in accounting processes and review procedures during the latter part of 2018 and early 2019 meant that a significant number of weekly charges from partner agencies were not fully accrued at 31 December 2018. A detailed review, undertaken in late 2019, highlighted the error, which amounted to an understatement of cost of sales of £1.7m in that year. For similar reasons, a large number of relatively small value supplier invoices for overhead costs were also not accrued resulting in an understatement of administrative expenses of £0.7m (of which £0.3m is non-underlying). The adjustment reverses in the six months ended 30 June 2020.

Trade receivables and revenues understated by £2.8m and trade payables and cost of sales understated by £2.6m

The Recruitment GB division reported its results to 30 December 2018, which was inconsistent with the rest of the Group, which reported to 31 December 2018. An adjustment is required to recognise an additional day's trading to align the results of the division with the rest of the Group.

2) Revenue adjustments - Revenue and cost of sales understated by £8.5m

In prior periods, revenues arising from 'agency style' contracts in the Datum business (part of the Recruitment GB division), which was acquired during 2018, have been incorrectly reported on a gross rather than on a net basis as required IFRS 15: Revenue from Contracts with Customers. Revenues and cost of sales have been reduced by £20.2m for this item.

For management reporting purposes the Recruitment GB division reports periodic revenues after deduction of certain employment related direct costs. For statutory reporting purposes an adjustment should have been made in order to correctly report revenues as amounts invoiced to third party customers and to include the costs within cost of sales. A restatement adjustment of £11.7m is required to increase revenues and cost of sales for this item.

3) Contract exit costs understated - Trade payables understated by £0.3m, provisions understated by £0.1m and cost of sales understated by £0.4m

As described in the Group's Annual Report for the year ended 31 December 2019, the Group's contract with the Ministry of Justice ("MOJ"), via The Warwickshire and West Mercia Community Rehabilitation company ("CRC"), was terminated early by the MOJ. This resulted in an impairment adjustment to the CRC assets of £0.8m. The reassessment of contract at December 2019 revealed that additional exit costs of £0.3m would be incurred for which the liability crystallised in the first half of 2019.

4) Employee settlement -Trade and other payables overstated, and non-underlying administrative expenses understated by £1.4m

During the year ended 31 December 2019, the Group settled a legal claim involving share incentives payable to an ex-employee, amounting to £1.4m. The outcome of the case was known at 30 June 2019 and the cost should have been recognised in that period.

5) Refinancing costs - Non-underlying finance costs understated by £3.2m, trade and other payables understated by £1.2m, borrowings understated by £0.7m and non-current other liabilities understated by £1.3m

Refinancing costs associated with the refinancing on 26 June 2019 were previously carried forward and amortised over the period of the related finance. Subsequently, the Group was advised that the costs should have been charged to the income statement as modification costs in accordance with the requirements of IFRS9 Financial Instruments.

6) Legal claim - Accruals and non-underlying administration costs understated by £1.0m

The Group has received a formal legal claim in respect of the sale of A4e's Indian business to the management team in 2014. The substance of the claim was known before 30 June 2019 and should have been recognised at that time.

7) Holiday pay accrual -Trade and other payables and cost of sales understated by £0.8m

The Group makes provision for the future cost of holiday pay earned by workers up to the reporting date. During the 2019 audit of the Recruitment GB division it was discovered that no provision had been made for holiday pay accrued by workers in the 'drivers' category. The omission occurred because prior to 2019 their pay was processed on a separate payroll system and the accrual was overlooked.

8) Reclassification adjustments -Provisions overstated, and trade and other payables understated by £21.1m

Provision items that are likely to be payable in less than one year were incorrectly classified as due after more than one year.

2 Segmental reporting

Management identifies three operating segments: Recruitment GB, the provision of workforce recruitment and management to industry; Recruitment Ireland, the provision of generalist recruitment services; and PeoplePlus, the provision of skills training and probationary services. These operating segments are monitored by the Chief Operating Decision Maker, the Group's Board, and strategic decisions are made on the basis of segment operating results.

Segment information for the reporting half-year is as follows:

* Segment underlying operating profit before amortisation of intangible assets arising on business combinations, reorganisation costs, other non-underlying costs and the non-cash charge/credit for share-based payment costs.

Segment information for the year ended 31 December 2019 is as follows:

No customer contributed more than 10% of the Group's revenue in either of the six months ended 2019 or 2020.

3 Administrative expenses (non-underlying)

Reorganisation costs of £1.9m during the period relate to further restructuring of the Recruitment GB division and represents staff redundancy and property closure costs.

Transaction costs relate to advice in connection with the Group's strategic options.

Costs incurred for refinancing the Group's bank credit facilities, as described in note 9, comprise legal and advisory fees.

Goodwill impairment arises from the revision of the carrying values of the Recruitment GB and PeoplePlus divisions using forecasts updated for the effect of the COVID-19 pandemic. Further details are provided in note 5.

4 Earnings per share and dividends

The calculation of basic earnings per share is based on the earnings attributable to ordinary shareholders divided by the weighted average number of shares in issue during the period, after deducting any shares held in the Joint Share Ownership Plan or "JSOP" - "own shares" (1,140,000 shares at 30 June 2020, at 30 June 2019 and at 31 December 2019). The calculation of the diluted earnings per share is based on the basic earnings per share as adjusted to further take into account the expected issue of ordinary shares resulting from any share options granted to certain Directors and share options granted to employees in 2017, 2018 and 2019 under the SAYE scheme.

Details of the earnings and weighted average number of shares used in the calculations are set out below:

*Underlying earnings after adjusting for amortisation of intangible assets arising on business combinations, business acquisition costs, exceptional reorganisation costs, the non-cash charge/credit for share-based payment costs.

Dividends

During the six-month period to 30 June 2020, Staffline Group plc paid no dividends to its equity shareholders (H1 2019: £nil).

No interim dividend for 2020 is proposed (2019: £nil).

5 Goodwill