Staffline Regulatory News (STAF)

30 June 2020

STAFFLINE GROUP PLC

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

RESULTS FOR THE YEAR ENDED 31 DECEMBER 2019

Staffline Group plc, the recruitment and training group, today announces its audited preliminary results for the year ended 31 December 2019.

Financial Highlights

· Revenue decreased (3.9)% to £1,076.7m (2018 restated: £1,120.9m)

· Underlying* operating loss of £(0.8)m (2018 restated: £32.8m profit)

· Reported operating loss of £(39.9)m (2018 restated: £(14.7)m)

· Reported loss before tax of £(48.1)m (2018 restated: £(17.8)m)

· On a pre-IFRS 16 basis net borrowings reduced by £3.5m to £59.5m (2018: £63.0m)

· On a post-IFRS 16 basis net borrowings were £67.9m

Operational Highlights

· The Group's credit facilities have been restructured in June 2020, post period-end

· Group leadership, finance and main Board strengthened post year-end with the following appointments:

o Ian Lawson as Executive Chairman in April 2020

o Daniel Quint, Interim Chief Financial Officer, appointed to the Board in May 2020

o Albert Ellis as Non-executive Director in March 2020 and as Chair of the Audit Committee in April 2020

o Richard Thomson as Senior Non-executive Director and Chair of the Remuneration Committee in April 2020

· Implementation of corporate governance improvements following certain control failures and prior period reporting issues

Current Trading and Outlook

· The impact of COVID-19 has been mixed across the Group with surges of demand reported in key food distribution and production supply chains, offset by declines in demand from sectors where the Government's shutdown was most severe such as manufacturing, retail and classroom-based training programmes

· The Recruitment divisions have experienced significant variance between customer sectors

o Strong response to the unprecedented surge in food sector demand utilising web-based platforms to connect displaced workers with vital roles required in the food supply chain, where demand continues to be strong

o Conversely, demand from other sectors such as retail, automotive and manufacturing diminished considerably

o Since the easing of lockdown, the Group has benefitted from a gradual recovery in demand for labour in non-food sectors including retail and manufacturing in line with our expectations

· PeoplePlus has continued to operate the majority of its services adhering to isolation measures

o Most funding support provided has been on a cost only basis

o Whilst business intake in 2020 has weakened, it is anticipated that the Government will launch new funding for training and retraining schemes, which PeoplePlus is well-positioned to benefit from

· The Board remains cautiously optimistic that each of the three operating divisions will achieve a positive result in 2020 on an underlying operating profit basis

Ian Lawson, Executive Chairman of Staffline, commented:

"2019 was a challenging year for the Group during which time Staffline faced a number of significant issues. Our new management team are now ensuring that the appropriate measures of strong corporate governance and controls are being put in place. Clearly in the current year, we are operating within an unprecedented macroeconomic climate as a result of the COVID-19 pandemic, however, Staffline's people have risen to this challenge and maintained an outstanding level of business continuity, enabling us to successfully support our blue-chip customer base.

"Our strong operational base and leading positions in many of the markets in which we operate sit firmly at the heart of our strategy to create the most reliable, flexible and integrated workforce in the UK, delivering both opportunities and jobs, training and re-skilling, and in-turn to deliver value to all stakeholders."

* Note: Underlying results exclude amortisation of intangible assets arising on business combinations, exceptional reorganisation, legal and refinancing costs, exceptional transaction costs, exceptional National Minimum Wage remediation and financial penalties, revised audit scope and increased audit fees, employee dispute settlements, goodwill impairment and the non-cash charge/credit for share-based payment costs.

Note: The results for the year ended 31 December 2019 have been prepared in accordance with International Financial Reporting Standards and reflect IFRS 16 'Leases', effective for financial periods beginning on or after 1 January 2019. The Group has adopted the modified retrospective approach and therefore there has been no restatement of the comparatives for the 2018 reporting period. The impact on the financial statements is summarised in the Financial Review. There is no overall impact on the Group's cash and cash equivalents.

Note: EBITDA represents Earnings Before Interest, Taxation, Depreciation and Amortisation.

Note: Net debt includes transaction costs of £nil (2018:£0.8m).

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

I joined the Board on 25 April 2020 as Executive Chairman following a 15-month period in which the Group had experienced a number of significant operational issues. These operational issues created uncertainty particularly in respect of ensuring the Group had sufficient funding in-place, all of which was compounded by the COVID-19 pandemic and the varying impact on demand across the Group.

Over the last few months, we have made significant progress in creating a platform from which to future-proof the Group. Most significantly, the Group has successfully refinanced its credit facilities, which will provide support to our ongoing business activities. In addition, Staffline is benefitting from HMRC's VAT deferral, which improves the Group's liquidity through to the end of 2020, and has utilised the Government's furlough scheme where relevant, with respect to certain of the Group' permanent employees, as well as temporary workers.

The Group overall is being reshaped to ensure that it is sufficiently resilient with improvements being implemented in all key areas: corporate governance, financial reporting processes, management information channels and cross-selling and communication across all divisions. An Executive Management Team has been established which includes myself, Daniel Quint, Interim Group CFO, and our three highly experienced divisional Managing Directors. We are also, for the first time, reporting across three distinct business divisions: Recruitment GB, led by Frank Atkinson; Recruitment Ireland, led by Tina McKenzie; and PeoplePlus, led by Simon Rouse.

There is a real passion and commitment across the Group and our people believe we have a great opportunity to use the strengths and talents we have by working more closely together. This has been particularly evident during the current COVID-19 pandemic with the divisions coming together to create "Feed the Nation," a nationwide scheme supported by clients and the Government. This was when as a country, we needed, more than ever, to come together to keep essential services running and provide support for hard working employees who are doing everything they can to support customers during these challenging times. There was a marked increase in demand in the food sector and we responded well to the sudden and unpredicted surge in demand, utilising the size of the Company's database, geographic reach and investment in digital worker engagement.

The Group's near-term strategy is to create a sustainable business that can benefit from both its existing resources and talent, as well as capitalise on the significant opportunity that exists within our target markets. The new Board has set out the following near-term priorities to underpin this strategy, which are:

1) Operational excellence - to improve the financial position of the Group through strengthening of the balance sheet, maximising profitability, reducing debt, increasing cash generation, enhancing reporting processes and streamlining and sharing services across the Group

2) Optimised service delivery - better understanding of our customers' objectives and securing opportunities with new customers in order to increase market share in our key quality sectors whilst adhering to high standards of compliance

3) Leverage our brand - unify our existing brands within the Recruitment divisions under 'Staffline,' build on the strength of the PeoplePlus brand in its chosen markets to leverage our brand equity, whilst driving synergies and opportunities across our Recruitment and PeoplePlus businesses to ultimately increase market share

4) Develop and cultivate our talent - bring together our people across the divisions by reducing organisational silos, and leverage the best in our people's skills and experience across the Group

An example of this strategy in action, is the recent rebranding of Grafton Recruitment, the Company's Northern Ireland recruitment business, under the 'Staffline' brand, as we focus on unifying our operating divisions in order to generate further opportunities.

Operational review

The Group experienced challenging trading conditions across all divisions in 2019. In Recruitment, customer confidence was impacted by the delay to the publication of the 2018 full year results, together with a heightened level of uncertainty surrounding Brexit. In the second half, extremely weak consumer confidence impacted our end customers which fed through to demand for our services. Meanwhile, throughout the year, PeoplePlus was undergoing fundamental reorganisation and transition, heavily impacting the trading performance. Group revenue declined by (3.9)% to £1,076.7m (2018 restated: £1,120.9m), with the decline being partially offset by a full year's contribution from the acquisitions made in 2018.

Notwithstanding the extended audit, the Board has 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, amounting to a reduction to the 2018 opening reserves position of £(0.9)m and a reduction of £(7.5)m to the 2018 reported profit after tax.

In order to strengthen the Group's balance sheet, in July 2019, we completed an equity capital raise which delivered net proceeds of £38.0m, of which £15.1m was allocated to settling historical National Minimum Wage liabilities. In June 2020, we agreed with our lenders a revised financing structure in respect of our main banking facilities, as described in the Financial Review.

Recruitment

In our Recruitment businesses, progress was made in 2019 against our digital transformation strategy, which has a number of key objectives, which are to:

· Implement further automation of the recruitment journey, removing low value, high effort activities to free up our talent

· Drive performance, to reduce operating costs, further improve our customer service and worker engagement

· Extend our pool of candidates from our industry leading database of c.900,000 candidates, to maintain unrivalled access to the labour market

· Focus on commercial upsides and new business wins where our automation is valued as a premium offering

The Group continues to promote digital engagement and will, over time, further differentiate our service offering. However, in the short term, the continued shortfall in industry regulation continues to provide competitors with the opportunity to under-price in the market. In particular, the widespread exploitation across our industry of legislative loopholes. We welcome the Government's announcement regarding the establishment of a Single Enforcement Agency to address these issues and would encourage it to accelerate this initiative. We anticipate that Staffline, which has re-engineered its operating model and refreshed its Board and management, would significantly benefit from the levelling of the competitive playing field.

Our Recruitment Ireland business continues to perform well, with levels of engagement continuing to be strong and an average client relationship of 5-10 years. Our Ireland division offers a 360° recruitment model including a high street branch network, specialist recruitment focusing on high-end sectors such as banking and finance, on-site solutions, RPO and HR consultancy. The business has over 1,000 active clients providing workers for the largest employer in Northern Ireland through to SME's.

PeoplePlus

2019 was a year during which the PeoplePlus business was entirely re-invented, closing down the Work Programme, and transforming into the UK's market-leading adult skills and training company, with prime positions in multiple sectors.

Key ongoing growth priorities include to:

· Leverage our market-leading people, technology and content capabilities to help "Skill the Nation" as part of the UK national recovery and ongoing productivity challenge

· Maintain our tight bid disciplines to secure sustainable business growth and enable us to further diversify our revenue mix to drive high-quality earnings

· Continue to improve the efficiency of the operating platform, with increased use of automation across both front and back office operations

· Build on our transformed digital operating model in Apprenticeships to deliver a profitable, high-quality learner experience focused on our chosen sectors

Significant re-organisation costs were incurred in the transition of PeoplePlus's operating model. However, the new PeoplePlus is formed of multiple service contracts across a number of sectors, with far less reliance on central government funding. Overall, we believe that PeoplePlus now has the characteristics of a business that will enjoy far higher quality of earnings and longevity.

Current trading

As a result of the rapid development of the COVID-19 pandemic, the Recruitment businesses experienced significant variance between sectors. There was an unprecedented increase in demand in the food and food supply chain sector, with a record 87,000 digital applications submitted through the www.staffline.co.uk and www.feedthenation.co.uk gateways in the month of March 2020, over 2.5 times that of February 2020.

Conversely, demand from other sectors such as retail, automotive and manufacturing declined considerably with the Group's limited exposure to professional recruitment also impacted. On a net basis, despite food sector customers representing approximately 56% of our client base, the growth in demand was not material enough to mitigate the temporary shutdown of the majority of other clients in non-food sectors. The demand in the food sector is now normalising and the relaxation of lockdown measures means additional sectors such as retail and manufacturing are beginning to re-open. However, it is too early to quantify what levels of demand Staffline will see from these industries in the short-term.

In PeoplePlus, whilst 2019 was a year of transition, 2020 was planned as a year of stabilisation as new contracts won in the previous year developed into maturity. With the COVID-19 pandemic, well-developed resilience plans and digital operating models, meant that we could continue to operate the majority of our services. However, loss of classroom delivery, and funder positions moving towards providing cost support impacted certain areas. The in-year new business intake has also weakened. Mitigating actions have been put in place to support management's continued drive to clear profitability notwithstanding the wider market disruption. In addition, it is anticipated that in light of the increase in unemployment as a result of COVID-19, that the Government will launch a round of funding for training and retraining schemes, which PeoplePlus, as one of the UK's leading training providers, is well-positioned to benefit from.

Across all three divisions cost saving initiatives, begun in the second half of 2019, have been significantly expanded in light of the challenging trading environment. Additionally, Group cost sharing initiatives are being explored to further reduce the overall cost base.

Going concern

The financial statements have been prepared on a going concern basis. The Directors have reviewed this basis and made full disclosure in note 3, 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 3, as well as the mitigating actions available to the Group as described in note 3, the Directors have a reasonable expectation that the Group and Company have adequate resources to continue in operational existence for the foreseeable future.

Annual General Meeting

In light of the COVID-19 pandemic, we note the guidance from the FRC and BEIS regarding the timing of AGMs and grace periods expected to be given by retrospective legislation. The Company will hold its AGM after the usual six-month window, but as soon as reasonably practicable following the publication of the Annual Report, which is now expected to be published and sent to shareholders in July.

Outlook

The current macroenvironment is dominated by the global COVID-19 pandemic and I am pleased to report that all our facilities, where open, currently remain operational in line with Government advice. Whilst there has been an inevitable reduction in volumes in certain sectors, we have taken measures to mitigate the effect of these. Our priority is the health, safety and wellbeing of our employees, suppliers and customers. We have taken a number of actions, in line with government guidance, to facilitate this and continue to monitor the situation to ensure we are employing best practice.

The ultimate impact of the COVID-19 pandemic on the economy and Staffline is uncertain, and the Board does not underestimate the operational and macroeconomic challenges that lie ahead for the Company, so therefore the Company is not making a forecast for 2020. However, we take assurance from having well established, market-leading businesses with a committed workforce, and we are appreciative of the efforts of all the Group's lenders who have helped deliver the refinancing and provide a platform that gives us confidence we can navigate this uncertainty.

Ian Lawson

Executive Chairman

29 June 2020

Financial Review

Introduction

2019 was a challenging year for the Group, with weak consumer confidence affecting the recruitment businesses and the PeoplePlus division undergoing fundamental transformation following the Work Programme wind-down. Total revenue for the year decreased by (3.9)% to £1,076.7m (2018 restated: £1,120.9m).

The Group is split into three divisions and will be reported as such from the current year: Recruitment GB, flexible blue-collar recruitment; Recruitment Ireland, generalist recruitment; and PeoplePlus, an adult skills and training provider.

Revenues in our Recruitment GB division declined by £(67.0)m or (7.4)%. Customer confidence was impacted by the delay to the publication of the 2018 full year results in the first half of 2019, as well as the impact of the uncertainty around the first Brexit deadline of 31 March 2019. In the second half, ongoing uncertainty surrounding Brexit continued to impact the business with lower than anticipated demand from end consumers. When striving for certainty, customers increased their permanent staff at the expense of their temporary workforce. The typical peak trading months in Q4 included the second Brexit deadline of 31 October 2019 as well as the general election on 12 December 2019. Both of these events caused further economic and political uncertainty, contributing to the weakness experienced in trading. Q4 2019 hours worked were 17.4 million compared to 20.8 million in 2018, a (16)% decline. Revenue generated from temporary recruitment accounted for 99% of total revenue compared to 1% from permanent recruitment. Gross profit generated from temporary recruitment accounted for 94% of the total, with 6% of gross profit generated from permanent recruitment.

Revenues in our Recruitment Ireland division increased by £42.4m or 40.3% due to the full year contribution from Grafton Recruitment, acquired in July 2018. Had Grafton Recruitment been owned for the whole of the 2018 comparative period, total Recruitment Ireland revenues would have been broadly flat year-on-year. The political and economic uncertainty related to Brexit, and the general election referred to above, had specific impact on Recruitment Ireland in the context of the Brexit issues relating to the Irish border, which became a significant factor in the Brexit negotiations. Revenue generated from temporary recruitment accounted for 99% of total revenue compared to 1% from permanent recruitment. Gross profit generated from temporary recruitment accounted for 87% of the total, with 13% of gross profit generated from permanent recruitment.

PeoplePlus revenues decreased by £(19.6)m or (18.2)% with the fundamental transformation of the business. The wind-down of the Work Programme reduced revenue by £(27.5)m. This was partly offset by revenue growth in other sectors, principally in Justice, which saw revenue growth of £5.8m, and in Apprenticeships, with revenue growth of £4.3m.

The sales mix between the operating divisions was broadly unchanged over the year, with the recruitment businesses accounting for 92% of 2019 revenue (2018 restated: 90%).

Overall gross profit decreased by (25.9)% to £86.5m (2018 restated: £116.8m) with gross profit margins reducing to 8.0% (2018 restated: 10.4%). This margin reduction is primarily a result of the lower gross profit margins which are achieved under the new PeoplePlus operating model. PeoplePlus achieved a gross margin of 16.3% in 2019, which compares to 37.6% in 2018, largely due to the Work Programme contract. The gross margin for Recruitment GB decreased to 6.7% (2018 restated: 7.3%). The increase in the National Minimum Wage in April 2019, from £7.83 to £8.21 per hour for over 25s, does not impact absolute gross profit but does negatively impact the gross margin percentage achieved and this dynamic will continue with the increase in April 2020 to £8.72 per hour for over 25s. The gross margin for Recruitment Ireland increased slightly to 10.6% (2018 restated: 10.0%) driven by the division's decision not to bid for lower margin opportunities.

Reported loss before taxation was £(48.1)m in 2019 (2018 restated: £(17.8)m). Reflecting the challenges faced in the year, underlying operating loss was £(0.8)m (2018 restated: £32.8m profit). Total non-underlying charges before tax were £42.3m (2018 restated: £47.5m) as described below. Finance charges were £8.2m (2018 restated: £3.1m). This included £3.2m (2018: £nil) of non-underlying finance charges relating to the accounting for the June 2019 refinancing of the credit facilities, also described below.

The underlying loss before tax for 2019 was £(5.8)m (2018 restated: £29.7m profit). Underlying (loss) / profit before taxation as a percentage of revenue fell to (0.5)% (2018 restated: 2.6%). The reported loss after tax for 2019 was £(44.0)m (2018 restated: £(16.0)m).

Non-underlying administrative charges

In the reporting of its financial performance, the Group uses certain measures that are not defined under IFRS, the Generally Accepted Accounting Principles ("GAAP") under which the Group reports. The Directors believe that these non-GAAP measures assist with the understanding of the performance of the business. These non-GAAP measures are not a substitute for, or superior to, any IFRS measures of performance but they have been included as a means of comparing performance year-on-year.

Non-underlying items of income or expenditure are items that are non-recurring or of a particular size or nature such that they require separate identification. Non-underlying items are included in total reported results but are excluded from underlying results. These items can vary significantly from year to year and therefore create volatility in reported earnings which does not reflect the Group's underlying performance. It should be noted that whilst the amortisation of intangible assets arising on business combinations has been added back, the revenue from those acquisitions has not been eliminated.

Non-underlying charges before tax have decreased to £42.3m in 2019 (2018 restated: £47.5m) as shown below. They include exceptional restructuring costs in 2019 of £1.3m relating to the reorganisation of Recruitment GB into a geographically focussed operating structure, £1.0m of legal investigation professional fees for the independent investigation conducted by Osborne Clarke LLP, a release of £0.7m reflecting the net impact of increased National Minimum Wage ("NMW") remediation costs, reduced financial penalties and related professional fees, revised audit scope and increased audit fees of £0.8m, transaction costs of £0.9m related to the Group exploring strategic options, costs of £1.4m relating to the settlement of a dispute with an ex-employee regarding share incentives payable, legal costs of £1.0m in respect of a historic claim against A4E India, refinancing costs totalling £3.2m (including expensing old transaction costs of £0.6m, the June 2019 amendment fee of £1.2m and the recognition of a future exit fee of £1.4m as required by IFRS9 in relation to the new financing package as entered into in June 2019), a £10.9m charge for the amortisation of intangible assets arising on business combinations, a £22.3m goodwill impairment charge, and a share-based payment charge of £0.2m.

The charge in the year for amortisation of intangible assets arising on business combinations relates principally to the following acquisitions: the A4e business (£1.4m charge: asset fully amortised), Vital Recruitment (charge £3.2m: asset will be fully amortised by February 2023), Milestone (£1.0m charge: asset will be fully amortised by September 2020) , Passionate about People (charge £2.3m: asset will be fully amortised by October 2023), Grafton (£1.3m: asset will be fully amortised by June 2023), Brightwork (charge £0.7m: asset will be fully amortised by April 2022).

Taxation

The total tax credit for the year of £4.1m (2018: £1.8m), which amounts to 8.5% (2018: 10.1%) of the loss for the year, relates principally to the recovery of UK tax losses in previous years and on the movement of deferred tax balances. The Group has no current Corporation Tax liability in respect of either the current or prior years and as a result is anticipating a refund of amounts that were paid on account. An element of losses incurred during 2018 will be set against taxed profits in previous years, which will also result in a refund. Remaining tax losses carried forward in the Recruitment GB and PeoplePlus divisions have not been recognised as a deferred tax asset.

The amortisation charge relating to intangible assets arising on business combinations is not deductible under UK corporation tax and is therefore added back to taxable profits. A deferred tax liability is recognised in respect of consolidated intangible assets. This liability is reduced each year in line with the amortisation charge, giving rise to a deferred tax credit each year. No deferred tax is recognised on JSOP charges. An element of acquisition-related expenses and HMRC settlement costs incurred in 2018 were also treated as non-deductible.

Key performance indicators

Earnings per share

Statutory basic and diluted loss per share were both (96.3)p (2018 restated: both (61.2)p).

The weighted average number of shares (basic) has been increased by 20,642,000 (2018: increased by 546,000) shares to take account of the effect of the placing and open offer in July 2019 whereby 40,986,097 new ordinary shares were issued.

Removing the non-underlying charges, and their respective taxation impacts, results in underlying basic and diluted loss per share both being (9.0)p (2018 restated: both 88.3p).

Prior year restatements and review of internal controls

Following the extended 2018 audit, the Board has 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 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 Financial Statements) contain prior year adjustments. Overall, the 2018 opening reserves position has been decreased by £(0.9)m and the total 2018 income statement impact was a £(7.5)m reduction in profit after tax. See note 3 for further details.

The Recruitment GB division acquired several businesses in 2018 and within a short timeframe endeavoured to integrate the acquired finance functions, whilst at the same time changing some critical IT systems covering operations, payroll and finance. This, combined with high staff turnover, resulted in weaknesses in the balance sheet control environment, which have now been rectified.

After the end of the reporting period, management's review of internal controls identified a material misstatement within reported accrued income and costs for the year ended 31 December 2019, which contributed towards profit guidance for 2019 being reduced earlier this year. On further investigation, this material misstatement was traced to the deliberate manual manipulation of internal reports which were used in the accrued income and accrued cost accounting process.

While the impact was relatively small in the context of Group revenue, on identification of the issue, the Board was immediately notified and an investigation took place covering the control environment and substantiation of accrued income and costs. Control improvements have now been implemented, including additional segregation of duties. The individual involved with the issue is no longer employed by the Group. Importantly, no external funding rules were broken as a result of this issue. It has no impact on the Board's outlook and the incident has now been fully resolved.

Statement of financial position, cash generation and financing

The Group's total equity decreased by £(6.8)m over the year from the 2018 restated position. This is as a result of the total comprehensive loss for the year of £(44.7)m offset by the equity raise in July 2019 which delivered net proceeds of £38.0m. The transition to IFRS 16 on 1 January 2019 also decreased equity by £(0.1)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 of £24.6m, primarily due to the decline in trading, and a decrease in trade and other payables and provisions of £23.8m, primarily due to a reduction in VAT liabilities due to weak trading and payment timing.

The Group ended the year with pre-IFRS16 net debt of £59.5m compared to the £63.0m at the end of 2018 (including unamortised transaction costs). Post-IFRS16 net debt was £67.9m at 31 December 2019. The unamortised transaction costs were written off in the year, at the time of the 2019 refinancing.

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 results exclude amortisation of intangible assets arising on business combinations, exceptional reorganisation, legal and refinancing costs, exceptional transaction costs, exceptional National Minimum Wage remediation and financial penalties, revised audit scope and increased audit fees, employee dispute settlements, goodwill impairment and the non-cash charge/credit for share-based payment costs.

The Group's headroom relative to available committed banking facilities as at 31 December 2019 was £43.7m (31 December 2018 restated: £52.4m) as set out below:

* excluded from headroom in 2018

Refinancing: Amendments to Credit Facilities June 2019

Following discussions with the lenders of the revolving credit facility ("RCF"), the Company and the lenders agreed on 26 June 2019 to certain amendments to the RCF. In summary:

The lenders agreed to a waiver of all quarterly financial covenant tests for the quarter ending 30 June 2019.

The key revised terms to the RCF were:

i) Relaxation of the September and December 2019 leverage covenants followed by a gradual reduction of the leverage covenant to net debt of less than 2x EBITDA by 31 December 2020;

ii) Restrictions on new material share, business and asset acquisitions until January 2021;

iii) No dividends to be declared by the Company for the 2019 and 2020 financial years;

iv) Repayment and cancellation of revolving facility commitments by £10.0m on both 15 November 2019 and 15 November 2020;

v) Net proceeds of the July 2019 share issue in excess of £30.0m were to be used to reduce, and cancel, the Credit Facilities available.

In consideration of these amendments, a fee was paid to the lenders and certain other changes were made to the Credit Facilities (including the removal of the Accordion option and the ability to request the lenders to extend the Credit Facilities for an additional 12 months beyond July 2022). The expiry date for the Credit Facility remains in July 2022. The Company agreed to pay the lenders an exit fee based on a percentage of the outstanding commitments when the Credit Facility expires or, if sooner, refinanced.

All borrowings drawn down were repayable on a monthly basis. Interest accrued on the borrowings at between 2.25% and 3.50% plus LIBOR, depending upon the level of adjusted leverage. In addition, a commitment charge of 40% of the interest liability accrued on the RCF not utilised. At the year end the unutilised amount totalled £0.1m.

Total underlying finance charges were £5.0m for the year (2018: £3.1m), of which £3.2m related to the interest costs for the RCF, £1.5m related to interest on customer financing arrangements and £0.3m related to interest discounting the IFRS 16 lease liabilities.

In December 2019, the Company agreed an amendment to the Credit Facilities which included:

i) The deferral of testing covenants at December 2019; and

ii) The agreement to waive any potential covenant breaches and defaults arising as a result of the prior year adjustments.

Subsequently, between January and May 2020, the Company agreed amendments to the Credit Facilities which included further deferrals of covenant testing and the reporting of such testing.

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 previous RCF was reduced from £95.0m to £78.2m with cancellations in July 2019 and November 2019.

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 2019 financial year.

Going concern

The financial statements have been prepared on a going concern basis. The Directors have reviewed this basis and made full disclosure in note 3, 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 3, as well as the mitigating actions available to the Group as described in note 3, the Directors have a reasonable expectation that the Group and Company have adequate resources to continue in operational existence for the foreseeable future.

Impact of amendments to International Financial Reporting Standards: IFRS 16 Leases

IFRS 16 Leases is effective for accounting periods beginning on or after 1 January 2019. Therefore, these financial statements cover the first year to which the transition to IFRS 16 is applicable. The Group has adopted the modified retrospective approach to transition, meaning that the cumulative transitional adjustments to assets, liabilities and equity have been recognised on 1 January 2019 and no comparative figures have been restated. For the rest of the 2019 financial year, all leasing arrangements that are covered by the provisions of IFRS 16 have been accounted for in line with this new accounting standard.

Daniel Quint

Interim Chief Financial Officer

29 June 2020

Consolidated statement of comprehensive income

For the year ended 31 December 2019

* An analysis of the non-underlying items is provided in note 5

Details of the restatement adjustments are provided in note 3.

The accompanying notes form an integral part of these financial statements.

Consolidated statement of changes in equity

For the year ended 31 December 2019

The accompanying notes form an integral part of these financial statements.

Consolidated statement of financial position

As at 31 December 2019

Details of the restatement adjustments are provided in note 3. The 1 January 2018 balance sheet is presented before the adjustment for the transition to IFRS 15 'Revenue Recognition', as disclosed in the Consolidated statement of changes in equity.

The accompanying notes form an integral part of these financial statements.

Consolidated statement of cash flows

For the year ended 31 December 2019

The accompanying notes form an integral part of these financial statements.

Notes to the financial information

For the year ended 31 December 2019

1 Nature of operations

The principal activities of Staffline Group plc and its subsidiaries ("the Group") include the provision of recruitment and outsourced human resource services to industry and the provision of skills training and probationary services.

2 General information and statement of compliance

Staffline Group plc, a Public Limited Company limited by shares listed on AIM ("the Company"), is incorporated and domiciled in England, United Kingdom. The Company acts as the holding company of the Group. The Company's registration number is 05268636.

The financial information set out in this document does not constitute the Group's statutory accounts for the years ended 31 December 2019 or 2018 but is derived from those accounts. Statutory accounts for 2018 have been delivered to the registrar of companies. The auditors have reported on those accounts; their reports were (i) unqualified, (ii) contained an Emphasis of Matter on the impact of non-compliance of National Minimum Wage legislation non-compliance and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. Statutory accounts for 2019 will be delivered to the registrar of companies in due course. The auditors have reported on those accounts; their reports were (i) unqualified, (ii) contained an Emphasis of Matter highlighting a materiality uncertainly related to going concern and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006

The financial statements for the year ended 31 December 2019 (including the comparatives for the year ended 31 December 2018) were approved and authorised for issue by the Board of Directors on 29 June 2020. This results announcement for the year ended 31 December 2019 was also approved by the Board on 29 June 2020

In 2019 the Group has adopted new guidance for the recognition of leases (see note 3 below). The new standard has been applied using the modified retrospective approach, with the cumulative effect of adoption as at 1 January 2019 being recognised as a single adjustment to retained earnings. Accordingly, the Group is not required to present a third statement of financial position as at that date.

3 Accounting policies

Basis of preparation

The Consolidated financial statements are prepared for the year ended 31 December 2019. The Consolidated financial statements of the Group have been prepared on a going concern basis using the significant accounting policies and measurement bases summarised below, 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 Group has adopted the new accounting pronouncements which have become effective this year, which are as follows:

IFRS 16 'Leases'

IFRS 16 'Leases' replaces IAS 17 'Leases' along with three Interpretations (IFRIC 4 'Determining whether an Arrangement contains a Lease', SIC 15 'Operating Leases-Incentives' and SIC 27 'Evaluating the Substance of Transactions Involving the Legal Form of a Lease').

The adoption of this new Standard has resulted in the Group recognising a right-of-use asset and related lease liability in connection with all former operating leases except for those identified as low-value or having a remaining lease term of less than 12 months from the date of initial application. The new Standard has been applied using the modified retrospective approach, with the cumulative effect of adopting IFRS 16 being recognised in equity as an adjustment to the opening balance of retained earnings for the current period. Prior periods have not been restated.

For contracts in place at the date of initial application, the Group has elected to apply the definition of a lease from IAS 17 and IFRIC 4 and has not applied IFRS 16 to arrangements that were previously not identified as a lease under IAS 17 and IFRIC 4. The Group has elected not to include initial direct costs in the measurement of the right-of-use asset for operating leases in existence at the date of initial application of IFRS 16, being 1 January 2019. At this date, the Group has also elected to measure the right-of-use assets at an amount equal to the lease liability adjusted for any prepaid or accrued lease payments that existed at the date of transition.

Instead of performing an impairment review on the right-of-use assets at the date of initial application, the Group has relied on its historic assessment as to whether leases were onerous immediately before the date of initial application of IFRS 16. On transition, for leases previously accounted for as operating leases with a remaining lease term of less than 12 months and for leases of low-value assets the Group has applied the optional exemptions to not recognise right-of-use assets but to account for the lease expense on a straight-line basis over the remaining lease term.

On transition to IFRS 16 the weighted average incremental borrowing rate applied to lease liabilities recognised under IFRS 16 was 2.3%.

The Group has benefited from the use of hindsight for determining the lease term when considering options to extend and terminate leases.

Reconciliations of the financial statement line items from IAS 17 to IFRS 16 at 1 January 2019 and of total operating lease commitments at 31 December 2018 (as disclosed in the financial statements to 31 December 2018) to the lease liabilities recognised at 1 January 2019, are given in note 15.

At the date of authorisation of these financial statements, several new, but not effective, Standards and amendments to existing Standards and Interpretations have been published by the IASB. None of these Standards or amendments to existing Standards have been adopted early by the Group.

The Directors anticipate that all relevant pronouncements will be adopted for the first period beginning on or after the effective date of the pronouncement. New Standards, amendments and Interpretations not adopted in the current year have not been disclosed as they are not expected to have a material impact on the Group's financial Statements.

The Consolidated financial statements are presented in sterling, which is the presentational currency of the parent Company and Group. Selected, principal accounting policies of the Group are set out below and have been consistently applied, unless stated otherwise.

Going concern

The financial statements are prepared on a going concern basis notwithstanding that the Group has reported an underlying loss before tax of £5.8m (2018 restated: £29.7m underlying profit before tax) and an unadjusted loss before tax of £48.1m (2018 restated: £17.8m loss before tax). As at 31 December 2019, the Group had net current assets (excluding restricted cash) of £10.6m (2018 restated: £2.9m) and net assets of £75.8m (2018 restated: £82.6m). The Group generated an underlying EBITDA profit (prior to exceptional and non-recurring items) of £6.5m (2018 restated: £37.6m).

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 is scheduled to reduce 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 estimated to be £45.7m, of which £37.8m has already been realised.

The net debt position of the Group (excluding unamortised transaction costs), as discussed earlier, has reduced during 2019 from £63.8m to £59.5m on a pre-IFRS 16 basis.

As at 26 June 2020, the Group had cash at bank of £39.9m (excluding £3.5m held in an escrow account to fund outstanding liabilities in relation to National Minimum Wage ("NMW")), an undrawn commitment of £nil under its revolving credit facilities and an unutilised facility of £0.7m under its receivables financing facility, resulting in aggregate available liquidity of £40.6m.

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 have 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 is scheduled to reduce 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. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review.

As described in the Executive Chairman's Statement, the Group experienced challenging trading conditions across all divisions in 2019 and reported an operating loss for the year. In Recruitment GB, customer confidence was impacted by the delay to the publication of the 2018 full year results, together with a heightened level of uncertainty surrounding Brexit. In the second half, extremely weak consumer confidence impacted our end customers which fed through to demand for our services. Meanwhile, throughout the year, PeoplePlus was undergoing fundamental reorganisation and transition, heavily impacting the trading performance. In addition, 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 recently 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 the annual financial statements. The Group and Company financial statements do not include the adjustments that would result if the Group and Company were unable to continue as a going concern.

Prior year restatements

Following the extended 2018 audit, the Board has 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 Financial Statements) contain prior year adjustments. Overall, the 2018 opening reserves position has been decreased by £0.9m and the total 2018 income statement impact is a £7.5m reduction in profit after tax, following a decrease in underlying operating profit of £6.3m and in non-underlying loss of £1.9m.

Management have focussed on strengthening the balance sheet control environment. The Recruitment GB division acquired several businesses in 2018 and within a short timeframe endeavoured to integrate the acquired finance functions, whilst at the same time changing some critical IT systems covering operations, payroll and finance. This, combined with high staff turnover, resulted in weaknesses in the balance sheet control environment, which have now been rectified.

Restatements for the year ended 31 December 2017

Restatement of Consolidated statement of financial position

As at 31 December 2017

1. Lease dilapidation provisions - Administrative expenses and provisions understated by £0.8m

The detailed review of lease agreements carried out during the year for the adoption of IFRS 16 highlighted that most lease agreements on properties occupied by the Recruitment GB division contain dilapidation provisions but that hitherto no financial provisions had been made. The potential liability for each property has been calculated based on the estimated cost of making good in accordance with the lease terms.

2. Holiday pay provision - Cost of sales and accruals understated by £0.4m

The Group makes provision for the future cost of holiday pay earned by workers up to the reporting date. During the 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.

3. Polish subsidiary reserves - Revenue and trade receivables overstated by £0.2m

The Group owns two trading companies that are registered in, and operate in, Poland. The financial results of the companies were not previously available at the time the Group announces its results. Consequently, the Group included estimated results in the years ended 31 December 2017 and 2018. Financial returns received for the current year reveal that, on a cumulative basis, past results were significantly different from previous estimates and that an adjustment to brought forward retained earnings is required.

4. Historic fair value provisions - Administrative expenses overstated, and trade receivables understated by £0.3m

Upon acquisition of Milestone Operations Limited and The Warwickshire & West Mercia Community Rehabilitation Company Limited in the year ended 31 December 2015, the Group made a fair value provision for a potential negligence claim for £0.1m and a goodwill adjustment for £0.2m, respectively. Both items have been held as consolidation adjustments ever since, but they are not required and should have been written back prior to the year ended 31 December 2018.

Restatements for the year ended 31 December 2018

Restatement of Consolidated statement of comprehensive income

For the year ended 31 December 2018

Restatement of Consolidated statement of financial position

As at 31 December 2018

* Provisions were all shown within the non-current category in the prior year. See note 21 for ageing analysis.

1. Receivables - Trade receivables and revenue overstated by £0.3m. Accruals understated, and revenue overstated by £0.8m

The Group had an arrangement with a Saudi business for the use of the PeoplePlus name in the Middle East in exchange for a turnover related 'franchise fee'. The potential non-recovery of the debt of £0.3m was noted at 31 December 2018, but a provision was not raised on materiality grounds. The Directors consider that in view of the number and value of prior year adjustments now required, this item should be adjusted to revenue. This balance receivable was held by Staffline Group plc, whose comparative balance sheet for the year ended 31 December 2018 has been amended accordingly.

The commercial arrangements with certain customers contain adjustment clauses whereby certain employer costs (typically pension and National Insurance), which are initially charged to customers on an estimation basis, are periodically reconciled to actual costs. The calculations are reviewed on an 'open book' style basis, typically with the customer's involvement. Working with one of the Group's major customers, a review highlighted a previous misinterpretation of the contractual terms, resulting in an under-accrual of the rebate payable of £0.8m in the year to 31 December 2018, which has now been made good.

2. 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. 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).

3. Transitional accounting errors - PPE overstated by £0.2m, trade receivables overstated by £0.7m, trade payables understated by £1.1m, revenue overstated by £0.4m, cost of sales understated by £1.1m and administrative expenses understated by £0.5m

The Group acquired several businesses in the year ended 31 December 2018 and within a short timeframe endeavoured to integrate the finance functions of the acquired businesses into the Recruitment GB division financial shared service centre. In addition, the business, trade and assets of some of the acquired businesses were transferred into Staffline Recruitment Ltd. The service centre was not sufficiently resourced to cope with the volume and complexity of the task, which resulted in a number of unsupported balances being held on the company's balance sheet, to a value of £1.4m.

A further £0.6m of transport costs incurred under a new commercial arrangement with the vendor of one of the acquired businesses were booked as prepaid costs rather than being charged to revenue as incurred.

4. Impairment of PPE, CRC assets - Overstatement of PPE and understatement of administrative expenses by £0.8m (non-underlying)

The Warwickshire and West Mercia Community Rehabilitation Company ("CRC") contract commenced in February 2015 with an original contract end date of January 2022, and a possible extension of up to 3 years. The contract is funded by the Ministry of Justice ("MOJ"). During 2018 and 2019 the MOJ issued a series of communications outlining an intention to end the contract early (categorised as Voluntary Early Termination) and migrate the 'Offender Management' element of the service back to the National Probation Service. In late 2018 the MOJ issued notice to terminate the contract in December 2020 but in early 2019 this was updated to June 2021. As a result of a contract variation in 2018 which enacted the MOJ's right to end the contracts early, it was deemed that a write down of the carrying value of associated PPE was required in that year. A further review at December 2019 in accordance with IAS36 using a Discounted Cash Flow model has indicated that an additional write down of £0.8m to £nil should have been made.

5. Provisions - Understatement of provisions by £2.0m, understatement of goodwill by £0.9m, understatement of administrative expenses by £1.1m (of which £0.8m is non-underlying)

As a result of the business acquisitions made during 2018, the Group's property portfolio increased significantly, and, a review of office space requirements indicated that further provisions for lease dilapidations amounting to £0.3m, would crystallise.

During the year the Group has continued its investigations into the National Minimum Wage enquiry that was reported in the 2018 Annual Report and which gave rise to a provision totalling £15.1m. The further investigations and negotiations with HMRC have revealed that, based on information that was available at the time, a further provision amounting to £1.7m to cover sites acquired during that year and some sites in Northern Ireland, should have been made. The element relating to acquired sites amounted to £0.9m, which has been treated as a fair value provision and adjusted in goodwill.

6. Other adjustments

a. Understatement of cost of sales and accruals by £0.3m

The annual financial statements of certain subsidiary companies for the year ended 31 December 2018 were finalised after the Group Annual Report had been completed. In finalising these financial statements, the subsidiary companies made adjustments, principally related to audit findings, which had not been recognised in the Group Annual Report for that year. The aggregate effect was to understate cost of sales and accruals by £0.3m.

b. Understatement of cost of sales and accruals by £0.4m

The Group makes provision for the future cost of holiday pay earned by workers up to the reporting date. During the 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.

c. Overstatement of revenues and trade receivables by £0.3m

In the years up to and including the year ended 31 December 2018, financial results for the operations in Poland were not available when the Group's results were published. The values included for Poland were therefore estimated. Detailed financial reports for the year ended December 2019 have been received, which show that the accumulated revenue reserves up to 31 December 2017 are £0.2m lower than estimated and are £0.3m lower than estimated for the year ended 31 December 2018, an overstatement of revenue and trade receivables in that year.

Trading adjustments

d. Revenue and cost of sales understated by £7.2m

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. This adjustment is required to correct the omission.

e. 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.

f. Revenue and cost of sales overstated by £13.5m

Audit testing for compliance with the requirements of IFRS 15: Revenue from Contracts with Customers, revealed that revenues have been incorrectly reported in the Datum business (part of the Recruitment GB division), which was acquired during 2018. Revenues and cost of sales arising under 'agency style' contracts were disclosed gross rather than on a net basis.

g. Revenue and cost of sales overstated by £2.1m, trade receivables overstated by £0.7m, trade payables overstated by £0.1m and accruals overstated by £0.6m

As part of the rationalisation process following the company acquisitions made in 2018, the various existing and acquired businesses entered into reciprocal trading arrangements. The revenues and associated cost of sales generated by this inter-company trading was not eliminated for the purposes of reporting the Group results arising from third party relationships. Similarly, the receivable and payable balances between the respective parties was also not eliminated as at 31 December 2018.

h. Revenue and cost of sales understated by £0.8m

For internal reporting purposes certain costs that are billed to customers in the Recruitment GB division were deducted from cost of sales rather than being treated as revenue.

Consolidation of subsidiaries

The Group financial statements consolidate those of the parent Company and all of its subsidiaries as at 31 December 2019 in accordance with IFRS 10. Subsidiaries are all entities to which the Group is exposed or has rights to variable returns and the ability to affect those returns through control over the subsidiary. The results of subsidiaries whose accounts are prepared in a currency other than sterling; are translated at the average rates of exchange during the period and their year-end balances at the year-end rate of exchange. Translation adjustments are taken to the profit and loss reserves.

Acquired subsidiaries and businesses are subject to the application of the acquisition accounting method. This involves the recognition at fair value of all identifiable assets and liabilities, including contingent liabilities of the subsidiary, at the acquisition date, regardless of whether or not they were recorded in the financial statements of the subsidiary or business prior to acquisition. On initial recognition, the assets and liabilities of the subsidiary are included in the consolidated balance sheet at these fair values, which are also used as the bases for subsequent measurement in accordance with the Group accounting policies.

Material intra-Group balances and transactions, and any unrealised gains or losses arising from intra-Group transactions, are eliminated in preparing these financial statements.

Underlying profit - non-GAAP measures of performance

In the reporting of its financial performance, the Group uses certain measures that are not defined under IFRS, the Generally Accepted Accounting Principles ("GAAP") under which the Group reports. The Directors believe that these non-GAAP measures assist with the understanding of the performance of the business. These non-GAAP measures are not a substitute, or superior to, any IFRS measures of performance but they have been included as the Directors consider them to be an important means of comparing performance year-on-year and they include key measures used within the business for assessing performance.

Non-underlying items of income and expenditure

These non-underlying charges are regarded as recurring or non-recurring items of income or expenditure of a particular size and/or nature relating to the operations of the business that in the Directors' opinion require separate identification. These items are included in "total" reported results but are excluded from "underlying" results. These items can vary significantly from year to year and therefore create volatility in reported earnings which does not reflect the Group's underlying performance.

Underlying EBITDA

Underlying operating profit before the deduction of underlying depreciation and amortisation charges. This is considered a useful measure because it approximates the underlying cash flow by eliminating depreciation and amortisation charges.

Net debt

Net debt is the amount of bank debt less available cash balances. This is a key measure as it is one on which the terms of the banking facilities are based and shows the level of external debt utilised by the Group to fund operations.

The Directors acknowledge that the adjustments made to arrive at underlying profit may not be comparable to those made by other companies, mainly in respect of the adjustment for share-based payment charges including both equity and cash-settled components. It should be noted that whilst the amortisation of acquisition-related intangible assets has been added back, the revenue from those acquisitions has not been eliminated.

All of these alternative performance measures are utilised by the Board to monitor performance and financial position. They show a comparable level of performance excluding one-off items, with which underlying performance and ability to service debt can be judged.

Business combinations

The Group applies the acquisition method in accounting for business combinations. The consideration transferred by the Group to obtain control of a subsidiary is calculated as the sum of the acquisition-date fair value of assets transferred, liabilities incurred and the equity interests of the Group, which includes the fair value of any asset or liability arising from a contingent consideration arrangement. Acquisition costs are expensed as incurred.

Goodwill is stated after separate recognition of identifiable intangible assets. It is calculated as the sum of a) fair value of consideration transferred, b) the recognised amount of any non-controlling interest in the acquiree and c) acquisition-date fair value of any existing equity interest in the acquiree, over the acquisition-date fair values of identifiable net assets. If the fair values of identifiable net assets exceed the sum calculated above, the excess amount (i.e. gain on a bargain purchase) is recognised in the statement of comprehensive income immediately.

Segment reporting

The Group has three material operating segments: the provision of recruitment and outsourced human resource services to industry, in Great Britain (Recruitment GB) an also in Ireland (Recruitment Ireland), plus the provision of skills training and probationary services, together "PeoplePlus". Each of these operating segments is managed separately as each requires different technologies, marketing approaches and other resources. For management purposes, the Group uses the same measurement policies as those used in its financial statements.

In previous years the Groups Irish operations were included within the Recruitment segment. Following the acquisition of the 'Grafton' companies the Group's operations in Ireland are a significant proportion of the Groups total operations, which now require separate disclosure.

4 Segmental reporting

Management currently 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 year is as follows: