Sysgroup Regulatory News (SYS)

27 June 2018

SysGroup plc

("SysGroup" or the "Company" or the "Group")

Final Results for the year ended 31 March 2018

SysGroup PLC (AIM:SYS), the managed IT services and cloud hosting provider is pleased to announce its final results for the year ended 31 March 2018.

HIGHLIGHTS

Financial

· Record revenues delivered with revenue increasing by 45.7% to £10.45 million (2017: £7.17 million) benefiting from the contribution of Rockford IT Ltd ("Rockford IT") in H2 2018

o £7.13m of revenue is recurring in nature (2017: £5.0m)

o Organic revenue growth of 20.8% generating revenues of £8.65 million

· Adjusted EBITDA* increased by 61.3% to £1.0 million (2017: £0.62 million)

o £0.86 million EBITDA delivered in H2

· Adjusted PBT** growth of 104.2% to £0.49 million (2017: £0.24 million)

· Cash generated from operations of £0.79 million (£1.00 million)

· Net (debt)/cash*** of £(0.92) million (2017: £3.07 million)

Operational

· Integration of System Professional Ltd ("Sys-Pro") completed

· Acquisition of Rockford IT in November 2017 for an aggregate consideration of £3.85 million and subsequent integration completed

· Improved sales and marketing functions

o Creation of a single team focused on managed IT services and cloud hosting

o Appointment of a Group Marketing Director

o Investment in a single CRM system, to unify the sales operations onto a single platform

· Three year c£1.0 million contract win with T.J. Morris Limited demonstrating success of sales and marketing focus

Board transition

· Mark Quartermaine appointed as an independent Non-Executive Director in November 2017

· Mike Fletcher appointed as an independent Non-Executive Director in January 2018

· New executive team with the appointment of Adam Binks as CEO, having joined the Board as COO in October 2017, and Martin Audcent appointed as CFO post period end

Post period-end developments

· Transition to a single brand complete

· Momentum generated in H2 FY2018 continuing into H1 FY2019 with trading in line with expectations

(*) Adjusted EBITDA, is earnings before interest, taxation, depreciation, amortisation, acquisition and restructuring costs, fair value adjustments and share based payments

(**) Adjusted PBT is profit before taxation after adding back share-based payments, amortisation on acquired intangibles, fair value adjustments, share based payments and costs relating to acquisition and restructuring

(***) Net (debt)/cash represents cash balances less loans and finance lease liabilities

Adam Binks, Chief Executive Officer commented:

"I am delighted to report, for the first time as Chief Executive Officer, what has been a transformational year for SysGroup. The acquisition of Rockford IT has added further capabilities to the Group's offering as well as providing additional scale. We have completed the integration of the previously acquired businesses, significantly strengthened the Board and begun to see the initial success of our newly focused sales and marketing teams.

Group revenue grew by 45.7% largely driven by the Managed Services division and supplemented by value added resale. Our sales pipeline continues to grow and I am confident we are now well placed to take advantage of the strong market dynamics as the demand for managed IT services and cloud hosting continues to grow.

We remain committed to investment in order to accelerate our organic growth strategy whilst continuing to assess complementary strategic acquisition opportunities.

I am confident we can continue to build on the strong momentum we've developed in FY2018 into FY2019 and beyond."

About SysGroup

SysGroup is a leading provider of Managed IT Services, Cloud Hosting, and expert IT Consultancy. The Group delivers solutions that enable clients to understand and benefit from industry leading technologies and advanced hosting capabilities. SysGroup focuses on a customer's strategic and operational requirements - enabling clients to free up resources, grow their core business and avoid the distractions and complexity of delivering IT services.

The Group has offices in Liverpool, Coventry, London and Telford.

For more information, visit http://www.sysgroupplc.com 

STRATEGIC REPORT

Chairman's statement

SysGroup made considerable progress during the financial year to 31 March 2018. Revenue increased by 45.7% (including organic growth of 20.8%) with Adjusted EBITDA improving by 61.3%. Recurring revenue for the year increased to £7.13m (2017: £5.0m), evidence that the transformation of the Group into a trusted provider of managed IT services and cloud hosting is now complete.

During the course of the year Chris Evans left the business to focus on his health following long-standing issues. The Board naturally considered his replacement extensively and ultimately were delighted that Adam Binks, previously Chief Operating Officer, agreed to step up to become Chief Executive Officer in April 2018.

Adam has been integral to the development of SysGroup and has an unrivalled knowledge of our business through his previous role as Chief Operating Officer. The Board has been impressed with his strategic vision for the Company. As separately announced this morning, Martin Audcent will be joining the Company as Chief Financial Officer in July, following Julian Llewellyn's decision to pursue other opportunities. Julian will remain with the Group for a brief period to oversee an orderly handover and we thank him for his contribution to the Group and wish him success for the future. Martin's appointment completes an Executive team positioned to drive this business through its next phase of growth and which will be ably supported by a Board which was strengthened further during the year with the appointments of Mark Quartermaine and Mike Fletcher as Non-Executive Directors. Mark and Mike bring a significant blend of industry and listed company expertise.

The market opportunity for SysGroup is both considerable and growing as the secular trend continues towards trusted, outsourced partners driven by increasingly complex regulatory requirements and security needs. The Board believes that it has the right strategy and the right team in place to execute. With further investment in the current year we are confident that we can take advantage of this opportunity and look forward to another busy year.

Michael Edelson

Chairman

27 June 2018

Chief Executive Officer's report

Introduction

During the financial year ended 31 March 2018 my role was that of Chief Operating Officer, joining the Board of Directors at the end of October 2017 before taking up the post of Chief Executive Officer at the outset of the current financial year. I believe that the operational insights that I gained as COO provide the right grounding for driving the strategic direction of the business. SysGroup is well placed for continued profitable organic and acquisitive growth. I'd also like to thank Michael Edelson for his contribution and support during his tenure as Interim Executive Chairman towards the end of the period.

In 2016 SysGroup commenced a transition of the business to become a trusted provider of managed IT services and cloud hosting. This has been executed through the acquisitions of Sys-Pro (2016) and Rockford IT (2017) and disposal of the Group's SME mass market business (2016). These corporate actions, coupled with structural change within the organisation, have transformed the Group. The Group now has a robust platform, underpinned by high levels of recurring income, to execute its growth strategy.

Following the integration of the Sys-Pro and Rockford IT businesses the Group now has the capability to offer fully managed end to end solutions for its prospects and customers. From managed end user support through to hosted infrastructure, we have an excellent platform from which to deliver further organic growth. Another beneficial aspect of the integration is that we have been able to establish and develop a highly capable senior leadership team across the Group and an engaged workforce who are committed to executing our strategic objectives.

Market

The overall market for our services continues to be buoyant. Companies are increasingly looking for trusted partners to manage their IT needs, driven by the growing focus on security and burdens of compliance and governance, rather than applying internal resource that could struggle with the changing regulatory dynamics. As well as ensuring the best solutions this frees up time and resources for management teams to focus on their business operations.

As with most evolving and growing markets, ours is highly fragmented with a vast array of providers on a national and regional basis varying from full service offerings such as SysGroup through to niche operators.

Strategy

SysGroup's clear focus is to expand its position as a trusted provider of managed IT services and cloud hosting to clients in the UK. The Board believes that a business focused on the provision of managed IT services offers the highest growth opportunity and the potential for increased margins and longer-term contracts, thereby providing greater revenue visibility for the future. In pursuit of this strategy, the Group has been positioned as an extension of a customer's existing IT department, with an emphasis on consultative-led sales to guide customers through the complexities and developments in the market.

Acquisitions

In November 2017 the Group acquired Rockford IT for an aggregate consideration of £3.85m in cash (on a cash-free/debt-free basis). Rockford enhanced the Group's offering in hosting and security services as well as complementing with connectivity capabilities which now completes the product offering for the provision of end to end managed solutions.

Acquisitions will continue to play a significant role in the Group's strategy to complement organic growth. As previously mentioned, the market in which we operate remains highly fragmented and we believe that we are well placed to be a consolidator. The Board remains alert to earnings enhancing opportunities which will enable us to expand our customer base and / or enhance our offering alongside our internal initiatives.

Sales and MarketingAs highlighted in the group's Half Year Report, a number of strategic changes to the Sales and Marketing functions were implemented in the first half of the year to better support the business. The sales function was restructured to create a single team focused fully on managed IT services and cloud hosting, now headed up by the post-period appointment of Colin Deamer to the role of Group Sales Director. Colin was previously Group Sales Director at IDE Group Holding plc. All supporting teams have likewise been integrated across the Group with single teams operating across the service desk, infrastructure support, cloud delivery and professional services teams. Investments have been made in a new CRM system which has enabled us to unify our sales operations onto a single platform across the group.

In Marketing, the Group initiated a complete overhaul of the marketing efforts to create a new strategic marketing function. This included the appointment of Emmy Lippold to the newly created role of Group Marketing Director. Emmy has previously held senior positions in technology companies with Data8 Limited and Upland Software Inc. based in the USA. This has led to a much more coherent message and strategy with a newly embraced digital marketing capability.

The results of the improved sales and marketing functions are already being seen in the business, as evidenced by the three year contract with T.J Morris Limited which was announced in March of this year. This contract win came as a direct result of our improved marketing initiatives and underpinned the Board's belief in this strategy. As a result, further investments in marketing will be made throughout the current financial year. Whilst this will have an impact on profitability in the current year, the Board firmly believes that it will accelerate our rate of growth and enable us to better take advantage of the current market opportunity.

Financial reviewIn the following review, the numbers provided for 2017 exclude operations which were discontinued during that year, in order to give a meaningful comparison for progress achieved in the year to 31 March 2018.

Group revenue for the year grew by 45.7% to £10.45m for the year to 31 March 2018 (2017: £7.17m). Revenue growth was predominately driven by the Managed Services division and complemented by the value added resale services that the Group offers. Organic revenue growth was 20.8% for the year to 31 March 2018.

We continue to have good visibility of future revenues as the vast majority of our customers have entered into multi-year contracts. As at 31 March 2018 there is £0.43m of deferred revenue (2017: £0.47m) which will be released to profit in future periods.

Gross profit for the year was £5.99m (2017: £4.38m) representing a gross margin of 57.4% (2017: 61.2%). The reduction in gross margin is attributable to the change of sales mix during the year including the introduction of connectivity products which contribute less at the gross margin level. The loss before tax for the year of £(0.007)m was a significant improvement on the previous period (2017: £(1.35)m).

Adjusted earnings before interest, taxation, depreciation and amortisation ("EBITDA") for the year to 31 March 2018 increased by 61.3% to £1.0m (2017: £0.62m). Adjusted EBITDA is calculated after excluding acquisition and restructuring costs, share based payment costs and fair value adjustments. The Directors consider that an adjusted EBITDA figure is a more appropriate measure of the underlying performance of the business.

Balance sheet, cashflow and net (debt)/cash

Net cash inflow from operating activities during the year amounted to £0.79m (2017: £1.0m). Net debt (comprising cash balances less loans and finance lease liabilities) at 31 March 2018 was £(0.92)m (2017: net cash £3.07m). During the period the Group drew down £2.0m from an acquisition facility to part fund the acquisition of Rockford IT on 1 November 2017.

Summary and outlookWith the integration of acquired businesses and subsequent transformation of the Group now complete, I am confident that SysGroup is well placed to take advantage of strong market dynamics. The momentum within the business is demonstrated by the fact that £0.86 million of the Group's Adjusted EBITDA performance was delivered in the second half of the year.

We have a full end-to-end managed service offering which provides the solutions that our clients need in an increasingly complex regulatory environment and with the necessary levels of security to protect their businesses. We have a clear go-to-market strategy that has already started to deliver results, led by an impressive senior leadership team and supported by a highly engaged workforce and the appropriate levels of infrastructure.

Our successful track record of identifying and integrating acquisitions positions us well in a market ripe for further consolidation, which will complement and enhance our organic initiatives.

The current year has started well and trading in line with expectations supported by a growing pipeline of opportunities. The Board will continue to invest in this financial year as we look to accelerate our growth and target profitability improvements next year and beyond.

Adam Binks

Chief Executive Officer

27 June 2018

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 MARCH 2018

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 MARCH 2018

COMPANY STATEMENT OF FINANCIAL POSITION

AS AT 31 MARCH 2018

As permitted by section 408 of the Companies Act 2006, the holding company's profit and loss statement has not been included in the financial statements.

For the year ended 31 March 2018, the Company made a loss of £526,783 (2017: loss of £85,672)

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 MARCH 2018

COMPANY STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 MARCH 2018

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 MARCH 2018

COMPANY STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 MARCH 2018

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 MARCH 2018

1. Accounting policies

SysGroup Plc (the 'Company') is a company incorporated and domiciled in the United Kingdom. The company's registered office is at Walker House, Exchange Flags, Liverpool, L2 3YL. These consolidated financial statements comprise the Company and its subsidiaries (together referred to as the 'Group').

Basis of preparation

The preliminary financial information does not constitute statutory accounts for the financial years ended 31 March 2018 and 31 March 2017, but has been derived from those accounts. The accounting policies used in preparation of this preliminary announcement have remained unchanged from those set out in the 2017 annual report. Statutory accounts for 2017 have been delivered to the Registrar of Companies and those for the financial year ended 31 March 2018 will be delivered following the Company's Annual General Meeting. The auditors have reported on those accounts and their reports were unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

Going concern

The Directors have prepared the financial statements on a going concern basis which assumes that the Group and the company will continue to meet liabilities as they fall due. The Directors have reviewed forecasts prepared for the period ending 31 March 2020 and considered the projected trading forecasts and resultant cash flows together with confirmed loan facilities and other sources of finance. The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group can continue to operate within the current facilities available to it.

The Directors therefore have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future and thus they continue to adopt the going concern basis of accounting in preparing the financial statements.

New standards and interpretations not yet adopted

A number of new standards, amendments to standards and interpretations have been issued during the year ended 31 March 2018 but are not yet effective, and therefore have not yet been adopted by the Group:

- IFRS 15 Revenue from Contracts with Customers is effective after 1 January 2018. This standard will change how revenue is recognised based on a framework. The interim accounts to 30 September 2018 will be prepared in accordance with IFRS15. IFRS15 seeks to identify linked revenue transactions and to recognise that revenue over the period in which benefits accrue to the customers. The potential impact on the Group has been assessed by management and there is not currently expected to be a significant impact.

- Amendments to IAS12 'Recognition of Deferred Tax Assets for Unrealised Losses' have not yet been endorsed but the IASB effective date will be 1 January 2018.

- IFRS 9 'Financial Instruments' is effective from 2018. This standard will simplify the classification of financial assets for measurement purposes but is not anticipated to have a significant impact on the financial statements.

- IFRS 16 Leases is expected to be applicable after 1 January 2019. If endorsed, this standard will affect the presentation of the Group financial statements with all leases apart from short term leases being recognised as on-balance sheet finance leases with a corresponding liability being the present value of lease payments. The potential impact on the Group has not yet been assessed by management.

The Group continues to monitor the potential impact of other new standards and interpretations which may be endorsed by the European Union and require adoption by the Group in future reporting periods.

The adoption of these standards does not have an impact on the results and net assets of the Group.

Revenue

Revenue is recognised to the extent that it is probable that the economic benefits associated with the transaction will flow into the Group. Revenue represents the fair value of amounts received or receivable for goods and services provided net of trade discounts and VAT. Revenue from the sale of managed IT services and cloud hosting is recognised evenly over the life of the contract as benefits accrue to the customer. Revenue from value added resale is recognised as these products or services are delivered. This revenue policy also applies to Rockford IT Ltd, acquired during the year.

Basis of consolidation

Where the company has control over an investee, it is classified as a subsidiary. The company controls an investee if all three of the following elements are present: power over the investee; exposure to variable returns from the investee; and the ability of the investor to use its power to affect those variable returns. Control is re-assessed whenever facts and circumstances indicate that there may be a change in any of these elements of control.

The consolidated financial statements present the results of the company and its subsidiaries ("the Group") as if they formed a single entity. Intercompany transactions and balances between group companies are therefore eliminated in full.

The consolidated financial statements incorporate the results of business combinations using the acquisition method. In the statement of financial position, the acquirer's identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of acquired operations are included in the consolidated statement of comprehensive income from the date on which control is obtained. They are deconsolidated from the date on which control ceases.

Business combinations

All business combinations are accounted for by applying the purchase method. On acquisition, all the subsidiaries' assets and liabilities that exist at the date of acquisition are recorded at their fair values reflecting the conditions at that date. The results of subsidiaries acquired in the period are included in the income statement from the date on which control is obtained.

Goodwill

Goodwill represents the excess of the cost of a business combination over the total acquisition date fair value of the identifiable assets, liabilities and contingent liabilities acquired. Goodwill is not amortised but is capitalised as an intangible asset with any impairment in carrying value being charged to the consolidated statement of comprehensive income. In determining the fair value of consideration, the fair value of equity issued is the market value of equity at the date of completion, and the fair value of contingent consideration is based on the expected future cashflows based on whether the Directors believe performance conditions will be met and thus the extent to which the further consideration will be payable. Where the fair value of identifiable assets, liabilities and contingent liabilities exceed the fair value of consideration paid, the excess is credited in full to the consolidated statement of comprehensive income on the acquisition date.

Impairment of non-financial assets

Impairment tests on goodwill and other intangible assets with indefinite useful economic lives are undertaken annually at the financial year end. Other non-financial assets are subject to impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Where the carrying value of an asset exceeds its recoverable amount (i.e. the higher of value in use and fair value less costs to sell), the asset is written down accordingly.

Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the asset's cash-generating unit (i.e. the lowest Group of assets in which the asset belongs for which there are separable identifiable cash flows that are largely independent of the cash flows from the other assets or Groups of assets). Goodwill is allocated on initial recognition to each of the Group's cash-generating units that are expected to benefit from the synergies of the combination giving rise to the goodwill.

The estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

Foreign currencies

Transactions in foreign currencies are recorded using the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated using the rate of exchange ruling at the balance sheet date and the gains or losses on translation are included in the consolidated statement of comprehensive income. The results of foreign subsidiaries that have a functional currency different from the group's presentation currency are translated at the average rates of exchange for the year. Assets and liabilities of foreign subsidiaries that have a functional currency different from the group's presentation currency, are translated at the exchange rates prevailing at the balance sheet date. Exchange differences arising from the translation of the results of foreign subsidiaries and their opening net assets are recognised as a separate component of equity.

Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker has been identified as the Board of Directors.

Financial instruments

Financial instruments are classified and accounted for, according to the substance of the contractual arrangement, as either financial assets, financial liabilities or equity instruments. An equity instrument is any contract that evidences a residual interest in the assets of the company after deducting all of its liabilities.

Financial assets

The Group's financial assets comprise trade and other receivables and cash and cash equivalents in the consolidated statement of financial position. Trade receivables are stated at their nominal value and an impairment provision will be recognised if there is evidence that the amount is irrecoverable and will be shown in administrative expenses in the Consolidated Statement of Comprehensive Income. Cash and cash equivalents includes cash in hand and deposits held at call with banks.

Share capital

Financial instruments issued by the Group are classified as equity only to the extent that they do not meet the definition of a financial liability or financial asset. The Group's ordinary shares are classified as equity instruments and are recorded at the proceeds received, net of direct issue costs. Proceeds of any share issue in excess of the nominal value of the share capital is recognised within the share premium account.

Financial liabilities

The Group classifies its financial liabilities into one of two categories, depending on the purpose for which it was acquired. The Group's accounting policy for each category is as follows:

Fair value through profit or loss

This category comprises only contingent consideration. They are carried in the statement of financial position at fair values with changes in fair value recognised in the consolidated income statement.

Other financial liabilities

Other financial liabilities include trade payables and other short-term monetary liabilities, which are initially recognised at fair value and subsequently carried at amortised cost using the effective interest rate method.

Fair value measurement hierarchy

IFRS 7 requires certain disclosures which require the classification of financial assets and financial liabilities measured at fair value to reflect the significance of the inputs used in making the fair value measurement. The fair value hierarchy has the following levels:

(a) Quoted prices in active markets for identical assets or liabilities (Level 1)

(b) Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) (Level 2); and

(c) Inputs from the asset or liability that are not based on observable market data (Level 3)

The level in the fair value hierarchy within which the financial asset or financial liability is categorised is determined on the basis of the lowest level input that is significant to the fair value measurement. Financial assets and financial liabilities are classified in their entirety into only one of the three levels.

Share based payments

The fair value of employee options, along with any share warrants granted, is charged to the consolidated statement of comprehensive income with a corresponding increase in equity. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options. The fair value of the options granted is measured using the Black Scholes pricing model, considering the terms and conditions upon which the options were granted. The fair value of warrants is also reviewed to the extent that exercise of the warrants is considered likely.

Leases

Assets obtained under hire purchase contracts and finance leases are capitalised as tangible assets and depreciated over the shorter of the lease term and their useful lives. Obligations under such agreements are included in payables net of the finance charge allocated to future periods. The finance element of the rental payment is charged to the consolidated statement of comprehensive income so as to produce a constant periodic rate of charge on the net obligation outstanding in each period. Rentals payable under operating leases are charged against income on a straight-line basis over the lease term.

Property plant and equipment

Items of property, plant and equipment are stated at cost less depreciation. Depreciation is provided at annual rates calculated to write off the cost less estimated residual value of each asset over its expected useful life, as follows:

IT hardware 20% - 33.3% straight line

Furniture and fittings 20% - 33.3% straight line

Motor vehicles 25% straight line

Investment in subsidiaries

Fixed asset investments in the Parent Company are shown at cost less any provision for impairment as necessary.

Research and development

Research expenditure is written off to the consolidated statement of comprehensive income in the year in which the expenditure occurs. Development expenditure is treated in the same way unless the Directors are satisfied as to the technical, commercial and financial viability of individual projects, there is an intention to complete and sell the product and the costs can be easily measurable. In this situation, the expenditure is capitalised and the amortised expense is included in administrative expenses in the Consolidated Statement of Comprehensive Income over the years during which the Group is to benefit.

Intangible assets

Intangible assets are recognised on business combinations if they are separable from the acquired entity or give rise to other contractual/legal rights. The amounts ascribed to such intangibles are arrived at by using appropriate valuation techniques (see section related to critical estimates and judgements below).

The significant intangibles recognised by the Group, their estimated useful economic lives and the methods used to determine the cost of intangibles acquired in business combinations are as follows:

Intangible asset Estimated UEL Valuation method

Customer relationships 5-7 years Estimated discounted cash flow

Software and web design costs 3-5 years Cost less amortisation

Deferred taxation

Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the consolidated statement of financial position differs from its tax base, except for differences arising on:

· the initial recognition of goodwill;

· the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting or taxable profit; and

· investments in subsidiaries and jointly controlled entities where the Group is able to control the timing of the reversal of the difference and it is probable that the difference will not reverse in the foreseeable future.

Recognition of deferred tax assets is restricted to those instances where it is highly probable that relief against taxable profit will be available.

The amount of the asset or liability is determined using tax rates that have been enacted or substantively enacted by the reporting date and are expected to apply when the deferred tax liabilities/(assets) are settled/(recovered).

Deferred tax assets and liabilities are offset when the Group has a legally enforceable right to offset current tax assets and liabilities and the deferred tax assets and liabilities relate to taxes levied by the same tax authority on either:

· the same taxable Group company; or

· different Group entities which intend either to settle current tax assets and liabilities on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets or liabilities are expected to be settled or recovered.

Deferred tax liabilities are recognised on intangible assets and other temporary differences recognised in business combinations.

2 Significant accounting estimates and judgements

The preparation of this financial information requires management to make estimates and assumptions that affect the amounts reported for assets and liabilities at the period end date and the amounts reported for revenues and expenses during each period. However, the nature of estimation means that actual outcomes could differ from those estimates. The key sources of estimation that have a significant impact on the carrying value of assets and liabilities are discussed below.

Revenue

Management make judgements in determining the appropriate timing of revenue recognition and in unbundling contracts that relate to the provision of more than one service and/or product.

Impairment of goodwill and other intangibles

The Group tests goodwill for impairment on an annual basis in line with the accounting policy noted above. This involves judgement regarding the future development of the business and the estimation of the level of future profitability and cash flows to support the carrying value of goodwill. An impairment review has been performed at the reporting date, taking into account sensitivities around future business performance, covering a range of outcomes and risks over levels of revenue, cost and cash generation. No impairment has been identified. More details including carrying values are included in note 13. 

Impairment of other assets

The Group reviews the carrying value of all other assets for indications of impairment at each period end. If indicators of impairment exist, the carrying value of the asset is subject to further testing to determine whether its carrying value exceeds its recoverable amount.  

Valuation of intangibles acquired in business combinations

Determining the fair value of customer relationships acquired in business combinations requires estimation of the value of the cash flows related to those relationships and a suitable discount rate in order to calculate the present value. More details including carrying values are included in note 13.

Valuation of contingent consideration

When valuing the contingent consideration still payable on acquisitions, the Group considers various factors including the performance of the acquired entity since acquisition together with its expected performance to the end of the earn-out period. Following the adoption of IFRS 3 (revised) - Business Combinations, contingent consideration is recognised at, and carried thereafter at, fair value. All changes in fair value (other than measurement period adjustments) are reflected in the income statement.  

Useful economic lives of intangible assets

Intangible assets are amortised over their useful economic lives. Useful lives are based on management's estimates of the period over which the assets will generate revenue, which are periodically reviewed for continued appropriateness. Changes to estimates can result in changes in the carrying values and hence amounts charged to the income statement in particular periods which could be significant.

3 Financial instruments - risk management

The Group's financial instruments comprise cash and liquid resources and various items such as trade receivables and trade payables that arise directly from its operations. There have been no substantive changes in the Group's objectives, policies and processes for managing those risks or the methods used to measure them from previous periods. The Group's objective is to ensure adequate funding for continued growth and expansion.

All the Group's financial instruments are carried at amortised cost with the exception of contingent consideration. There is no material difference between the carrying and fair value of its financial instruments, in the current or prior year, due to the instruments bearing interest at fixed rates or being of short term nature.

A summary of financial instruments held by category is shown below:

Per the fair value hierarchy classifications under IFRS 7 Financial Instruments the contingent consideration due on acquisitions shown above are considered to be level 3 financial liabilities as there are no observable inputs for valuation.

The fair value adjustment related to the change in fair value calculation of the contingent consideration payable on the System Professional acquisition.

Liquidity risk

Liquidity risk arises from the Group's management of working capital and the finance charges and principal repayments on its debt instruments. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due.

The Group's policy is to prepare periodic working capital forecasts, allowing an assessment of the cash requirements of the Group and Company, to manage liquidity risk. Cash resources are managed in accordance with planned expenditure forecasts and the Directors have regard to the maintenance of sufficient cash resources to fund the Group and Company's immediate operating requirements and capital expenditure.

The following table sets out the contractual maturities (representing undiscounted contractual cash-flows) of financial liabilities:

Interest rate risk

The Group seeks to minimise exposure to interest rate risk by borrowing at a mix of fixed and floating interest rates appropriate to the nature and term length of borrowings. During the period the Group drew down on a £2m acquisition facility with an interest rate set at LIBOR + 5%. 

Credit risk

The Group generally gives 30-day credit terms on its continuing business and provides against doubtful debts only when recoverability is considered to be at risk. For cash and cash equivalents, the Group only uses recognised banks with high credit ratings.

Capital disclosures

The Group monitors "adjusted capital" which comprises all components of equity (i.e. share capital, share premium and retained earnings).

The Group's objective when maintaining capital are:

· to safeguard the entity's ability to continue as a going concern, so that it can provide returns for shareholders in future periods and benefits for other stakeholders, and

· to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk.

The Group sets the amount of capital it requires in proportion to risk. The Group manages its capital structure and adjusts it in the light of changes in economic conditions and the risk characteristics of the underlying assets.

4 Segmental analysis

The chief operating decision maker for the Group is the Board of Directors. The Group reports in two segments:

· Managed Services - this segment provides all forms of managed services to customers. This segment was created on the acquisition of Netplan in November 2013 and has been further expanded with the acquisition of Q4Ex Limited, System Professional Ltd and Rockford IT Limited.

· Value Added Resale (VAR) of products/services - this segment provides all forms of VAR sales where the business is acting as a reseller. This segment was created following the acquisition of System Professional Limited and has been further expanded by the acquisition of Rockford IT Limited.

Information regarding the operation of the reportable segments is included below. The performance of each operating segment is based on revenue and gross profit as the Board believe this is the best measure for segmental performance.

Assets and liabilities are not reviewed on a segmental basis. All non-current assets are within the UK. All segments are continuing operations. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. Transactions between segments are accounted for using an arm's length commercial basis.

5 Operating profit/(loss)

6 Finance expense

7 Staff numbers and costs

Total staff costs for the Company are £836,188 (2017: £580,907). Average staff numbers for the Company are 14 (2017: 11).

Directors and key management personnel

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group, they are also the Directors of the Company listed on page 14.

The emoluments of the highest paid Director, Julian Llewellyn, were £136,609 (2017: Julie Joyce £128,000).

The Group does not operate a defined benefits pension scheme and Executive Directors who are entitled to receive pension contributions may nominate a defined contribution scheme into which the Company makes pension contributions.

The fees relating to Non-Executive Directors are in some cases payable to third parties in connection with the provision of their services. The balance outstanding at 31 March 2018 was £4,331 (2017: nil).

8 Acquisition and restructuring costs

9 Share based payments and warrants

The Company has granted a number of EMI options. The Directors have the discretion to grant options to subscribe for ordinary shares up to a maximum of 10 per cent of the Company's issued share capital. Options can be granted to any employee of the Group. For options to vest the employee has to be employed by the Group at the vesting date. There are no other performance criteria attached to the options. The weighted average exercise price of options in issue is 48.4p per share.  

Rights to options over ordinary shares of the Company are summarised as follows:

At 31 March 2018 there were 2,500 outstanding warrants to subscribe for the ordinary share capital of the Company as follows:

The fair value of the warrants has been calculated at 0.36p based on the following assumptions - share price at granting 50p, annual risk-free rate 0.5%, and volatility 20%. No provision has been made for the warrants in shared based payments.

10 Acquisitions

There has been one acquisition during the period. The Board strategically expect acquisitions to be a common component of growth in the future.

Acquisitions made during the year to 31 March 2018 were:

Rockford IT Limited

The Group acquired 100% of the share capital of Rockford IT Limited on 1 November 2017. Rockford provides managed services, cloud hosting, value added resale services, and IT consultancy support.

During the year to 31 March 2018 the Group incurred £186,458 of costs in relation to this acquisition. These costs are included in administrative expenses in the Group's consolidated statement of comprehensive income for the year ended 31 March 2018.

The fair value of acquired customer relationships intangible asset has been estimated using a discounted cashflow method, based on the estimated level of profit to be generated from them. A post tax discount rate of 10.3% was used in the valuation. Customer relationships are being amortised over an estimated useful life of 7 years.

Since the acquisition date to 31 March 2018, Rockford IT Limited has contributed £1,796,400 to Group revenue and £278,656 to Group EBITDA. Had the acquisition taken place on 1 April 2017, the contribution to Group revenue would have been £4,250,080 and £701,800 to Group EBITDA.

11 Earnings per share

12 Taxation