Sysgroup Regulatory News (SYS)

7 June 2017

SysGroup plc

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

Final Results for the year ended 31 March 2017

SysGroup PLC (AIM: SYS), the managed services and cloud integrator, announces its final results for the year ended 31 March 2017.

HIGHLIGHTS

Financial:

· Total revenue (including discontinued operations) up 65.2% to £7.87m (FY16: £4.76m)

o Revenue from continuing operations up 186% to £7.18m (FY16: £2.51m)

· Organic growth from existing Managed Services business excluding the acquisition of System Professional Ltd and divestment of SME Mass Market is 19.8%

· Gross profit margin of 61.3% (FY16: 63.2%)

· Adjusted EBITDA (including discontinued operations) of £0.81m (FY16: £0.66m)

o Adjusted EBITDA (continuing operations) of £0.62m (FY16: £0.54m)

· Adjusted PBT* growth of 45.1% to £0.45m (FY16: £0.31m)

*after adding back share based payments, amortisation on acquired intangibles and costs relating to acquisition and restructuring 

Operational

· Acquisition of Systems Professional Ltd ("Sys-Pro") for an initial consideration of £4.0m

· Placing to raise £5.0m gross in July 2016

· Disposal of non-core SME Mass Market division for £2.7m (4.9x EBITDA) in July 2016

· Transformation to a managed services provider

· New banking facilities of £3.0m, incorporating a £2.5m acquisition facility agreed with Santander

· Continued investment in infrastructure and portfolio of services including use of 'hyper-scale' technologies

· First VEEAM Accredited Service Partner (VASP) in the UK

· Finance function successfully relocated and integrated across Group to a single location, closure of Nottingham office

· Existing customers overall net spend increasing

· Creation of an "integrations" team to enhance capabilities around acquisition integration and to ensure efficient execution

Post period-end developments

· Variation to terms of the Sys-Pro acquisition with settlement of all future potential deferred consideration by payment of £150,000 to the vendors of Sys-Pro

· Group no longer has any contingent amounts due in relation to acquisitions

· Further acceleration of integration and realisation of synergies

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

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

(3) Net Cash represents cash balances less finance lease liabilities

Chris Evans, Chief Executive commented: "We are pleased with our results, delivered in a year of both significant progress and change for the Group. We have achieved our objectives of fundamentally transforming the business to focus on high growth managed services whilst delivering enhanced profitability and results in line with market expectations, while at the same time integrating a large acquisition. Our sales pipeline has grown by 28.8% from 30 September 2016 to £3.49m at 31 March 2017, showing the tangible impact of our growth strategy.

"We have started the new financial year with the right business platform to support further organic and acquisitive growth. Given our healthy levels of recurring revenue and long term contracts with key customers, coupled with our cash generation, we are well placed to capture market opportunity and I remain confident in the Group's future prospects."

About SysGroup

SysGroup is a leading provider of Cloud Hosting, Managed Services and expert IT Consultancy. The Group delivers solutions that ensure clients understand and benefit from industry-leading technologies and advanced hosting capabilities. The SysGroup team focuses on a customer's strategic and operational requirements - enabling them 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 East Sussex.

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

STRATEGIC REPORT

Chairman's Statement

The Board is pleased to report on a busy and successful year for the Group, which saw the business undergo a complete transformation to a managed services provider, delivering against our stated strategic objectives for the 2017 financial year. At the same time the Group achieved impressive growth in line with market expectations, delivering an increase in Group revenue of 65.1%, including 19.8% organic growth.

The Group's transformation consisted of the acquisition of Systems Professional Limited ("Sys-Pro") in early July, complementing the Group's existing managed services business, and an associated re-branding of the business from Daily Internet Plc to SysGroup Plc. This, combined with the subsequent disposal of the Company's legacy, non-core SME Mass Market hosting division, resulted in the formation of a business focussed exclusively on servicing the high value managed services market, with a strong focus on cloud.

To facilitate the funding of the Sys-Pro, the Group completed an oversubscribed placing in July raising £5.0m gross and bringing a number of new institutional shareholders onto the Company's register. In conjunction with the placing and acquisition, the Company also undertook a 40 for 1 share consolidation and sought court approval for the cancellation of its share premium account, leaving the parent company able to pay dividends in the future should it be appropriate to do so (see note 22).

In order to support the new business composition and operational focus, a number of organisational changes were implemented to restructure the Group, including the appointment of Julian Llewellyn as CFO and Amy Yateman-Smith as Non-Executive Director. I would like to welcome both Julian and Amy to the Board and I look forward to working with them as we continue to execute our growth strategy.

The Board believes the Group now has in place the right platform, expertise and focused service offering to capitalise on a substantial market opportunity. The managed services market continues to evolve and remains highly fragmented, and the Board believes that a strategy of organic growth and targeted acquisitions, supported by the Group's strong gross cash position of £3.5m and unutilised £2.5m acquisition facility, will deliver sustained, long-term value for shareholders.

I would like to take this opportunity to thank all of our employees for their commitment and dedication to the business. We have started the new financial year with an improved operational structure and strong financial footing, which, combined with increasing levels of recurring revenue, leaves me optimistic for the Group's growth prospects ahead.

Michael Edelson

Chairman

06 June 2017

STRATEGIC REPORT

Chief Executive Officer's Report

Introduction

The year to 31 March 2017 has been a year of both significant progress and change for SysGroup plc.

The acquisition of System Professional Ltd ("Sys-Pro") in July 2016 and subsequent disposal of the SME Mass Market business unit in the same month marked the firm transition to a Cloud and Managed Services business.

These were large undertakings for our business as firstly we acquired a business which had higher revenue and staff numbers than ourselves and then disposed of a business which represented almost half of the Group's size, before the acquisition of Sys-Pro.

Subsequent to the transactions, we reorganised the combined businesses and made several changes to the management team. We have created internal teams for managing the integration and have created liaisons between teams to maximise the cross-selling opportunity to customers to take advantage of the increased range of services from our growing product portfolio.

Not only did this work to create a business that is now focused on managed services with a cloud bias but it allowed us to put in place the foundations to better take advantage of the opportunities that present themselves in this growing market.

The above corporate activity was in line with the Board's stated strategy to exit from a light-touch, low margin and high volume mass hosting market, which was largely commoditised and subject to high customer churn, to a business focused exclusively on providing higher value managed services.

Notwithstanding the management time that was involved in this, we maintained focus on the core business and delivered results in line with market expectations for FY 2017.

Our revenues (from continuing and discontinued operations) in the year were £7.87m, an increase of 65.1% on the previous year (2016: £4.76m). Our adjusted EBITDA (from continuing and discontinued operations) increased by 22.7% to £0.81m (2016: £0.66m) and our adjusted profit before tax increased from £0.31m in 2016 to £0.45m representing a 45.1% increase. At the year-end, we had a healthy net cash position of £3.07m.

We believe that the foundations are now firmly laid for us to capture growth in our chosen markets and complement these with carefully considered acquisitions.

Market

The market for managed and cloud services is large and long term, driven by the structural move to cloud delivered solutions and IT outsourcing in general. IT is no longer seen as a cost base but is something which can really help drive profits and efficiencies in businesses, and corporations are embracing technologies that will put them at a commercial advantage compared with a competitor.

This desire to embrace the best of breed technologies which can drive these efficiencies mean that knowledge of better, more cost effective, reliable and secure solutions in a changing environment drives customers to partner with us as we help guide and advise them along their journey. We become part of our customers' IT function and our close and increasing engagement with them is demonstrated by an overall net increase in customer spend year on year for the past three years.

Our managed service offerings include all forms of Cloud hosting (private, public and hybrid) but also outsourced service desk and various IT consulting services including public cloud (Azure and AWS services). Our managed services revenue is predominantly derived from Cloud and this element of our service is growing at the fastest rate, with organic growth of 19.8% in 2017.

Strategy

SysGroup's clear focus is to expand its position as a trusted provider of managed services and expert IT consultancy to clients in the UK and Ireland. We have positioned the Group as an extension to a customer's existing IT department guiding them through the complexities and developments in the market.

Our target market is servicing the UK corporate sector that has traditionally managed and housed their own IT infrastructure on premise. We operate in a variety of vertical sectors but have weighting in not for profit, education, health services, financial services, insurance, technology and merchant and distribution sectors with a variety of well-known clients in these verticals.

Being a Visa Level 1 PCI-DSS service provider (highest level) and with our ISO9001 and ISO27001 credentials we are an attractive partner to anyone who wishes to ensure platforms are built and maintained to the highest of security standards.

Our IT consulting services often results in customers taking Cloud services from us, and the legacy Value Added Reseller ("VAR") element of the Sys-Pro business provides a feeder of cloud and managed service opportunities as customers favour OPEX over CAPEX models and the flexibilities that offers.

Along with seeking to engage with larger spending customers who have a specific need for a large custom built cloud platform we also seek to engage with customers in our chosen markets who are at different stages of their IT journey. This can initially be by partnering with us for functions like our monitoring services, remote service desk, backup and disaster recovery services. As our customers develop, the opportunity grows and results in more of their services being outsourced to us. The result is that these customers can be very sticky in nature as the increased level of services provided by the Group creates a greater reliance on the Group and significant barrier to entry for competitors. Customers typically sign up for a contract period of one to three years, with larger contracts tending to be three years.

We intend to supplement our organic growth with carefully considered acquisitions.

Acquisitions

In July 2016 the Group acquired Sys-Pro for an initial consideration of £4.0m, paid 85% cash and 15% in new ordinary shares at 60 pence per share, funded by way of a placing raising £5.0m gross. There have been certain operational challenges at Sys-Pro since its acquisition but overall integration of the business into the Group is continuing and was accelerated just prior to the year end, with a number of important milestones already reached.

During the period the Group secured new banking facilities with Santander UK plc. The facilities comprise a £2.5m Revolving Credit Term Loan Facility to finance acquisitions alongside a £0.5 million overdraft facility and a £0.5m finance leasing facility.

In line with the Group's stated growth strategy, the Board remains alert to strategic acquisition opportunities to supplement organic growth. In a fragmented market, we believe we are well placed to make further astute acquisitions given our size and funding availability.

Disposal

On 22 July 2016 the Group announced the disposal of its SME Mass Market business for a total consideration of £2.7m in cash, less an amount of £0.5m in respect of advance receipts/payments.

As this business was based in the Group's former head office in Nottingham a necessary reorganisation occurred and a new finance function was established in the Liverpool office of the Group.

Operational Review

All of the Group's activities relate to delivering IT managed services with a Cloud bias along with consulting. The Group is segmented into managed services, VAR and SME Mass Market. The SME Mass Market division was discontinued following completion of the disposal of this division on 18 July 2016, and is therefore shown as discontinued in the table below. Managed services segment consists of all the activities of Netplan Internet Solutions Ltd and that of Sys-Pro but excluding its VAR business.

For both SME Mass Market and for Sys-Pro they are included in results to their respective date of disposal or acquisition.

We have introduced a new operating segment of VAR. This is legacy activity from which Sys-Pro built its business. Traditionally Sys-Pro was a provider of hardware and software but has followed the transformation to Cloud and IT Managed Services and was at the beginning but established level of the curve in converting its traditional 'on premise' customers to Cloud delivered solutions. We continue our work educating our traditional customers of the benefits of Cloud delivered services and the concept of moving from a CAPEX to an OPEX model. Market drivers and overall trend underline the substantial opportunity to us in this base. We expect the VAR segment to decrease in value as customers continue to shift to Managed Services.

The revenue split of the divisions is shown below:

Key performance indicator review

Revenue from continuing operations grew by 184.9% driven by Managed Services and the acquisition of Sys-Pro.

Adjusted EBITDA (including discontinued activities) improved 22.7% to £0.81m (2016: £0.66m).

The growth in Adjusted EBITDA is a combination of improved performance from the Netplan business unit and from contribution from Sys-Pro (acquired in the period)

Performance review

Group revenue for the year grew by 65.3% to £7.865m for the year to 31 March 2017 (2016: £4.764m). Revenue growth was driven by the Managed Services division, which consists of the Netplan brand (incorporating Q4Ex) and the System Professional brand (acquired in the year), contributing revenues of £7.165m (2016: £2.52m). The SME Mass Market division generated revenues of £0.7m (2016: £2.2m) before being divested.

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 2017 there is £0.47m of deferred revenue (2016: £0.71m) which will be released to profit in future periods.

Gross profit for the year on continuing and discontinued operations was £4.82m (2016: £3.01m) representing a gross margin of 61.2% (2016: 63.2%). The reduction in gross margin is attributable to the change of sales mix during the year and the slower conversion of Sys-Pro VAR customers into managed services revenue.

Adjusted earnings before interest, taxation, depreciation and amortisation ("EBITDA") for the year to 31 March 2017 is £0.81m (2016: £0.67m). 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

Net cash inflow from operating activities during the year amounted to £1.10m (2016: £0.67m). Cash at bank at 31 March 2017 was £3.47m (2016: £0.51m).

Payables falling due within one year are reported at £1.98m (2016: £1.64m). This figure includes an amount of £0.47m (2016: £0.71m) for deferred revenue which will be released to profit in future years.

Contingent consideration payable on the Sys-Pro acquisition of £0.69m (2016: nil), which is the fair value of the amounts payable in shares, is included within liabilities falling due after more than one year. Contingent consideration on the acquisition of Q4Ex Ltd has now been fully settled given all performance criteria were satisfied.

Based on certain performance criteria, the vendors of Sys-Pro could be due further consideration of up to £1.865m. At the year-end the fair value of the contingent consideration stood at £0.69m. Post period end however this has now been settled by a one-off payment of £150,000. This is a post balance sheet event and has also removed some operational challenges by removing certain approval processes required with the vendors allowing for integration to be accelerated and is explained in more detail in note 24.

The Directors are confident there is sufficient working capital within the Group. The Group also has surplus cash, is cash generative and has £3.0m of committed but undrawn banking facilities (which includes a £2.5m acquisition facility). However, should accretive acquisitions become available to the Group that cannot be met from existing resources (or with enough headroom comfort), the Group may seek to raise additional finance either through debt, equity or a mixture of the two.

Our people

Our people are very highly valued and the Directors place considerable emphasis on employees sharing in the success of the Group. This is achieved through the participation in share option schemes. Due to the nature and size of the business, employees are constantly encouraged to communicate with the Group's senior management to discuss business issues and potential improvements.

It is the policy of the Group that there should be no unfair discrimination in recruiting and promoting staff, including applicants who are disabled. The Directors are committed to maintaining and developing communication and consultation processes with employees, who in turn are encouraged to develop an awareness of the issues affecting the Group.

Infrastructure and technology

During the year, we invested in our capabilities and have begun deploying Cloud services from a newly fitted out location on our network in a datacentre in Manchester. We are utilising 'hyper-scale' technologies that the likes of Facebook, Microsoft and Amazon utilise, such as software defined networking and continuous integration. These technologies allow us to automatically roll-out a whole network deployment and virtual machine build in minutes whilst continuous integration means we can test changes in a virtual environment before pushing these to a live environment, minimising 'change control' risks.

Our work and contribution to the CEPH OpenSource community gained us recognition for the development of an industry leading low cost storage solution which lead us to become the first VEEAM accredited service partner in the UK. We will continue our R&D efforts and bring new and interesting services to our customers.

Summary and Outlook

We are pleased with our results, delivered in a year of both significant progress and change for the Group. We have achieved our objectives of fundamentally transforming the business to focus on high growth managed services whilst delivering enhanced profitability and results in line with market expectations, while at the same time integrating a large acquisition. Our sales pipeline has grown by 28.8% from 30 September 2016 to £3.49m at 31 March 2017, showing the tangible impact of our growth strategy.

Due to operational challenges at Sys-Pro since its acquisition the Group expects growth to be slower than originally expected for FY 2018. The Board have taken the necessary remedial steps and following entry into the deed of variation with the vendors of Sys- Pro, the management team has the ability to accelerate the integration process.

Our new management structure and internal teams will support further organic and acquisitive growth and given our healthy levels of recurring revenue and long term contracts with key customers, coupled with our cash generation, we are well placed to capture market opportunity.

We look forward to the future with confidence.

This Strategic Report was approved and signed by order of the board.

Chris Evans

Chief Executive Officer

6 June 2017

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 MARCH 2017

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 MARCH 2017

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 MARCH 2017

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 MARCH 2017

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 MARCH 2017

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').

Statement of compliance

These Group and Company financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs and IFRIC interpretations) as endorsed by the European Union ("endorsed IFRS") and with those parts of the Companies Act 2006 applicable to companies preparing their accounts under endorsed IFRS.

Basis of preparation

The principal accounting policies adopted in the preparation of the Financial Statements are set out below. The policies have been consistently applied to all the years presented, unless otherwise stated. The consolidated financial statements have been prepared under the historical cost basis, except for the revaluation of certain financial liabilities which have been valued in accordance with IAS 39.

The preparation of financial statements in compliance with adopted IFRS requires the use of certain critical accounting estimates. It also requires Group management to exercise judgement in applying the Group's accounting policies. The areas where significant judgements and estimates have been made in preparing the Financial Statements and their effect are disclosed in note 2. The financial statements are presented in pounds' sterling, rounded to the nearest thousand, unless otherwise stated.

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 2019 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

At the date of authorisation of these financial statements, the following standards and interpretations, issued by the International Accounting Standards Board (IASB), have been adopted for the first time by the Group with no significant impact on its consolidated results or financial position:

- Annual Improvements to IFRSs (2012-2014 Cycle)

- Disclosure Initiative: Amendments to IAS 1

A number of new standards, amendments to standards and interpretations have been issued during the year ended 31 March 2017 but are not yet effective, and therefore have not yet been adopted by the Group:

- 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 2017.

- 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 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 potential impact on the Group has not yet been fully assessed by management.

- 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 in future periods may have an impact on the results and net assets of the Group, however it is too early to quantify this.

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 domain name registrations is recognised when the domain name is registered or renewed. Revenue from value added resale is recognised as these products or services are delivered. Revenue from managed services is taken to deferred income on the balance sheet and recognised over the life of each contract.

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 acquiree'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 loans and receivables 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, 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.

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 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, taking into account the terms and conditions upon which the options were granted.

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% both reducing balance and straight line

Furniture and fittings 20% - 33.3% reducing balance

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 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

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 judgements, 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.

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 and 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 Q4Ex 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 fixed interest rates.

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 makes adjustments to 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 three segments:

· SME Mass Market - this segment provides a range of VPS, shared hosting, email and domain registration services to individuals and SME's. This business was divested during the year.

· 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 Ltd and System Professional Ltd. This segment was previously referred to as Managed Hosting..

· 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 Ltd

Information regarding the operation of the reportable segments is included below. The performance of each operating segment is based on revenue and earnings before interest, tax, depreciation and amortisation (EBITDA) before any allocation of Group overheads, share based payments, fair value adjustments or acquisition costs, as the Board believe this is the best measure for performance. The Groups Adjusted EBITDA has been calculated after deducting Group overheads which include the cost of the Board, Group marketing, legal and professional fees, share based payments, fair value adjustments and acquisition costs.

Assets and liabilities are not reviewed on a segmental basis. 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 loss

6 Finance expense

7 Staff numbers and costs

Total staff costs for the company are £339,599 (2016: £328,376). Average staff numbers for the year for the company are 5.

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 page13.

The emoluments of the highest paid director Julie Joyce were £126,000 (2016: Christopher Evans £96,000).

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.

8 Acquisition and restructuring costs

*Integration and restructuring costs relate to closing and relocating offices/teams, streamlining operations and establishing single front and back office IT platforms/systems. This includes costs of £161k in relation to the use of internal management and technical staff resources to deliver the changes.

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. There are no performance criteria associated with the options. The weighted average exercise price is 50.97p per share.

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

At 31 March 2017 there were 140,000 outstanding warrants to subscribe for the ordinary share capital of the Company as follows:

The fair value of the convertible loan 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 convertible loan note 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 2017 were:

System Professional Ltd

The Group acquired 100% of the share capital of System Professional Ltd (Sys-Pro) on 4 July 2016. Sys-Pro provides managed services, cloud hosting, value added resale services, and IT consultancy support.

During the year to 31 March 2017 the Group incurred £414,000 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 2017.

The amount of identifiable net assets assumed at the acquisition date is shown below:

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 19% was used in the valuation. Customer relationships are being amortised over an estimated useful life of 5 years. The acquisition of Sys-Pro included a contingent consideration which is payable 85% in cash and 15% in shares at 60p (resulting in the issue of 975,000 consideration shares in respect of the 15%). The contingent consideration payable is based on delivering certain performance criteria and is capped at £1.865m. The earn out period is to 31 March 2018 (unless achieved in 31 March 2017). If EBIT (earnings before interest and tax) of less than £714k in the year ended 31 March 2018 then no consideration is payable, there is a ratchet mechanism and a set of ranges. Achieving the maximum potential consideration would require Sys-Pro to deliver £1.3m or more of EBIT for the respective full financial year.

Since the acquisition date to 31 March 2017, System Professional Limited has contributed £4,058,000 to Group revenue and £159,000 to Group EBITDA. Had the acquisition taken place on 1 April 2016, the contribution to Group revenue would have been £5,208,639 and £911,283 to Group EBITDA.

11 Earnings per share

Basic earnings per share is calculated by dividing the earnings attributable to equity shareholders by the weighted average number of ordinary shares in issue during the year, excluding treasury shares which are treated as cancelled.

For diluted earnings per share, the weighted average number of ordinary shares in issue during the year is adjusted to include the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares (from share options) into ordinary shares.

12 Taxation

The Group recognised deferred tax assets and liabilities as follows:

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

The movement in the deferred tax account during the year was:

13 Intangible assets

The Company held no Intangible assets at 31 March 2017 or 31 March 2016.

All amortisation and impairment charges are included in the depreciation, amortisation and impairment of non-financial assets classification, which is disclosed as administrative expenses in the statement of comprehensive income.

During the year, goodwill was reviewed for impairment in accordance with IAS 36 "Impairment of Assets". No impairment charges arose as a result of this review.

The recoverable amount is determined based on a discounted cash flow basis and is allocated to individual cash generating units. The calculation uses pre-tax cash flow projections based on financial budgets approved by the Board covering a two year period. Cash flows beyond the two year period are extrapolated using the estimated growth rates stated below. The growth rates and margins used to estimate future performance are based on past performance and the experience of growth rates.

The carrying value of each CGU is as follows:

The assumptions used for the impairment reviews are as follows

The Group had no contractual liability for development costs at 31st March 2017. As a result of the impairment testing carried out on the basis of these estimates and assumptions, no impairment provisions are required.

The recoverable amount for the Netplan and System Professional businesses exceeds the carrying value of the total net assets by £2.8m. A 1% increase in the discount rate would reduce the recoverable amount by approximately £0.5m. A 4% reduction in the growth rate would reduce the recoverable amount by approximately £0.27m."

14 Property Plant and Equipment