Sysgroup Regulatory News (SYS)

20 June 2022

SysGroup plc

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

Final results for the year ended 31 March 2022

SysGroup plc (AIM:SYS), the multi award-winning managed IT services, cyber security and cloud hosting provider, is pleased to announce its audited final results for the period ended 31 March 2022.

HIGHLIGHTS

Financial

Operational

Post period-end developments

1. Adjusted EBITDA is earnings before interest, taxation, depreciation, amortisation of intangible assets, exceptional items, and share based payments.

2. Adjusted profit before tax ("Adjusted PBT") is profit before tax after adding back amortisation of intangible assets, exceptional items, and share based payments.

3. Adjusted Basic EPS is profit after tax after adding back amortisation of intangible assets, exceptional items, share based payments and associated tax, divided by the weighted average number of shares in issue.

4. Net cash represents cash balances less bank loans, lease liabilities and contingent consideration.

Adam Binks, Chief Executive Officer, commented:

"The Adjusted EBITDA performance and strong cash generation in a year when turnover was impacted by COVID highlights the strength of our business model. We have invested to drive future growth whilst maintaining prudent financial discipline throughout the business. Operationally, the Group is ideally placed to take advantage of conditions as they begin to normalise and we have started to see the early green shoots of such a recovery.

The acquisitions of Truststream and Orchard added further customers, expertise and geographical reach and demonstrate our ongoing commitment to be consolidators in this highly fragmented market. M&A activity in our sector is picking up and we believe there will be further opportunities that we can take advantage of during the course of this year. With a clear strategy for both organic and inorganic growth, the Board is confident in the future."

About SysGroup

SysGroup is a leading provider of managed IT services, cloud hosting, cyber security and expert IT consultancy. The Group delivers solutions that enable clients to benefit from industry leading technologies and delivers managed solutions with security, compliance and governance from the core. 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 managing IT services.

The Group has offices in Bristol, Edinburgh, Liverpool, London, Manchester and Newport.

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

STRATEGIC REPORT

Chairman's Statement

The financial performance of SysGroup over the past year, whilst highly credible, does not represent the wider progress made. Revenue decreased as expected due to the impact of the pandemic but through strong management the Group was able to deliver an Adjusted EBITDA performance in line with management's expectations coupled with stronger than expected cash generation, whilst also investing in the business to prepare it for future growth.

Despite the short-term frustrations caused by the pandemic and wider economic uncertainty, the market opportunity for SysGroup has not diminished and, in fact, continues to grow. With this in mind, the management team has focused on optimising the Group's operations in readiness for when the market returns to growth, and the increased activity seen towards the end of the financial year are grounds for cautious optimism.

Our people are the bedrock of the business and the culture that pervades across SysGroup has helped us to endure difficult conditions with great dignity and professionalism. It is their focus which has resulted in customer satisfaction levels comfortably ahead of our target and on behalf of the Board, I offer them my sincere thanks.

The Board is pleased to present its first ESG report this year and in the forthcoming year we anticipate focusing on how SysGroup can further improve as a good corporate citizen. It is the first step in our commitment to do more and having reported our baseline position this year we will now progress to establishing the measures we are taking and KPI's against which we will be measured and be held accountable. It is an exciting and important step in our evolution.

The two acquisitions completed post the period end complement our existing operations, bringing talented teams, enhanced offering and geographical reach as well as new clients and strong recurring revenue streams. Further, they signal our ongoing commitment to the Group's buy and build strategy and to act as a consolidator in a highly fragmented market. The pandemic and associated lockdowns subdued activity but we are starting to see increasing levels of M&A activity in our sector and are confident that further opportunities will present themselves.

Michael Edelson

Chairman

17 June 2022

Chief Executive Officer's report

Introduction

I am pleased to report a very robust performance for the Group despite a number of sector wide headwinds throughout the period. The resilience that SysGroup has shown exemplifies the continued demand for our core services, the quality of our service offering and our highly talented team. Alongside this performance we have further improved the operational structure of the business to enable us to drive growth as demand returns.

As a result of solid trading in the year, the Group achieved Adjusted EBITDA in line with management's expectations at £2.82m, which has been achieved despite the anticipated decrease in revenue to £14.75m. The strong Adjusted EBITDA performance has been driven by a greater mix of managed IT services, representing 87.1% of the Group's total revenue, with lower margin value added resale ("VAR") contributing the balance of 12.9% as businesses deferred asset refresh spending. It also reflects the synergies throughout the Group and careful control of overheads, whilst investing in areas that will drive future performance.

Cash conversion was again typically strong during the period, ending the year ahead of management's expectations with net cash of £2.99m. This performance was achieved in a financial year that was dominated by the effects of the global pandemic with economic uncertainty throughout and a return to office working only coming through in the second half.

We have used these difficult markets to focus on all areas within our control, to improve our business where possible and to ensure it is ideally placed to benefit as confidence and economic stability returns. I am pleased to say that we have achieved a huge amount and with customer engagement increasing on new project discussions and sales opportunities beginning to convert towards the end of the financial year, we are confident in our opportunity to succeed.

Market

The pandemic has greatly enhanced the demand for digital transformation and managed IT services with businesses needing reliable technology solutions to ensure the continued smooth running of their operations in an increasingly hybrid working environment. The pace of the transition away from on-premise IT to cloud and hybrid solutions has continued as flexible working becomes the norm for many businesses and cloud-based services offer the efficiency and practicality required to accommodate businesses' evolving needs.

Security is increasingly important to businesses as people continue to work from home, presenting greater threats through increased access points as well as traditional dangers through email and web. Similarly, connectivity, storage and backup are focus areas where customers need the right solutions for their staff to be effective.

With the technology landscape becoming increasingly complicated and solutions evolving continuously, outsourced managed IT services are recognised as the go-to solution. SysGroup's well established reputation as an industry leader in this field will ensure accelerated growth as spending commitment returns.

Strategy

The Group's strategy is to consolidate its position as a leading managed IT services, cyber security and cloud hosting provider to UK businesses. We are dedicated to remaining up to date with all recent developments in technology to pre-empt our customers' demands, so as to offer each individual organisation the solutions they require in a timely manner.

We have a clear understanding of the market that we can best serve with our customers typically ranging from 50 to 500 and above employees.

We place a great emphasis on understanding and servicing the needs of existing customers through dedicated field-based account management resources. As a result, we continue to enjoy very high levels of recurring business and our customer satisfaction levels remained comfortably ahead of our 97% target throughout the entire year, meaning we are a highly trusted partner to our clients and can benefit from any increasing needs within their IT infrastructure.

Our sales teams have been strengthened and during the year we were pleased to open the new office in Manchester which creates a unified marketing and sales team from which to target new clients. Working closely together provides the unit with the ability to be more agile and react quickly to any changes in market demand. The hub is still in its infancy but there are a number of key marketing campaigns scheduled for the new financial year centred around our core competencies and tailored specifically towards individual sector verticals. We are confident these will help us reach new audiences, encourage engagement and build our sales pipeline.

Through a combination of existing customer focus, increased relevant service offerings and targeted new client acquisition we are confident that we can deliver solid and sustainable organic growth.

Acquisitions

To support the Group's ambitious growth strategy, the Board continues to monitor the market for complementary acquisitions, backed by the strong bank support with increased credit facility and a solid shareholder register all supportive of the M&A strategy.

Our goal is to find businesses with distinct characteristics that mirror those of SysGroup. Typically, they will benefit from high levels of recurring income with an engaged and talented team and the opportunity to provide cross-selling opportunities. Geographical reach is also a consideration in helping us to broaden our national sales coverage, as is the potential to enhance our existing product expertise.

Post period end, we were pleased to announce the acquisitions of Truststream and Orchard, prime examples of the characteristics described above. Both deals have significantly enhanced the existing service offering, creating additional cross-selling opportunities, bringing in new talent and expanding the Group's geographic reach into Scotland whilst enhancing the existing position in the Southwest.

The expansion of the business enables SysGroup to offer customers an enhanced suite of IT solutions, providing a competitive edge over competitors and better positioning the Company to take advantage of the market opportunities in the near future. We continue to engage with potential targets and assess businesses that could enable the continued growth of the Group and ensure that our customers continue to receive the best possible service available.

Operational focus

Alongside the opening of the Manchester sales hub, this year has seen a number of strategic developments completed and from which we are already experiencing significant benefits. We were able to close down our Telford office, with all customers continuing to be supported from other Group locations and we refurbished the offices in Newport to create a greater working environment for the team.

In March 2022 we completed Project Fusion, the project to deliver a unified platform of systems across the Group. In FY21, we successfully implemented a new and unified CRM, marketing, service desk, projects and billing system. In FY22 we completed the project with further functionality for marketing automation, people management and reporting. As well as providing greater transparency and efficiency across the existing Group, the platform has enabled us to immediately commence the integration programme for the two recent acquisitions. Systems integration for both Truststream and Orchard are both underway with people integration already completed and CRM, service desk and billing on track to be completed by the end of the first half of the current financial year.

SysCloud 2.0, the Group's multi-tenanted cloud platform went fully live and operational in May 2022. SysGroup offers full cloud support from the environment, platform, virtualisation up to the operating system for infrastructure as a service (IaaS) or database platforms for platform as a service (PaaS). We support the full cloud lifecycle from design, deployment, provisioning of the platform as well as customers' applications and data to ongoing service and change management. SysCloud 2.0 provides our clients with even better performance and provides the Group with greater efficiency, giving more capacity from less physical space.

People

As a people led business, our staff are at the very centre of everything that we do and we have gone to great lengths to both attract and retain the best talent available in the market.

The recruitment market remains challenging with many companies competing to hire the best talent available and SysGroup is committed to investing in this regard. We have revamped our recruitment process and moved to a direct sourcing model with the addition of our own talent acquisition partner. The aim is to give us better access to a wider talent pool and reduce our overall cost of talent acquisition.

I am proud of the commitment our team members have shown in the face of challenging conditions brought about by the pandemic. Our people have returned to the office, largely on a full-time basis and I am pleased to see the benefits of in-person collaboration and innovation coming to fruition. The quality of the work produced by our team is industry-leading and this is reflected in our customer satisfaction levels remaining above our 97% target throughout the 12 month period.

ESG

SysGroup is a people first business and we hold social responsibility at the very core of our ethos. As such we continue to push ourselves to be a more conscientious business and welcome accountability as we work towards becoming a more socially impactful business. We are dedicated to our sense of purpose and are proud to have supported our team throughout the pandemic without utilising the furlough scheme.

As part of our ongoing social responsibility programme, the Group has commenced an ESG programme and has chosen to voluntarily disclose our ESG activities and position. A copy of our summary ESG report is available to view on our website and the full ESG report will be available alongside publication of our annual report and accounts. We believe that being a good corporate citizen, good employer and working to reduce carbon emissions are of the utmost importance and are committed to improving in this regard. Through this disclosure, we will establish a baseline for reporting moving forward as we set out actionable KPI's and execute on this commitment.

As a technology focused business, our environmental impact is relatively low and our recently refurbished offices allow us to reduce our carbon emissions further. Our management team, staff and stakeholders are collectively committed to further combat climate change and we look forward to setting our path to doing so in the near future.

Summary and Outlook

The Group has delivered strong financial results with high levels of Adjusted EBITDA and cash generation throughout a prolonged difficult period caused by the pandemic and the ongoing macro-economic situation which are beyond the Group's control. We are well aware that challenges remain. There can be no doubt though that SysGroup today is a stronger business than at the onset of the global pandemic.

We have the right service portfolio and technical expertise to meet the individual and evolving needs of the UK mid-market. We have an established and engaged customer base that we can provide a broader range of solutions to and we have a unified sales and marketing team who can help us convey the SysGroup value proposition to a broader audience through concise, targeted campaigns. We also remain committed to exploring further M&A opportunities which can accelerate this growth.

Towards the end of the last financial year we began to see the green shoots of recovery for new business, with existing clients beginning to engage on projects and an increasing pipeline of opportunities from new potential clients. Whilst these are still early days and we must remain cautious, I am confident that we will see improvements to both revenue and EBITDA performance in this new financial year.

Adam Binks

Chief Executive Officer

17 June 2022

Chief Financial Officer's Report

Group Statement of Comprehensive Income

The Group delivered revenue of £14.75m (FY21: £18.13m), a decrease of 19% on the prior year and an Adjusted EBITDA of £2.82m (FY21: £2.91m), a decrease of 3% against the FY21 performance.

This has been another challenging period as COVID restrictions continued for most of the year, and the economy was affected by high inflation and rising energy costs. During H1 the Government implemented the roadmap for lifting lockdown to return the public and businesses to normal home and working life but throughout the year most businesses continued to operate homeworking policies which limited the ability to have valued face to face meetings or attend business facilities. Whilst SysGroup continued to operate with minimal disruption throughout the COVID period and without using the furlough scheme, there has been a negative impact on revenue as customers and prospects deferred spending decisions. Contract churn also increased beyond normal levels as customers were forced to reduce or cancel their contracted services on renewal. This arose from their need to save costs to manage their financial position or from a reduction in their staff numbers meaning less resources where required.

Managed IT services revenue was £12.85m (FY21: £14.34m), a decrease of 10% on the prior year. We entered this financial year at a lower level of contracted income than last year due to the higher level of churn in FY21 and as previously described we continued to see contract churn in FY22. With most businesses continuing to enforce homeworking policies, this also meant that our sales and technical consulting teams were unable to visit many of our customers until Q4 of FY22. This has eased as we have entered FY23 with companies gradually returning to the office and firmly placing IT strategy on board agendas with an increased interest in cloud hosted solutions. Value added resale ("VAR") revenue was £1.90m (FY21: £3.79m), a decrease of 50%, as companies deferred spending decisions on tech refresh activity and extended the useful life of on-premise IT assets.

In the short and medium term, managed IT services and VAR revenue is expected to increase but in the long term, as businesses opt to move more towards our higher margin cloud hosted service offerings, we can expect to see VAR revenues continue to trend down.

The revenue mix of 87% managed IT services and 13% VAR is ahead of the Group's target business model of 75% managed IT services and 25% VAR which was predominantly due to the lower relative VAR sales in the year. The FY21 revenue mix was 79%:21%.

Gross profit was £8.92m with a gross margin of 60.5% (FY21: £10.50m and 57.9% respectively). The higher gross margin percentage reflects good cost control and an increase in revenue mix towards higher margin managed IT services. The gross margin for managed IT services was 66.3% (FY21: 66.9%) and the gross margin for VAR was 21.5% (FY21: 23.9%).

Adjusted operating expenses of £6.10m were £1.49m below last year (FY21: £7.59m) with a ratio of overhead to revenue of 41.4% (FY21: 41.8%). The main driver for this was a reduction in employee costs as headcount reduced in full realisation of post-acquisition synergies and we had a slightly higher vacancy rate in the face of a challenging recruitment market. The Group made no use of the government furlough scheme throughout the COVID period. Other overhead costs were well managed throughout the year and we continued to invest into strategic areas of value such as employee training and development and the ESG programme. During the year we opened a new office in Manchester which has given us good presence in a strong tech sector location and the lease has been recognised under the IFRS16 lease accounting policy.

Adjusted EBITDA was £2.82m for the twelve months to 31 March 2022 which is slightly lower than FY21 Adjusted EBITDA of £2.91m. The Adjusted EBITDA margin was 19.1% in FY22 compared to 16.1% in FY21 which continues the progressive improvement in profit efficiency as the Group has scaled up and synergised the cost base.

The Group had no exceptional items in FY22 (FY21: £0.08m). Amortisation of intangible assets was £1.24m (FY21: £1.29m), of which £1.10m (FY21: £1.22m) relates to the amortisation of acquired intangible assets from acquisitions and £0.14m (FY21: £0.07m) relates to the amortisation of Project Fusion software development costs.

Finance costs of £0.13m remain low (FY21: £0.11m) as the term loan continued to amortise through fixed quarterly loan repayments and the remaining lease contracts are generally for office leases. The share-based payments charge of £0.20m for the year (FY21: £0.50m) relates to charges for the share options under the Executive Director LTIP and Employee Management Incentive schemes.

The reconciliation of operating profit to Adjusted EBITDA is shown in the table below. The Directors consider that Adjusted EBITDA is the most appropriate measure to assess the business performance since this reflects the underlying trading performance of the Group. Adjusted EBITDA is not a statutory measure and is calculated differently by each company.

The Group has reported a statutory profit before tax of £0.60m which compares to a profit before tax of £0.21m in FY21, an increase of 192%. Whilst Adjusted EBITDA is slightly lower this year, profit before tax is higher due to the lower charges for depreciation, amortisation and share based payments. The table below shows the reconciliation of profit before taxation to Adjusted PBT.

Adjusted basic earnings per share was 3.6p (FY21: 3.5p) and basic earnings per share was 0.9p (FY21: 0.5p), both showing a marginal improvement on the prior year.

Taxation

The Group has a tax charge of £0.15m (FY21: £0.04m credit) and this includes a £0.17m one-off deferred tax adjustment to reflect the increase in the corporation tax rate that will apply from 1 April 2023.

The corporation tax current charge has reduced this year to £0.03m (FY21: £0.28m). This reduction is partly from having a slightly lower trading profit but is also due to a £0.1m prior year adjustment and the availability of accelerated capital allowances using the new scheme put in place by the UK Government.

The deferred tax charge has increased to £0.12m (FY21: £0.31m credit) which includes the one-off £0.17m charge. This adjustment is to recognise the expected higher future tax liability which will arise from the increase in corporation tax rate to 25% in April 2023. The deferred tax charge also includes a £0.08m prior year adjustment for fixed asset timing differences, unrelated to the change in tax rate.

As an outlook, we expect the tax charge to increase in FY23 since brought forward trading losses have been fully utilised in FY22 and Project Fusion, which has allowed the Group to claim for R&D tax credits, has now been completed. Looking further out to FY24, we expect the tax charge to increase further since the rate of corporation tax increases on 1 April 2023 from 19% to 25% and the accelerated capital allowances scheme comes to an end. 

Cashflow & Net Cash

The Group had a strong net cash position of £2.99m at the end of the year, an increase of £1.11m from FY21 net cash of £1.88m, and had a gross cash balance of £4.13m (FY21: £3.47m). Cashflow from operations was £2.47m (FY21: £2.93m) and cash conversion of 88% was at the higher end of our target range of 80-90% (FY21: 103%).

Working capital continues to be managed well with debtor days at year end below the target level of 25 days and suppliers routinely paid in our monthly payment runs to agreed terms. Corporation tax paid was £0.16m (FY21: £0.10m) reflecting the general increase in the Group's tax liability. The cash outflow from investing activities of £0.89m (FY21: £1.55m) includes £0.30m (FY21: £nil) expenditure on office refurbishments for the Newport and Manchester offices, and £0.27m (FY21: £0.40m) of Project Fusion capitalised software development costs. Cashflow from financing activities includes interest payments, which have been re-categorised from operating activities in the Consolidated Cashflow Statement, and bank loan repayments which as expected, stepped up this financial year in accordance with the terms of the loan agreement.

The Group's net cash position of £2.99m (FY21: £1.88m), an increase of 59% and £1.11m, reflects the strength of the business model for cash generation. We consider net cash to be a KPI of the business since the level of cash availability and financial indebtedness of the Group is relevant for Board strategic decisions and a key financial measure for the Group's shareholder base and potential investors.

Cash conversion

We have previously reported our cash conversion ratio to include tax and interest payments as part of operating cash but we have made the decision to amend the calculation to be more consistent with our listed peer group by measuring operating cashflows generated after movements in working capital. The cash conversion ratio is therefore calculated as cashflow from operations, adjusted for exceptional cashflow, as a percentage of Adjusted EBITDA. This performance measure is reported as a KPI to the Board of Directors each month and is a key indicator of the quality of adjusted profit as it converts into cash. In FY22 cash conversion was 88% (FY21: 103%).

Consolidated Statement of Financial Position

The Group's net assets of £21.3m at 31 March 2022 represent an increase of £0.7m compared to the prior year (FY21: £20.6m).

Non-current assets of £21.35m (FY21: £22.13m) have reduced by £0.78m and this movement represents capital additions of £1.13m less £1.90m of depreciation charge and amortisation of intangible assets. During the year, we invested £0.86m of tangible capex into our business and office locations. As well as investing £0.30m in the office refurbishments, we also invested £0.13m to significantly enhance our multi-tenanted cloud hosting platform for greater capacity and resilience. We invested a further £0.27m (FY21: £0.39m) into Project Fusion as capitalised development costs and the final phase of Project Fusion was completed in March 2022.

Working capital was managed well throughout the year. The gross trade debtor balance of £2.08m compares to £1.73m in the previous year and the trade and other payables balance of £2.69m compares to £2.68m in the prior year.

At the year end, the remaining balance on the senior term loan liability was £0.80m (FY21: £1.17m). There were no further drawdowns of the bank facilities during the year and the bank loan covenants were met throughout the year.

New £8.0m Revolving Credit Facility

Following the 31 March 2022 year end, the Company re-financed its existing term loan facility of £1.75m and its undrawn acquisition revolving credit facility ("RCF") of £3.25m and replaced both with a new £8.0m RCF provided by Santander to provide additional financial flexibility for acquisitions and working capital requirements. The Group drew down £4.5m of RCF funds to finance the acquisition of Truststream.

The new banking facility has a five year term which expires in April 2027 and carries an interest rate of base rate +3.25% on drawn funds and 1.3% on undrawn funds. The bank covenants in the RCF will be tested quarterly and calculated on total net debt to Adjusted EBITDA leverage and minimum liquidity.

Project Fusion

The project to deliver a unified platform of systems across the Group has continued to deliver significant improvements to our business operations. In FY21, we successfully implemented a unified CRM, marketing, service desk, projects and billing system and in FY22 we have gone live with further functionality for marketing automation, people management and business reporting. As anticipated, the project was completed in March 2022 with all core operational systems now on a single platform. This provides a robust, efficient and single pane of glass view of our business which will be used as the platform for integrating newly acquired businesses in the future. Capitalised software development costs comprising employee and third-party supplier costs were £0.27m in FY22 (FY21: £0.39m).

Share Option Grants

During the period the Company granted options over 336,000 shares to employees and 250,000 shares to senior management under the 2018 SysGroup EMI Scheme. In June 2021, the Remuneration Committee granted 179,675 performance shares to Adam Binks, Chief Executive Officer, and 107,805 performance shares to Martin Audcent, Chief Financial Officer, in relation the Group's performance in FY21 and under the terms of the 2020 SysGroup Long Term Incentive Plan.

Martin Audcent

Chief Financial Officer

17 June 2022

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 MARCH 2022

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 MARCH 2022

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 MARCH 2022

CONSOLIDATED STATEMENT OF CASHFLOWS

FOR THE YEAR ENDED 31 MARCH 2022

NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION

FOR THE YEAR ENDED 31 MARCH 2022

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

The Group financial statements have been prepared in accordance with UK adopted international accounting standards ("endorsed IFRS") and with those parts of the Companies Act 2006 applicable to companies preparing their accounts under endorsed IFRS.

This consolidated financial information does not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. The comparative figures for the financial year ended 31 March 2021 are an extract of the Company's statutory accounts for the year ended 31 March 2021, prepared in accordance with International Financial Reporting Standards (IFRS), approved by the Board of Directors on 18 June 2021 and delivered to the Registrar of Companies. The report of the auditor on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 (2) or (3) of the Companies Act 2006.

The statutory accounts for the year ended 31 March 2022 will be delivered to the Registrar of Companies following the Company's Annual General Meeting. The Auditors have reported on those accounts; their report was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 (2) or (3) of the Companies Act 2006.

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 and share based payments which have been valued in accordance with IFRS9 and IFRS2 respectively.

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 the base business forecast for the period to 31 March 2024 and a sensitised version which models the financial consequences of a considerable downside scenario. In assessing the forecasts, the Directors have considered the potential impacts on the world and UK economies from the Russian invasion of Ukraine and prolonged rises in inflation and energy costs.

In the base forecast there is significant and increasing headroom in the bank covenants as the business continues to generate cash and reduce net debt. In the sensitised forecast, and despite lower revenue and profits, the Group maintains positive gross cash balances, reduces net debt and stays within the bank covenants. The Group has a business model with a high degree of financial resilience since circa 80% of revenue is derived from contracted managed IT services which is a continuous and business critical service supply to customers. This provides a high level of operating cash generation. At 31 March 2022, the Group had cash balances of £4.1m and a net cash position of £3.0m. Subsequent to the year end, the Group re-financed with Santander and now has an £8.0m Revolving Credit Facility ("RCF") which can be used for acquisitions and working capital requirements and has no fixed repayment terms. This provides further financing flexibility to the Group.

The forecasts, the resultant cashflows, together with the confirmed new RCF loan facilities, 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

A number of new standards and amendments to standards and interpretations have been issued during the year ended 31 March 2022. The Group has adopted all of the new and revised standards and interpretations issued by the IASB and the International Financial Reporting Interpretations Committee (IFRIC) of the IASB that are relevant to its operations. Other new amended standards and interpretations issued by the IASB that apply to the financial statements do not impact the Group as they are either not relevant to the Group's activities or require accounting which is consistent with the Group's current accounting policies.

New standards not yet effective

There are a number of standards and amendments to standards, and interpretations which have been issued by the IASB and in some cases not yet adopted by the UK Endorsement Board that are effective in future accounting periods that the Group has decided not to adopt early. SysGroup plc is currently assessing the impact of these new standard and amendments. The Group does not expect any other standards issued by the IASB, but not yet effective, to have a material outcome on the Group.

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.

Segmental 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.

Alternative profit measures

In reporting its results, the Directors have presented various alternative profit measures (APMs) of financial performance, position or cashflows, which are not defined or specified under the requirements of IFRS. On the basis that these measures are not defined by IFRS, they may not be directly comparable with other companies. The key APMs that the group uses include recurring revenue as a percentage of revenue, Adjusted EBITDA, Adjusted PBT, Adjusted EPS and Net cash.

The Group makes certain adjustments to the statutory profit in order to derive many of these APMs. These include exceptional items and share based payments. The group presents as exceptional items on the face of the Statement of Comprehensive Income those material items of income and expense which the Directors consider, because of their size or nature and expected non-recurrence, merit separate presentation to facilitate financial comparison with prior periods and to assess trends in financial performance. Exceptional items are included in Administration expenses in the Consolidated Statement of Comprehensive Income but excluded from Adjusted EBITDA as management believe they should be considered separately to gain an understanding of the underlying profitability of the trading businesses on a consistent basis from year to year.

2 Significant accounting estimates and judgements

The preparation of this financial information requires management to make estimates and judgements 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. The nature of the estimation or judgement means that actual outcomes could differ from the estimates and judgements taken in the preparation of the financial statements.

Significant accounting estimates

Impairment of goodwill and other intangibles

The Group tests goodwill for impairment annually and in line with the stated accounting policy. 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.

Valuation of intangible assets 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.

Significant accounting judgements

Going concern

The Board have approved an Annual Operating Plan for FY23 and a forecast to 31 March 2024, and management have exercised judgement in the preparation of the financial forecasts particularly on the level of future sales, customer contract uplifts and cancellations, and working capital assumptions. The Board have reviewed the Group's financial forecasts and a sensitised model in order to assess the Group's business viability and to form a judgement on going concern. Having reviewed the forecasts the Board were satisfied that the Group remains a going concern.

Revenue

Management make judgements in determining the appropriate application of revenue recognition policies to the sale of services and products.

Assessment of CGU's and carrying value of intangible assets

A CGU is the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets and the Board of Directors use their judgement to identify the CGUs of the Group. When SysGroup acquire a company, the newly acquired business is allocated its own CGU for the first year and until such time as either the business and assets have been hived up into the main SysGroup trading company or when the systems, finances & management of the business have been successfully integrated, whichever is earlier. At 31 March 2022, the Board exercised their judgement and concluded that the Group continues to have one CGU, "Managed IT Services", which is the same as in the prior year.

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. The Group have capitalised system development expenditure in the current and previous financial year in relation to Project Fusion, a project to integrate all of the legacy business systems into one new CRM, Marketing, People, Projects, Billing & Service Desk system. The System Development intangible asset is being amortised over a five-year useful life which the Directors consider appropriate for the Group's core business system. Project Fusion was completed in March 2022.

IFR16 - Leases

Management make judgements in their assessment of lease contract agreements to ensure the appropriate lease accounting recognition under IFRS16 - Leases. The main elements of judgement are:

3 Segmental analysis

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

The monthly management accounts reported to the Board of Directors are reviewed at a consolidated level with the operating segments representative of the business model for growth of recurring contract income in Managed IT Services and VAR sales as a complementary business activity. The Board review the results of the operating segments at a revenue and gross profit level since the Group's management and operational structure supports both operational segments as Group functions. In this respect, assets and liabilities are also not reviewed on a segmental basis. All assets are located in the UK.

All segments are continuing operations and there are no transactions between segments.

4 Earnings per share

5 Taxation

6 Intangible assets

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. Customer relationships have a remaining amortisation period of between 2 and 5 years.

Cash-generating units ("CGUs")

Goodwill and intangible assets are allocated to CGUs in order to be assessed for potential impairment. The Group has a single CGU of "Managed IT Services". As the Group acquires new businesses they will form their own CGU until they have been integrated into the Group's core operational structure.

The allocation of goodwill and carrying amounts of assets for each CGU is as follows:

Impairment review

When assessing impairment, the recoverable amount of each CGU is based on value-in-use calculations (VIU). VIU calculations are an area of material management estimate as set out in note 2. These calculations require the use of estimates, specifically: pre-tax cash flow projections; long-term growth rates; and a pre-tax discount rate. Cash flow projections are based on the Group's detailed annual operating plan for the forthcoming financial year which has been approved by the Board.

7 Trade and other receivables

8 Trade and other payables

9 Loans and borrowings

Following the 31 March 2022 year end, SysGroup plc re-financed its existing term loan facility of £1.75m and its undrawn acquisition revolving credit facility of £3.25m and replaced both with a new £8.0m revolving credit facility with Santander to provide additional financial flexibility for the Group. The new banking facility has a term of five years, an interest rate of Base Rate +3.25% margin on drawn funds and covenants that will be tested quarterly relating to total net debt to Adjusted EBITDA leverage and minimum liquidity. The Group drew down £4.5m of RCF funds for the Truststream acquisition in April 2022.

10 Contract liabilities

11 Share Capital

12 Post balance sheet events

Following the year end date, SysGroup plc acquired 100% of the issued share capital in Truststream Security Solutions Limited ("Truststream") and Independent Network Solutions Limited ("INSL", holding company of Orchard Computers Limited).

The acquisition purchase price accounting calculation has not been calculated at the date of this Annual Report but the exercise will be undertaken and completed ahead of SysGroup's Interim Announcement later in the year. The acquired book values of the net assets has been provided for both acquisitions below.

Truststream Security Solutions Limited

Established in 2011 and based in Edinburgh, Truststream is one of the UK's fastest growing providers of professional and managed cyber security services. Truststream covers all aspects of cyber security from analysis and threat detection, through protection architecture and implementation, to incident response and ongoing 24/7 support and training. The Acquisition further enhances SysGroup's service offering and is complementary to the Group's core expertise and key areas of focus. In addition, the Acquisition enables the Group to further strengthen its UK presence by opening up Scotland as an attractive hub for the Group.

SysGroup acquired Truststream on 4 April 2022 for £4.8m initial cash consideration on a cash-free debt-free basis with an earn-out payable following the first and second anniversaries of the transaction of up to £3.075m. The earn-out is subject to the achievement of certain maintainable EBITDA performance targets in the first and second 12 month periods following the completion of the acquisition.

The Truststream acquisition was mainly funded from a new £8.0m revolving credit facility ("RCF") which was signed with Santander on 4 April 2022. SysGroup utilised £4.5m of funds from the RCF to finance the acquisition.

Independent Network Solutions Limited

INSL is the holding company of Orchard Computers Limited ("Orchard") which is based in Bristol. Orchard has been in operation for over 30 years and has built a loyal customer base largely in the South West of England and across a broad range of sectors, covering both the private and public sectors. Its managed IT service offering mirrors that of SysGroup, providing high quality consulting services and building tailor made, vendor agnostic solutions, designed specifically to meet individual customer needs, followed by ongoing support. The acquisition of Orchard will further strengthen SysGroup's presence in the South West of England.

SysGroup acquired INSL on 26 April 2022 for £1.0m cash consideration on a cash-free debt-free basis. There is no contingent or deferred consideration for this acquisition. The cash consideration was funded from the Group's existing cash balances.