iomart
Annual Report 2017

Plain-text annual report

iomart Group plc Annual report and accounts 2017Contents Overview About iomart Highlights Strategic Report Chairman’s statement Chief executive officer’s report Finance director's report Key performance indicators and principal risks and uncertainties Corporate Governance Board of directors Corporate governance report Report of the board to the members on directors’ remuneration Directors' report Directors' responsibilities statement Financial Statements Independent auditor's report to the members of iomart Group plc Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of cash flows Consolidated statement of changes in equity Notes to the financial statements Parent company financial statements Annual General Meeting Notice of annual general meeting Officers and Professional Advisers Officers and professional advisers 1 6 7 8 10 14 16 17 22 28 30 31 32 33 34 35 36 68 80 84 iomart Group plc Annual report and accounts 2017 About iomart iomart provides managed cloud services to support businesses and organisations of all sizes in their digital transformation. Not only do we design, build and deploy bespoke cloud platforms in our data centres, we provide the network connectivity, security services and technical expertise to support them 24x7. Our consultants help organisations decide how to take their very first steps into the cloud, while our comprehensive portfolio of managed services helps the biggest global brands consolidate and strengthen their enterprise IT while protecting their data across multiple geographical locations. In a world where cyber-attacks are a constant threat, iomart works with the world’s leading technology vendors to provide secure cloud solutions and multi-layered defence to customers. iomart is proud to be the UK’s most accredited cloud services company and a trusted partner to business. iomart Group plc Annual report and accounts 2017Our Year iomart has enjoyed another exciting year of growth with revenues increasing by 17% to £89.6m. As a result we are improving our dividend policy to reflect this ongoing growth and our confidence in the future. iomart Group plc Annual report and accounts 2017Our Infrastructure iomart continues to invest in its people, skills and infrastructure to help organisations derive maximum commercial and operational value from the cloud. The core components of our services are delivered from a network of data centres which are fully connected by our own fibre network. Our managed cloud services are delivered from a network of fully owned data centres across the UK. We also have points of presence in 16 locations globally to extend our reach for our customers. iomart has partnerships with the big three public cloud vendors – AWS, Microsoft and Google Cloud – which enable us to combine public cloud access with our own cloud services to help our customers to innovate and grow. iomart Group plc Annual report and accounts 2017“iomart continue to be a pleasure to work with. They afford us a wealth of technical and commercial expertise as well as hands-on account management and assist with planning complex requirements at every stage. iomart’s knowledge and appetite to deliver, combined with our in-house development team and contract expertise, ensures CEMAR remains highly available, fast, secure, resilient and flexible for our clients.” Daniel Walker, Infrastructure Director for CEMAR iomart Group plc Annual report and accounts 2017“With iomart's partnership, we were able to strengthen our infrastructure model within the UK, enabling us to provide various solutions that meet UK Government regulatory compliance, and deliver the value our customers have come to expect from Exostar." Girish Maheswar, Senior Product Manager, eSourcing for Exostar iomart Group plc Annual report and accounts 2017Financial statements for year ended 31March 2017 Highlights FINANCIAL HIGHLIGHTS · Revenue growth of 17% to £89.6m (2016: £76.3m) - Cloud Services segment organic revenue growth of 10% (2016: 9%) · Adjusted EBITDA1 growth of 13% to £36.6m (2016: £32.3m) · Adjusted profit before tax growth2 of 18% to £22.4m (2016: £19.0m) · Adjusted diluted earnings per share3 from operations increased by 18% to 16.99p (2016: 14.44p) · Cashflow from operations increased by 22% to £37.8m (2016: £30.9m) · Adjusted profit before tax2 margins maintained at 25% (2016: 25%) · Proposed final dividend increased by 90% to 6.00p per share (2016: 3.15p per share) OPERATIONAL HIGHLIGHTS · Acquisition of Cristie Data during the year for a net consideration of £0.7m · Acquisition of Dediserve post year end for a consideration of €7.9m · · Strengthened relationships with Hypercloud vendors Further investment in skills and accreditations to support broadening service offering Statutory Equivalents The above highlights are based on adjusted results. A full reconciliation between adjusted and statutory results is contained within this statement. The statutory equivalents of the above results are as follows: · Profit before tax growth of 13% to £14.7m (2016: £13.0m) · Basic earnings per share from operations increased by 9% to 11.27p (2016: 10.32p) 1 Throughout these financial statements adjusted EBITDA is earnings before interest, tax, depreciation and amortisation (EBITDA) before share based payment charges, acquisition costs and in the previous year the gain on revaluation of contingent consideration. Throughout these financial statements acquisition costs are defined as acquisition related costs and non-recurring acquisition integration costs. 2 Throughout these financial statements adjusted profit before tax is profit before tax, amortisation charges on acquired intangible assets, share based payment charges, mark to market adjustments in respect of interest rate swaps, acquisition costs, interest on contingent consideration due and in the previous year the gain on revaluation of contingent consideration and the accelerated write off of arrangement fees on the bank borrowing facility which was restructured in the previous year. 3 Throughout these financial statements adjusted diluted earnings per share is earnings per share before amortisation charges on acquired intangible assets, share based payment charges, mark to market adjustments in respect of interest rate swaps, acquisition costs, interest on contingent consideration due and in the previous year the gain on revaluation of contingent consideration and the accelerated write off of arrangement fees on the bank borrowing facility which was restructured in the previous year, including the taxation effect of these. 6 iomart Group plc Annual report and accounts 2017 Strategic Report Chairman's Statement We have once again seen another year of excellent performance for our shareholders. Not only have we maintained our relative level of organic growth in our Cloud Services segment, our Easyspace segment has also returned to organic growth after declining a little last year. Both of those elements of organic growth plus the acquisition of Cristie during the year, which we have allocated to a new Non- recurring Revenue segment, together with the full year contributions of SystemsUp and United Hosting has meant we have maintained our overall level of revenue growth for the year. In May, after the end of our financial year we purchased Dediserve and we believe that there will be other opportunities to allow us to continue to add to our organic growth through acquisition. We have again enjoyed a substantial increase in profitability over the year, driven by that organic and acquisitive revenue growth. All of this progress is a result of a great deal of hard work by our executives and staff and I thank them all on behalf of the Board and the shareholders for their efforts over the year. Sarah Haran, who has served as an executive director of iomart throughout the time the Group has been listed on AIM, decided to step down from the Board at the end of this financial year. She has given many years of loyal and valuable service to the Group and on behalf of all shareholders I thank her warmly for her service. After nearly 6 years of first class commitment and service, Crawford Beveridge has chosen not to stand for re-election as Non-Executive Director at our forthcoming Annual General Meeting. Both personally and on behalf of everyone connected with the Group, I want to thank him for his valuable contribution to the development of iomart over the years. The search for a replacement for Crawford is at an advanced stage and we expect to be in a position to make an announcement about this in the near future. As we indicated in our trading update which was issued at the end of March we have decided to improve our dividend policy to reflect the ongoing growth that we have been delivering, the level of cash we generate, and the confidence we continue to have in our future prospects. We had previously committed to paying up to 25% of our adjusted diluted earnings per share by way of dividend and last year our pay-out ratio was 22%. We have now increased the upper limit of dividend pay-out to 40% and the Board is proposing to pay a final dividend of 6.0p per share on 6 September 2017 to shareholders on the register on 11 August 2017, based on an ex-dividend date of 10 August 2017. This represents an increase of 90% over the dividend last year and equivalent to a pay-out ratio of 35% of adjusted diluted earnings per share. We continue to offer shareholders the option to participate in a Dividend Reinvestment Plan (DRIP) as an alternative to receiving cash. Details of the DRIP scheme will be distributed with the annual accounts in due course. We have started the new financial year in a strong position and I look forward to another exciting year of growth with considerable confidence. Ian Ritchie Chairman 12 June 2017 7 iomart Group plc Annual report and accounts 2017 Strategic Report Chief Executive Officer's Report Introduction We have again enjoyed another very successful year with revenues and profits growing to record levels both organically and through acquisition as we continue to deliver an ever broader range of cloud solutions. Our revenues in the year were £89.6m, an increase of 17% over the previous year, our adjusted EBITDA of £36.6m showed a 13% increase over the previous year and our profit before tax also increased by 13% to £14.7m. The opportunity remains to continue to grow both organically and through a disciplined acquisition strategy. Market The market for cloud services continues to grow and evolve. There is still a long runway of opportunity as the ‘IT as a service’ philosophy and delivery unfolds. There is an inevitability around this fundamental change in how IT is delivered but there is also a built in delay mechanism as systems, processes and applications are dealt with on a ‘one by one’ basis rather than in one full organisation wide swoop, as applications and workloads are individually considered for an upgrade, refresh or rewrite. Security has again been in the headlines and it serves to show that on premise infrastructure is far more difficult to keep secure and available on a 24x7x365 basis than those in the cloud, in specialist datacentres, with 24x7x365 monitoring and management and with all the required perimeter defences in place. We believe that iomart is one of the most compliant organisations with regard to security and certification in the sector. This will drive more opportunity for us, with our long experience of security whether it be infrastructure and network protection, detection and response to threats, access control, log management, or compliance with various standards. We are now less than a year away from the introduction of the new regulations around data security, the EU General Data Protection Regulation (GDPR). Our plans for the introduction of these regulations are well advanced both for the Group’s own needs and to help other organisations understand the implications for their own business and thereby to become compliant. Organisations today are confronted by an increasingly complex set of cloud decisions in terms of cost, value, effectiveness, complexity, security, data protection and compliance. Whatever the cloud challenge iomart can assist all organisations in moving to the cloud, whether it be private, public or hybrid approach. The long term recurring revenue opportunity for iomart remains compelling. We are well established as a major player in providing the flexible cloud solutions that businesses require. The future success of cloud companies will be driven by their ability to address further towards the application layer as well as the underlying infrastructure. There is growing evidence of different market segments with distinct hosting and cloud requirements and characteristics. This is leading to a growing trend in specialisation in various verticals such as e-commerce or financial software and this is one reason why the hosting and cloud markets will be served by a wide variety of vendors and vendor types. Our challenge is to continue to navigate through these early days of the further evolution of cloud adoption and to ensure we build the skills and resources necessary to be successful in that ever more complex space. Acquisitions We again augmented our organic growth through the acquisition of Cristie Data Limited (“Cristie”) in August and after the year-end, in May, through the acquisition of Dediserve Limited (“Dediserve”), a Dublin based provider of Cloud solutions in ten locations around the world. To date we have not seen any impact from the UK’s decision to leave the European Union other than the weakening of Sterling. The Board has considered the impact on the Group of the UK’s decision to leave and whilst there are still many issues to be resolved we believe we will be able to deal with them as they arise. The acquisition of Dediserve gives us a Cloud operation in geographical areas where we do not currently have a presence, including another base in the European Union. We continue to look for businesses that fit our criteria with a view to making further acquisitions in the coming year. Operational Review We have previously reported in two operating segments (Cloud Services and Easyspace) both of which involve the provision of services from common infrastructure delivering a very high level of recurring revenue. During the year we acquired Cristie and we have decided to report that in a separate segment as it predominantly involves the provision of IT infrastructure on customers’ premises with little by the way of recurring revenue. We have designated this segment as Non-recurring Revenue. 8 iomart Group plc Annual report and accounts 2017Strategic Report. Chief Executive Officer's Report Cloud Services Revenues in this segment have grown by 11% to £72.7m (2016: £65.4m) partly as a result of the continued organic growth and as a result of acquisitions. Organic growth in the year was 10%, slightly above the level of 9% we have delivered in our last two financial years and our adjusted EBITDA percentage margin continues to be amongst the highest in the industry. Through our iomart Cloud unit we provide complex hosting solutions, involving private, public and hybrid cloud solutions with customers typically paying for these services on a monthly basis on contracts ranging from one to three years in length. Our churn levels in this unit have stabilised and are in line with that experienced last year. Our server infrastructure business, delivering dedicated physical servers to customers, is run as one unit encompassing the RapidSwitch and Redstation brands. We manage many thousands of physical servers for our customers using highly automated systems and processes which we continue to develop and improve. Our Back-up and Disaster Recovery specialism is primarily sold through Backup Technology. SystemsUp provides consultancy services to organisations, particularly in the public sector, helping them to decide on their cloud strategy with an emphasis on the public cloud. Having a consultancy division within the Group allows us to engage at an earlier stage with organisations considering their cloud strategy and provides the opportunity to leverage the provision of those consultancy services to gain recurring revenue through the deployment of cloud solutions. However, unlike our other activities within the Cloud Services segment there is less recurring revenue generated from consultancy services and this area has not performed as predicted during the year and in future we will be more prudent in projecting the revenues which we expect to generate to recognise the difficulty in estimating revenue levels. We have made some changes to senior management within the consultancy unit and have also refined its strategic approach to focus on the delivery of a set of core cloud technologies. This is with a view to ensuring that as often as possible projects that are delivered will ultimately have a managed service and recurring revenue element. We are able to supply products and services across the cloud spectrum and do so using common platforms across the Group. Within the scope of our product set we have strengthened our relationships with Amazon Web Services (AWS) and Microsoft now labelled as Hypercloud vendors. Both are growing strongly on a global basis although they still account for a very small fraction of overall IT and Cloud spend. We are now an Advanced Partner of AWS and moving towards the next level. We are one of Microsoft’s most respected Cloud Service Providers in the UK and we are being presented with a growing number of Microsoft Azure opportunities. We continue to build on our skills and accreditations and see constant improvement across the Group’s skillset. Easyspace In line with our expectations the Easyspace segment has performed well over the year, returning to a position of organic revenue growth. Our activities within this segment provide a range of products to the micro and SME markets including domain names, shared, dedicated and virtual servers and email services. Revenues in the segment have grown by 22% to £13.2m (2016: £10.9m) mainly as a result of the acquisition of United Hosting in the previous year. Organic growth in the year was 4% against a decline of 8% in the previous year. Non-recurring revenue The non-recurring revenue segment contains the results of Cristie since we acquired that business in August 2016. In just over 7 months of ownership the revenue generated was £3.6m. Cristie primarily provides solutions similar to those provided by the Cloud Services segment with the exception that they would tend to be less complex in nature and predominantly installed on the customers’ own premises rather than from a datacentre location. These solutions would involve, for example, the provision of storage and back-up infrastructure. Cristie has a substantial number of public sector customers in areas such as health and education and we welcome its activities into the Group. Current trading and outlook This has been another year of strong growth and trading since the year end remains good. The long term opportunity and runway for success remains large and long. iomart remains well positioned to take advantage of that opportunity and to deliver further significant growth. I look forward, once again, with confidence to the year ahead. Angus MacSween Chief Executive Officer 12 June 2017 9 iomart Group plc Annual report and accounts 2017Strategic Report Finance Director's Report Trading Results Revenue Revenues for the year grew by 17% to £89.6m (2016: £76.3m) through the combination of continued organic growth and the impact of acquisitions. Our Cloud Services segment grew revenues by 11% to £72.7m (2016: £65.4m). This growth was helped by a full year contribution from SystemsUp which we acquired in June 2015. Revenue growth in the Cloud Services segment excluding the impact of acquisitions was 10% (2016: 9%). Revenues within the Easyspace segment grew by 22% to £13.2m (2016: £10.9m). This growth was helped by a full year contribution from United Hosting which we acquired in November 2015. Revenue growth in the Easyspace segment excluding the impact of acquisitions was 4% (2016: decline of 8%). As expected the decline in the organic revenue levels in this segment has stopped as new sales and churn levels have moved into balance, largely due to revised pricing in the domain market and the introduction of new products. As a result, the segment has returned to an encouraging level of organic growth. During the year we acquired Cristie which is largely a non-recurring revenue operation. Given that the vast majority of our revenue in our Cloud Services and Easyspace segments is recurring in nature we have decided to review the performance of this unit separately and as a consequence we will report this in a separate segment which we have called our Non-recurring Revenue segment. Revenues of £3.6m (2016: £nil) were generated in this segment in the year. We continue to have good revenue visibility and high levels of recurring revenue. With our larger customers we have multi-year contracts for the provision of complex managed hosting solutions. Many of our smaller customers pay in advance for the provision of hosting services resulting in a substantial sum of deferred revenue which we then recognise during the period over which we provide our services. Gross Margin Our gross profit for the year was £57.3m (2016: £51.6m) increasing as a result of the additional revenues we generated as explained above. In percentage terms our margin reduced to 64.0% (2016: 67.7%). This expected reduction in percentage has arisen partly due to the changing nature of the provision of some of our cloud infrastructure and partly due to the impact of the acquisition of Cristie. The provision of Public Cloud solutions by our Cloud Services segment results in a charge from the Public Cloud service provider within our cost of sales. This is offset by savings in our costs for power, which is included within cost of sales, and some support services which are provided by the Public Cloud service provider, which is included within our overheads and depreciation. Whilst our gross margin percentage has reduced our adjusted profit before tax percentage margin has been maintained partly due to the offsetting savings when providing Public Cloud solutions. The gross margin within our traditional private and hybrid cloud solutions continues to rise due to our relatively static datacentre costs which to some extent are fixed in nature and therefore do not rise in line with revenue growth. Cristie predominantly sells hardware and software to its customers on which it incurs a substantial cost of sale and therefore a lower gross margin percentage contribution than in the other segments. The gross margin within our Easyspace segment improved over the year due largely to the impact of the acquisition of United Hosting. Adjusted EBITDA The adjusted EBITDA for the year was £36.6m (2016: £32.3m) an increase of 13%. As expected, our adjusted EBITDA margin has reduced to 40.8% (2016: 42.4%). The Cloud Services segment increased its absolute level of margin over the period whilst experiencing a modest reduction in its percentage margin, the Easyspace segment increased both its absolute and percentage margin and the Non-recurring Revenue segment has a lower adjusted EBITDA contribution than the other segments which contributed to the overall adjusted EBITDA percentage margin reduction. Adjusted EBITDA in the Cloud Services segment was £33.7m (2016: £31.1m), an increase of 8.4%. This improved performance is mainly a direct result of the additional gross margin delivered by the increase in sales revenue, from both organic and acquired sources, offset by a modest increase in administrative expenses which has been helped by an exchange gain. In percentage terms the adjusted EBITDA 10 iomart Group plc Annual report and accounts 2017Strategic Report. Finance Director's Report margin has reduced to 46.3% (2016: 47.5%). This reduction is due to the impact of the reduced gross margin percentage as previously explained together with the full year effect of SystemsUp which has a lower adjusted EBITDA margin than the rest of the segment’s operations but which, unlike the rest of the segment, has no depreciation charges. This was offset by administrative expenses rising at a slower rate than revenue which improved the segment’s EBITDA percentage margin. The Easyspace segment’s adjusted EBITDA was £6.2m (2016: £5.1m) an increase of 22.6%. This improvement in adjusted EBITDA is almost entirely due to the full year impact of United Hosting which was acquired in the previous year. Excluding the acquisition, adjusted EBITDA increased slightly as a result of the increase in organic revenue. In percentage terms the adjusted EBITDA margin has improved to 47.1% (2016: 46.8%). Excluding the acquisition of United Hosting the Easyspace segment maintained its adjusted EBITDA percentage margin. The improvement in percentage margin is therefore entirely due to the impact of the previous year’s acquisition. The Non-recurring segment’s adjusted EBITDA was £0.3m (2016: £nil). In percentage terms the adjusted EBITDA margin was 9.0%. Group overheads, which are not allocated to segments, include the cost of the Board, the running costs of the headquarters in Glasgow, Group marketing, human resource, finance and design functions and legal and professional fees for the year. These overhead costs have reduced slightly to £3.6m (2016: £3.8m) mainly due to staff related costs. Adjusted profit before tax Depreciation charges of £11.0m (2016: £10.9m) have remained at the same level as previous years as a result of charges for the equipment bought to provide services to the additional Cloud Services segment customers being offset by equipment purchased in previous periods becoming fully depreciated and thereby no longer impacting the depreciation charge in the year. The charge for amortisation of intangibles, excluding amortisation of intangible assets resulting from acquisitions (“amortisation of acquired intangible assets”) of £1.9m (2016: £1.2m) has increased over the year as a result of an increase in the level of software acquired over the year and the advance purchase of some software licences. Finance income in the period was £nil (2016: £0.1m). Finance costs of £1.6m (2016: £1.4m), excluding the mark to market adjustment in respect of interest swaps on the Company’s loans, the interest charge on the contingent consideration due in respect of acquisitions and in the previous year the accelerated write off of arrangement fees on the restructuring of the bank facility, remained static over the period. After deducting the charges for depreciation, amortisation, excluding the charges for the amortisation of acquired intangible assets, and finance costs, excluding the mark to market adjustment in respect of interest swaps on the Company’s loans, the interest charge on the contingent consideration due in respect of acquisitions and in the previous year the accelerated write off of arrangement fees on the restructuring of the bank facility, and crediting the finance income from the adjusted EBITDA, the Group’s adjusted profit before tax was £22.4m (2016: £19.0m) an increase of 18%. The adjusted profit before tax margin for the year was 25.0% (2016: 24.9%). This modest margin improvement of 0.1% has two largely offsetting components. The adjusted EBITDA margin reduced by 1.6% as previously explained. Depreciation charges as a percentage of revenue have fallen by 2.0% partly due to tangible assets becoming fully depreciated, partly due to the provision of Public Cloud not incurring a depreciation charge and partly due to some of our activities not needing the purchase of tangible assets in the provision of their services. Profit before tax The measure of adjusted profit before tax is a non-statutory measure which is commonly used to analyse the performance of companies particularly where M&A activity forms a significant part of their activities. A reconciliation of adjusted profit before tax to reported profit before tax is shown below: Reconciliation of adjusted profit before tax to profit before tax Adjusted profit before tax Less: Amortisation of acquired intangible assets Less: Acquisition costs Less: Share based payments Add: Mark to market adjustment on interest rate swaps Less: Accelerated write off of arrangement fees on restructuring of the bank facility Less: Interest on contingent consideration Add: Gain on revaluation of contingent consideration Profit before tax 2017 £’000 22,406 (5,558) (104) (1,844) 84 - (330) - 14,654 2016 £’000 18,970 (5,354) (116) (1,081) 64 (177) (152) 870 13,024 11 iomart Group plc Annual report and accounts 2017  Strategic Report. Finance Director's Report Profit before tax (continued) The adjusting items are: charges for the amortisation of acquired intangible assets of £5.6m (2016: £5.4m) which have increased slightly mainly as a result of the acquisitions made in the year and the full year effect of acquisitions made in previous years; acquisition costs of £0.1m (2016: £0.1m) as a result of acquisitions made; share based payment charges of £1.8m (2016: £1.1m) which have increased as a result of the award of share options in the year; a mark to market credit adjustment in respect of interest rate swaps on the Company’s loans of £0.08m (2016: £0.06m); the accelerated write off of arrangement fees on the restructuring of the bank facility during the previous year of £nil (2016: £0.2m); the charge of interest, at the weighted average cost of capital rate of 15.5%, on the contingent consideration expected to be paid for the acquisition of United Hosting of £0.3m (2016: £0.2m); and in the previous period the gain on the revaluation of the contingent consideration to be paid for SystemsUp of £nil (2016: £0.9m). After deducting these items from the adjusted profit before tax; the reported profit before tax was £14.7m (2016: £13.0m) an increase of 13%. In percentage terms the profit before tax margin was 16% (2016: 17%). The reduction in percentage margin is for the same reasons as the adjusted profit before tax percentage margin change and also due to the gain on revaluation of contingent consideration recorded in the previous year which improved the percentage margin last year. Taxation There is a tax charge for the year of £2.6m (2016: £2.0m). The tax charge for the year is made up of a corporation tax charge of £4.4m (2016: £3.6m) with a deferred tax credit of £1.8m (2016: £1.6m). The effective rate of tax for the year is 17.5% (2016: 15.4%) and an explanation of this increase in given in note 9. At the year end, the Group has no unused tax losses available for offset against future profits (2016: £nil). Profit for the year from total operations After deducting the tax charge for the year from the profit before tax the Group has recorded a profit for the year from total operations of £12.1m (2016: £11.0m) an increase of 10% which has been significantly adversely affected by the gain on revaluation on contingent consideration recorded in the previous year. Earnings per share Adjusted diluted earnings per share, based on profit for the year attributed to ordinary shareholders before share based payment charges, amortisation charges of acquired intangible assets, mark to market adjustments in respect of interest rate swaps, the charge of interest on contingent consideration due, acquisition costs and in the previous year the accelerated write off of arrangement fees on the restructuring of the bank facility and the gain on the revaluation of the contingent consideration to be paid for SystemsUp and the tax effect of these items was 16.99p (2016: 14.44p), an increase of 18%. The measure of adjusted diluted earnings per share as described above is a non-statutory measure which is commonly used to analyse the performance of companies particularly where M&A activity forms a significant part of their activities. The calculation of both adjusted earnings per share and basic earnings per share is included at note 12. Basic earnings per share from continuing operations was 11.27p (2016: 10.32p), an increase of 9% which has been significantly adversely affected by the gain on contingent consideration recorded in the previous year. Acquisitions On 25 August 2016 the Company acquired the entire share capital of Cristie on a no debt, no cash, normalised working capital basis. At completion a payment of £3.8m in cash, including adjustments required in respect of normalised working capital, was made to acquire Cristie which at the time had net debt/cash of £3.1m resulting in a net outflow of funds of £0.7m to acquire the company. After the end of the financial year, on 17 May 2017 we completed the acquisition of the entire share capital of Dediserve on a no debt, no cash, normalised working capital basis for a total purchase price of €7.9m. An initial payment was made at completion of €7.8m (£6.7m) in cash less the sum of €0.25m (£0.21m) in cash as an interim settlement of the expected amount due by the vendors in respect of the no debt, no cash, normalised working capital adjustment. The initial payment was funded by a draw down from the Group’s revolving credit facility. A further sum of €0.1m has been deferred and is due to be paid on the earlier of the completion of the handover of certain operational tasks or 6 months after the original purchase date. Dividends We have proposed a 90% increase in the level of dividend pay-out for this year thereby raising the rate to 6.00p per share (2016: 3.15p). We have also committed to an improved pay-out ratio in the future based on the level of adjusted diluted earnings per share we deliver. The Board has taken the decision to increase the dividend return to shareholders as a result of the recurring revenue nature of the Group, the level of operating cash which we now deliver and the low level of indebtedness within the Group. We have continued with our acquisition activity having brought Cristie into the Group during the year and Dediserve post the year end and we are confident that we can make additional acquisitions in the future. The proposed change to dividends will have no impact on our ability to continue to make acquisitions of the like we have to date. 12 iomart Group plc Annual report and accounts 2017Strategic Report. Finance Director's Report Cash flow and net debt Net cash flows from operating activities The Group continued to generate high levels of operating cash over the year. Cash flow from operations was £37.8m (2016: £30.9m) with the significant increase of 22% over the previous year’s level due to a combination of the increase in adjusted EBITDA and improvements in working capital management. After deducting payments for corporation tax of £3.9m (2016: £4.3m) the net cash flow from operating activities was £33.9m (2016: £26.6m). Cash flow from investing activities In line with our strategy of accelerating our growth by acquisition the Group continued to incur substantial sums on investing activities, spending a total of £15.2m (2016: £32.6m) in the year. Of this amount, £0.7m (2016: £15.9m), net of cash acquired of £3.1m (2016: £4.5m), was incurred in relation to the acquisition of Cristie as described above. In addition, the Group incurred expenditure of £1.16m (2016: £1.65m) in respect of contingent consideration due on acquisitions. The Group continues to invest in property, plant and equipment through expenditure on datacentres and on equipment required to provide managed services to both its existing and new customers. As a result, the Group spent £10.2m (2016: £12.4m) on assets, net of related finance lease drawdowns, trade creditor movements and non-cash reinstatement provisions. Expenditure was also incurred on development costs of £1.4m (2016: £1.1m), on intangible assets of £1.8m (2016: £1.2m) and on property lease deposits of £nil (2016: £0.3m). Cash flow from financing activities There were no drawdowns of the bank loan in the year (2016: £16.5m) to fund the purchase of the acquisitions. Bank loan repayments of £16.0m (2016: £3.5m) were made in the year. We received £1.1m (2016: £0.1m) from the issue of shares as a result of the exercise of options by employees. We also made a dividend payment of £3.4m (2016: £2.7m); incurred finance costs of £1.2m (2016: £1.5m); and made lease repayments of £0.6m (2016: £1.0m). Net cash flow As a consequence, our overall cash expenditure during the year was £1.4m (2016: £2.0m cash generated) which resulted in cash and cash equivalent balances at the end of the year of £8.9m (2016: £10.3m). After recognising bank loans of £18.6m (2016: £34.5m) and finance lease obligations of £0.9m (2016: £1.4m) net debt balances at the end of the period stood at £10.6m (2016: £25.6m) a level the Board is comfortable with given the strong cash generation of the Group. Exposure to credit and liquidity risks Disclosures relating to our exposure to credit and liquidity risks are outlined in note 30. Financial position The Group is now in a position where it is generating substantial amounts of operating cash. The generation of that cash flow together with the committed bank loan facility for acquisitions and capital expenditure and finance lease facilities which are also available to fund capital expenditure, means that the Group has the liquidity it requires to continue its growth through both organic and acquisitive means. Richard Logan Finance Director 12 June 2017 13 iomart Group plc Annual report and accounts 2017Strategic Report - Key Performance Indicators and Principal Risks and Uncertainties Key performance indicator review Revenue Growth Revenue Growth 2017 £89.6m 17% increase 2016 £76.3m 16% increase Revenue from continuing operations grew by 17% over the year compared to a growth of 16% in the previous year. The Cloud Services segment grew revenues by 11% (2016: 19%) and the Easyspace segment grew by 22% (2016: 1%). The Non-recurring Revenue segment, which was created on the acquisition of Cristie on 25 August 2016, generated £3.6m (2016: £nil) of revenue which helped drive overall revenue growth. Adjusted EBITDA Margin Adjusted EBITDA Adjusted EBITDA margin 2017 £36.6m 41% 2016 £32.3m 42% The adjusted EBITDA has shown a 13% increase as a consequence of organic growth and acquisitions. In percentage terms there has been a modest decrease partly as a result of recent acquisitions and partly due to the change in the nature of the provision of some services from our Cloud Services segment. Easyspace improved its adjusted EBITDA percentage margin mainly due to the impact of an acquisition made in the previous year. The Non-recurring Revenue segment adjusted EBITDA margin of 9% contributed £0.3m (2016: £nil) to the absolute level of adjusted EBITDA growth. Adjusted PBT Margin Adjusted PBT Adjusted PBT margin 2017 £22.4m 25% 2016 £19.0m 25% The adjusted PBT has shown a 18% increase as a consequence of organic growth and acquisitions. The percentage margin has been maintained over the year. Adjusted diluted EPS Adjusted diluted EPS Adjusted diluted EPS growth 2017 16.99p 18% 2016 14.44p 14% Our dividend policy uses adjusted diluted EPS as its calculation basis. We have therefore added adjusted diluted EPS and in particular the growth of this measure as a KPI. The adjusted diluted EPS has shown a 18% increase as a consequence of organic growth and acquisitions. Principal risks and uncertainties The board has established a formal process to identify risks and uncertainties through the production and maintenance of a risk register. There are a number of potential risks and uncertainties which have been identified as a result of this process which could have a material impact on the Group’s future performance. These are not all the risks which the board has identified but those that the Directors currently consider to be the most material. In addition to these risks Note 30 contains details of financial risks. Staff As with any service organisation iomart is dependent on the skill, experience and commitment of its employees and especially a relatively small number of senior staff. The performance of the Group could be adversely affected if the required staffing levels are not maintained. The Group seeks to recruit and retain suitably skilled and experienced staff by offering a challenging and rewarding work environment. This includes competitive and innovative reward packages and a strong commitment to training and development. Datacentre operation Any downtime experienced at our datacentres would immediately have an impact on our ability to provide customers with the level of service they demand. Should the Group be unable to provide the required level of service this could have an adverse effect on the Group’s performance through the loss of customers and reputation. Our ongoing investment in preventative maintenance and lifecycle replacement programme ensures our datacentres continue to deliver operational efficiency and effectiveness. Network The service we provide to customers is dependent on the continued operation of our fibre network which connects our datacentre estate. Should the network fail there would be an adverse impact on customers. The Group has implemented a resilient network throughout its datacentre estate with no single points of failure to ensure the likelihood of network failure is minimised. 14 iomart Group plc Annual report and accounts 2017Strategic Report - Key Performance Indicators and Principal Risks and Uncertainties Principal risks and uncertainties (continued) Data and Cyber Security There has been a sharp rise in recent years in cyber and data related crime. The security of customer, commercial and personal data presents both a reputational and financial risk to the Group. Whilst it is a challenge to completely eliminate all data and cyber security risks the Group continues to make substantial investment in physical and data security systems and promote a culture within the organisation which embeds security across all of our operations. The Group also carries specific insurance in this regard. Customers The Group provides an essential service to an extensive client base many of whom rely on the provision of that service for their major internet presence. Any diminution in the level of service could have serious consequences for customer acquisition and retention. This risk is mitigated by the operation of our datacentres, the network and staffing as described above. Our high level of recurring revenue and our low level of customer attrition are evidence of our ability to provide the level of service required. Key suppliers The Group is dependent on certain key suppliers for the continued operation of its business, the most significant of which are those for electricity, bandwidth and servers. Were any of these key suppliers to fail in their service provision to the Group this could have an adverse effect on the Group’s ability to provide services to its customers. In all cases these supplies are obtained from reputable organisations chosen after a thorough selection process. After selection, the Group actively seeks to maintain good relationships with the chosen suppliers. The Group also seeks to maintain either several sources of supply or in the case of electricity alternative sources of power. Search engine optimisation A significant amount of the Group’s sales revenues are generated through consumers using internet search engines to acquire goods and services. Should the Group’s search engine optimisation performance deteriorate this could have an adverse effect on the revenue of the Group. The Group continually monitors the position of its websites with respect to these search engines. Through the allocation of experienced staff the Group seeks to maintain or enhance the position of its websites for detection by internet search engines. Growth management The Group is experiencing high levels of growth through both organic and acquisitive means. As a consequence we need to continue to evolve as an organisation to meet the demands that such growth places on our business operations. Failure to evolve in the necessary way could lead to deterioration in overall business performance. As part of our annual strategy and budget review process, which is updated as necessary throughout the year we identify the resource and organisational changes that are needed to support our growth. In addition a detailed integration and migration plan is produced for each acquisition that is made to ensure the acquired operation is successfully integrated into the Group’s operations. Acquisitions The Group has made several acquisitions over the last number of years and has a stated strategy to continue to make acquisitions. This produces three areas of risk: • • • Acquisition target risk – We may not be able to identify suitable targets for acquisition. Through a combination of internal research and external relations we maintain an active pipeline of potential acquisition targets. Acquisition integration risk – We may not integrate the acquired business into the Group in an effective manner and as a consequence could lose staff and customers of the acquired business. For each acquisition we prepare a detailed integration and migration plan which includes the participation of the vendor to ensure successful integration of the acquired business into the Group’s operations. Acquisition performance risk – The acquired business may not perform in line with expectations. As a consequence the expected financial performance of the operation may not be achieved with a resulting adverse effect on profits and cashflow. For each acquisition diligence and integration planning is undertaken and all potential synergies identified. The Strategic Report on pages 7 to 15 has been approved by the Board and is signed on its behalf: Richard Logan Finance Director 12 June 2017 15 iomart Group plc Annual report and accounts 2017Corporate Governance Board of Directors Ian Ritchie Non-Executive Chairman Angus MacSween Chief Executive Officer Crawford Beveridge Non-Executive Director Richard Logan Finance Director Ian Steele Non-executive Director Aged 66, appointed 2008; currently Chairman of Computer Application Services Limited, Krotos Limited, Red Fox Media Limited, Tern plc and the Informatics Ventures unit at Edinburgh University. Ian is a past President of the British Computer Society and former Vice-President of the Royal Society of Edinburgh. He was founding chairman of several technology companies, including Voxar Limited (now part of Toshiba), Orbital Software Group plc (now part of Sopheon plc), Digital Bridges Limited (now part of Oberon Inc) and Sonaptic Limited (now part of Cirrus Logic Inc). 16 Aged 60, appointed 2000; founded iomart in December 1998 following 15 years spent creating and selling businesses in the telephony and internet sector. In 1984, after a short service commission in the Royal Navy, Angus started his first business selling telephone systems. He then grew and sold five profitable businesses – including Prestel, an online information division of BT, which he turned into one of the UK’s first internet service providers. Following the sale of Teledata Limited, the UK’s leading telephone information services company, to Scottish Telecom plc, Angus then spent two years on the executive of Scottish Telecom plc where he was responsible for the development of the company's internet division. Aged 71, appointed 2011; Crawford Beveridge CBE has over 40 years’ experience in the technology industry, including 16 years at Sun Microsystems ("Sun"), where he was Executive Vice President and Chairman, EMEA, APAC and the Americas, until retiring in January 2010. His business background also includes roles with Hewlett-Packard; Digital Equipment Corp. and Analog Devices. He was a Non-Executive Director of Hitachi Global Storage Technologies, a subsidiary of Hitachi Limited; Chief Executive of Scottish Enterprise; and Chairman of the investment advisory board at Scottish Equity Partners. He is currently Non-Executive Chairman of NASDAQ listed Autodesk. Aged 59, appointed 2006; Richard is a chartered accountant, having qualified with Arthur Young in 1984. Richard then spent seven years with Ben Line Group Limited initially as Group treasurer and latterly as financial director of the main container shipping division. From 1992 to 2002 Richard served as finance director of Kingston SCL, which provided administration and billing software to the mobile communications market, during which time he was involved in a management buy-out and subsequent trade sale of the company. Immediately prior to joining iomart Richard served as finance director of ePOINT Group Limited, a technology company based in Scotland. Richard is a Non- Executive Director of Inspired Energy plc, an AIM listed energy procurement organisation. Aged 60, appointed 2016; Ian is a chartered accountant with over 35 years’ experience in the corporate finance and corporate advisory sector. During a 16-year career with Deloitte LLP, Ian undertook roles within corporate finance and global advisory services. For the past eight years, Ian sat on the UK board of the firm and fulfilled the role of senior partner for Scotland and Northern Ireland. Ian is a member of the Council of the Institute of Chartered Accountants of Scotland. He is a Non- Executive Director of STV Group plc and a Non-Executive Director of Killinchy Aerospace Holdings Limited, the principal trading subsidiary of which is Martin-Baker Aircraft Company Limited. iomart Group plc Annual report and accounts 2017Corporate Governance Report As the company is listed on the Alternative Investment Market it is not required to comply with the provisions of the UK Corporate Governance Code (the “Code”) issued in September 2014. However, the Board is committed to ensuring that proper standards of corporate governance operate and has established governance procedures and policies that are considered appropriate to the nature and size of the Group. We do not comply with the Code. During the year the Board met with corporate governance advisers and reviewed trends in corporate governance, best practice where compliance with the Code was not required and its current corporate governance arrangements. We have reported on our Corporate Governance arrangements by drawing upon that review including those aspects of the Code we consider to be relevant to the Company. The Board considers that at this stage in the Group’s development the expense of fully complying with the Code is not appropriate. The Board The Code requires the Company to have an effective Board whose role is to develop strategy and provide leadership to the Company as a whole, as well as ensuring a framework of controls exist which allow for the identification, assessment and management of risk, ultimately taking collective responsibility for the success of the Company. Through the leadership of the Chairman, the Board sets the Company’s strategic goals; ensuring obligations to shareholders are met. Matters reserved for a decision of the Board include approval of Group strategy, annual budgets and business plans, acquisitions, disposals, business development, annual reports, interim statements, and any significant funding and capital expenditure plans. The Board meets regularly, usually monthly, to discuss and agree on the various matters brought before it, including the trading results. The Company has a highly committed and experienced Board, which is supported by a senior management team, with the qualification and experience necessary for the running of the Group. In addition, there is regular communication between Executive and Non-Executive Directors, where appropriate, to update the Non- Executive Directors on matters requiring attention prior to the next Board meeting. Role of the Chairman and Chief Executive Officer The Code requires that there should be a clear division of responsibilities between the running of the Board and the executive responsible for the Company’s business, so as to ensure that no one person has unrestricted powers of decision. The Chairman is responsible for the leadership of the Board, ensuring its effectiveness and setting its agenda. Once strategic and financial objectives have been agreed by the Board, it is the Chief Executive Officer’s responsibility to ensure they are delivered upon. To facilitate this, the Chief Executive Officer chairs the Group’s Operations Boards which additionally comprises the other executive directors and, where appropriate, senior members of the management team. The day-to-day operation of the Group’s business is managed by these Boards. The Chairman holds other directorships, as detailed in his biography on page 16. The Board has considered the time commitment required by his other roles and has concluded they do not detract from his chairmanship of the Company. Composition of and Appointments to the Board The Code requires that there should be a balance of Executive and Non-Executive Directors and when appointing new Directors to the Board there should be a formal, rigorous and transparent procedure. The Board comprises a Non-Executive Chairman, Chief Executive Officer, Finance Director and two independent Non-Executive Directors. Short biographies of the directors are given on page 16. All Non-Executive Directors serving at the year-end are considered to be independent. The Board does not consider the shareholdings of the Non-Executive Directors as detailed on page 25 to have any effect on their independence. The Board is satisfied with this balance between Executive and Non-Executive Directors. The Board considers that its composition is appropriate in view of the size and requirements of the Group’s business and the need to maintain a practical balance between Executive and Non-Executive Directors. Each member of the Board brings different experience and skills to the Board and its various committees. The Board composition is kept under review as this mix of skills and business experience is a major contributing factor to the proper functioning of the Board, helping to ensure matters are fully debated and that no individual or group dominates the Board decision-making process. When a new appointment to the Board is made, consideration is given to the particular skills, knowledge and experience that a potential new member could add to the existing Board composition. A formal process is then undertaken, which may involve external recruitment agencies, with appropriate consideration being given, in regards to Executive appointments, to internal and external candidates. Before undertaking the appointment of a Non-Executive Director, the Chairman establishes that the prospective Director can give the time and commitment necessary to fulfil their duties, in terms of availability both to prepare for and attend meetings and to discuss matters at other times. 17 iomart Group plc Annual report and accounts 2017Corporate Governance Report Information and Development A further principle of the Code is that information of a sufficient quality is supplied to the Board in a timely manner. The Chairman is responsible for ensuring that all the Directors continually update their skills, their knowledge and familiarity with the Group in order to fulfil their role on the Board and the Board’s Committees. Updates dealing with changes in legislation and regulation relevant to the Group’s business are provided to the Board by the Company Secretary/Finance Director and through the Board Committees. All Directors have access to the advice and services of the Company Secretary, who is responsible to the Board for ensuring the Board procedures are properly complied with and that the discussions and decisions are appropriately minuted. Directors may seek independent professional advice at the Company’s expense in furtherance of their duties as Directors. Training in matters relevant to their role on the Board is available to all Board Directors. New Directors are provided with an induction in order to introduce them to the operations and management of the business. Performance Evaluation The Code requires the Board to undertake a formal and rigorous evaluation of its own performance annually and that of its committees and individual Directors. During the year a formal evaluation was conducted by means of a detailed questionnaire which was completed by each Director. The results of this process were collated by the Chairman and discussed by the Board collectively. The evaluation included a review of the performance of individual Directors, including the Chairman, and the Board Committees. Based on this evaluation the Board has concluded that its performance in the past year has been satisfactory. Re-election Under the Code, Directors should offer themselves for re-election at regular intervals and under the Company’s Articles of Association, at every Annual General Meeting, at least one third of the Directors who are subject to retirement by rotation, are required to retire and may be proposed for re-election. In addition, any Director who was last appointed or re-appointed three years or more prior to the AGM is required to retire from office and may be proposed for re-election. Such retirement will count in obtaining the number required to retire at the AGM. New Directors, who were not appointed at the previous AGM, automatically retire at their first AGM and, if eligible, can seek re-appointment. Two Directors will retire from office at the Company’s forthcoming AGM and stand for re-appointment. Board Committees The Board has established two committees to deal with specific aspects of the Board’s affairs: Audit and Remuneration Committees. The Board has also established a Nominations Committee which is chaired by Ian Ritchie and includes Crawford Beveridge, Ian Steele and the Chief Executive Officer. Attendance at Board and Committee Meetings Attendances of Directors at Board and Committee meetings convened in the year, along with the number of meetings that they were invited to attend, are set out below: Ian Ritchie – Non-Executive Chairman Angus MacSween – Chief Executive Officer Chris Batterham – Non-Executive Director (resigned 24 August 2016) Crawford Beveridge – Non-Executive Director Sarah Haran – Chief Operating Officer (resigned 31 March 2017) Richard Logan – Finance Director Ian Steele – Non-Executive Director (appointed 15 June 2016) Board Remuneration Committee Audit Committee Held Attended Held Attended Held Attended 10 10 3 10 10 10 8 10 10 3 8 10 9 8 2 - 1 2 - - 1 2 - 1 2 - - 1 4 - 2 4 - - 2 4 - 2 3 - - 2 18 iomart Group plc Annual report and accounts 2017Corporate Governance Report The Audit Committee The members of the Audit Committee during the year were Ian Steele (Chairman from 24 August 2016 succeeding Chris Batterham who retired from the Board on 24 August 2016), Ian Ritchie and Crawford Beveridge. The Audit Committee, chaired by Ian Steele, who has recent and relevant experience, is authorised by the Board to conduct any activity within its terms of reference and to seek any information it requires from any employee. The Audit Committee has written terms of reference, which are available on request, and include reviewing and monitoring: interim and annual reports, including consideration of the appropriateness of accounting policies; • • material assumptions and estimates adopted by management; developments in accounting and reporting requirements; • external auditor’s plans for the year-end audit of the Company and its subsidiaries; • the effectiveness of the Committee; • the Risk Register covering the systems of internal control and their effectiveness, reporting and making recommendations • to the Board on the results of the review and receiving regular updates on key risk areas of financial control; the performance and independence of the external auditor concluding in a recommendation to the Board on the reappointment of the auditor by shareholders at the Annual General Meeting; non-audit fees charged by the external auditor; and the formal engagement terms entered into with the external auditor. • • • At the invitation of the Committee, meetings are attended by the Chief Executive Officer, the Group Finance Director and the Group Financial Controller. Representatives of the external auditors, Grant Thornton, also attend each meeting. The Chairman of the Committee also meets separately with senior management and the external auditors. The Chairman of the Audit Committee reports to the subsequent meeting of the Board on the Committee’s work and the Board receives a copy of the minutes of each meeting. The Committee’s effectiveness is reviewed annually as part of the Board evaluation exercise. Under its terms of reference, the Audit Committee is responsible for monitoring the independence, objectivity and performance of the external auditors and for making a recommendation to the Board regarding the appointment of external auditors on an annual basis. The Group’s external auditors, Grant Thornton UK LLP, were first appointed as external auditors of the Group for the period ended 31 March 2005. The auditors have confirmed to the Committee that in relation to their services to the Company they comply with UK regulatory and professional requirements, including Ethical Standards issued by the Auditing Practices Board and that their objectivity is not compromised. The auditors are required each year to confirm in writing that they have complied with the independence rules of their profession and regulations governing independence. Before Grant Thornton takes on any engagement for other services from the Company careful consideration is given as to whether the project could conflict with their role as auditor or impair their independence. The Remuneration Committee The Remuneration Committee is chaired by Crawford Beveridge and its other members are Ian Ritchie and Ian Steele. It is normal for the Chief Executive Officer to be invited to attend meetings except where matters under review by the Committee relate to him. The Committee has responsibility for making recommendations to the Board on the remuneration packages of the Executive Directors which includes: • making recommendations to the Board on the Company’s policy on Directors’ remuneration and overseeing long term incentive plans (including share option schemes for all employees); • • ensuring remuneration is both appropriate to the level of responsibility and adequate to attract and/or retain Directors and staff of the calibre required by the Company; and ensuring that remuneration is in line with current industry practice. 19 iomart Group plc Annual report and accounts 2017Corporate Governance Report Risk Management and Internal Control The Directors, who are responsible for the Group’s system of risk management and internal control, have established systems to ensure that an appropriate level of oversight and control is provided. The systems are reviewed for effectiveness by the Audit Committee and the Board. The Group’s systems of risk management and internal control are designed to help the Company meet its business objectives by appropriately managing, rather than eliminating, the risks to those objectives. The controls can only provide reasonable, not absolute, assurance against material misstatement or loss. Executive Directors and senior management meet to review both the risks facing the business and the controls established to minimise those risks and their effectiveness in operation on an on-going basis. The aim of these reviews is to provide reasonable assurance that material risks and problems are identified and appropriate action taken at an early stage. The Board confirms that procedures to identify, evaluate and manage the significant risks faced by the Group have been in place throughout the year and up to the date of approval of the Annual Report. Financial Control The annual financial plan is reviewed and approved by the Board. Financial results with comparisons to plan and forecast results are reported on monthly to the Board together with a report on operational achievements, objectives and issues encountered. Significant variances from plan are discussed at Board meetings and actions set in place to address them. Approval levels for authorisation of expenditure are at set levels and cascaded through the management structure with any expenditure in excess of predefined levels requiring approval from the executive directors. Relations with Shareholders The Chief Executive Officer and Finance Director have, where appropriate, had regular dialogue with shareholders and analysts to discuss strategic and other issues including the Company’s financial results. The Company engages in full and open communication with both institutional and private investors and responds promptly to all queries received. In conjunction with the Company’s brokers and other financial advisers all relevant news is distributed in a timely fashion through appropriate channels to ensure shareholders are able to access material information on the Company’s progress. The Company’s website has a section for investors, which contains all publicly available financial information and news on the Company. Going Concern The Directors, having made suitable enquiries and analysis of the accounts, consider that the Group has adequate resources to continue in business for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis in preparing the financial statements. In making this assessment, the Directors have considered the Group budgets and the cash flow forecasts for the next two financial periods, and associated risks and the availability of bank and leasing facilities. The £60m revolving credit facility is available from Lloyds Banking Group plc until June 2019. AIM Rule Compliance Report iomart Group plc is quoted on AIM and as a result the Company has complied with AIM Rule 31 which requires the following: • Have in place sufficient procedures, resources and controls to enable its compliance with the AIM Rules; Seek advice from its Nominated Advisor (“Nomad”) regarding its compliance with the Rules whenever appropriate and take that advice into account; Provide the Company’s Nomad with any information it reasonably requests in order for the Nomad to carry out its responsibilities under the AIM Rules for Nominated Advisors, including any proposed changes to the Board and Provision of draft notifications in advance; Ensure that each of the Company’s Directors accepts full responsibility, collectively and individually, for compliance with the AIM rules; and Ensure that each Director discloses without delay all information which the Company needs in order to comply with AIM Rule 17 (Disclosure of Miscellaneous Information) insofar as that information is known to the director or could with reasonable diligence be ascertained by the Director. • • • • 20 iomart Group plc Annual report and accounts 2017Corporate Governance Report Quality of Personnel and Employee Involvement The Group is committed to attracting and retaining the highest level of personnel. It strives to do this through, amongst other things, the application of high standards in recruitment. The Group is aware of the importance of good communication in relationships with its staff and also follows a policy of encouraging training. A number of employees participate in the growth of the business through the ownership of share options with some employees also participating in the Group bonus scheme. Business Ethics The Board recognises that the Company is accountable to its shareholders and, at the same time, seeks to take into account the interests of all its stakeholders including customers, suppliers and subcontractors, employees, as well as the local community, and the environment in which it operates. The Group maintains core values of Honesty, Integrity, Hard Work, Service and Quality and actively promotes these values in all activities undertaken on behalf of the Group. Customers The Group treats all of its customers with the utmost respect and seeks to be honest and fair in all relationships with them. The Group provides its customers with products of high quality. Suppliers and Subcontractors Relationships with suppliers and subcontractors are based on mutual respect, and the Group seeks to be honest and fair in its relationships with suppliers and subcontractors, and to honour the terms and conditions of its agreements in place with such suppliers and subcontractors. The Group is aware that the giving or accepting of bribes is not acceptable business conduct. Employees The Group recognises the importance of its employees and that the success of the Group is due to their efforts. The Group respects the dignity and rights of all its employees. The Group provides clean, healthy and safe working conditions. An inclusive working environment and a culture of openness are maintained by the regular dissemination of information. The Group endeavours to provide equal opportunities for all employees and facilitates the development of employees’ skill sets. A fair remuneration policy is adopted throughout the Group. The Group does not tolerate any sexual, physical or mental harassment of its employees. The Group operates an equal opportunities policy and specifically prohibits discrimination on grounds of colour, ethnic origin, gender, ages, religion, political or other opinion, disability, or sexual orientation. By order of the Board Bruce Hall Company secretary 12 June 2017 21 iomart Group plc Annual report and accounts 2017Report of the board to the members on directors' remuneration Directors’ Remuneration Report for the year to March 2017 As the Company is listed on the Alternative Investment Market it is not required to comply with the provisions of the UK Corporate Governance Code 2014 (“Code”) issued by the Financial Reporting Council. However, in framing its remuneration policy the committee has given consideration to the Code to ensure that the remuneration policy both reflects our strategy and is aligned with shareholders’ interests. We have provided disclosures in addition to that which is required by AIM Rule 19 on a voluntary basis to enable shareholders to understand and consider our remuneration arrangements. In line with best practice, we will also voluntarily submit this report to an advisory shareholder vote at the annual general meeting. Remuneration committee The remuneration committee determines, on behalf of the board, the Group’s policy for executive remuneration and the individual remuneration packages for executive directors. In setting the Group’s remuneration policy, the remuneration committee considers a number of factors, including the following: • • • salaries and benefits available to executive directors of comparable companies; the need to attract and retain executives of an appropriate calibre; and alignment with our overall strategy and the continued commitment of executives to the Group’s success through appropriate incentive schemes. The committee is chaired by Crawford Beveridge. Ian Ritchie, the Company’s non-executive Chairman and Ian Steele are also members of the Committee. The CEO may attend meetings from time to time at the invitation of the committee and provide information and support as requested. Directors are not present when their own remuneration is being discussed. The committee normally meets at least twice per year and met two times during the current year. Remuneration of executive directors The remuneration packages of the executive directors comprise the following elements: Element Overview of policy and structure Opportunity Performance measures Base salary • The remuneration committee sets base salaries to reflect responsibilities and the skill, knowledge and experience of the individual taking into account salary levels at similar sized businesses. • Base salaries are reviewed annually and the remuneration committee considers external expert advice when setting the level of reward packages. • The executive directors do not receive directors’ fees. • The committee recently reviewed base salary and salaries with effect from 1 April 2017 will be as follows: • CEO – £350,000 • FD – £210,000 n/a 22 iomart Group plc Annual report and accounts 2017Report of the board to the members on directors' remuneration Remuneration of executive directors (continued) Element Overview of policy and structure Opportunity Performance measures Annual bonus • The executive directors are eligible to receive an annual bonus dependent on Group and individual performance at the discretion of the remuneration committee. • Bonuses are normally paid in cash following the year end. The maximum annual bonus opportunity is 135% of base salary. Performance share plan • The Group operates a performance share plan for executive directors and managers to reward, retain and incentivise those individuals who have made a major contribution to the Group and will continue to play a key role in helping the Group achieve its objectives in the future. • Awards are granted in the form of 1p options. • No share options awarded will vest any earlier than the third anniversary of the date of grant of the option. • Participants have 10 years from award to exercise awards The maximum award under the performance share plan is 110% of base salary. • The level of executive directors’ discretionary bonus payments is determined by a number of factors including the Group’s financial performance, its successful continuation of its organic and acquisitive strategy, its continual internal improvement programme and the individual’s own performance. • For the bonus for the March 2018 financial year the performance measures will be based primarily on Group adjusted EBITDA performance, with the above criteria taken into account by the Committee when determining payments. • For achievement of target a bonus 100% of salary is paid. Executives only receive more than 100% of salary for performance well in excess of target. Bonuses reduce significantly if targets are not achieved with no bonuses payable if less than 90% of target is achieved. • The vesting of options is subject to the achievement of performance conditions and the executive continuing in employment with the group. • Performance is assessed based on the achievement of profit targets in three years set with reference to our organic and acquisitive growth strategy. • Options granted in April 2017 will vest based on Group adjusted EBITDA performance for the March 2020 financial year to ensure continued focus on driving profit performance. 23 iomart Group plc Annual report and accounts 2017Report of the board to the members on directors' remuneration Remuneration of executive directors (continued) Element Overview of policy and structure Opportunity Performance measures Pension • The Company may make pension contributions to individuals’ personal pension arrangements. • The maximum contributions payable by the Group are 2 times the contribution made by the director up to a maximum employer contribution of 10% of basic salary. n/a • Neither the CEO nor the CFO currently receive a pension contribution. Benefits • The executive directors are entitled to life insurance cover, death in service benefits and to participate in the Group’s Private Medical Insurance scheme. n/a • The Group operates a Sharesave scheme for all employees including executive and non-executive directors. n/a Service contracts Executive directors are engaged under service contracts which require the following notice periods: Angus MacSween Richard Logan 12 months 6 months Remuneration of non-executive directors The fees paid to the non-executive directors are determined by the Board. In addition to basic fees, non-executive directors are eligible to participate in the Sharesave scheme. Non-executive directors are not entitled to receive any bonus or other benefits. Non-executive directors are entitled to reasonable expenses incurred in the performance of their duties. Non-executive directors’ fees were reviewed during the year to ensure that they are appropriate for a company of our size and complexity. Our policy for the March 2018 financial year is to pay a fee of £40,000 per annum for Board Director duties with additional fees of £5,000 per annum paid to the Audit and Remuneration Committee chairman to reflect the additional time required to fulfil these roles. The chairman receives a fee of £75,000 per annum. Non-executive directors’ letters of appointment are on a 6 month rolling basis. 24 iomart Group plc Annual report and accounts 2017 Report of the board to the members on directors' remuneration Directors’ remuneration for the year ended 31 March 2017 Details of individual director’s emoluments for the year are as follows (this information has been audited): Name of director Executive directors Angus MacSween Richard Logan Sarah Haran 1 Non-executive directors Chris Batterham 2 Crawford Beveridge Ian Ritchie Ian Steele 3 Salary or fees £ Bonus £ Benefits £ 330,000 196,000 191,000 231,000 137,200 133,700 4,210 2,669 940 14,090 25,000 55,000 27,462 - - - - - - - - 1 Sarah Haran stepped down from the Board on 31 March 2017 2 Chris Batterham stepped down from the Board on 24 August 2016 3 Ian Steele joined the Board on 15 June 2016 Pension contributions £ Year ended 31 March 2017 Total £ Year ended 31 March 2016 Total £ - - - - - - - 565,210 335,869 325,640 595,706 373,020 361,660 14,090 25,000 55,000 27,462 35,000 25,000 55,000 - Directors’ interests in shares The interests of the directors in the shares of the company at 31 March 2017, together with their interests at 1 April 2016 were as follows: Name of director Angus MacSween Chris Batterham (resigned 24 August 2016) Crawford Beveridge Sarah Haran (resigned 31 March 2017) Richard Logan Ian Ritchie Ian Steele (appointed 15 June 2016) Number of ordinary shares 31 March 2017 At 1 April 2016 16,998,789 16,994,087 n/a 30,000 1,956,449 962,095 156,102 - 90,621 30,000 1,963,747 969,393 151,400 n/a 25 iomart Group plc Annual report and accounts 2017Report of the board to the members on directors' remuneration Directors’ interests in share options (this information has been audited) The interests of the directors at 31 March 2017 in options over the ordinary shares of the Company were as follows: At 31 March 2017 Exercise price Date of Grant Date from which exerciseable Expiry date 43,010 46.5p 06/10/2008 31/03/2009 06/10/2018 113,334 113,333 113,333 1p 1p 1p 27/03/2013 31/05/2014 27/03/2023 27/03/2013 31/05/2015 27/03/2023 27/03/2013 31/05/2016 27/03/2023 - 191.4p 08/01/2014 01/02/2017 31/07/2017 117,480 1p 25/09/2014 25/09/2017 25/09/2024 4,620 194.8p 12/08/2015 01/10/2018 31/03/2019 175,575 134,281 814,966 1p 1p 28/08/2015 28/08/2018 28/08/2028 01/04/2016 01/04/2019 01/04/2026 - 50.5p 27/09/2007 27/09/2010 27/09/2017 42,913 80,000 80,000 80,000 46.5p 06/10/2008 31/03/2009 06/10/2018 1p 1p 1p 27/03/2013 31/05/2014 27/03/2023 27/03/2013 31/05/2015 27/03/2023 27/03/2013 31/05/2016 27/03/2023 - 191.4p 08/01/2014 01/02/2017 31/07/2017 68,000 1p 25/09/2014 25/09/2017 25/09/2024 4,620 194.8p 12/08/2015 01/10/2018 31/03/2019 85,253 70,574 3,529 514,889 28,495 80,000 80,000 80,000 1p 1p 1p 28/08/2015 28/08/2018 28/08/2028 01/04/2016 01/04/2019 01/04/2026 24/08/2016 24/08/2019 24/08/2026 46.5p 06/10/2008 31/03/2010 06/10/2018 1p 1p 1p 27/03/2013 31/05/2014 27/03/2023 27/03/2013 31/05/2015 27/03/2023 27/03/2013 31/05/2016 27/03/2023 - 191.4p 08/01/2014 01/02/2017 31/07/2017 72,080 1p 25/09/2014 25/09/2017 25/09/2024 4,620 194.8p 12/08/2015 01/10/2018 31/03/2019 87,557 72,481 7,428 512,661 1p 1p 1p 28/08/2015 28/08/2018 28/08/2028 01/04/2016 01/04/2019 01/04/2026 24/08/2016 24/08/2019 24/08/2026 - 191.4p 08/01/2014 01/02/2017 31/07/2017 4,620 4,620 194.8p 12/08/2015 01/10/2018 31/03/2019 Name of director At 1 April 2016 Exercised Granted Lapsed - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Angus MacSween Sarah Haran Richard Logan 43,010 113,334 113,333 113,333 - - - - 4,702 (4,702) 117,480 4,620 175,575 - - - - - - - - - - - - - 134,281 685,387 (4,702) 134,281 58,115 (58,115) 42,913 80,000 80,000 80,000 4,702 68,000 4,620 85,253 - - - - - - (4,702) - - - - - 503,603 (62,817) 28,495 80,000 80,000 80,000 4,702 72,080 4,620 87,557 - - - - - - (4,702) - - - - - - - - - - - - - - 70,574 3,529 74,103 - - - - - - - - 72,481 7,428 437,454 (4,702) 79,909 Ian Ritchie 4,702 4,620 9,322 (4,702) - (4,702) - - - 26 iomart Group plc Annual report and accounts 2017Report of the board to the members on directors' remuneration During the year options over 288,293 ordinary shares (2016: 348,385) were granted to Directors under the unapproved share option scheme with an average exercise price of 1.0p per share (2016: 1.0p per share) and no options over ordinary shares under the Sharesave scheme were granted to Directors (2016: 18,480 with an average exercise price of 194.8p per share). Between 25 August 2016 and 26 August 2016, Richard Logan sold 6,000 ordinary shares at an average price of 307.3p per share resulting in proceeds of £18,440. Over the same time period, Mr Logan’s spouse sold 6,000 ordinary shares at an average price of 307.3p per share resulting in proceeds of £18,440. On 26 August 2016, Sarah Haran sold 6,000 ordinary shares for 306.0p per share resulting in proceeds of £18,360. Between 30 August 2016 and 31 August 2016, Mrs Haran’s spouse sold 6,000 ordinary shares at an average price of 297.5p per share resulting in proceeds of £17,850. On 6 December 2016, Sarah Haran exercised 58,115 share options under the Company’s Enterprise Management Incentive Share Option Scheme at an exercise price of 50.5p. Mrs Haran sold the resulting 58,115 ordinary shares on 7 December 2016 at a price of 289.0p per share resulting in a gain on exercise of £138,604. The market price on the date of exercise was 291.3p. On 1 February 2017, Angus MacSween, Richard Logan, Sarah Haran and Ian Ritchie each exercised 4,702 share options under the Company’s sharesave scheme at an exercise price of 191.4p per share each resulting in a gain on exercise of £5,436. The market price on the date of exercise was 307.0p. The market price of the company’s shares at the end of the financial period was 296.5p and the range of prices during the period was between 245.0p and 325.0p. By order of the board Crawford Beveridge Chairman, Remuneration committee 12 June 2017 27 iomart Group plc Annual report and accounts 2017Directors' Report The directors present their annual report on the affairs of the Group, together with the financial statements and auditor’s report, for the year ended 31 March 2017. Financial instruments The Group’s financial instruments comprise cash and liquid resources, bank loans and finance leases together with various items such as trade debtors and trade creditors that arise directly from its operations. The main purpose of these financial instruments is to provide finance for the Group’s operations. The Group has a £60m multi option revolving credit facility with Lloyds Banking Group plc. At the start of the year there was £34.5m outstanding on the multi option revolving credit facility and there were no drawdowns made from the facility during the year. Repayments totalling £16.0m were made resulting in a balance outstanding at the end of the year of £18.5m. The multi option revolving credit facility may be used by the Group to finance acquisitions, capital expenditure and for the issue of guarantees, bonds or indemnities. The facility is available until June 2019 at which point any advances made under the multi option revolving credit facility will become immediately repayable. In addition, each draw down made under this facility can be for either 3 or 6 months and can either be repaid or continued at the end of the period. Interest is charged on this loan at an annual rate determined by the sum of the multi option revolving credit facility margin, LIBOR and the lender’s mandatory costs. The multi option revolving credit facility margin is fixed at 1.7% per annum and a non-utilisation fee of 40% of the multi option revolving credit facility margin is due on any undrawn portion of the full £60m multi option revolving credit facility. The effective interest rate for multi option revolving credit facility in the current year was 3.32% (2016: 3.17%). The Group has exposure to movements in interest rates on its borrowings. The Group has entered into an interest rate swap in respect of £10m which has been drawn under the revolving credit facility from April 2015 which reduces by £2m every 6 months until October 2017 and as a consequence the interest rate on that amount of borrowing is fixed at 2.03% from April 2015 until maturity. As a consequence, at 31 March 2017, £2m of the amount drawn under the multi option revolving credit facility was covered by interest rate swap arrangements. The fair value of the interest rate swap contracts is estimated to be a gain of £84,000 (2016: £64,000) which has been recognised in profit or loss for the year. The Group’s borrowings at 31 March 2017 comprise finance leases totalling £0.9m (2016: £1.4m) and bank facility usage totalling £18.5m (2016: £34.5m). The interest rates on the finance leases are fixed for the term of the lease at between 9.3% and 11.5% and the average interest rate was 11.2% (2016: 9.9%). The Group has exposure to movements in the exchange rate of the US dollar as certain domain name purchases and licences are transacted in this currency. To protect cash flows against the level of exchange rate risk, the Group entered into forward exchange contracts to hedge foreign exchange exposures arising on the forecast payments. The majority of transactions of the parent company and the UK subsidiaries are in UK sterling and, with the exception of forward foreign exchange contracts and interest rate swaps, the Group does not use derivative instruments. Additional information on financial instruments is included in Note 30. Dividend The directors have not declared an interim dividend for the year ended 31 March 2017 (2016: nil). The directors recommend a final dividend for the year ended 31 March 2017 of 6.00p per share (2016: 3.15p per share). Research and development The Group develops cloud computing products including private cloud platforms, hybrid cloud platforms, virtual platforms, online backup and storage solutions and email related products. Post balance sheet events On 17 May 2017 the Company acquired the entire share capital of Dediserve Limited. Further details of the acquisition have been given in note 31. Future developments The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report on pages 7 to 15. 28 iomart Group plc Annual report and accounts 2017Directors' Report Directors and their interests The present membership of the board is set out on page 84 and the directors who served during the year are listed on page 25. In accordance with the company’s Articles of Association Angus MacSween, Richard Logan and Crawford Beveridge are due to retire by rotation. Angus MacSween and Richard Logan offer themselves for re-election at the forthcoming annual general meeting. Details of directors’ interests in the company’s shares are set out in the Report of the Board to the Members on Directors’ Remuneration on pages 22 to 27. Insurance for directors and officers The Company has purchased and maintains appropriate insurance cover against legal action brought against directors and officers. Substantial shareholdings At 30 May 2017 the following interests in 3% or more of the issued ordinary share capital, excluding shares held by the iomart Group plc Employee Benefit Trust, had been notified to the Company: Shareholder Liontrust Asset Management Angus MacSween Octopus Investments Schroders plc Investec Wealth & Investment Noble Grossart Investment Limited Shares Percentage held 17,182,408 16,998,789 10,767,142 7,727,716 4,077,324 3,505,000 15.97% 15.80% 10.01% 7.18% 3.79% 3.26% Transactions in own shares During the year 745,797 (2016: 98,567) own shares held in treasury at a carrying value of 49.5p each were issued following the exercise of share options by employees for which a net total of £1,065,018 (2016: £91,374) was received. Employee involvement The Group regularly communicates with all staff providing information on developments within the Group including updates on the Group’s strategy and details of new products and services provided by the Group. Staff are eligible to receive share options in the company under the Group’s share incentive schemes and it is the board’s policy to make specific awards as appropriate to attract and retain the best available people. Employment of disabled persons Full and fair consideration is given to applications for employment made by disabled persons having regard to their particular aptitudes and abilities. Appropriate training is arranged for disabled persons, including retraining for alternative work of employees who become disabled, to promote their career development within the organisation. Auditors Grant Thornton UK LLP have expressed their willingness to continue in office as auditors and a resolution to reappoint them will be proposed at the forthcoming annual general meeting. By order of the board Bruce Hall Company secretary 12 June 2017 29 iomart Group plc Annual report and accounts 2017Directors' Responsibilities Statement The directors are responsible for preparing the Strategic Report and Directors’ Report, and the Group and Parent Company financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have to prepare the financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs and profit or loss of the Company and Group for that period. In preparing these financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and accounting estimates that are reasonable and prudent; • state whether applicable IFRSs have been followed for the Group financial statements and whether United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable laws) have been followed for the Parent Company financial statements, subject to any material departures disclosed and explained in the financial statements; • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and Parent Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and Parent Company and enable them to ensure that the Group and Parent Company financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and Parent Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors confirm that: • so far as each director is aware, there is no relevant audit information of which the Group and Parent Company’s auditor is unaware; and • the directors have taken all the steps that they ought to have taken as directors in order to make themselves aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Group's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 30 iomart Group plc Annual report and accounts 2017 Independent Auditor's Report to the Members of iomart Group Plc We have audited the Group financial statements of iomart Group Plc for the year ended 31 March 2017 which comprise the consolidated statement of comprehensive income, the consolidated statement of financial position, the consolidated statement of cash flows, the consolidated statement of changes in equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditor As explained more fully in the Directors’ Responsibilities Statement as set out on page 30, the directors are responsible for the preparation of the Group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Group financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council's website at www.frc.org.uk/auditscopeukprivate. Opinion on financial statements In our opinion the parent company financial statements: • give a true and fair view of the state of the Group's affairs as at 31 March 2017 and of its profit for the year then ended; • have been properly prepared in accordance with IFRS as adopted by the European Union; and • have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matter prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: • the information given in the strategic report and the directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and • the strategic report and the directors' report have been prepared in accordance with applicable legal requirements. Matter on which we are required to report under the Companies Act 2006 In the light of the knowledge and understanding of the group and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors' report. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the Group, or returns adequate for our audit have not been received from branches not visited by us; or • the Group financial statements are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Other matter We have reported on the information in the Directors’ Remuneration Report that is described as having been audited and have reported separately on the parent company financial statements of iomart Group plc for the year ended 31 March 2017. Robert Hannah Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants Glasgow 12 June 2017 31 iomart Group plc Annual report and accounts 2017Consolidated statement of comprehensive income. Year ended 31March 2017 Revenue Cost of sales Gross profit Administrative expenses Operating profit Analysed as: Earnings before interest, tax, depreciation, amortisation, acquisition costs, share based payments and gain on revaluation of contingent consideration Share based payments Acquisition costs Depreciation Amortisation – acquired intangible assets Amortisation – other intangible assets Gain on revaluation of contingent consideration Finance income Finance costs Profit before taxation Taxation Note 4 4 27 6 4 4 4 30 7 7 2017 £’000 89,573 2016 £’000 76,280 (32,266) (24,650) 57,307 51,630 (41,074) (37,917) 16,233 13,713 36,570 32,341 (1,844) (104) (1,081) (116) (10,972) (10,878) (5,558) (1,859) (5,354) (1,199) - 22 870 128 (1,601) (1,687) 14,654 13,024 9 (2,571) (2,005) Profit for the year attributable to equity holders of the parent 12,083 11,019 Other comprehensive income Amounts which may be reclassified to profit or loss Currency translation differences Other comprehensive income for the year Total comprehensive income for the year attributable to equity holders of the parent Basic and diluted earnings per share Total operations Basic earnings per share Diluted earnings per share 22 22 10 10 12,105 11,029 12 12 11.27 p 11.08 p 10.32 p 10.17 p The following notes form part of the financial statements. 32 iomart Group plc Annual report and accounts 2017        Consolidated statement of financial position. Year ended 31March 2017 Note 2017 £’000 2016 £’000 ASSETS Non-current assets Intangible assets – goodwill Intangible assets – other Lease deposits Property, plant and equipment Current assets Cash and cash equivalents Trade and other receivables Total assets LIABILITIES Non-current liabilities Contingent consideration due on acquisitions Non-current borrowings Trade and other payables Provisions Deferred tax Current liabilities Contingent consideration due on acquisitions Trade and other payables Provisions Current income tax liabilities Current borrowings Total liabilities Net assets EQUITY Share capital Own shares Capital redemption reserve Share premium Merger reserve Foreign currency translation reserve Retained earnings  Total equity 13 13 14 16 18 17 21 22 20 23 10 21 19 23 22 25 26 62,000 19,707 2,760 35,049 119,516 8,906 15,080 23,986 61,123 23,065 2,760 36,045 122,993 10,341 13,718 24,059 143,502 147,052 - (625) (102) (1,721) (888) (3,336) (2,373) (23,368) (38) (2,000) (18,872) (46,651) (2,068) (826) (455) (1,879) (2,075) (7,303) (1,135) (19,532) (211) (1,504) (35,098) (57,480) (49,987) (64,783) 93,515 82,269 1,078 (120) 1,200 21,067 4,983 (15) 65,322 93,515 1,078 (489) 1,200 21,067 4,983 (37) 54,467 82,269 These financial statements were approved by the board of directors and authorised for issue on 12 June 2017. Signed on behalf of the board of directors Angus MacSween Director and chief executive officer iomart Group plc – Company Number: SC204560 The following notes form part of the financial statements 33 iomart Group plc Annual report and accounts 2017                                Consolidated statement of cash flows. Year ended 31March 2017 Profit before taxation Gain on revaluation of contingent consideration Finance costs – net Depreciation Amortisation Share based payments Movement in trade receivables Movement in trade payables Cash flow from operations Taxation paid Net cash flow from operating activities Cash flow from investing activities Purchase of property, plant and equipment Capitalisation of development costs Purchase of intangible assets Payments for current period acquisitions net of cash acquired Contingent consideration paid Payment of deposits Finance income received Net cash used in investing activities Cash flow from financing activities Issue of shares Draw down of bank loans Repayment of finance leases Repayment of bank loans Finance costs paid Dividends paid Net cash (used in)/received from financing activities Note 30 7 4 4 27 16 13 13 22 22 8 2017 £’000 14,654 - 1,579 10,972 7,417 1,844 837 480 37,783 (3,874) 33,909 2016 £’000 13,024 (870) 1,559 10,878 6,553 1,081 (1,612) 298 30,911 (4,311) 26,600 (10,189) (12,385) (1,372) (1,845) (703) (1,161) - 22 (1,123) (1,207) (15,924) (1,650) (300) 33 (15,248) (32,556) 1,064 - (580) (16,000) (1,205) (3,375) (20,096) 91 16,500 (984) (3,500) (1,489) (2,668) 7,950 Net (decrease)/increase in cash and cash equivalents (1,435) 1,994 Cash and cash equivalents at the beginning of the year 10,341 8,347 Cash and cash equivalents at the end of the year 18 8,906 10,341 The following notes form part of the financial statements. 34 iomart Group plc Annual report and accounts 2017Consolidated statement of changes in equity. Year ended 31March 2017 Changes in equity Share capital £’000 Own shares EBT £’000 Own shares Treasury £’000 Note Foreign currency translation reserve £’000 Capital redemption reserve £’000 Share premium account £’000 Merger reserve £’000 Retained earnings £’000 Total £’000 Balance at 1 April 2015 1,078 (70) (468) (47) 1,200 21,067 4,983 44,936 72,679 Profit in the year Currency translation differences Total comprehensive income Dividends – final (paid) Share based payments Deferred tax on share based payments Issue of own shares for option redemption Total transactions with owners 8 27 10 26 Balance at 31 March 2016 Profit in the year Currency translation differences Total comprehensive income Dividends – final (paid) Share based payments Deferred tax on share based payments Issue of own shares for option redemption Total transactions with owners 8 27 10 26 Balance at 31 March 2017 - - - - - - - - - - - - - - - - - - - - - - 49 49 - 10 10 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 11,019 11,019 - 10 11,019 11,029 (2,668) (2,668) 1,081 1,081 57 42 57 91 (1,488) (1,439) 1,078 (70) (419) (37) 1,200 21,067 4,983 54,467 82,269 - - - - - - - - - - - - - - - - - - - - - - 369 369 - 22 22 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 12,083 12,083 - 22 12,083 12,105 (3,375) (3,375) 1,844 1,844 (392) (392) 695 1,064 (1,228) (859) 1,078 (70) (50) (15) 1,200 21,067 4,983 65,322 93,515 The following notes form part of the financial statements. 35 iomart Group plc Annual report and accounts 2017Notes to the financial statements. Year ended 31March 2017 Cloud Services segment Under IFRS 15 some set-up fees charged on contracts, which are currently recognised when the set-up is complete, will require to be spread over the life of the contract. The impact of any changes, both individually and in aggregate are not expected to be material to the revenue or profits in any given financial year. Easyspace segment The total revenue from the provision of domain names is currently recognised at the point of sale when the title to the domain name passes to the customer. Under IFRS 15 this revenue will require to be split between the registration of the domain and the ongoing services, such as support and mail forwarding, which are provided by the company over the period of registration of the domain. As with the Cloud Services segment, the impact of any changes, both individually and in aggregate are not expected to be material to the revenue or profits in any given financial year. Non-recurring segment The current accounting policies within the non-recurring segment comply fully with IFRS 15, and as such, no adjustments will be required. IFRS 16 presents new requirements for the recognition, measurement, presentation and disclosure of leases. The standard provides that lessees will be required to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. The standard was issued in January 2016 and applies to annual reporting periods beginning on or after 1 January 2019 but is yet to be endorsed by the EU. The Directors have not yet assessed the impact that this standard will have on the Group’s net asset position and are therefore not in a position to make a reliable estimate of the impact this revised standard will have on the Group’s accounting policies. The standard is expected to be applicable to the Group for the period beginning 1 April 2019. Summary of Accounting Policies Basis of consolidation The Group financial statements consolidate those of the Company and all of its subsidiary undertakings drawn up to 31 March 2017. Under IFRS 10, control exists when an investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. As each of the divisions within the Group are 100% wholly owned subsidiaries, the Group has full control over each of its investees. Unrealised gains on transactions between the Group and its subsidiaries are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Amounts reported in the financial statements of subsidiaries have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Group. 1. GENERAL INFORMATION iomart Group plc is a company incorporated and domiciled in the United Kingdom under the Companies Act 2006. The address of the registered office is given on page 84 of this report. The nature of the Group’s operations and its principal activities are set out in the Strategic Report and Directors’ Report. The financial statements are presented in UK Pounds Sterling because that is the currency of the primary economic environment in which the Group operates. 2. ACCOUNTING POLICIES Basis of preparation The consolidated financial statements have been prepared in accordance with applicable International Financial Reporting Standards (IFRS) as adopted by the EU and in accordance with the Companies Act 2006. The measurement bases and principal accounting policies of the Group are set out below. These policies have been consistently applied to all years presented unless otherwise stated. Standards, amendments and interpretations effective in year There were no additional standards, amendments and interpretations that had a material impact on the Group’s financial statements during the year. The following standards, amendments and interpretations were effective in the year but had no material impact on the Group’s financial statements: • IAS 16 and IAS 38 - Amendments relating to Clarification • • • of Acceptable Methods of Depreciation and Amortisation. IAS 27 - Amendments relating to Equity Method in Separate Financial Statements. IFRS 9 – Financial instruments. IFRS 10 and IAS 28 - Amendments relating to Sale or Contribution of Assets between an Investor and its Associate or Joint Venture. • IFRS 11 - Amendments relating to Acquisitions of Interests in Joint Operations. • Annual Improvements to IFRSs 2012 - 2014 cycle. New standards and interpretations of existing standards that are not yet effective and have not been adopted early by the Group IFRS 15, Revenue from Contracts with Customers, becomes effective for the Group on 1 April 2018. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognised at the date of initial application (the cumulative catch-up transition method). It is expected that the Group will adopt the cumulative catch-up transition method. The Group is currently performing a detailed analysis of the impact of IFRS 15 on all aspects of its business. The preliminary analysis has been substantially completed and the indications are that the vast majority of the Group’s current accounting policies as regards revenue recognition will not change as a result of the adoption of IFRS 15. The review has identified some minor areas in which adjustments may be required in revenue and cost recognition and in the related procedures and processes. The areas which are likely to be affected are in relation to set-up fees within the Cloud Services segment and revenue from domain registration within the Easyspace segment. 36 iomart Group plc Annual report and accounts 2017 Notes to the financial statements. Year ended 31March 2017 2. ACCOUNTING POLICIES (CONTINUED) Acquisitions of subsidiaries are dealt with by the acquisition method. The acquisition method involves the recognition at fair value of all identifiable assets and liabilities, including contingent liabilities of the subsidiary, at the acquisition date, regardless of whether or not they were recorded in the financial statements of the subsidiary prior to acquisition. On initial recognition, the assets and liabilities of the subsidiary are included in the statement of financial position at their fair values, which are also used as the bases for subsequent measurement in accordance with the Group accounting policies. Where the Group’s assessment of the net fair value of a subsidiary’s identifiable assets acquired and liabilities assumed is less than the fair value of the consideration including contingent consideration of the business combination then the excess is treated as goodwill. Where the Group’s assessment of the net fair value of a subsidiary’s net assets and liabilities exceeds the fair value of the consideration including contingent consideration of the business combination then the excess is recognised through profit or loss immediately. Revenue Revenue comprises the fair value of the consideration received or receivable for the sale of services in the ordinary course of the Group’s activities. Revenue is shown net of value-added tax, returns, rebates and discounts and after eliminating sales within the Group. The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow from the transaction and specific criteria have been met for each of the Group’s activities as described below. The amount of revenue is not considered to be reliably measurable until all contingencies relating to the sale have been resolved. The Group bases its estimates on prior experience, taking into consideration the type of customer and the type of transaction. Easyspace This operating segment provides domain name registration and hosting services. Revenue from the provision of domain names is recognised at the point of sale when the title to the domain name passes to the customer. Revenue from the provision of hosting services is recognised evenly over the period of the service and only after the service has been established. Any unearned portion of revenue is included in payables as deferred revenue. Cloud Services This operating segment provides managed cloud computing facilities and services including consultancy. Revenue from the sale of cloud computing facilities and managed services is spread evenly over the period of the agreement and only after the service has been established. Any unearned portion of revenue is included in payables as deferred revenue. Consultancy services are generally provided on a “time and materials” basis and therefore revenue is recognised as these services are rendered. Non-recurring This operating segment provides data storage, backup and virtualisation solutions. Revenue from the supply of hardware or software, and the provision of services in respect of installation or training, is recognised when delivery and installation of the equipment is completed. Revenue from the sale of cloud computing facilities and support services is spread evenly over the period of the agreement and only after the service has been established. Any unearned portion of revenue is included in payables as deferred revenue. Interest Interest is recognised on an accruals basis using the effective interest method. Intangible assets is capitalised Goodwill Goodwill arising on consolidation in the consolidated statement of financial position and, subject to an annual impairment test, has an indefinite life. The carrying value of goodwill is cost less accumulated impairment losses and is allocated to cash generating units for the purpose of impairment testing. The allocation is made to those cash generating units that are expected to benefit from the business combination. Impairment reviews are carried out by the Board at least annually. Impairments to goodwill are charged to profit or loss in the period in which they arise. Customer relationships Customer relationships are recognised only on acquisition. The fair value is derived based on discounted cash flows from estimated recurring revenue streams. The carrying value is stated at fair value at acquisition less accumulated amortisation and impairment losses. The useful economic life is assessed for each acquisition separately. Amortisation is charged over the useful life of the relationships in proportion to the estimated future cash flows, a period which is generally between five and eight years. Research and development Expenditure on research (or the research phase of an internal project) is recognised as an expense in the period in which it is incurred. Development costs incurred are capitalised when all the following conditions are satisfied: • completion of the intangible asset is technically feasible so that it will be available for use or sale • the Group intends to complete the intangible asset and use or sell it • the Group has the ability to use or sell the intangible asset • the intangible asset will generate probable future economic benefits • there are adequate technical, financial and other resources to complete the development and to use or sell the intangible asset, and • the expenditure attributable to the intangible asset during its development can be measured reliably. Development costs not meeting the criteria for capitalisation are expensed as incurred. The costs which do meet the criteria range from new product development to the enhancement of existing services such as mail platforms. The scope of the development team’s work continues to evolve as the Group continues to deliver business critical solutions to a growing customer base. Development costs capitalised are amortised on a straight-line basis over the estimated useful life of the asset. The estimated useful life is deemed to be three years for all developments capitalised. Amortisation charges are recognised through profit or loss in the period in which they are incurred. 37 iomart Group plc Annual report and accounts 2017 Notes to the financial statements. Year ended 31March 2017 2. ACCOUNTING POLICIES (CONTINUED) Software Software is recognised at cost on purchase and amortised on a straight-line basis over its useful economic life, which does not generally exceed five years. Acquisition costs In accordance with IFRS 3 Business Combinations, costs incurred on professional fees during an acquisition are not included in the overall cost of the investment in the acquired business. Consequently, these acquisition costs are included as Administrative Expenses in the Consolidated Statement of Comprehensive Income. In addition, the costs associated with integrating the acquired businesses into the Group are also included in this category. The combination of both these types of expenses is also shown in the Consolidated Statement of Comprehensive Income as acquisition costs. Non-Statutory Profit Measures In addition to measuring financial performance of the Group based on statutory profit measures, the Group also measures performance based on adjusted EBITDA, adjusted profit before tax and adjusted diluted earnings per share. Adjusted EBITDA Adjusted EBITDA is defined as earnings before interest, tax, depreciation and amortisation (EBITDA) before share based payment charges, acquisition costs and any gains or losses on the revaluation of contingent consideration. Adjusted EBITDA is a common measure used by investors and analysts to evaluate the operating financial performance of companies, particularly in the sector that the Group operates. The Group considers adjusted EBITDA to be a useful measure of operating performance because it approximates the underlying operating cash flow by eliminating the charges mentioned above. It is not a direct measure of liquidity, which is shown in the Consolidated Statement of Cash Flows, and needs to be considered in the context of the Group’s financial commitments. Adjusted Profit before Tax Adjusted profit before tax is defined as profit before tax adjusted for the following: • amortisation charges on acquired intangible assets; • • mark to market adjustments in respect of interest rate share based payment charges; swaps; • where bank facilities are restructured during the year any accelerated write off of arrangement fees; and • M&A activity including: - - - - Professional fees; Any non-recurring integration costs Any gain or loss on the revaluation of contingent consideration Any interest charge on contingent consideration Adjusted profit before tax is a common measure used by investors and analysts to evaluate the financial performance of companies, particularly in the sector that the Group operates, where M&A activity forms a significant part its activities. The Group considers adjusted profit before tax to be a useful measure of performance because it eliminates the impact of certain non-recurring items associated with acquisitions and other charges commonly excluded from profit before tax by investors and analysts for valuation purposes. 38 Adjusted Diluted Earnings per Share Adjusted diluted earnings per share is calculated by taking the adjusted profit before tax as described after deducting an appropriate taxation charge and dividing by the total weighted average number of ordinary shares in issue during the year and adjusting for the dilutive potential ordinary shares relating to share options. The Group considers adjusted diluted earnings per share to be a useful measure of performance for the same reasons as adjusted profit before tax. In addition it is used as the basis for dividend payments. Contingent consideration Where an acquisition involves a potential payment of contingent consideration the estimate of any such payment is based on its fair value. To estimate the fair value an assessment is made as to the amount of contingent consideration which is likely to be paid having regard to the criteria on which any sum due will be calculated and is probability based to reflect the likelihood of different amounts being paid. Where a change is made to the fair value of contingent consideration within the initial measurement period as a result of additional information obtained on facts and circumstances that existed at the acquisition date then this is accounted for as a change in goodwill. Where changes are made to the fair value of contingent consideration as a result of events that occurred after the acquisition date then the adjustment is accounted for as a charge or credit to profit or loss. Property, plant and equipment Property, plant and equipment is stated at cost net of depreciation and any provision for impairment. Leasehold property is included in property, plant and equipment only where it is held under a finance lease. Disposal of assets The gain or loss arising on the disposal of an asset is determined as the difference between the disposal proceeds and the carrying amount of the asset and is recognised in profit or loss. Depreciation Depreciation is calculated to write down the cost of all property, plant and equipment to the expected residual value by equal annual instalments over their estimated useful economic lives. All items of plant and equipment have immaterial residual values. The rates generally applicable are: Freehold property Between 2.00% and 3.33% per annum Leasehold improvements Between 6% and 10% per annum Computer equipment Between 20% and 50% per annum Office equipment Between 10% and 25% per annum Datacentre equipment Between 6% and 10% per annum Motor vehicles 25% per annum Land Not depreciated Impairment testing of goodwill, other intangible assets and property, plant and equipment For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). As a result, some assets are tested individually for impairment and some are tested at cash-generating unit level. Goodwill is allocated to those cash- generating units that are expected to benefit from synergies of the related business combination and represent the lowest level within the Group at which management monitors goodwill. iomart Group plc Annual report and accounts 2017 Notes to the financial statements. Year ended 31March 2017 2. ACCOUNTING POLICIES (CONTINUED) Goodwill, other individual assets or cash-generating units that include goodwill, and those intangible assets not yet available for use are tested for impairment at least annually. All other individual assets or cash-generating units are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. (net of transaction costs) and the redemption value is recognised through profit or loss over the period of the borrowings using the effective interest method. Where borrowings are repaid early and new loan facilities agreed the terms of each loan facility are compared. Where the terms of the new borrowings are significantly different from those of the previous borrowings, the previous borrowings are treated as extinguished rather than modified as prescribed under IAS 39. An impairment loss is recognised for the amount by which the asset’s or cash-generating unit’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell, and value in use based on an internal discounted cash flow evaluation. Management estimate expected future cash flows from each cash generating unit and determine a suitable interest rate to calculate the present value of the future cash flows. Discount factors are determined for each cash generating unit to reflect the underlying risks involved. The future cash flows used in the calculation are based on the Group’s latest approved budget. Impairment losses recognised for cash-generating units, to which goodwill has been allocated, are credited initially to the carrying amount of goodwill. Any remaining impairment loss is charged pro rata to the other assets in the cash generating unit. With the exception of goodwill, all assets are subsequently reassessed for indications that an impairment loss previously recognised may no longer exist. Details of the key assumptions and judgements are shown in note 13. Leased assets In accordance with IAS  17 Leases, the economic ownership of a leased asset is deemed to have been transferred to the Group (the lessee) if the Group bears substantially all the risks and rewards related to the ownership of the leased asset. The related asset is recognised at the time of inception of the lease at the fair value of the leased asset or, if lower, the present value of the minimum lease payments plus incidental payments, if any, to be borne by the lessee. A corresponding amount is recognised as a finance lease liability. The interest element of leasing payments represents a constant proportion of the capital balance outstanding and is charged to profit or loss over the period of the lease. All other leases are regarded as operating leases and the payments made under them are charged to profit or loss on a straight line basis over the lease term. Lease incentives are spread over the term of the lease. Where a lease is for land and buildings, these are considered separately as to whether there is a finance lease within the lease. Lease deposits Rental and re-instatement deposits for leasehold premises are included in the Consolidated Statement of Financial Position as either non-current assets or current assets depending on the length of time to maturity. Where lease deposits are interest earning the amount of deposit is not discounted and where they are not interest earning they are discounted at an appropriate rate. Borrowings Borrowings are initially stated at fair value after deduction of any issue costs. The carrying amount is increased by the finance costs in respect of the accounting period and reduced by payments made in the period. Borrowings are subsequently stated at amortised cost, any difference between the periods Reinstatement costs The Group has made alterations to properties which it occupies under lease arrangements. These lease arrangements contain provision for reinstatement of the property to its original condition at the Group’s cost at the end of the lease should the landlord require that to happen. In respect of property leases which contain such a reinstatement provision the estimated cost of the reinstatement is provided in the financial statements. The discounted value of the expected cost of reinstatement is recorded as a leasehold improvement within property, plant and equipment and is then depreciated over the remaining term of the lease. A matching provision is recognised at the same time which is increased over the period of the lease by way of an interest charge such that the estimated cost of the reinstatement has been fully provided at the end of the lease period. Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense. Income taxes The tax expense recognised in profit or loss comprises the sum of deferred tax and current tax not recognised in other comprehensive income or directly in equity. Current tax is the tax currently payable based on taxable profit for the year. Deferred income taxes are calculated using the liability method on temporary differences. Deferred tax is generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases. However, deferred tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit. Deferred tax on temporary differences associated with shares in subsidiaries is not provided if reversal of these temporary differences can be controlled by the Group and it is probable that reversal will not occur in the foreseeable future. In addition, tax losses available to be carried forward as well as other income tax credits to the Group are assessed for recognition as deferred tax assets. Deferred tax liabilities are provided in full, with no discounting. Deferred tax assets are recognised to the extent that it is probable that the underlying deductible temporary differences will be able to be offset against future taxable income. Current and deferred tax assets and liabilities are calculated at tax rates and laws that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the period end. 39 iomart Group plc Annual report and accounts 2017 Notes to the financial statements. Year ended 31March 2017 2. ACCOUNTING POLICIES (CONTINUED) Changes in deferred tax assets or liabilities are recognised as a component of tax expense in the Statement of Comprehensive Income, except where they relate to items that are recognised directly in other comprehensive income or equity (such as share based remuneration) in which case the related deferred tax is also recognised in other comprehensive income or equity accordingly. Financial assets All financial assets are recognised when the Group becomes a party to the contractual provisions of the instrument. Financial assets other than those categorised as at fair value through profit or loss are recognised at fair value plus transaction costs on initial recognition. Financial assets categorised as at fair value through profit or loss are recognised initially at fair value with transaction costs expensed through profit or loss. All income and expenses relating to financial assets that are recognised in the statement of comprehensive income are presented within ‘finance costs’ or ‘finance income’ except for impairment of trade receivables which is presented within ‘administrative expenses’. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are measured subsequent to initial recognition at amortised cost using the effective interest method, less provision for impairment. Discounting is omitted where the effect of discounting is immaterial. The Group’s cash and cash equivalents, trade and most other receivables fall into this category of financial instruments. Provision against trade and other receivables is made when there is objective evidence that the Group will not be able to collect all amounts due to it in accordance with the original terms of those receivables. The amount of the write-down is determined as the difference between the asset’s carrying amount and the present value of estimated future cash flows. An assessment for impairment is undertaken at least at each reporting date. Financial derivatives such as forward foreign exchange contracts and interest rate swaps are carried at fair value through profit or loss subsequent to initial recognition. Financial liabilities Financial liabilities are obligations to pay cash or other financial assets and are recognised when the Group becomes a party to the contractual provisions of the instrument. Financial liabilities categorised as at fair value through profit or loss are recorded initially at fair value, all transaction costs are recognised immediately in profit or loss. All other financial liabilities are recorded initially at fair value, net of direct issue costs. Financial liabilities categorised as at fair value through profit or loss are re-measured at each reporting date at fair value, with changes in fair value being recognised through profit or loss. All other financial liabilities are recorded at amortised cost using the effective interest method, with interest-related charges recognised as an expense in finance costs through profit or loss. A financial liability is derecognised only when the obligation is extinguished, that is, when the obligation is discharged, cancelled or when it expires. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are charged to profit or loss on an accruals basis using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. 40 Foreign currency transactions Transactions denominated in foreign currencies are recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the period end are retranslated at the rates ruling at that date. Any gains or losses arising on assets and liabilities between the date of recording and the date of settlement are treated as gains or losses through profit or loss. Forward foreign exchange contracts used to hedge the Group’s exposure to foreign currency transactions are fair valued at the balance date and the gain or loss is recognised through profit or loss for the period. The results and financial position of all Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of the statement of financial position; income and expenses for each income statement are translated at average exchange rates; and • • all resulting exchange differences are recognised as a separate component of equity in the foreign currency translation reserve. Cash and cash equivalents Cash and cash equivalents comprise cash on hand and demand deposits, together with other short-term, highly liquid investments that are readily convertible into known amounts of cash with maturities of three months or less from inception and which are subject to an insignificant risk of changes in value. Dividends Dividend distributions payable to equity shareholders are included in the financial statements within ‘other short term financial liabilities’ when a final dividend is approved in a general meeting. Interim dividend distributions to equity shareholders approved by the Board are not included in the financial statements until paid. Equity Equity comprises the following: • • • • • • • • “Share capital” represents the nominal value of equity shares. “Own shares Treasury” represents the amount of the Company’s own equity shares, plus attributable transaction costs, that is held by the Company as treasury shares. “Own shares EBT” represents the amount of the Company’s own equity shares, plus attributable transaction costs, that is held by the Company within the iomart Group plc Employee Benefit Trust. “Share premium” represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the share issue. “Merger reserve” represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the share issue, when ordinary share capital is included in the consideration for business acquisitions. “Capital redemption reserve” represents set aside reserves in relation to previous redemption of own shares. “Foreign currency translation reserve” represents all exchange differences on the translation of the results and financial position of Group entities that have a functional currency different from the presentation currency. “Retained earnings” represents retained profits. iomart Group plc Annual report and accounts 2017 Notes to the financial statements. Year ended 31March 2017 2. ACCOUNTING POLICIES (CONTINUED) Employee benefits - pensions The Group contributes to an auto-enrolment pension scheme and also to a number of personal pension schemes on behalf of executive directors and some senior employees. The pension costs charged against operating profit are the contributions payable to the schemes in respect of the accounting period. Share-based payment The Group operates equity-settled share-based remuneration plans for its employees. All goods and services received in exchange for the grant of any share-based payment are measured at their fair values. Where employees are rewarded using share-based payments, the fair values of employees’ services are determined indirectly by reference to the fair value of the instrument granted to the employee. This fair value is appraised at the grant date and excludes the impact of non-market vesting conditions (for example, profitability and sales growth targets). All share-based remuneration plans are ultimately recognised as an expense through profit or loss with a corresponding credit to ‘retained earnings’. If vesting periods or other non-market vesting conditions apply, the expense is allocated over the vesting period, based on the best available estimate of the number of share options expected to vest. Estimates are subsequently revised if there is any indication that the number of share based incentives expected to vest differs from previous estimates. The two main vesting conditions that apply to share options relate to the achievement of annual objectives and continuous employment. Any cumulative adjustment prior to vesting is recognised in the current period. No adjustment is made to any expense recognised in prior periods if share based incentives ultimately exercised are different to that estimated on vesting. Upon exercise of share based incentives the proceeds received net of attributable transaction costs are credited to share capital, and where appropriate share premium. Segmental reporting The Group provides segmental reporting on a basis consistent with the provision of internal financial information used for decision making purposes by the Chief Operating Decision Maker. Internal reports are produced on a basis consistent with the accounting policies adopted in the Group’s financial statements. The Group calculates geographical information on the basis of the location of the customer. Going concern The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report on pages 7 to 15. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Finance Director’s Report on pages 7 to 10. In addition, Note 30 to the financial statements includes the Group’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk. As described in note 22 the Group has a £60m multi option revolving credit facility with Lloyds Banking Group of which £18.5m is drawn down at the year end and which is available until June 2019. The net debt balances at the end of the period stood at £10.6m (2016: £25.6m) a level which the Board is comfortable with given the strong cash generation of the Group. The Group has considerable financial resources together with long term contracts with a number of customers and suppliers across different geographic areas and industries. As a consequence, the directors believe that the Group is well placed to manage its business risks. - The directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements. Key judgements and sources of estimation uncertainty The key assumptions concerning the future, and other key sources of estimation uncertainty at the period end, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Impairment of goodwill The Group is required to make a judgement as to whether there is any impairment of goodwill. This requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires the entity to estimate the future cash flows expected to arise from the cash-generating unit and to select a suitable discount rate in order to calculate the present value. Full details of the assumptions used in the calculation are disclosed in note 13. Valuation of intangible assets and fair value adjustments on acquisition As the Group continues to implement its acquisition strategy there is a requirement to fair value the assets and liabilities of any business acquired during the year. The Group is required to make a judgement as to what intangible assets exist within the acquired business at the time of the acquisition and what fair value adjustments are required. When reviewing the existence of intangible assets consideration has been given to potential intangible assets such as customer relationships and brand. The estimation of the valuation of customer relationships is based on the value in use calculation which requires estimates of the future cash flows expected to arise from the existing customer relationships over their useful life and to select a suitable discount rate in order to calculate the present value. Full details of the assumptions used in the calculation of intangible assets and fair value adjustments on the acquisitions that have occurred during the current year are disclosed in note 11. Reinstatement provisions The Group is required to make a judgement as to whether any reinstatement of buildings held under leases is required. For each lease, on an annual basis, the Directors assess the cost of restoring leasehold premises to their original condition at the end of the lease. These estimates are based on information provided by external advisors, the initial cost of the leasehold improvements and inflation rates and discount rates until the end of the lease. The reinstatement provision required at the end of the current year is shown in note 23. Contingent consideration Where an acquisition involves a potential payment of contingent consideration the Group is required to make a judgement as to whether any contingent consideration payment is likely. If it is then an estimate of any such payment is based on its fair value. To estimate the fair value an assessment is made as to the amount of contingent consideration which is likely to be paid having regard to the criteria on which any sum due will be calculated and is probability based to reflect the likelihood of different amounts being paid. 41 iomart Group plc Annual report and accounts 2017 Notes to the financial statements. Year ended 31March 2017 3. SEGMENTAL ANALYSIS The chief operating decision-maker has been identified as the Chief Executive Officer (“CEO”) of the Company. The Group has three operating segments and the CEO reviews the Group’s internal reporting which recognises these three segments in order to assess performance and to allocate resources. The Group has determined its reportable segments which are also its operating segments based on these reports. The Group currently has three operating and reportable segments. In the previous year there were only two segments. During the year the Group acquired Cristie Data. Unlike the other operations in the Group, Cristie Data has largely non-recurring revenue and therefore this has been included in a separate segment. • Easyspace – this segment provides a range of shared hosting and domain registration services to micro and SME companies. • Cloud Services – this segment provides managed cloud computing facilities and services, through a network of owned datacentres, to the larger SME and corporate markets. The segment uses several routes to market including iomart Cloud, RapidSwitch, Redstation, Backup Technology and SystemsUp. • Non-recurring – this segment provides data storage, backup and virtualisation solutions across a range of sectors, from SMEs to large enterprises, encompassing both public and private sector. Information regarding the operation of the reportable segments is included below. The CEO assesses the performance of the operating segments based on revenue and a measure of Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA) before any allocation of Group overheads, charges for share based payments, costs associated with acquisitions and any gain or loss on revaluation of contingent consideration. This segment EBITDA is used to measure performance as the CEO believes that such information is the most relevant in evaluating the results of the segment. The Group’s EBITDA for the year has been calculated after deducting Group overheads from the EBITDA of the three segments as reported internally. Group overheads include the cost of the Board, all the costs of running the premises in Glasgow, the Group marketing, human resource, finance and design functions and legal and professional fees. The segment information is prepared using accounting policies consistent with those of the Group as a whole. The assets and liabilities of the Group are not reviewed by the chief operating decision-maker on a segment basis. Therefore none of the Group’s assets and liabilities are segmental assets and liabilities and are all unallocated for segmental disclosure purposes. For that reason the Group has not disclosed details of segmental assets and liabilities. All segments are continuing operations. No customer accounts for 10% or more of external revenues. Inter-segment transactions are accounted for using an arms-length commercial basis. Operating Segments Revenue by Operating Segment Easyspace Cloud Services Non-recurring External £’000 13,249 72,685 3,639 89,573 2017 Internal £’000 12 1,538 - 1,550 Total £’000 13,261 74,223 3,639 91,123 External £’000 10,883 65,397 - 76,280 2016 Internal £’000 - 1,114 - 1,114 Total £’000 10,883 66,511 - 77,394 Geographical Information In presenting the consolidated information on a geographical basis, revenue is based on the geographical location of customers. There is no single country where revenues are individually material other than the United Kingdom. The United Kingdom is the place of domicile of the parent company, iomart Group plc. Analysis of Revenue by Destination United Kingdom Rest of the World Revenue from operations 42 2017 £’000 75,163 14,410 89,573 2016 £’000 64,218 12,062 76,280 iomart Group plc Annual report and accounts 2017 Notes to the financial statements. Year ended 31March 2017 3. SEGMENTAL ANALYSIS (CONTINUED) Profit by Operating Segment 2017 Depreciation, amortisation, acquisition costs and share based payments £’000 (948) (17,120) (321) - (104) (1,844) Adjusted EBITDA £’000 6,244 33,680 326 (3,680) - - Operating profit/(loss) £’000 5,296 16,560 5 (3,680) (104) (1,844) Adjusted EBITDA £’000 5,094 31,084 - (3,837) - - 2016 Depreciation, amortisation, acquisition costs and share based payments £’000 (815) (16,616) - - (116) (1,081) Operating profit/(loss) £’000 4,279 14,468 - (3,837) (116) (1,081) 36,570 (20,337) 16,233 32,341 (18,628) 13,713 36,570 (20,337) - (4,150) 12,083 32,341 (18,628) 870 (3,564) 11,019 Easyspace Cloud Services Non-recurring Group overheads Acquisition costs Share based payments Profit before tax and interest Gain on revaluation of contingent consideration Group interest and tax Profit for the year Group overheads, acquisition costs, share based payments, gain on revaluation of contingent consideration, interest and tax are not allocated to segments. 4. OPERATING PROFIT The profit for the year from total operations is stated after charging the following operating costs: Staff costs excluding development costs capitalised and research and development costs written off profit or loss Depreciation of property, plant and equipment - Owned assets - Leased assets Property, plant and equipment hire - Land and buildings - Plant and machinery Amortisation of intangible assets - Acquired intangible assets - Other intangible assets R&D expensed to profit or loss Marketing and sales Bad debt expense Exchange gain Premises and office 2017 £’000 2016 £’000 19,184 16,751 10,495 477 10,171 707 2,623 76 5,558 1,859 74 1,399 622 (524) 5,736 2,714 91 5,354 1,199 168 1,429 513 (39) 5,744 Included within administrative expenses are fees paid to the Group’s auditors, an analysis of which is provided below: Auditors’ remuneration Audit services: - Fees payable for the audit of the consolidation and the parent company accounts - Fees payable for audit of subsidiaries, pursuant to legislation Non-audit services: - Assurance service fees - Tax advisory - Tax compliance 2017 £’000 2016 £’000 55 77 6 23 50 50 66 19 - 50 211 185 43 iomart Group plc Annual report and accounts 2017      Notes to the financial statements. Year ended 31March 2017 5. INFORMATION REGARDING DIRECTORS AND EMPLOYEES Directors’ emoluments Aggregate emoluments Pension contributions to personal money purchase schemes Share based payments Emoluments payable to the highest paid director are as follows: Aggregate emoluments Pension contributions to personal money purchase schemes 2017 £’000 1,348 - 819 565 - 2016 £’000 1,408 38 655 596 - During the year the Company did not make any personal pension contributions to personal pension schemes of the directors (2016: 2). The aggregate amount of gains realised by directors on the exercise of share options during the year was £161,600 (2016: £98,200). The detailed numerical analysis of directors’ remuneration and share options is included in the Report of the Board to the Members on Directors’ Remuneration on pages 22 to 27. Average number of persons employed by the Group (including directors): Technical Sales and marketing Administration Staff costs of the Group during the year in respect of employees and directors were: Wages and salaries Social security costs Pension costs Share based payments 2017 No. 242 99 46 387 2016 No. 224 97 55 376 2017 £’000 2016 £’000 16,739 1,726 172 1,844 20,481 15,194 1,612 155 1,081 18,042 The Group operates a stakeholder pension scheme and also contributes to a number of personal pension schemes on behalf of executive directors and some senior employees. In the case of executive directors, details of the pension arrangements are given within the Report of the Board to the Members on Directors’ Remuneration on pages 22 to 27. In the case of senior employees, pension contributions to individuals’ personal pension arrangements are payable by the Group at a rate equal to the contribution made by the senior employee subject to a maximum employer contribution of 5% of basic salary. 6. ACQUISITION COSTS Professional fees Non-recurring integration costs: - - Total acquisition costs Onerous lease provisions Other 2017 £’000 99 - 5 104 2016 £’000 263 (169) 22 116 During the year costs of £99,000 (2016: £263,000) were incurred in respect of professional fees on acquisitions and £5,000 (2016: £22,000) other costs directly related to the integration of acquisitions into the Group were also incurred. In the previous year a one-off credit of £169,000 was earned in relation to provisions (note 23). 44 iomart Group plc Annual report and accounts 2017Notes to the financial statements. Year ended 31March 2017 7. NET FINANCE COST Finance income: Bank interest receivable Other interest income Finance income for the year Finance expenses: Bank loan Finance leases Other interest charges Items affecting adjusted profit before tax calculation: Mark to market interest adjustment Accelerated write off of arrangement fees on restructuring of facility Finance charge on contingent consideration on business combinations Finance expense for the year Net finance cost 2017 £’000 22 - 22 (1,131) (172) (52) (1,355) 84 - (330) 2016 £’000 21 107 128 (1,109) (251) (62) (1,422) 64 (177) (152) (1,601) (1,687) (1,579) (1,559) Included in other interest income is £nil (2016: £95,000) in respect of leasehold deposits and £nil (2016: £12,000) other interest. 8. DIVIDENDS ON SHARES CLASSED AS EQUITY Paid during the year: Final dividend Equity dividends on ordinary shares 2017 Pence per share 2017 £’000 2016 Pence per share 2016 £’000 3.15p 3,375 2.50p 2,668 The directors have recommended a final dividend for the year ended 31 March 2017 of 6.00p per share (2016: 3.15p per share). Subject to shareholder approval this proposed final dividend would be payable on 6 September 2017 to shareholders on the register as of 11 August 2017. 45 iomart Group plc Annual report and accounts 2017 Notes to the financial statements. Year ended 31March 2017 9. TAXATION Tax charge for the year Adjustment relating to prior years Total current taxation charge Origination and reversal of temporary differences Adjustment relating to prior years Effect of different statutory tax rates of overseas jurisdictions Effect of changes in tax rates Total deferred taxation credit 2017 £’000 (4,349) (12) (4,361) 1,751 227 27 (215) 1,790 2016 £’000 (3,663) 52 (3,611) 1,482 31 61 32 1,606 Total taxation charge (2,571) (2,005) The differences between the total current tax shown above and the amount calculated by applying the standard rate of UK corporation tax to the profit before tax are as follows: Profit before tax Tax charge @ 20% (2016 – 20%) Expenses disallowed for tax purposes Non-taxable income Adjustments in current tax relating to prior years Effect of different statutory tax rates of overseas jurisdictions Movement in deferred tax relating to changes in tax rates Effect of research and development tax reliefs Tax effect of share based remuneration Movement in unprovided deferred tax related to development costs Movement in unprovided deferred tax related to property, plant and equipment Movement in deferred tax relating to prior years 2017 £’000 2016 £’000 14,654 13,024 2,931 2,605 134 - 12 5 215 (326) (151) (13) (9) (227) 67 (174) (52) (53) (32) (335) (206) 228 (12) (31) Taxation charge for the year 2,571 2,005 The weighted average applicable tax rate for the year ended 31 March 2017 was 20% (2016: 20%). The total current corporation tax charge for the year of £4,349,000 (2016: £3,663,000) on operations represents 29.7% (2016: 28.1%) of the Group profit before tax of £14,654,000 (2016: £13,024,000). The effective rate of tax for the year, based on the taxation charge for the year as a percentage of the profit before tax, is 17.5% (2016: 15.4%). The increase of 2.1% is mainly due to the reduction in future corporation rates which has had an adverse impact on the deferred tax charge relating to our deferred tax assets, a prior year adjustment in deferred tax relating to the lower availability of capital allowances than previously anticipated and the absence of non-taxable income in the year when in the previous year the gain on the revaluation of contingent consideration was non-taxable. This has been partially offset by a prior year adjustment in deferred tax relating to share based payments and the absence of a deferred tax charge relating to development costs in the current year following the initial recognition of a deferred tax liability in the prior year. A number of changes to the UK Corporation tax system were announced in the March 2016 Budget Statement with the main rate of corporation tax reduced from 18% to 17% from 1 April 2020. These changes were substantively enacted at the period end and therefore are included in these financial statements.  46 iomart Group plc Annual report and accounts 2017Notes to the financial statements. Year ended 31March 2017 10. DEFERRED TAX The Group recognised deferred tax assets and liabilities as follows: 2017 2016 Deferred tax Recognised £’000 Deferred tax Unrecognised £’000 Deferred tax Recognised £’000 Deferred tax Unrecognised £’000 Share based remuneration Capital allowances temporary differences Deferred tax on development costs Deferred tax on acquired assets with no capital allowances Deferred tax on customer relationships Deferred tax liability 1,135 1,181 (311) (326) (2,567) (888) - - - - - - 1,010 1,103 (195) (442) (3,551) (2,075) At the year end, the Group had no unused tax losses (2016: £nil) available for offset against future profits. - - - - - - The movement in the deferred tax account during the year was: Tax losses carried forward £’000 Share based remuneration £’000 Capital allowances temporary differences £’000 Development costs £’000 Deferred tax on acquired assets with no capital allowances £’000 Customer relationships £’000 Total £’000 Balance at 1 April 2015 Acquired on acquisition of subsidiary Credited to equity (Charged)/credited to statement of comprehensive income Effect of different tax rates of overseas jurisdictions Effect of changes in tax rates Balance at 31 March 2016 Acquired on acquisition of subsidiary Charged to equity (Charged)/credited to statement of comprehensive income Effect of different tax rates of overseas jurisdictions Effect of changes in tax rates Balance at 31 March 2017 289 - - (289) - - - - - - - - - 575 - 57 389 - (11) 873 (24) - 378 - (124) - - - (605) (3,219) (2,087) - - (1,627) (1,651) - 57 (195) 115 1,115 1,513 - - - 48 61 119 61 32 1,010 1,103 (195) (442) (3,551) (2,075) - (392) 546 - (29) 1,135 (14) - 321 - (229) 1,181 - - - - (186) (200) - (392) (116) 108 1,108 1,967 - - - 8 27 35 27 (215) (311) (326) (2,567) (888) The deferred tax asset in relation to share based remuneration arises from the anticipated future tax relief on the exercise of share options. The deferred tax on capital allowances temporary differences arises mainly from plant and equipment in the Cloud Services segment where the tax written down value varies from the net book value. The deferred tax on development costs arises from development expenditure on which tax relief is received in advance of the amortisation charge. The deferred tax on acquired assets arises from datacentre equipment acquired through the acquisition of iomart Datacentres Limited on which depreciation is charged but on which there are no capital allowances available. The deferred tax on customer relationships arises from temporary differences on acquired intangible assets. 47 iomart Group plc Annual report and accounts 2017 Notes to the financial statements. Year ended 31March 2017 11. ACQUISITIONS Cristie Data Limited The Group acquired 100% of the issued share capital of Cristie Data Limited (“Cristie”) on 25 August 2016. Cristie is a Stroud based data storage, backup and virtualisation solutions provider, which has operated across all sectors of industry from SMEs to large enterprises, and public sector to private sector for over 40 years. Cristie is particularly active in the education and health sectors, which offers the opportunity for the Group to increase its presence in these areas. The acquisition is in line with the Group’s strategy to grow its operations both organically and by acquisition. During the current period the Group incurred £99,000 of third party acquisition related costs in respect of this acquisition. These expenses are included in administrative expenses in the Group’s consolidated statement of comprehensive income for the year ended 31 March 2017. The following table summarises the consideration to acquire Cristie and the amounts of identified assets acquired and liabilities assumed at the acquisition date and are final: Recognised amounts of net assets acquired and liabilities assumed: Cash and cash equivalents Trade and other receivables Property, plant and equipment Intangible assets Trade and other payables Current borrowings Current income tax liabilities Deferred tax liability Identifiable net assets Goodwill Total consideration Satisfied by: Cash – paid on acquisition Total consideration to be transferred £’000 3,104 2,226 206 982 (3,358) (25) (33) (200) 2,902 877 3,779 3,779 3,779 The agreed purchase price for the shares, on a cash-free, debt-free, normalised working capital basis was £1,250,000. On the date of the acquisition a payment of £3,779,000 was made in cash, including an amount of £2,529,000 in settlement in respect of the additional debt assumed, cash acquired and normalised working capital position of Cristie at completion. The goodwill arising on the acquisition of Cristie is attributable to the premium payable for a pre-existing, well positioned business and the specialised, industry specific knowledge of the management and staff, together with the benefits to the Group in merging the business with its existing infrastructure and the anticipated future operating synergies from the combination. The goodwill is not expected to be deductible for tax purposes. The name Cristie Data is not actively advertised or promoted, with the majority of Cristie’s business being generated from existing customers, by word of mouth or from attendance at trade exhibitions. Cristie’s privacy policy includes a commitment not to sell, distribute or lease any personal information it holds on customers unless the customer’s permission is given. As a consequence there is no significant value in either the trade name/brand or customer lists acquired at the acquisition date and therefore no value has been attributed to either intangible asset. 48 iomart Group plc Annual report and accounts 2017  Notes to the financial statements. Year ended 31March 2017 11. ACQUISITIONS (CONTINUED) Cristie Data Limited (continued) The fair value included in respect of the acquired customer relationships intangible asset is £982,000. To estimate the fair value of the customer relationships intangible asset, a discounted cash flow method, specifically the income approach, was used with reference to the directors’ estimates of the level of revenue which will be generated from them. A post-tax discount rate of 11.22% was used for the valuation. Customer relationships are being amortised over an estimated useful life of 5 years. The fair value of the financial assets acquired includes trade receivables with a fair value of £496,000. The gross amount due under contracts is £500,000 of which £4,000 are expected to be uncollectable. Provisional fair values of the acquired assets and liabilities, including goodwill, were reported in the interim report for the 6 months ended 30 September 2016. Following a detailed review of Cristie’s accounting policies in respect of revenue recognition, the policy relating to the sale of third party maintenance and support contracts was changed to defer the revenue over the life of the contract, in compliance with FRS 101, rather than recognising it in full when the sale was completed. The treatment of the cost of purchasing the third party maintenance and support contracts, which was previously expensed in full when paid, has also been changed to spread the costs over the life of the contract, with the deferred element of the cost being included in receivables. These adjustments have been reflected in the table of net assets acquired and liabilities assumed with trade and other payables being increased by £1,997,000, offset by an increase of £1,655,000 in trade and other receivables, and a reduction in current income tax liabilities of £66,000, to give an increase in goodwill of £276,000. The fair values of the acquired assets and liabilities, including goodwill, are now final. Cristie earned revenue of £3,639,000 and generated profits, before allocation of group overheads, share based payments and tax, of £235,000 in the period since acquisition. United Communications Limited The fair values of acquired assets and liabilities, including goodwill, previously disclosed as provisional for United Communications Limited have been finalised in the current period with no changes to the fair values disclosed in the Annual Report and Accounts 2016. Pro-forma full year information The following summary presents the Group as if the businesses acquired during the year had been acquired on 1 April 2016. The amounts include the results of the acquired business, depreciation and amortisation of the acquired property, plant and equipment and intangible assets recognised on acquisition. The amounts do not include any possible synergies from the acquisition. The information is provided for illustrative purposes only and does not necessarily reflect the actual results that would have occurred, nor is it necessarily indicative of the future results of the combined companies. Revenue Profit after tax for the year Pro-forma year ended 31 March 2017 £’000 91,262 11,939 49 iomart Group plc Annual report and accounts 2017  Notes to the financial statements. Year ended 31March 2017 12. EARNINGS PER ORDINARY SHARE Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year, after deducting any own shares held in Treasury and held by the Employee Benefit Trust. Diluted earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the total of the weighted average number of ordinary shares in issue during the year, after deducting any own shares, and adjusting for the dilutive potential ordinary shares relating to share options. Total operations Profit for the financial year and basic earnings attributed to ordinary shareholders Weighted average number of ordinary shares: Called up, allotted and fully paid at start of year Own shares held in Treasury Own shares held by Employee Benefit Trust Weighted average number of ordinary shares - basic 2017 £’000 2016 £’000 12,083 11,019 No 000 107,803 (465) (141) 107,197 No 000 107,803 (898) (141) 106,764 Dilutive impact of share options 1,808 1,609 Weighted average number of ordinary shares - diluted 109,005 108,373 Basic earnings per share Diluted earnings per share Adjusted earnings per share Profit for the financial year and basic earnings attributed to ordinary shareholders - - - Amortisation of acquired intangible assets Acquisition costs Share based payments - Mark to market interest adjustment - - - - Accelerated write off of arrangement fees Finance charge on contingent consideration Gain on revaluation of contingent consideration Tax impact of adjusted items Adjusted profit for the financial year and adjusted earnings attributed to ordinary shareholders Adjusted basic earnings per share Adjusted diluted earnings per share 50 11.27 p 11.08 p 10.32 p 10.17 p 2017 £’000 2016 £’000 12,083 11,019 5,558 104 1,844 (84) - 330 - (1,313) 5,354 116 1,081 (64) 177 152 (870) (1,311) 18,522 15,654 17.28 p 16.99 p 14.66 p 14.44 p iomart Group plc Annual report and accounts 2017 Notes to the financial statements. Year ended 31March 2017 13. INTANGIBLE ASSETS Goodwill £’000 Development costs £’000 Customer relationships Software £’000 £’000 Beneficial contracts £’000 Domain names & IP addresses £’000 Cost At 1 April 2015 Additions Currency translation differences Acquired on acquisition of subsidiary Development cost capitalised At 31 March 2016 Additions Currency translation differences Acquired on acquisition of subsidiary Development cost capitalised 47,342 - - 13,781 - 61,123 - - 877 - At 31 March 2017 62,000 Accumulated amortisation: 3,709 - - - 1,123 4,832 - - - 1,372 6,204 26,431 23 8,428 - 34,882 101 982 - 2,114 1,020 3 - - 3,137 1,670 40 - - 86 - - - - 86 - - - - 280 - - - - 280 - - - - 35,965 4,847 86 280 109,382 Total £’000 79,962 1,020 26 22,209 1,123 104,340 1,670 141 1,859 1,372 At 1 April 2015 Currency translation differences Charge for the year At 31 March 2016 Currency translation differences Charge for the year At 31 March 2017 Carrying amount: - - - - - - - (2,496) (9,945) (1,003) - (16) (4) (698) (3,194) (5,347) (15,308) (446) (1,453) - (77) (29) (989) (4,183) (5,551) (20,936) (815) (2,297) At 31 March 2017 62,000 2,021 15,029 2,550 At 31 March 2016 61,123 1,638 19,574 1,684 (19) - (7) (26) - (7) (33) 53 60 (116) (13,579) - (20) (55) (171) (6,553) (20,152) - (106) (55) (226) (7,417) (27,675) 54 81,707 109 84,188 Of the total additions in the year of £1,670,000 (2016: £1,020,000), £122,000 (2016: £297,000) was included in trade payables as unpaid invoices at the year end resulting in a net cash outflow of £175,000 (2016: net cash outflow £187,000) in trade payables. Consequently, the consolidated statement of cash flows discloses a figure of £1,845,000 (2016: £1,207,000) as the cash outflow in respect of intangible asset additions in the year. 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. Included within customer relationships are the following significant items: customer relationships in relation to the acquisitions of Backup Technology with a net book value of £4.1m and a remaining useful life of 5 years; United Hosting with a net book value of £4.3m and a remaining useful life of 7 years; Melbourne Server Hosting with a net book value of £2.0m and a remaining useful life of 4 years; and ServerSpace with a net book value of £1.7m and remaining useful life of 6 years. During the year, goodwill was reviewed for impairment in accordance with IAS 36 “Impairment of Assets”. No impairment charges (2016: £nil) arose as a result of this review. For this review goodwill was allocated to individual Cash Generating Units (CGU) on the basis of the Group’s operations. The goodwill acquired in the Cristie Data acquisition has been allocated to the Non-recurring CGU as this is the CGU expected to benefit from the business combination. 51 iomart Group plc Annual report and accounts 2017Notes to the financial statements. Year ended 31March 2017 13. INTANGIBLE ASSETS (CONTINUED) The carrying value of goodwill by each CGU is as follows: Cash Generating Units (CGU) Easyspace Cloud Services Non-recurring 2017 £’000 23,210 37,913 877 62,000 2016 £’000 23,210 37,913 - 61,123 The recoverable amount of a CGU is determined based on value-in-use calculations. These calculations use pre-tax cash flow projections based on financial budgets approved by the Board covering a two-year period. These projections are the result of detailed planning and assume similar levels of organic growth as the Group has experienced in the previous year unless there is a reason to alter historic growth rates and also full year contributions from acquisitions. The growth rates and margins used to extrapolate estimated future performance in the 3 years after the initial 2 year period continue to be based on past growth performance adjusted downwards to take into account the additional risk due to the passage of time. The growth rate does not exceed the long-term average growth rate for the business in which the CGU operates. The growth rates used to estimate future performance beyond the periods covered by the annual and strategic planning processes do not exceed the long-term average growth rates for similar products. The assumptions used for the CGU included within the impairment reviews are as follows: Discount rate Average growth rate in years 3 to 5 Future perpetuity rate Initial period for which cash flows are estimated (years) Easyspace Cloud Services Non- recurring 13% 2.5% 2.0% 2 12% 3.4% 2.0% 2 14% 2.5% 2.0% 2 Based on an analysis of the impairment calculation’s sensitivities to changes in key parameters (growth rate, discount rate and pre-tax cash flow projections) there was no reasonably possible scenario where the CGU’s recoverable amount would fall below its carrying amount. 14. LEASE DEPOSITS The lease deposits of £2,760,000 (2016: £2,760,000) are made up of a rental deposit of £784,000 (2016: £784,000) and a reinstatement deposit of £1,976,000 (2016 £1,976,000). The rental and reinstatement deposits are due to be repaid at the end of the lease which at the earliest is July 2020. The Group is due to receive interest on the lease deposits at the prevailing market rate and therefore they have not been discounted. 52 iomart Group plc Annual report and accounts 2017Notes to the financial statements. Year ended 31March 2017 15. SUBSIDIARIES The following are subsidiaries and have all been consolidated in the Group financial statements: Country of registration and operation Activity Ordinary share capital Owned by the company % Owned by subsidiary undertakings % Backup Technology Holdings Limited England Non-trading Backup Technology Limited Cristie Data Limited Easyspace Limited EQSN Limited Global Gold Holdings Limited Global Gold Network Limited Internet Engineering Limited Internetters Limited iomart Cloud Inc England England Non-trading Provision of data storage, backup and virtualisation solutions England Webservices Scotland Non-trading England Non-trading England Webservices England Non-trading England Dormant USA Managed hosting services iomart Cloud Services Limited Scotland Managed hosting services iomart Datacentres Limited iomart Development Limited iomart Hosting Limited iomart Limited England Non-trading Scotland Dormant Scotland Managed hosting services Scotland Dormant iomart Virtual Servers Hosting Limited Scotland Dormant Melbourne Server Hosting Limited England Managed hosting services My Documents Limited Netintelligence Limited NicNames Limited Open Minded Solutions Limited Rapidswitch Limited Redstation Limited ServerSpace Limited Skymarket Limited Switch Media (Ireland) Limited Switch Media Limited Systems Up Limited Titan Internet Limited United Communications Limited Web Genie Internet Limited England Dormant Scotland Dormant England Dormant England Non-trading England Non-trading England Non-trading England Managed hosting services England Non-trading England Webservices England Webservices England Consultancy services England Non-trading England Webservices England Non-trading 100 - 100 100 100 100 - 100 - 100 100 100 100 100 100 100 100 100 100 - 100 100 100 100 100 - 100 100 100 100 - - 100 - - - - 100 - 100 - - - - - - - - - - 100 - - - - - 100 - - - - 100 53 iomart Group plc Annual report and accounts 2017 Notes to the financial statements. Year ended 31March 2017 16. PROPERTY, PLANT AND EQUIPMENT Freehold property £’000 Leasehold improve- ments £’000 Datacentre equipment £’000 Computer equipment £’000 Office equipment £’000 Motor vehicles £’000 2,062 - - - - 2,062 - - - - 6,857 466 18,367 2,105 - - - 7,323 647 - (3) - - - - 20,472 697 - - - 37,978 9,103 152 (15) 24 47,242 8,115 179 (58) 125 2,144 209 3 - - 2,356 231 27 - - 48 - 20 - - 68 - - - - Total £’000 67,456 11,883 175 (15) 24 79,523 9,690 206 (61) 125 2,062 7,967 21,169 55,603 2,614 68 89,483 (150) (41) - - (191) (67) - - (1,858) (479) - - (2,337) (440) 3 - (6,253) (1,686) (23,196) (8,399) - - 15 (5) (7,939) (1,824) (31,585) (8,370) - - 58 (45) (1,112) (259) - - (1,371) (258) - - (41) (14) - - (55) (13) - - (32,610) (10,878) 15 (5) (43,478) (10,972) 61 (45) (258) (2,774) (9,763) (39,942) (1,629) (68) (54,434) Cost: At 1 April 2015 Additions in the year Acquisition of subsidiary Disposals in the year Currency translation differences At 31 March 2016 Additions in the year Acquisition of subsidiary Disposals in the year Currency translation differences At 31 March 2017 Accumulated depreciation: At 1 April 2015 Charge for the year Disposals in the year Currency translation differences At 31 March 2016 Charge for the year Disposals in the year Currency translation differences At 31 March 2017 Carrying amount: At 31 March 2017 At 31 March 2016 1,871 4,986 12,533 15,657 1,804 5,193 11,406 15,661 985 985 - 13 35,049 36,045 The net book value of computer equipment held under finance lease at 31 March 2017 was £546,000 (2016: £930,000) and the net book value of datacentre equipment held under finance lease at 31 March 2017 was £456,000 (2016: £536,000). Of the total additions in the year of £9,690,000 (2016: £11,883,000), none (2016: £97,000) were funded by finance leases and £1,256,000 (2016: £1,755,000) was included in trade payables as unpaid invoices at the year end resulting in a net decrease of £499,000 (2016: net decrease of £599,000) in trade payables. Consequently, the consolidated statement of cash flows discloses a figure of £10,189,000 (2016: £12,385,000) as the cash outflow in respect of property, plant and equipment additions in the year. 54 iomart Group plc Annual report and accounts 2017          Notes to the financial statements. Year ended 31March 2017 17. TRADE AND OTHER RECEIVABLES Trade receivables Less: Provision for impairment Trade receivables (net) Other receivables Prepayments Accrued income Trade and other receivables 2017 £’000 7,157 (1,121) 6,036 553 7,889 602 2016 £’000 7,716 (850) 6,866 619 5,819 414 15,080 13,718 The carrying amount of trade and other receivables approximates to their fair value, which has been calculated based on expectations of debt recovery from historic performances feeding into impairment provision calculations. Some of the higher value trade receivables in the Cloud Services segment are reviewed individually for impairment and judgement made as to any likely impairment based on historic trends and the latest communication with specific customers. The balance of trade receivables in the Group are individually small in terms of value, so are considered for impairment by business unit specific provision calculations and are not individually impaired. To consider the total exposure to credit risks, the Group uses figures net of VAT. At 31 March 2017, £4,118,000 (2016: £4,460,000) of net trade receivables were fully performing. Net trade receivables of £1,918,000 (2016: £2,406,000) were past due, but not impaired. The credit quality of financial assets that are neither past due or impaired can be assessed by reference to the customer type. Trade receivables consist of a large number of customers in various industries and geographical areas. The Group is not exposed to any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. The aging below shows that almost all are less than three months old and historic performance indicates a high probability of payment for debts in this aging. Those over three months relate to customers without history of default for which there is a reasonable expectation of recovery. Up to 3 months Over 3 months but less than 6 months Over 6 months but less than 1 year 2017 £’000 1,887 - 31 2016 £’000 2,349 57 - Total unimpaired trade receivables which are past due 1,918 2,406 The movement in the allowance for impairment in respect of trade receivables during the year was as follows: Balance at start of the year Increase in provision for receivables impairment Fair value of trade receivable provision acquired during the year Balance at end of year 18. CASH AND CASH EQUIVALENTS Cash at bank and on hand Cash and cash equivalents 2017 £’000 850 267 4 1,121 2017 £’000 8,906 8,906 2016 £’000 539 311 - 850 2016 £’000 10,341 10,341 The credit risk on cash and cash equivalents is considered to be negligible because the counter parties are UK banking institutions. The effective interest rate earned on short term deposits was 0.33% (2016: 0.50%). 55 iomart Group plc Annual report and accounts 2017              Notes to the financial statements. Year ended 31March 2017 19. TRADE AND OTHER PAYABLES Trade payables Other taxation and social security Accruals Deferred income Other creditors Trade and other payables 2017 £’000 (5,958) (2,385) (6,660) (8,257) (108) 2016 £’000 (5,215) (1,823) (6,331) (5,980) (183) (23,368) (19,532) The carrying amount of trade and other payables approximates to their fair value. Trade payables and accruals are non-interest bearing and generally mature within three months. 20. NON-CURRENT TRADE AND OTHER PAYABLES Trade payables Non-current trade and other payables 21. CONTINGENT CONSIDERATION Contingent consideration due on acquisitions within one year: - - Systems Up Limited United Communications Limited Contingent consideration due on acquisitions after more than one year: - United Communications Limited 2017 £’000 (102) (102) 2016 £’000 (455) (455) 2017 £’000 2016 £’000 - (2,373) (2,373) (135) (1,000) (1,135) - - (2,068) (2,068) Total contingent consideration due on acquisitions (2,373) (3,203) 56 iomart Group plc Annual report and accounts 201722. BORROWINGS Current: Obligations under finance leases Bank loans Current borrowings Non-current: Obligations under finance leases Bank loans Total non-current borrowings Total borrowings Notes to the financial statements. Year ended 31March 2017 2017 £’000 2016 £’000 (233) (18,639) (18,872) (573) (34,525) (35,098) (625) - (625) (826) - (826) (19,497) (35,924) The carrying amount of borrowings approximates to their fair value. The obligations under finance leases are secured by the related assets and are repayable as follows: Due within one year Due between two and five years Due after more than five years Capital £’000 233 541 84 858 2017 Interest £’000 81 170 3 254 Total £’000 314 711 87 Capital £’000 573 587 239 1,112 1,399 2016 Interest £’000 130 237 24 391 Total £’000 703 824 263 1,790 The Group in its ordinary course of business enters into hire purchase and finance lease agreements to fund or re-finance the purchase of computer equipment and software. The lease agreements are typically for periods of 2 to 3 years and do not have contingent rent or escalation clauses. The agreements have industry standard terms and do not contain any restrictions on dividends, additional debt or further leasing. The finance lease liability has an effective interest rate of 11.2% (2016: 9.9%). Lease payments are made on a monthly and quarterly basis. The future lease obligation of £1,112,000 (2016: £1,790,000) has a present value of £858,000 (2016: £1,399,000). At the start of the year there was £34.5m outstanding on the multi option revolving credit facility and there were no drawdowns made from the facility during the year. Repayments totalling £16.0m were made resulting in a balance outstanding at the end of the year of £18.5m. The £60m multi option revolving credit facility may be used by the Group to finance acquisitions, capital expenditure and for the issue of guarantees, bonds or indemnities. The facility is available until June 2019 at which point any advances made under the multi option revolving credit facility will become immediately repayable. In addition, each draw down made under this facility can be for either 3 or 6 months and can either be repaid or continued at the end of the period. Interest is charged on this loan at an annual rate determined by the sum of the multi option revolving credit facility margin, LIBOR and the lender’s mandatory costs. The multi option revolving credit facility margin is fixed at 1.7% per annum and a non-utilisation fee of 40% of the multi option revolving credit facility margin is due on any undrawn portion of the full £60m multi option revolving credit facility. The effective interest rate for multi option revolving credit facility in the current year was 3.32% (2016: 3.17%). 57 iomart Group plc Annual report and accounts 2017Notes to the financial statements. Year ended 31March 2017 22. BORROWINGS (CONTINUED) The future loan obligations of £18,722,000 (2016: £34,907,000) equate to a present value of £18,315,000 (2016: £33,922,000). The capital element of the bank loans is £18,639,000 (2016: £34,525,000) and this differs from the net amount drawn down of £18,500,000 (2016: £34,500,000) due to an effective interest rate adjustment. The obligations under the multi option revolving credit facility and term loan facility are repayable as follows: Due within one year Due between two and five years Capital £’000 18,639 - 18,639 2017 Interest £’000 83 - 83 Total £’000 18,722 - 18,722 Capital £’000 34,525 - 34,525 2016 Interest £’000 382 - 382 Total £’000 34,907 - 34,907 Analysis of change in net cash/(debt) At 1 April 2015 Repayment of bank loans New bank loans Impact of effective interest rate Inception of finance leases Acquired on acquisition of subsidiary Currency translation differences Cash flow At 31 March 2016 Repayment of bank loans Impact of effective interest rate Acquired on acquisition of subsidiaries Currency translation differences Cash flow At 31 March 2017 23. PROVISIONS Cash and cash equivalents £’000 8,347 - - - - 4,476 - (2,482) Bank loans £’000 (21,457) 3,500 (16,500) (68) - - - - Finance leases and hire purchase £’000 (2,284) - - - (97) - (2) 984 Total £’000 (15,394) 3,500 (16,500) (68) (97) 4,476 (2) (1,498) 10,341 (34,525) (1,399) (25,583) - - 3,104 - (4,539) 8,906 16,000 (114) - - - - - - (39) 580 16,000 (114) 3,104 (39) (3,959) (18,639) (858) (10,591) The Group has made provision for the reinstatement of certain leasehold properties and after initial measurement, any subsequent adjustments to reinstatement provisions will be recorded against the original amount included in leasehold improvements with a corresponding adjustment to future depreciation charges. Upon the acquisition of ServerSpace, the Group recognised an onerous lease provision for excess datacentre capacity based on the contracted future lease rental obligations relating to datacentre capacity that is no longer required. The directors consider the carrying values of the provisions to approximate to their fair values as they have been discounted. Current: Onerous Total current provisions Non-current: Reinstatement Onerous Total non-current provisions Total borrowings 58 2017 £’000 (38) (38) (1,721) - (1,721) (1,759) 2016 £’000 (211) (211) (1,668) (211) (1,879) (2,090) iomart Group plc Annual report and accounts 2017Notes to the financial statements. Year ended 31March 2017 23. PROVISIONS (CONTINUED) The movement in the provisions during the year was as follows: Balance at start of the year Provision released during year Reduction in provision Unwinding of discount 24. OPERATING LEASES 2017 2016 Reinstatement £’000 Onerous £’000 Total Reinstatement £’000 £’000 Onerous £’000 (1,668) - - (53) (1,721) (422) - 384 - (38) (2,090) - 384 (53) (1,617) - - (51) (1,759) (1,668) (823) 169 232 - (422) Total £’000 (2,440) 169 232 (51) (2,090) The Group has outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows: Within one year Between two to five years After five years 2017 Land and buildings £’000 1,934 4,294 1,857 8,085 2016 Land and buildings £’000 2,406 5,853 2,458 10,717 Other £’000 76 285 137 498 Other £’000 76 289 208 573 Lease terms for land and buildings Operating leases do not contain any contingent rent clauses. None of the operating leases contain renewal of purchase options or escalation clauses or any restrictions regarding further leasing or additional debt. 25. SHARE CAPITAL Authorised At 31 March 2015, 2016 and 2017 Called up, allotted and fully paid At 31 March 2015, 2016 and 2017 Ordinary shares of 1p each Number of shares £’000 200,000,000 2,000 107,803,006 1,078 At 31 March 2017 the Company held 100,839 shares (2016: 846,636) as own shares in treasury which were accounted for in the Own Shares Treasury reserve and had a nominal value of £1,008 (2016: £8,466) and a market value of £298,988 (2016: £2,285,917). This represents 0.1% (2016: 0.8%) of the issued share capital as at 31 March 2017 excluding own shares. At 31 March 2017 the Company held 140,773 shares (2016: 140,773) as own shares in the iomart Group plc Employee Benefit Trust (“EBT”) which were accounted for in the Own Shares EBT reserve and had a nominal value of £1,408 (2016: £1,408) and a market value of £417,392 (2016: £380,088). This represents 0.1% (2016: 0.1%) of the issued share capital as at 31 March 2017 excluding own shares. The share capital of iomart Group plc consists of ordinary shares with a par value of 1p. All shares, excluding the shares held by the Company in treasury and the shares held by the EBT, are equally eligible to receive dividends and represent one vote at the shareholders' meetings of iomart Group plc. All shares issued at 31 March 2017 are fully paid. 59 iomart Group plc Annual report and accounts 2017Notes to the financial statements. Year ended 31March 2017 26. OWN SHARES RESERVES At 1 April 2015 Issue of own shares from Treasury for option redemption At 31 March 2016 Issue of own shares from Treasury for option redemption Own shares EBT £’000 Own shares Treasury £’000 Own shares Total £’000 (70) - (70) - (468) 49 (419) 369 (538) 49 (489) 369 At 31 March 2017 (70) (50) (120) During the year 745,797 (2016: 98,567) own shares held in treasury at the carrying value of 49.5p each were issued following the exercise of share options by employees for which a net total of £1,065,018 (2016: £91,374) was received. As a consequence, at 31 March 2017 the Company held 100,839 shares (2016: 846,636) in treasury with a carrying value of £49,915 (2016: £419,085) which were accounted for in Own Shares treasury reserve; and 140,773 shares (2016: 140,773) in the EBT with a carrying value of £69,982 (2016: £69,982) which were accounted for in the Own Shares EBT reserve. 27. SHARE BASED PAYMENTS The Group operated the following share based payment employee share option schemes during the year; an Enterprise Management Incentive scheme, a SAYE sharesave scheme and a number of unapproved schemes. All schemes are settled in equity only and are summarised below. Vesting period Maximum term Performance criteria Required to remain in employment Enterprise Management Incentive scheme Up to 3 years from grant 10 years after date of grant As set by Remuneration Committee Unapproved schemes Up to 3 years from grant 10 years after date of grant As set by Remuneration Committee Sharesave scheme 3 years from grant 6 months after vesting period No Yes Yes Yes The performance criteria as set by the Remuneration Committee are based on the achievement of annual objectives and continuous employment. During the year, options over 745,797 ordinary shares (2016: 98,567) were exercised and the average market price at the exercise dates was 286.1p (2016: 265.5p). Options over 602,228 ordinary shares (2016: 843,385) were granted under the unapproved share option scheme with an average exercise price of 1.0p (2016: 108.9p) and no options over ordinary shares were granted under the sharesave scheme (2016: 225,764 options granted with an average exercise price of 194.8p). Options over 473,750 ordinary shares (2016: 35,417) lapsed under the unapproved share option scheme with an average exercise price of 184.3p (2016: 118.5p), no options lapsed over shares under the EMI scheme (2016: 16,666 shares with an average exercise price of 87.5p); and options over 51,853 (2016: 62,330) lapsed under the sharesave scheme with an average exercise price of 193.9p (2016: 192.2p). As disclosed in note 5, a share based payment charge of £1,844,000 (2016: £1,081,000) has been recognised in the statement of comprehensive income during the year in relation to the above schemes. The fair value of the employee services received is valued indirectly by valuing the options granted using the Black-Scholes option pricing model, which worked on the following assumptions for the options granted in the current and previous year: 60 iomart Group plc Annual report and accounts 2017Notes to the financial statements. Year ended 31March 2017 27. SHARE BASED PAYMENTS (CONTINUED) Grant date Vesting date Variables used Share price at grant date Volatility Dividend yield Number of employees holding options/units Option/award life (years) Expected life (years) Risk free rate Expectations of meeting performance criteria Fair value Exercise price per share 1 Apr 2016 24 Aug 2016 30 Sep 2016 22 Dec 2016 31 Mar 2019 31 Mar 2019 30 Sep 2017 30 Sep 2017 265.0p 63% 0.93% 3 10 3.25 1.52% 100% 256.2p 1.0p 310.0p 64% 0.93% 2 10 3.83 0.69% 100% 298.2p 1.0p 278.3p 65% 0.93% 19 10 3.0 0.80% 100% 269.0p 1.0p 300.3p 64% 0.93% 1 10 3.0 1.43% 100% 291.0p 1.0p i) Expected volatility was determined at the date of grant from historic volatility, adjusted for events that were not considered to be reflective of the volatility of the share price going forward; and ii) Risk free rate was calculated based on the average Bank of England zero coupon yields The movement in options during the year in respect of the Company’s ordinary shares of 1p each under the various share option schemes are as follows: 2017 2016 Weighted average exercise price per share (p) Number of share options Weighted average exercise price per share (p) Number of share options 84.55 1.00 3,597,404 602,228 185.26 (525,603) - - 142.80 (745,797) 34.45 33.56 2,928,232 1,764,040 71.17 127.04 154.12 - 92.70 84.55 64.11 2,741,235 1,069,149 (114,413) - (98,567) 3,597,404 2,093,537 Outstanding at start of year Granted Forfeited Expired Exercised Outstanding at end of year Exercisable at end of year 61 iomart Group plc Annual report and accounts 2017 Notes to the financial statements. Year ended 31March 2017 27. SHARE BASED PAYMENTS (CONTINUED) Summary of share options that were outstanding at the year end: Share options – outstanding Share options – exercisable Range of exercise prices per share (p) Weighted average exercise price per share (p) Outstanding shares Weighted average remaining contractual life (years) Weighted average exercise price per share (p) Outstanding shares Weighted average remaining contractual life (years) Enterprise management incentive scheme Unapproved schemes Sharesave scheme As at 31 March 2017 Enterprise management incentive scheme Unapproved schemes Sharesave scheme As at 31 March 2016 43.5 – 87.5 260,813 66.92 1.0 – 173.0 2,487,258 19.44 191.4 – 194.8 180,161 194.68 2.6 6.9 1.9 260,813 66.92 1,496,645 27.05 6,582 191.40 2,928,232 34.45 6.2 1,764,040 33.56 43.5 – 87.5 320,011 64.01 1.0 – 196.0 2,874,471 71.61 191.4 – 194.8 402,922 193.19 3.2 7.3 2.2 320,011 64.01 1,773,526 64.12 - - 3,597,404 84.55 6.4 2,093,537 64.11 28. RELATED PARTY TRANSACTIONS Compensation paid to key management (only directors are deemed to fall into this category) during the year was as follows: Salaries and other short-term employee benefits Post-employment benefits Share-based payments Dividends paid to key management were as follows: Angus MacSween Chris Batterham Sarah Haran Richard Logan Ian Ritchie Crawford Beveridge Total dividends paid to directors 2017 £’000 1,502 - 819 2,321 2017 £’000 535 3 62 31 5 1 637 2.6 5.5 0.3 5.1 3.2 6.1 - 5.6 2016 £’000 1,580 38 655 2,273 2016 £’000 425 2 49 25 4 1 506 29. CONTINGENCIES AND COMMITMENTS (a) Contingencies There were no contingent assets or liabilities as at 31 March 2017 (2016: nil). (b) Commitments Capital expenditure on software licences and property, plant and equipment committed by the Group at 31 March 2017 was £1,146,980 (2016: £1,306,000). 62 iomart Group plc Annual report and accounts 2017Notes to the financial statements. Year ended 31March 2017 30. RISK MANAGEMENT The Group finances its operations by raising finance through equity, bank borrowings and finance leases. No speculative treasury transactions are undertaken however the Group does from time to time enter into forward foreign exchange contracts to hedge known currency exposures. Financial assets and liabilities include those assets and liabilities of a financial nature, namely cash, short term receivables/payables and borrowings. The carrying amounts of financial assets presented in the statement of financial position relate to the following measurement categories as defined in IAS 39: 2017 Non-current: Lease deposit Current: Trade receivables Cash and cash equivalents Other receivables Total for category 2016 Non-current: Lease deposit Current: Trade receivables Cash and cash equivalents Other receivables Total for category Loans and receivables £’000 2,760 6,036 8,906 553 18,255 2,760 6,866 10,341 619 20,586 63 iomart Group plc Annual report and accounts 2017Notes to the financial statements. Year ended 31March 2017 30. RISK MANAGEMENT (CONTINUED) The carrying amounts of financial liabilities presented in the statement of financial position relate to the following measurement categories as defined in IAS 39: 2017 Non-current: Trade payables Finance leasing capital obligations Current: Trade payables Accruals Bank loan Contingent consideration due on acquisitions Finance leasing capital obligations Interest rate swap contract Total for category 2016 Non-current: Trade payables Finance leasing capital obligations Contingent consideration due on acquisitions Current: Trade payables Accruals Bank loan Contingent consideration due on acquisitions Finance leasing capital obligations Interest rate swap contract Total for category At fair value through profit or loss £’000 Financial liabilities measured at amortised cost £’000 Other (non-IAS 39) £’000 - - (102) - Total £’000 (102) (625) (5,958) (6,616) (18,639) (2,373) (233) (44) (34,590) (455) (826) (2,068) (5,215) (6,203) (34,525) (1,135) (573) (128) (51,128) - (625) - - - - (233) - (858) - (826) - - - - - (573) - - - - (2,373) - (44) (2,417) - - (2,068) - - - (1,135) - (128) (3,331) (5,958) (6,616) (18,639) - - - (31,315) (455) - - (5,215) (6,203) (34,525) - - - (46,398) (1,399) The Group’s financial liabilities per the fair value hierarchy classifications under IFRS 13 ‘Financial Instruments: Disclosures’ are described below: Category of financial liability Fair value at 31 March 2017 £’000 Level in hierarchy Description of valuation technique Inputs used for valuation model Contingent consideration due on acquisitions Interest rate swap contracts (2,373) (44) 3 2 Based on level of future revenue and profitability and probability that vendors will comply with obligations under sale and purchase agreement. Interest rate swap contracts are not traded in active markets. Fair valued using observable interest rates corresponding to the maturity of the contracts. Management estimate on probability and time scale of vendors meeting revenue and profitability targets and complying with obligations. Observable interest rates corresponding to the maturity of the contracts. Effects of non-observable inputs are not significant for interest rate swaps. Total gains and (losses) recognised in profit or loss £’000 (330) 84 Total fair value (2,417) Total net losses (246) There have been no changes to valuation techniques or any amounts recognised through ‘Other Comprehensive Income’. The £84,000 gain recognised in profit or loss on interest rate swap contracts is included in finance costs. 64 iomart Group plc Annual report and accounts 2017Notes to the financial statements. Year ended 31March 2017 30. RISK MANAGEMENT (CONTINUED) The reconciliation of the carrying amounts of financial instruments classified within Level 3 is as follows: Contingent consideration Balance at start of the year Acquired through business combination Settled in cash during the year Recognised in profit or loss under: - - Gain on revaluation of contingent consideration Finance costs Balance at end of year Total amount included in profit or loss on Level 3 instruments under gain on business combinations and finance costs 2017 £’000 (3,203) - 1,160 - (330) (2,373) (330) 2016 £’000 (1,650) (3,921) 1,650 870 (152) (3,203) 718 Liquidity risk The Group seeks to manage financial risk to ensure sufficient liquidity is available to meet foreseeable needs and to invest cash safely and profitably. In note 22 the contractual maturity analysis of the Group’s total borrowings of £19.5m (2016: £35.9m) is shown. The Group has £41.5m (2016: £25.5m) available to draw down on the revolving credit facility and reviews its cash flow requirements on a monthly basis. Interest rates The interest rate on the Group’s cash at bank is determined by reference to the base rate and the interest rate on the Group’s revolving credit loan facilities is based on LIBOR plus a margin. The Group has entered into an interest rate swap in respect of £10m which has been drawn under the revolving credit facility from April 2015 which reduces by £2m every 6 months until October 2017 and as a consequence the interest rate on that amount of borrowing is fixed at 2.03% from April 2015 until maturity. As a consequence, at 31 March 2017, £2m of the amount drawn under the multi option revolving credit facility was covered by interest rate swap arrangements. The fair value of the interest rate swap contracts is estimated to be a gain of £84,000 (2016: £64,000) which has been recognised in profit or loss for the year. Currency risk During the year the Group made payments totalling US$5.5m (2016: US$5.3m) and EUR€0.1m (2016: EUR€0.1m) to acquire domain names for its Easyspace segment and licences for its Cloud Services segment. In addition, the Group received US$3.5m (2016: US$3.3m) and EUR€0.4m (2016: EUR€0.7m) from Cloud Services customers billed in foreign currency. During the year, the Group entered into forward exchange contracts to hedge its exposure to the US Dollar arising on these purchases but at the year end the Group had no outstanding forward contracts in place (2016: none). Consequently, the fair value of currency contracts at the year end was £nil (2016: £nil). The Group has no non-monetary assets or liabilities denominated in foreign currencies and the level of monetary assets and liabilities denominated in foreign currencies is minimal. Capital risk The capital structure of the Group consists of net debt, which includes borrowings (note 22) and cash and cash equivalents, and equity attributable to owners of the parent, comprising issued share capital (note 25), other reserves and retained earnings. The Group currently has net debt due to its acquisition activities. The Group seeks to maintain a level of gross cash which the Board considers to be adequate for the size of the Group’s operations which at the moment is around £10m. Consequently, the Group makes use of both banking facilities and finance lease arrangements to help fund the acquisition of companies and capital expenditure in order to maintain that level of gross cash. The Group’s current policy is to pay annual dividends depending on the level of adjusted diluted earnings per share. The Group was in compliance with all covenants under its banking facility arrangements throughout the reporting period. Credit risk The Group provides standard credit terms (normally 30 days) to some of its customers which has resulted in trade receivables of £6,036,000 (2016: £6,866,000) which are stated net of applicable provisions and which represent the total amount exposed to credit risk. The lease deposits of £2,760,000 (2016: £2,760,000) are held in escrow accounts with the landlord’s main UK bankers and the landlord is a major UK plc. The Group’s cash at bank £8,906,000 (2016: £10,341,000) is held within the UK clearing banks. In respect of trade receivables, lease deposits and cash at bank the directors consider the risk of exposure to credit is minimal due to the reasons given above. 65 iomart Group plc Annual report and accounts 2017Notes to the financial statements. Year ended 31March 2017 31. POST BALANCE SHEET EVENT Acquisition - Dediserve Limited The Group acquired 100% of the issued share capital of Dediserve Limited, (“Dediserve”) on 17 May 2017 for €7.9m on a no debt, no cash, normalised working capital basis. Dediserve is a company registered in the Republic of Ireland based in Dublin which provides cloud hosting services to over 1,500 customers from 10 locations world-wide. The acquisition is in line with the Group’s strategy to grow its hosting operations both organically and by acquisition. It also provides the Group with an additional European Union place of operation. The Group estimates that it will incur £400,000 of third party acquisition related costs in respect of this acquisition. These expenses will be included in administrative expenses in the Group’s consolidated statement of comprehensive income for the period ended 31 March 2018. The following table summarises the consideration to acquire Dediserve and the provisional amounts of identified assets acquired and liabilities assumed at the acquisition date: Recognised amounts of net assets acquired and liabilities assumed (provisional): Cash and cash equivalents Trade and other receivables Property, plant and equipment Intangible assets Trade and other payables Borrowings Current income tax liabilities Deferred tax liability Identifiable net assets Goodwill Total consideration Satisfied by: Cash – paid on acquisition Deferred consideration – payable Total consideration transferred £’000 236 190 779 3,680 (384) (279) (108) (671) 3,443 3,128 6,571 6,485 86 6,571 The recognised amounts of all the net assets acquired and liabilities assumed are provisional. The share purchase agreement, in respect of the acquisition of Dediserve, includes a provision under which the total consideration payable will be adjusted by a payment to be made either to or by the Company, depending on the level of cash, debt and working capital shown in an agreed set of accounts (the Completion Accounts) made up to, and as at, the completion date. The initial payment to acquire the company was €7,800,000 (£6,700,000) in cash and in addition an amount of €250,000 (£215,000) in cash was deducted as an interim settlement of the expected amount due in respect of the no debt, no cash, normalised working capital adjustment. An amount of €100,000 (£86,000) has been deferred and will be paid 6 months after the completion date or at the end of an operational handover period, whichever is sooner. The initial payment of €7,550,000 (£6,485,000) was funded by a draw down from the revolving credit facility of £6,485,000. The goodwill arising on the acquisition of Dediserve is attributable to the premium payable for a pre-existing, well positioned business that has excellent growth prospects, together with the benefits to the Group in leveraging its worldwide presence, in merging the business with its existing infrastructure and the anticipated future operating synergies from the combination. The goodwill is not expected to be deductible for tax purposes. 66 iomart Group plc Annual report and accounts 2017  Notes to the financial statements. Year ended 31March 2017 31. POST BALANCE SHEET EVENT (CONTINUED) The name Dediserve is not actively advertised or promoted, with the majority of Dediserve’s business being generated from existing customers or by word of mouth.  Dediserve has given a commitment to customers not to use for any purpose, other than the service agreement, any confidential information received from the customer. As a consequence there is no significant value in either the trade name/brand or customer lists acquired at the acquisition date and therefore no value has been attributed to either intangible asset. The fair value of the financial assets acquired includes trade receivables with a fair value of £151,000. The gross amount due under contracts is £151,000, all of which is expected to be collectable. The fair value included in respect of the acquired customer relationships intangible asset is £3,680,000. To estimate the fair value of the customer relationships intangible asset, a discounted cash flow method, specifically the income approach, was used with reference to the directors’ estimates of the level of revenue which will be generated from them. A post-tax discount rate of 13.61% was used for the valuation. Customer relationships are being amortised over an estimated useful life of 8 years. 67 iomart Group plc Annual report and accounts 2017Parent company financial statements. Year ended 31March 2017 Independent auditor's report to the members of iomart Group plc We have audited the parent company financial statements of iomart Group Plc for the year ended 31 March 2017 which comprise the parent company statement of financial position, statement of changes in equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), including FRS101 ‘Reduced Disclosure Framework’. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditor As explained more fully in the Directors’ Responsibilities Statement as set out on page 30, the directors are responsible for the preparation of the parent company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Company financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council's website at www.frc.org.uk/auditscopeukprivate. Opinion on financial statements In our opinion the parent company financial statements:  give a true and fair view of the state of the Company's affairs as at 31 March 2017 and of its profit for the year then ended;  have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and  have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matter prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit:  the information given in the strategic report and the directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and  the strategic report and the directors' report have been prepared in accordance with applicable legal requirements. Matter on which we are required to report under the Companies Act 2006 In the light of the knowledge and understanding of the Company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors' report. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:  adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or  the Company financial statements are not in agreement with the accounting records and returns; or  certain disclosures of directors’ remuneration specified by law are not made; or  we have not received all the information and explanations we require for our audit. Other matter We have reported separately on the Group financial statements of iomart Group plc for the year ended 31 March 2017. Robert Hannah Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants Glasgow 12 June 2017 68 iomart Group plc Annual report and accounts 2017Parent company financial statements. Year ended 31March 2017 STATEMENT OF FINANCIAL POSITION As at 31 March 2017 ASSETS Non-current assets Investments Current Assets Debtors Cash at bank and in hand Creditors: amounts falling due within one year Net current liabilities Total assets less current liabilities Creditors: amounts falling due after more than one year NET ASSETS EQUITY Called up share capital Own shares Capital redemption reserve Share premium account Merger reserve Profit and loss account SHAREHOLDERS’ FUNDS Note 2017 £’000 2016 £’000 3 4 6 7 10 11 107,374 107,374 4,785 7,195 11,980 102,693 102,693 39,954 8,930 48,884 (46,153) (79,208) (34,173) (30,324) 73,201 72,369 - (2,068) 73,201 70,301 1,078 (120) 1,200 21,067 4,983 44,993 1,078 (489) 1,200 21,067 4,983 42,462 73,201 70,301 As permitted by section 408(3) of the Companies Act 2006, no profit and loss account of the company is presented. The profit for the financial year, dealt with in the profit and loss account of the company was £3,759,000 (2016: £4,905,000). These financial statements were approved by the board of directors and authorised for issue on 12 June 2017. Signed on behalf of the board of directors Angus MacSween Director and chief executive officer iomart Group plc – Company Number: SC204560 The following notes form part of the financial statements 69 iomart Group plc Annual report and accounts 2017 Parent company financial statements. Year ended 31March 2017 STATEMENT OF CHANGES IN EQUITY Year ended 31 March 2017 Changes in equity Share capital £’000 Own shares EBT £’000 Own shares Treasury £’000 Capital redemption reserve £’000 Share premium account £’000 Note Merger reserve £’000 Retained earnings £’000 Total £’000 Balance at 1 April 2015 1,078 (70) (468) 1,200 21,067 4,983 39,045 66,835 Profit in the year Total comprehensive income Dividends – final (paid) Share based payments Deferred tax on share based payments Issue of own shares for option redemption Total transactions with owners 12 5 11 - - - - - - - - - - - - - - - - - - - 49 49 - - - - - - - - - - - - - - - - - - - - - 4,905 4,905 4,905 4,905 (2,668) (2,668) 1,081 1,081 57 42 57 91 (1,488) (1,439) Balance at 31 March 2016 1,078 (70) (419) 1,200 21,067 4,983 42,462 70,301 Profit in the year Total comprehensive income Dividends – final (paid) Share based payments Deferred tax on share based payments Issue of own shares for option redemption Total transactions with owners 12 5 11 - - - - - - - - - - - - - - - - - - - 369 369 - - - - - - - - - - - - - - - - - - - - - 3,759 3,759 3,759 3,759 (3,375) (3,375) 1,844 1,844 (392) (392) 695 1,064 (1,228) (859) Balance at 31 March 2017 1,078 (70) (50) 1,200 21,067 4,983 44,993 73,201 The following notes form part of the financial statements. 70 iomart Group plc Annual report and accounts 2017 Parent company financial statements. Year ended 31March 2017 1. COMPANY INFORMATION iomart Group plc is a company incorporated and domiciled in the United Kingdom under the Companies Act 2006. The address of the registered office is given on page 84 of this report. The nature of the Company’s operations and its principal activity is that of a holding company. 2. ACCOUNTING POLICIES Statement of compliance These financial statements have been prepared in accordance with applicable accounting standards and in accordance with Financial Reporting Standard 101 – ‘The Reduced Disclosure Framework’ (FRS 101). The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have all been applied consistently throughout the year unless otherwise stated. The financial statements have been prepared on a historical cost basis and are presented in Sterling (£). Disclosure exemptions adopted In preparing these financial statements the Company has taken advantage of all disclosure exemptions conferred by FRS 101. Therefore these financial statements do not include: the requirement to produce a statement of financial position at the beginning of the earliest comparative period; the requirement of IAS 24 related party disclosures to disclose related party transactions entered into between two or more • a statement of cash flows and related notes; • • members of the iomart Group as they are wholly owned within the iomart Group; • disclosure of key management personnel compensation; • • • business combination disclosures; • disclosures in respect of financial instruments; and • capital management disclosures; certain share based payments disclosures; the effect of future accounting standards not adopted. Investments Investments held as fixed assets are stated at cost less provision for any permanent diminution in value. As part of the acquisition strategy of the Company, the trade and net assets of subsidiary undertakings at or shortly after acquisition may be transferred at book value to fellow subsidiaries. Where a trade is hived across to a fellow subsidiary undertaking, the cost of the investment in the original subsidiary, which then becomes a non-trading subsidiary, is added to the cost of the investment in the entity to which the trade has been hived. In order to accurately assess any potential impairment of investments, the carrying value of the investment in all companies transferred is considered together against the future cash flows and net asset position of those companies which received the trade and net assets. Contingent consideration Where an acquisition involves a potential payment of contingent consideration the estimate of any such payment is based on its fair value. To estimate the fair value an assessment is made as to the amount of contingent consideration which is likely to be paid having regard to the criteria on which any sum due will be calculated and is probability based to reflect the likelihood of different amounts being paid. Where a change is made to the fair value of contingent consideration within the initial measurement period as a result of additional information obtained on facts and circumstances that existed at the acquisition date then this is accounted for as a change in goodwill. Where changes are made to the fair value of contingent consideration as a result of events that occurred after the acquisition date then we have elected to account for the adjustment as a charge or credit to profit or loss. 71 iomart Group plc Annual report and accounts 2017Parent company financial statements. Year ended 31March 2017 2. ACCOUNTING POLICIES (CONTINUED) Income taxes The tax expense recognised in profit or loss comprises the sum of deferred tax and current tax not recognised in other comprehensive income or directly in equity. Current tax is the tax currently payable based on taxable profit for the year. Deferred income taxes are calculated using the liability method on temporary differences. Deferred tax is generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases. However, deferred tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit. Deferred tax on temporary differences associated with shares in subsidiaries is not provided if reversal of these temporary differences can be controlled by the Company and it is probable that reversal will not occur in the foreseeable future. In addition, tax losses available to be carried forward as well as other income tax credits to the Company are assessed for recognition as deferred tax assets. Deferred tax liabilities are provided in full, with no discounting. Deferred tax assets are recognised to the extent that it is probable that the underlying deductible temporary differences will be able to be offset against future taxable income. Current and deferred tax assets and liabilities are calculated at tax rates and laws that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the period end. Changes in deferred tax assets or liabilities are recognised as a component of tax expense in the Statement of Comprehensive Income, except where they relate to items that are recognised directly in other comprehensive income or equity (such as share based remuneration) in which case the related deferred tax is also recognised in other comprehensive income or equity accordingly. Financial assets All financial assets are recognised when the Company becomes a party to the contractual provisions of the instrument. Financial assets other than those categorised as at fair value through profit or loss are recognised at fair value plus transaction costs on initial recognition. Financial assets categorised as at fair value through profit or loss are recognised initially at fair value with transaction costs expensed through profit or loss. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are measured subsequent to initial recognition at amortised cost using the effective interest method, less provision for impairment. Discounting is omitted where the effect of discounting is immaterial. The Company’s cash and cash equivalents and most other receivables fall into this category of financial instruments. Provision against other receivables is made when there is objective evidence that the Company will not be able to collect all amounts due to it in accordance with the original terms of those receivables. The amount of the write-down is determined as the difference between the asset’s carrying amount and the present value of estimated future cash flows. An assessment for impairment is undertaken at least at each reporting date. Financial derivatives such as forward foreign exchange contracts and interest rate swaps are carried at fair value through profit or loss subsequent to initial recognition. Financial liabilities Financial liabilities are obligations to pay cash or other financial assets and are recognised when the Company becomes a party to the contractual provisions of the instrument. Financial liabilities categorised as at fair value through profit or loss are recorded initially at fair value, all transaction costs are recognised immediately in profit or loss. All other financial liabilities are recorded initially at fair value, net of direct issue costs. Financial liabilities categorised as at fair value through profit or loss are re-measured at each reporting date at fair value, with changes in fair value being recognised through profit or loss. All other financial liabilities are recorded at amortised cost using the effective interest method, with interest-related charges recognised as an expense in finance costs through profit or loss. A financial liability is derecognised only when the obligation is extinguished, that is, when the obligation is discharged, cancelled or when it expires. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are charged to profit or loss on an accruals basis using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. 72 iomart Group plc Annual report and accounts 2017Parent company financial statements. Year ended 31March 2017 2. ACCOUNTING POLICIES (CONTINUED) Leases In accordance with IAS 17 Leases, the economic ownership of a leased asset is deemed to have been transferred to the Company (the lessee) if the Company bears substantially all the risks and rewards related to the ownership of the leased asset. The related asset is recognised at the time of inception of the lease at the fair value of the leased asset or, if lower, the present value of the minimum lease payments plus incidental payments, if any, to be borne by the lessee. A corresponding amount is recognised as a finance lease liability. The interest element of leasing payments represents a constant proportion of the capital balance outstanding and is charged to profit or loss over the period of the lease. All other leases are regarded as operating leases and the payments made under them are charged to profit or loss on a straight line basis over the lease term. Lease incentives are spread over the term of the lease. Where a lease is for land and buildings, these are considered separately as to whether there is a finance lease within the lease. Borrowings Borrowings are initially stated at fair value after deduction of any issue costs. The carrying amount is increased by the finance costs in respect of the accounting period and reduced by payments made in the period. Borrowings are subsequently stated at amortised cost, any difference between the periods (net of transaction costs) and the redemption value is recognised through profit or loss over the period of the borrowings using the effective interest method. Where borrowings are repaid early and new loan facilities agreed the terms of each loan facility are compared. Where the terms of the new borrowings are significantly different from those of the previous borrowings, the previous borrowings are treated as extinguished rather than modified as prescribed under IAS 39. Pension scheme arrangements The Company contributes to an auto-enrolment pension scheme and also to a number of personal pension schemes on behalf of executive directors and some senior employees. Pension costs are charged to profit or loss in the period to which they relate. Share-based payment All share-based payment arrangements granted after 7 November 2002 that had not vested prior to 1 January 2005 are recognised in the financial statements. All share-based payment arrangements in the company are equity settled. All goods and services received in exchange for the grant of any share-based payment are measured at their fair values. Where employees are rewarded using share- based payments, the fair values of employees’ services are determined indirectly by reference to the fair value of the instrument granted to the employee. This fair value is appraised at the grant date and excludes the impact of non-market vesting conditions (for example, profitability and sales growth targets). All equity-settled share-based payments are ultimately recognised as an expense through profit or loss with a corresponding credit to “Profit and loss reserve” unless the share based payment arrangement relates to an employee of a subsidiary company where in such instances the share based payment is added to the cost of investment in that subsidiary as a capital contribution. If vesting periods or other non-market vesting conditions apply, the expense is allocated over the vesting period, based on the best available estimate of the number of share options expected to vest. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates. Any cumulative adjustment prior to vesting is recognised in the current period. No adjustment is made to any expense recognised in prior periods if share options ultimately exercised are different to that estimated on vesting. Upon exercise of share options the proceeds received net of attributable transaction costs are credited to share capital, and where appropriate share premium. Cash at bank and in hand Cash at bank and in hand comprise cash on hand and demand deposits, together with other short-term, highly liquid investments that are readily convertible into known amounts of cash with maturities of three months or less from inception and which are subject to an insignificant risk of changes in value. 73 iomart Group plc Annual report and accounts 2017Parent company financial statements. Year ended 31March 2017 2. ACCOUNTING POLICIES (CONTINUED) Dividends Dividend distributions payable to equity shareholders are included in the financial statements within ‘other short term financial liabilities’ when a final dividend is approved in a general meeting. Interim dividend distributions to equity shareholders approved by the Board are not included in the financial statements until paid. Equity Equity comprises the following: • • • • • • • “Share capital” represents the nominal value of equity shares. “Own shares Treasury” represents the amount of the Company’s own equity shares, plus attributable transaction costs, that is held by the Company as treasury shares. “Own shares EBT” represents the amount of the Company’s own equity shares, plus attributable transaction costs, that is held by the Company within the iomart Group plc Employee Benefit Trust. “Share premium” represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the share issue. “Merger reserve” represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the share issue, when ordinary share capital is included in the consideration for business acquisitions. “Capital redemption reserve” represents set aside reserves in relation to previous redemption of own shares. “Retained earnings” represents retained profits. 3. INVESTMENTS HELD AS FIXED ASSETS Cost At 1 April 2016 Additions Share based payment (note 12) Cost at 31 March 2017 Net book value of Investments at 31 March 2017 Net book value of Investments at 31 March 2016 All of the above investments are unlisted. Shares in subsidiary undertakings £’000 102,693 3,779 902 107,374 107,374 102,693 74 iomart Group plc Annual report and accounts 2017       Parent company financial statements. Year ended 31March 2017 3. INVESTMENTS HELD AS FIXED ASSETS (CONTINUED) The following subsidiaries are included in the Company financial statements: Country of registration and operation Activity Ordinary share capital Owned by the company % Owned by subsidiary undertakings % Backup Technology Holdings Limited Backup Technology Limited Cristie Data Limited Easyspace Limited EQSN Limited Global Gold Holdings Limited Global Gold Network Limited Internet Engineering Limited Internetters Limited iomart Cloud Inc England England England England Non-trading Non-trading Provision of data storage, backup and virtualisation solutions Webservices Scotland Non-trading England England England England Non-trading Webservices Non-trading Dormant USA Managed hosting services iomart Cloud Services Limited Scotland Managed hosting services England Non-trading Scotland Scotland Scotland Scotland England England Scotland England England England England England England England England England England England England Dormant Managed hosting services Dormant Dormant Managed hosting services Dormant Dormant Dormant Non-trading Non-trading Non-trading Managed hosting services Non-trading Webservices Webservices Consultancy services Non-trading Webservices Non-trading iomart Datacentres Limited iomart Development Limited iomart Hosting Limited iomart Limited iomart Virtual Servers Hosting Limited Melbourne Server Hosting Limited My Documents Limited Netintelligence Limited NicNames Limited Open Minded Solutions Limited Rapidswitch Limited Redstation Limited ServerSpace Limited Skymarket Limited Switch Media (Ireland) Limited Switch Media Limited Systems Up Limited Titan Internet Limited United Communications Limited Web Genie Internet Limited 4. DEBTORS Prepayments and accrued income Other debtors Deferred taxation (note 5) Current income tax Other taxation and social security Amounts owed by subsidiary undertakings 100 - 100 100 100 100 - 100 - 100 100 100 100 100 100 100 100 100 100 - 100 100 100 100 100 - 100 100 100 100 - - 100 - - - - 100 - 100 - - - - - - - - - - 100 - - - - - 100 - - - - 100 2017 £’000 209 - 1,135 2,207 612 622 2016 £’000 356 61 1,010 2,357 450 35,720 4,785 39,954 75 iomart Group plc Annual report and accounts 2017 Parent company financial statements. Year ended 31March 2017 5. DEFERRED TAXATION The Company had recognised deferred tax assets and potential unrecognised deferred tax assets as follows: Share based remuneration 1,135 - 1,010 - The movement in the deferred tax account during the year was: 2017 2016 Recognised £’000 Unrecognised £’000 Recognised £’000 Unrecognised £’000 Balance brought forward Profit and loss account movement arising during the year Profit and loss account reserve movement during the year Balance carried forward 2017 £’000 1,010 517 (392) 1,135 2016 £’000 576 377 57 1,010 The deferred tax asset in relation to share based remuneration arises from the anticipated future tax relief on the exercise of share options. 6. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR Trade creditors Other taxation and social security Accruals and deferred income Contingent consideration due on acquisitions (note 8) Current borrowings (note 9) Amounts owed to subsidiary undertakings 7. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR Contingent consideration due on acquisitions (note 8) 8. CONTINGENT CONSIDERATION Contingent consideration due on acquisitions within one year: - - Systems Up Limited United Communications Limited Contingent consideration due on acquisitions after more than one year: - United Communications Limited Total contingent consideration due on acquisitions 76 2017 £’000 96 76 1,038 2,373 18,639 23,931 46,153 2017 £’000 - - 2017 £’000 - (2,373) (2,373) 2016 £’000 105 65 1,270 1,135 34,525 42,108 79,208 2016 £’000 2,068 2,068 2016 £’000 (135) (1,000) (1,135) - - (2,068) (2,068) (2,373) (3,203) iomart Group plc Annual report and accounts 20179. BORROWINGS Current: Bank loans Current borrowings Non-current: Bank loans Total non-current borrowings Total borrowings Parent company financial statements. Year ended 31March 2017 2017 £’000 2016 £’000 (18,639) (18,639) (34,525) (34,525) - - - - (18,639) (34,525) The carrying amount of borrowings approximates to their fair value. The future loan obligations of £18,722,000 (2016: £34,907,000) equate to a present value of £18,315,000 (2016: £33,922,000). The capital element of the bank loans is £18,639,000 (2016: £34,525,000) and this differs from the net amount drawn down of £18,500,000 (2016: £34,500,000) due to an effective interest rate adjustment. The obligations under the multi option revolving credit facility are repayable as follows: Due within one year Due between two and five years 10. SHARE CAPITAL Authorised At 31 March 2015, 2016 and 2017 Called up, allotted and fully paid At 31 March 2015, 2016 and 2017 Capital £’000 18,639 - 18,639 2017 Interest £’000 83 - 83 Total £’000 18,722 - 18,722 Capital £’000 34,525 - 34,525 2016 Interest £’000 382 - 382 Total £’000 34,907 - 34,907 Ordinary shares of 1p each Number of shares £’000 200,000,000 2,000 107,803,006 1,078 At 31 March 2017 the Company held 100,839 shares (2016: 846,636) as own shares in treasury which were accounted for in the Own Shares Treasury reserve and had a nominal value of £1,008 (2016: £8,466) and a market value of £298,988 (2016: £2,285,917). This represents 0.1% (2016: 0.8%) of the issued share capital as at 31 March 2017 excluding own shares. At 31 March 2017 the Company held 140,773 shares (2016: 140,773) as own shares in the iomart Group plc Employee Benefit Trust (“EBT”) which were accounted for in the Own Shares EBT reserve and had a nominal value of £1,408 (2016: £1,408) and a market value of £417,392 (2016: £380,088). This represents 0.1% (2016: 0.1%) of the issued share capital as at 31 March 2017 excluding own shares. The share capital of iomart Group plc consists of ordinary shares with a par value of 1p. All shares, excluding the shares held by the Company in treasury and the shares held by the EBT, are equally eligible to receive dividends and represent one vote at the shareholders' meetings of iomart Group plc. All shares issued at 31 March 2017 are fully paid. 77 iomart Group plc Annual report and accounts 2017Parent company financial statements. Year ended 31March 2017 11. OWN SHARES RESERVES At 1 April 2015 Issue of own shares from Treasury for option redemption At 31 March 2016 Issue of own shares from Treasury for option redemption At 31 March 2017 Own shares EBT £’000 Own shares Treasury £’000 Own shares Total £’000 (70) - (70) - (70) (468) 49 (419) 369 (50) (538) 49 (489) 369 (120) During the year 745,797 (2016: 98,567) own shares held in treasury at the carrying value of 49.5p each were issued following the exercise of share options by employees for which a net total of £1,065,018 (2016: £91,374) was received. As a consequence, at 31 March 2017 the Company held 100,839 shares (2016: 846,636) in treasury with a carrying value of £49,915 (2016: £419,085) which were accounted for in Own Shares treasury reserve; and 140,773 shares (2016: 140,773) in the EBT with a carrying value of £69,982 (2016: £69,982) which were accounted for in the Own Shares EBT reserve. 12. SHARE BASED PAYMENTS For details of share based payment awards and fair values see note 27 to the Group financial statements. The Company accounts recognise the charge for share based payments for the year of £1,844,000 (2016: £1,081,000) by; 1) 2) taking the charge in relation to employees of the parent company through the parent company statement of comprehensive income £942,000 (2016: £682,000), recording an increase to its investment in subsidiaries for the amounts attributable to employees of subsidiaries and recording a corresponding entry to the profit and loss account reserve £902,000 (2016: £399,000). 13. INFORMATION REGARDING PARENT COMPANY EMPLOYEES Average number of persons employed by the Company (including directors): Technical Sales and marketing Administration Staff costs of the Company during the year in respect of employees and directors were: Wages and salaries Staff costs recharged to other group companies Social security costs Pension costs Share based payments 2017 No. 2016 No. 8 6 23 37 5 5 21 31 2017 £’000 2016 £’000 2,025 (354) 265 19 942 2,897 2,077 (364) 353 25 682 2,773 The company operates a stakeholder pension scheme and also contributes to a number of personal pension schemes on behalf of executive directors and some senior employees. In the case of executive directors, details of the pension arrangements are given within the Report of the Board to the Members on Directors’ Remuneration on pages 22 to 27. In the case of senior employees, pension contributions to individuals’ personal pension arrangements are payable by the Group at a rate equal to the contribution made by the senior employee subject to a maximum employer contribution of 5% of basic salary. Details of director’s emoluments are disclosed within note 5 of the Group financial statements. 78 iomart Group plc Annual report and accounts 2017 Parent company financial statements. Year ended 31March 2017 14. RELATED PARTY TRANSACTIONS As permitted by FRS 101 related party transactions with wholly owned members of the Group have not been disclosed. Related party transactions regarding remuneration and dividends paid to key management (only directors are deemed to fall into this category) of the Company have been disclosed in note 28 of the Group financial statements. 15. CONTINGENCIES AND COMMITMENTS (a) Contingencies There were no contingent assets or liabilities as at 31 March 2017 (2016: nil). (b) Commitments There are no commitments present as at 31 March 2017 (2016: nil). 16. POST BALANCE SHEET EVENT On 17 May 2017 the Company acquired the entire share capital of Dediserve Limited. Further details of the acquisition have been given in note 31 of the Group financial statements. 17. ULTIMATE CONTROLLING PARTY The Directors have assessed that there is no ultimate controlling party. 79 iomart Group plc Annual report and accounts 2017Notice of the 2017 Annual General Meeting NOTICE IS HEREBY GIVEN that the 2017 annual general meeting of iomart Group plc (the “Company”) will be held at Lister Pavilion, Kelvin Campus, West of Scotland Science Park, Glasgow G20 0SP on 23 August 2017 at 10.00 am for the purpose of considering and, if thought fit, passing the following resolutions, of which resolutions 1 to 8 (inclusive) will be proposed as ordinary resolutions and resolutions 9 to 11 (inclusive) will be proposed as special resolutions:- by the Company, shall expire on 23 November 2018 or, if earlier, the date of the next annual general meeting of the Company after the passing of this resolution save that the Company may, before such expiry, make an offer or agreement which would or might require equity securities to be allotted after such expiry and the directors may allot equity securities in pursuance of such an offer or agreement as if the authority conferred hereby had not expired. To receive and adopt the financial statements of the Company 1 and the directors' and auditors' reports thereon for the year ended 31 March 2017. To approve the report of the board to the members on 2 directors' remuneration for the year ended 31 March 2017. This resolution revokes and replaces all unexercised authorities previously granted to the directors to allot shares in the Company and to grant rights to subscribe for, or to convert any security into, shares in the Company but is without prejudice to any allotment of shares or grant of rights already made, offered or agreed to be made pursuant to such authorities. 3 To reappoint Angus MacSween (who retires by rotation and, being eligible, offers himself for re-election) as a director of the Company. 4 To reappoint Richard Logan (who retires by rotation and, being eligible, offers himself for re-election) as a director of the Company. 5 To reappoint Richard Masters (who was appointed by the board since the last annual general meeting and, being eligible, offers himself for re-election) as a director of the Company. To declare a final dividend for the year ended 31 March 2017 6 of 6.00p per share payable on 6 September 2017 to shareholders on the register of members at the close of business on 11 August 2017. To reappoint Grant Thornton UK LLP, Chartered Accountants, 7 as auditors of the Company from the conclusion of this meeting until the conclusion of the next general meeting at which accounts are laid before shareholders and to authorise the directors to fix the auditors’ remuneration. 8 THAT the directors of the Company are generally and unconditionally authorised pursuant to section 551 of the Companies Act 2006 to exercise all powers to allot shares in the Company and to grant rights to subscribe for or to convert any security into shares in the Company: (a) comprising equity securities (as defined in section 560(1) of the Companies Act 2006) up to an aggregate nominal amount of £718,537.32 (including within such limit any shares issued or rights granted under paragraph (b) below) in connection with an offer by way of rights issue: (i) to ordinary shareholders in proportion (as nearly as may be practicable) to their existing holdings; (ii) to the holders of other equity securities as required by the rights of those securities or as the directors otherwise consider necessary, and subject to such exclusions or other arrangements as the directors consider expedient in relation to fractional entitlements, legal, regulatory or practical problems under the laws of, or the requirements of any regulatory body or stock exchange in, any territory, or any other matter; and (b) in any other case up to an aggregate nominal amount of £359,268.66 (such amount to be reduced by the nominal amount of any equity securities allotted pursuant to the authority in paragraph (a) above in excess of £359,268.66), provided that such authority, unless renewed, varied or revoked 80 9. THAT, subject to the passing of resolution 8, the directors of the Company are authorised pursuant to section 570 of the Companies Act 2006 to allot equity securities (as defined in section 560(1) of the Companies Act 2006) for cash under the authority given by resolution 8 and/or to sell ordinary shares held by the Company as treasury shares for cash as if section 561 of the Companies Act 2006 did not apply to any such allotment or sale, such authority be limited: (a) to the allotment of equity securities in connection with an offer of equity securities (but, in the case of the authority granted under resolution 8(b), by way of a rights issue only) to: (i) (ii) the ordinary shareholders made in proportion (as nearly as may be practicable) to their existing respective holdings; and to the holders of other equity securities as required by the rights of those securities or as the directors otherwise consider necessary, and subject to such exclusions or other arrangements as the directors may deem necessary or expedient in relation to treasury shares, fractional entitlements, record dates, legal or practical problems in or under the laws of any territory or the requirements of any regulatory body or stock exchange; and (b) to the allotment of equity securities pursuant to any authority conferred upon the directors in accordance with and pursuant to article 41 of the articles of association of the Company; and (c) to the allotment of equity securities or sale of treasury shares (otherwise than pursuant to paragraphs (a) and (b) above) up to an aggregate nominal amount of £53,890.30. such authority to expire at the end of the next annual general meeting of the Company (or, if earlier, at the close of business on 23 November 2018) but, in each case, prior to its expiry the Company may make offers, and enter into agreements, which would, or might, require equity securities to be allotted (and treasury shares to be sold) after the authority expires and the board of directors may allot equity securities (and sell treasury shares) under any such offer or agreement as if the authority had not expired. 10. THAT, subject to the passing of resolution 8, the directors of the Company are authorised in addition to any authority granted under resolution 9 to allot equity securities (as defined in section 560(1) of the Companies Act 2006) for cash under the authority given by resolution 8 and/or to sell ordinary shares held by the Company as treasury shares for cash as if section 561 of the Companies Act 2006 did not apply to any such allotment or sale, such authority to be: iomart Group plc Annual report and accounts 2017 Notice of the 2017 Annual General Meeting limited to the allotment of equity securities up to a nominal (a) amount of £53,890.30; and NOTES: Appointment of Proxy (b) used only for the purposes of financing (or refinancing, if the authority is to be used within six months after the original transaction) a transaction which the board of directors of the Company determines to be an acquisition or other capital investment of a kind contemplated by the Statement of Principles on Disapplying Pre-Emption Rights most recently published by the Pre-Emption Group prior to the date of this notice, such authority to expire at the end of the next annual general meeting of the Company (or, if earlier, at the close of business on 23 November 2018) but, in each case, prior to its expiry the Company may make offers, and enter into agreements, which would, or might, require equity securities to be allotted (and treasury shares to be sold) after the authority expires and the board of directors may allot equity securities (and sell treasury shares) under any such offer or agreement as if the authority had not expired. 11 That the Company be and is hereby generally and unconditionally authorised for the purposes of section 701 of the Companies Act 2006 to make one or more market purchases (within the meaning of section 693(4) of that Act) of ordinary shares of 1 pence each in the Company provided that: (a) the maximum number of ordinary shares hereby authorised to be purchased is 10,778,059, representing 10% of the Company's issued ordinary share capital (excluding for these purposes the 22,408 shares held by the Company in treasury) at the date of the notice of this annual general meeting); (b) the minimum price (exclusive of any expenses) which may be paid for each ordinary share is 1 pence; (c) the maximum price (exclusive of any expenses) which may be paid for each ordinary share shall be not more than 5% above the average of the middle market quotations for an ordinary share on the relevant investment exchange on which the ordinary shares are traded for the five business days immediately preceding the date on which such ordinary share is contracted to be purchased; (d) unless previously revoked or varied, the authority hereby conferred shall expire on the conclusion of the next annual general meeting of the Company; and (e) the Company may make a contract or contracts for the purchase of ordinary shares under this authority before the expiry of this authority which would or might be executed wholly or partly after the expiry of such authority, and may make purchases of ordinary shares in pursuance of such a contract or contracts, as if such authority had not expired. By order of the board 1 As a member of the Company you are entitled to appoint a proxy to exercise all or any of your rights to attend, speak and vote at a meeting of the Company. You should have received a proxy form with this notice of meeting. You can only appoint a proxy using the procedures set out in the notes to the proxy form. A proxy need not be a member of the Company. 2. To be effective, the proxy form, and any power of attorney or other authority under which it is executed (or a duly certified copy of any such power or authority), must be deposited at the office of the Company’s registrars, Capita Registrars, PXS, 34 Beckenham Road, Beckenham, Kent, BR3 4TU, not less than 48 hours (excluding weekends and bank holidays) before the time for holding the meeting (i.e. by 10.00am on Monday 21 August 2017) and if not so deposited shall be invalid. Entitlement to attend and vote 3 Pursuant to Regulation 41 of the Uncertificated Securities Regulations 2001, only those members entered in the Company's register of members at: • • close of business on 21 August 2017; or if this meeting is adjourned, at close of business on the day two days prior to the adjourned meeting, shall be entitled to attend and vote at the meeting. Documents on Display 1 Copies of the service contracts and letters of appointment of the directors of the Company will be available: • • for at least 15 minutes prior to the meeting; and during the meeting. Communication 2 Except as provided above, members who wish to communicate with the Company in relation to the meeting should do so by post to the Company's registered office, details of which are below. No other methods of communication will be accepted. Address: The Company Secretary iomart Group plc Lister Pavilion Kelvin Campus West of Scotland Science Park Glasgow G20 0SP Bruce Hall Lister Pavilion, Kelvin Campus, Company Secretary West of Scotland Science Park, 14 July 2017 Glasgow G20 0SP 81 iomart Group plc Annual report and accounts 2017 Notice of the 2017 Annual General Meeting EXPLANATORY NOTES TO THE NOTICE OF ANNUAL GENERAL MEETING IOMART GROUP PLC Ordinary Resolutions Resolutions 1 to 8 are all to be proposed as ordinary resolutions. This means that for each of those resolutions to be passed, more than half of the votes cast must be in favour of the resolution. Resolution 1 – To receive and adopt the financial statements for the year ended 31 March 2017 and the directors' and auditors' reports thereon For each financial year the directors of the Company must present the audited financial statements, the directors' report and the auditors' report on the financial statements to the shareholders at an annual general meeting. Resolution 2 – To approve the directors' remuneration report Shareholders are asked to approve the directors' remuneration report which may be found in the annual report on pages 22 to 27. This resolution is an advisory one and no entitlement to remuneration is conditional on the resolution being passed. Resolutions 3, 4 and 5 – Re-election of directors Under article 24 of the Company's articles of association one third of the directors are required to retire by rotation at each annual general meeting. Pursuant to those articles, Mr Angus MacSween and Mr Richard Logan are required to retire by rotation at this annual general meeting and, being eligible, offer themselves for reappointment. In addition, the articles also stipulate that any director appointed by the Board during the year must offer themselves for reappointment at the next available annual general meeting. Mr Richard Masters was appointed on 20 June 2017 and accordingly offers himself for reappointment. The board of directors is satisfied that the performance of Mr Angus MacSween, Mr Richard Logan and Mr Richard Masters continues to be effective and demonstrates commitment to their roles with the Company including commitment of time for board meetings and other duties required of them. Accordingly, resolutions 3, 4 and 5 propose the reappointment of Mr Angus MacSween, Mr Richard Logan and Mr Richard Masters. Brief biographical details of Mr Angus MacSween, Mr Richard Logan and Mr Richard Masters are given below. Mr Angus MacSween, 60, appointed 2000, founded iomart in December 1998 following 15 years spent creating and selling businesses in the telephony and internet sector. In 1984, after a short service commission in the Royal Navy, Angus started his first business selling telephone systems. He then grew and sold five profitable businesses – including Prestel, an online information division of BT, which he turned into one of the UK’s first internet service providers. Following the sale of Teledata Limited, the UK’s leading telephone information services company, to Scottish Telecom plc, Angus then spent two years on the executive of Scottish Telecom plc where he was responsible for the development of the company's internet division Mr Richard Logan, 59, appointed 2006, is a chartered accountant, having qualified with Arthur Young in 1984. Richard then spent seven years with Ben Line Group Limited initially as Group treasurer and latterly as financial director of the main container shipping division.  From 1992 to 2002 Richard served as finance director of Kingston SCL, which provided administration and billing software to the mobile communications market, during which time he was involved in a management buy-out and subsequent trade sale of the company.  Immediately prior to joining iomart Richard served as finance director of ePOINT Group Limited, a technology company based in Scotland. Richard is a Non-Executive Director of Inspired Energy plc, an AIM listed energy procurement organisation. Mr Richard Masters, 52, appointed 2017; has over 30 years’ experience in the legal profession and was managing partner with McGrigors LLP until April 2012 when it merged with Pinsent Masons LLP. After the merger and until June 2015 he was Head of Client Operations for Pinsent Masons LLP, which was a main Board executive position, and then held a non-executive role through to May 2016. He is currently the Executive Chairman of Complete Electronic Risk Compliance Limited (Cerico), a Pinsent Masons LLP subsidiary, and has held this role since June 2016. Resolution 6 – To declare a dividend 6.00p per ordinary share Subject to the provisions of the Companies Acts, the Company may by ordinary resolution declare dividends, but no dividend shall exceed the amount recommended by the board of directors. The board of directors recommends the payment of a final dividend of 6.00p per ordinary share, to be payable to shareholders registered at close of business on 11 August 2017. Resolution 7 – Re-appointment and remuneration of auditors The Company is required at each general meeting at which financial statements are presented to shareholders to appoint auditors who will remain in office until the next such meeting. Grant Thornton UK LLP have expressed their willingness to continue in office for a further year. In accordance with company law and corporate governance best practice, shareholders are also asked to authorise the directors to determine the auditors' remuneration. Resolution 8 – Authority to allot shares Under section 551 of the Companies Act 2006, the directors of a company may only allot shares or grant rights to subscribe for, or to convert any security, into shares in the Company if authorised to do so. In line with guidance issued by the Investment Management Association (now the Investment Association), the authority contained in paragraph (a) of this resolution will (if passed) give the directors authority to allot ordinary shares in connection with a rights issue in favour of ordinary shareholders up to an aggregate nominal amount equal to £718,537.32 (representing 71,853,732 ordinary shares) as reduced by the nominal amount of any shares issued under paragraph (b) of this resolution. This amount (before any reduction) represents approximately two- thirds of the issued ordinary share capital (excluding treasury shares) of the Company as at the latest practicable date prior to publication of the notice of the meeting. The authority contained in paragraph (b) of this resolution will (if passed) give the directors the authority to allot ordinary shares up to an aggregate nominal value of £359,268.66 (representing 35,926,866 ordinary shares of 1p each). This amount represents approximately one-third of the issued ordinary share capital (excluding treasury shares) of the Company as at the latest practicable date prior to the publication of the notice of the meeting. This authority will expire on 23 November 2018 or, if earlier, at the conclusion of the next annual general meeting. Special Resolutions Resolutions 9, 10 and 11 will be proposed as special resolutions. This means that for each of those resolutions to be passed, at least three-quarters of the votes cast must be in favour of the resolution. 82 iomart Group plc Annual report and accounts 2017Resolutions 9 and 10 - Disapplication of statutory pre-emption rights The Companies Act 2006 gives holders of ordinary shares, with limited but important exceptions, certain rights of pre-emption on the issue for cash of new ordinary shares or on the sale of any shares which the Company may hold in treasury following a purchase of its own shares. The directors of the Company believe that it is in the best interests of the Company that, as in previous years, the board of directors of the Company should have limited authority to allot some shares for cash or sell treasury shares without first having to offer such shares to existing shareholders. The directors' current authority expires at the close of the forthcoming annual general meeting. The authority sought by way of resolution 9 would expire at the earlier of the close of the next annual general meeting or 23 November 2018. The authority, if granted, will relate to the allotment of new ordinary shares or the sale of treasury shares in respect of (a) rights issues and similar offerings, where difficulties arise in offering shares to certain overseas shareholders, and in relation to fractional entitlements and certain other technical matters, (b) the right to receive shares, credited as fully paid, instead of cash in respect of the whole (or some part, to be determined by the board of directors) of such cash dividend or dividends (if the Company offers shareholders the option of making an election of that nature and if relevant shareholders make such an election), and (c) generally to allotments (other than in respect of pre-emptive offerings) of ordinary shares or the sale of treasury shares having an aggregate nominal value not exceeding £53,890.30 (being equal to 5% of the issued ordinary share capital (excluding treasury shares) of the Company as at the latest practicable date prior to the publication of the notice of the meeting). Resolution 10, if approved, would give the directors of the Company an additional authority to issue ordinary shares, or sell treasury shares, for cash in connection with an acquisition or capital investment of kind contemplated by the Pre-Emption Group's Statement of Principles up to an additional aggregate nominal amount of £53,890.30 (being equal to 5% of the issued ordinary share capital (excluding treasury shares) of the Company as at the latest practicable date prior to the publication of the notice of the meeting). The directors confirm that they will only allot shares pursuant to this authority where the allotment is in connection with an acquisition or specified capital investment (as defined in the Pre-Emption Group's Statement of Principles) which is announced contemporaneously with the allotment or sale, or which has taken place in the preceding six-month period and is disclosed in the announcement of the allotment of sale. The powers given by resolutions 9 and 10 will, unless sooner revoked or renewed by the Company in a general meeting, last until the earlier of the close of the next annual general meeting or 23 November 2018. Resolution 11 – Authority to purchase the Company's own shares This resolution grants authority to the Company to make purchases of up to a maximum of 10% of the issued ordinary share capital of the Company (excluding for these purposes the 22,408 shares held by the Company in treasury) as at the date of the notice of this meeting. In certain circumstances it may be advantageous for the Company to purchase its ordinary shares. The directors would use the share purchase authority with discretion and purchases would only made from funds not required for other purposes and in light of market conditions prevailing at the time. In reaching a decision to purchase ordinary shares, your directors would take account of the Company's cash resources and capital, the effect Notice of the 2017 Annual General Meeting of such purchases on the Company's business and on earnings per ordinary share. The directors have no present intention of using the authority. However, the directors consider that it is in the best interests of the Company and its shareholders as a whole that the Company should have flexibility to buy back its own shares should the directors in the future consider that it is appropriate to do so. In relation to any buy back, the maximum price per ordinary share at which the Company is authorised in terms of resolution 11 to effect that buy back is 5% above the average middle market price of an ordinary share for the five business days immediately preceding the date on which the buy back is effected. The statutory provisions governing buy backs of own shares are currently contained in, inter alios, sections 693 and 701 of the Companies Act 2006. 83 iomart Group plc Annual report and accounts 2017Officers and Professional Advisers Directors Ian Ritchie CBE, FREng, FRSE, FBCS, CEng, BSc Angus MacSween Ian Steele BAcc, CA Crawford Beveridge CBE Richard Logan BA, CA Secretary Bruce Hall BAcc(Hons), CA Registered office Non executive chairman Chief executive officer Non executive director Non executive director Finance Director Lister Pavilion, Kelvin Campus, West of Scotland Science Park, Glasgow G20 0SP Nominated adviser and broker Peel Hunt LLP, Moor House, 120 London Wall, London EC2Y 5ET Principal Bankers Lloyds Banking Group, Bank of Scotland plc, 235 Sauchiehall Street, Glasgow G2 3EY Solicitors Shepherd & Wedderburn LLP, 5th Floor, 1 Exchange Crescent, Conference Square, Edinburgh EH3 8UL Pinsent Masons LLP, 141 Bothwell Street, Glasgow G2 7EQ Independent auditors Grant Thornton UK LLP, Level 8, 110 Queen Street, Glasgow G1 3BX Registrars Capita IRG plc, Bourne House, 34 Beckenham Road, Beckenham, Kent BR3 4TU Company Registration Number SC204560 84 iomart Group plc Annual report and accounts 2017 Group Brands iomart Cloud Services 0141 931 6400 info@iomart.com www.iomart.com SystemsUp Ltd 020 7448 4615 info@systemsup.co.uk www.systemsup.co.uk Melbourne 0161 232 0001 inbox@melbourne.co.uk www.melbourne.co.uk Backup Technology 0800 999 3600 sales@backup-technology.com www.backup-technology.com RapidSwitch 01753 471 040 sales@rapidswitch.com www.rapidswitch.com Redstation 0800 622 6655 sales@redstation.com www.redstation.com United Hosting 0845 643 2011 sales@unitedhosting.co.uk www.unitedhosting.co.uk Easyspace 0370 755 5088 sales@easyspace.com www.easyspace.com Cristie Data 01453 847 000 sales@cristie.co.uk www.cristie.co.uk Design by iomart Group plc. 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