ANNUAL REPORT AND ACCOUNTS for the year ended 31 January 2024 32095-Keystone-Law-AR2024.indd 3 32095-Keystone-Law-AR2024.indd 3 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:49:41 17/04/2024 09:49:41 Attractive business model Our model offers lawyers freedom, flexibility and autonomy whilst delivering long-term and consistent growth. Scalable We grow organically by attracting high-calibre lawyers from a large addressable market which is ripe for disruption. Supportive culture Our supportive and collaborative culture is one of the reasons why lawyers are attracted to us and remain with us. Strategic Report Business Review and Growth Strategy Market Review Chairman’s Statement Chief Executive’s Review Financial Review and Strategic Report Environmental, Social and Governance Governance The Board of Directors Principal Risks and Uncertainties Corporate Governance Statement Report of the Audit Committee Report of the Remuneration Committee Directors’ Report Directors’ Responsibilities Statement Our Financials Independent Auditor’s Report Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Company Statement of Financial Position Consolidated Statement of Changes in Equity Company Statement of Changes in Equity Consolidated Statement of Cash Flows Company Statement of Cash Flows Notes to the Financial Statements 02 04 07 08 10 13 16 17 19 22 23 26 28 29 35 36 37 38 39 40 41 42 32095-Keystone-Law-AR2024.indd 3 32095-Keystone-Law-AR2024.indd 3 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:49:41 17/04/2024 09:49:41 FAST GROWING, PROFITABLE AND CASH GENERATIVE, KEYSTONE LAW IS DISRUPTING THE TRADITIONAL LEGAL MARKET. Lawyer Numbers 83 369 79 347 65 328 44 277 51 304 87 93 386 394 80 398 399 109 398 117 432 108 415 Revenue(1) £m 56.4 50.9 87.9 76.4 71.1 Jan 19 Jul 19 Jan 20 Jul 20 Jan 21 Jul 21 Jan 22 Jul 22 Jan 23 Jul 23 Jan 24 Principals Other Fee Earners 2020 2021 2022 2023 2024 Adjusted PBT £m Cash from Operations £m 11.3 9.1(²) 9.2 10.0 9.3 10.4 2022 2023 2024 2022 2023 2024 (1) Prior years revenue restated following FRC review. Restatement has Nil effect on adjusted PBT, earnings or cash. (2) 2022 benefitted from cost savings of c.£0.4m due to Covid-19 related restrictions. “ KEYSTONE’S MODEL HAS BEEN VINDICATED IN SPADES; THE FIRM IS LIGHT YEARS AHEAD. The Lawyer Awards 2020 ” 32095-Keystone-Law-AR2024.indd 1 32095-Keystone-Law-AR2024.indd 1 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:49:42 17/04/2024 09:49:42 01 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 BUSINESS REVIEW AND GROWTH STRATEGY KEYSTONE Keystone is an award-winning, innovative, tech-enabled full service law firm, providing conventional legal services through its scalable and proven business model operating in an addressable market of over £10bn. OUR MODEL Keystone has a strongly differentiated business model which offers lawyers freedom, flexibility and autonomy. We recruit high-quality, experienced lawyers from mid-market law firms. Our lawyers are self-employed and they determine how, when and where they work, being fully responsive to the clients’ demands. They earn up to 75% of the fees they bill: 60% for doing the work and 15% for introducing the client. In return, Keystone offers a full suite of resources, providing them with infrastructure and support via the central office, a bespoke user-friendly proprietary IT platform, and access to an extensive network of highly experienced colleagues, as well as a programme of events and initiatives focused on helping them to maximise their potential. Keystone contracts directly with the clients for the provision of legal services. Keystone provides its lawyers with infrastructure and support via its central office, a bespoke IT platform and access to a network of colleagues and events. CLIENTS Keystone invoices the client. Lawyers are paid once payment has been received from the client. Keystone’s lawyers are self-employed and work from locations of their choice. They get paid up to 75% of the value that they bill. PRINCIPALS Lawyers own the client relationships. The Keystone model offers them freedom, flexibility and autonomy. Pod members are employed by Principals but must be approved by the Company to ensure high quality. PODS The remuneration model is simple, transparent and the same for everyone. Lawyers are paid once the clients have paid for the services. This structure has two core benefits: typically, lawyers earn more money for the same work than they would in a conventional firm, and Keystone is resilient and highly cash generative. 02 32095-Keystone-Law-AR2024.indd 2 32095-Keystone-Law-AR2024.indd 2 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:49:42 17/04/2024 09:49:42 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 OUR CULTURE Keystone has a supportive and collaborative culture, which is one of the reasons why lawyers are attracted to the business and remain with us. We treat our lawyers like clients, and the absence of a hierarchical structure is beneficial in many ways – our lawyers are freed from office politics and unwanted managerial responsibilities and are able to focus exclusively on what they enjoy and do best: being a lawyer. For many lawyers, this is life changing. We have always believed that Keystone is one of, if not the, happiest law firm in the country. This belief was validated by Roll on Friday naming Keystone Firm of the Year 2021(1). Whilst the model provides our lawyers with independence, it also provides a strong network and sense of collaboration within Keystone, which we consciously and consistently encourage and promote. We commit substantial time, effort and resources to bring our lawyers together so that they meet, know, and trust each other. We recognise that internal networks offer both the professional and personal support our lawyers need to flourish. An important part of our lawyers’ success is access to the extensive knowledge and experience of their colleagues. More than 30% of work at Keystone is a result of cross-referrals, demonstrating the multi-faceted requirements of clients and the inter- connectivity and collaboration that is built into the DNA of Keystone. OUR SCALABLE GROWTH STRATEGY Keystone grows organically by recruiting high-calibre, senior lawyers from across the UK legal mid-market who bring with them their client relationships and contacts. Our addressable market is large (accounting for over £10bn in annual fee income) and is ripe for disruption as increasing numbers of lawyers seek to gain greater control over how they develop their practice, achieve an improved work-life balance, and earn more for the work they do (see page 04). Keystone’s model means that there are neither physical nor working capital constraints on the rate of growth or the size to which the business can grow, with most areas of law within the mid-market being addressable by our model. Furthermore, the way in which the Principal lawyers contract with Keystone means that they, in turn, can recruit (1) Since this time Roll on Friday has not allowed non-conventional law firms to participate in the survey. other lawyers into their “Pods”. To ensure the calibre is maintained, all recruits are approved by Keystone. Lawyers, who so wish, can use this structure to build a larger practice than would otherwise be possible, and thereby better leverage the value of their client relationships. For those who either do not wish to take this approach, or for whom the need for support is less substantial, there is always the ability to cross refer work to other Keystone Principals. Alternatively, junior support can be delivered by one of the junior lawyers employed by the central office to support all our senior lawyers. OUR SERVICES Keystone delivers high-calibre legal advice across the full range of legal services demanded by our clients. The Keystone model enables our lawyers to focus exclusively on the development and delivery of client legal work, ensuring that the service delivered is exemplary. Our client base, comprising predominantly SME businesses as well as high and ultra-high net worth individuals, operates across a broad range of sectors. Our growth strategy ensures that we continually extend both our client base and our service offering as new lawyers bring both the expertise and their client relationships with them to Keystone. The chart below shows the spread of revenue by matter work type for the current financial year. Other 3% Corporate 18% Private client 6% Commercial 20% Family 7% Property 21% Litigation 13% Employment 12% 03 32095-Keystone-Law-AR2024.indd 3 32095-Keystone-Law-AR2024.indd 3 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:49:42 17/04/2024 09:49:42 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024STRATEGIC REPORT MARKET REVIEW THE COMPOSITION OF THE UK LEGAL SERVICES MARKET The UK Legal Services Market The UK legal market is the second largest in terms of fee income in the world, with annual fee revenue of £43.7 billion in 2022(1) (up 5.6% year on year). The UK is the largest legal market in Europe, second only to the US worldwide, and is globally recognised as the most international due to the widespread use of English law as the framework for international commercial contracts and dispute resolution. The U K L e g al S e r v i c e s M a r k e t – £ 4 15 LARGEST UK LAW FIRMS £22 billion in annual revenue “MID-MARKET” LAW FIRMS Over £10 billion in annual revenue “HIGH STREET” LAW FIRMS 3 . 7 billion in annual fee r e v e n s e u The “mid-market” (the largest 200 law firms in the country (including Keystone which is ranked no. 60(2)) excluding the global elite): these firms account for over £10 billion annual fee income and employ more than 34,000 qualified lawyers(2). The “global elite” (the Magic Circle and Silver Circle firms and others that together make up the 15 largest UK firms by annual revenue): these firms focus on delivering complex legal services to the largest global businesses, generating, in aggregate, £22 billion annual fee income and employing over 37,000 qualified lawyers(2). The “high street” market: this category covers the rest of the market. Increasing complexity The UK market operates under three different regulatory environments, covering England and Wales (94.2% of the UK market by value), Scotland (4.6%) and Northern Ireland (1.2%)(1). The Legal Services Act 2007 introduced pivotal reforms liberalising the market in England and Wales, which, through the creation of the Alternative Business Structure (ABS), allowed non-lawyers to own and act in management capacities within law firms. These reforms have not been adopted in Northern Ireland, nor fully adopted in Scotland. The UK market is diverse, comprising approximately 9,000 law firms in England & Wales in July 2022(3) and around 96,000(3) solicitors acting in private practice. The Directors believe that the overall market can be broadly divided into the three segments shown above and that the mid-market is the segment in which Keystone operates. (1) TheCityUK UK legal services 2023. (2) The Lawyer Top 200, 2023. (3) Law Society 2023. 04 32095-Keystone-Law-AR2024.indd 4 32095-Keystone-Law-AR2024.indd 4 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:49:42 17/04/2024 09:49:42 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 FACTORS IMPACTING ON THE MID-MARKET LAW FIRM • Changes to legislative framework – The Legal Services Act 2007 allowed for changes to the delivery of legal services, resulting in both new entrants to the market and the creation of new business models which challenge the long-standing model of the traditional law firms. Prior to the Legal Services Act 2007, equity partnership was the only basis on which a lawyer could access the highest level of remuneration within a law firm. • Increasing commoditisation of services – The broader development and use of technology to deliver everyday services across the UK economy has meant that the services offered are more widely available and opportunities for differentiation more limited. This has resulted in increasing client pressure on fees and has produced a marked shift in legal services pricing mechanisms expected by clients and, with the rapid evolution of AI, it is likely that this development will continue to place further pressure on the legal industry in the coming years. • Longer-term macroeconomic factors – Even prior to Covid, the UK as a whole had experienced challenging times for over a decade. Within the legal market, this has manifested itself in increased pressure from clients on fees, whilst still having to combat the continued inflationary pressure on costs, especially property costs, and, more recently, salaries, which represent a substantial and largely fixed part of the cost base of most traditional law firms. We believe that the recent period of strong demand following the pandemic has just provided a short-term reprieve on these pressures and that the wage inflation driven by the highly competitive market conditions will have further exacerbated the long- term squeeze on profits for law firms operating in the “mid-market”. • Covid 19 effects – The outbreak of the pandemic, together with the government’s response to it, caused a series of short-term impacts to trading conditions. Some of these effects have been short to mid term, whilst others are still evolving and are likely to have a longer-term effect on the legal landscape and beyond. • Short to mid-term effects – The closing down of the UK economy, followed by the sporadic manner of the reopening, undoubtedly caused short-term dips and spikes in trading activity, as well as one-off distortions to profits across the economy, with many costs either not being incurred or offset by government assistance. During the 12 – 18 months when restrictions came to an end, the legal market had an exceedingly strong bounce back, which resulted in extreme competition for talent and significant wage inflation. • Evolving longer-term effects – Changes in working patterns forced on the business community by the Covid lockdowns have been transformative in attitudes towards remote working. Across the economy, and especially in professional and legal services sectors, there has been a general realisation that these roles can be carried out successfully without being office-based. This shift has been particularly strongly adopted by employees who have realised the benefits home working offer to them, and, as such, a significant number of those employed in the legal market now expect a far higher level of flexibility in their roles than would previously have been accepted. To date, employers have largely acceded to these demands, however, as time has progressed, we have seen some erosion of that flexibility, as most law firms have become increasingly mandatory as to frequency and the timing of office presence, we believe that over time, as client demand normalises and lawyers find it increasingly difficult to hit their recently increased targets, law firm management’s attitude to flexible working patterns will shift further back towards the traditional attitudes of presenteeism and control, which have always been prevalent within the legal industry. • Increased billing targets – Within traditional firms, the most common response to the longer-term macro-economic challenges has been to demand greater effort from those in senior associate and junior partner roles to deliver more revenue per head and drive business development, whilst still retaining a high level of managerial responsibility. In response to the well documented wage inflation seen following the high levels of demand across the legal industry over the last couple of years, firms have, once again, resorted to the same tactic, with large pay rises often being accompanied by an equivalent increase in billing targets. To date, with strong client demand together with the inflationary environment making rate rises easier to pass on to clients, these metrics have largely held up. However, moving forwards the ability of fee earners to hit these increased targets and so justify the higher salaries will become more challenging and this, in turn, will feed into the pressure brought to bear on lawyers across the industry. • Reduction in appeal of equity partnership – According to a recent survey by LexisNexis, today’s generation of legal associates aspire to an enviable salary and a good work-life balance. It is reported that whilst 75% of associates want to remain in private practice, only 25% want to make partner in the next five years. For 71% of associates, a good work–life balance is the most important factor determining their next career move. It appears that there has been a generational shift in the aspirations of young professionals progressing their career. Aside from the change in work–life balance aspirations, the financial 05 32095-Keystone-Law-AR2024.indd 5 32095-Keystone-Law-AR2024.indd 5 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:49:42 17/04/2024 09:49:42 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024STRATEGIC REPORT MARKET REVIEW CONTINUED risk associated with partnership has also contributed to the decline in interest as the cost of buying into partnerships is high yet reduced profits in conventional mid-market law firms mean that the return on equity is less attractive. Furthermore, with several high-profile law firm insolvencies in recent years and the associated equity losses and personal liabilities for the equity partners involved, partnership of a mid-market law firm is no longer necessarily regarded as a secure investment. • Changes in attitude towards “New Law”– It is no longer the case that the only route for a successful lawyer to develop their careers is via the traditional route to partnership within a conventional firm. Changes in attitude across the profession mean that those who pursue non-traditional routes can not only benefit from the financial or lifestyle upsides which these routes may offer, but also receive the professional recognition they aspire to from their peers within the more traditional sectors of the profession. OPPORTUNITY FOR KEYSTONE LAW The Keystone model is now well recognised and accepted within the mainstream of the UK legal mid-market, a market in which the traditional model continues to face long-term structural challenges. The nature of the traditional model and the way in which traditional firms have responded to these challenges ensures that there continues to be a sizeable pool of talented lawyers across the UK mid-market who wish to benefit from the advantages offered by the Keystone model. Whilst the previous couple of years have proved challenging for recruitment, with strong client demand alleviating some of the negative experiences which normally exist within the industry, the last twelve months have seen a more fertile recruitment environment and, over the mid and long term, we believe that the well-documented wage inflation across the industry will only serve to exacerbate the pressures brought to bear on lawyers and drive more of them to seek a change for the better. The effect of Covid-19 lockdowns on the working world has absolutely validated the concept of remote working within the legal industry, and this change in attitude will have served to further enlarge the pool of lawyers wishing to take advantage of the opportunities offered by the Keystone model in the near-term. Whilst, the generational shift in attitude, highlighted in the LexisNexis survey 2024, towards a financially rewarding career which provides the opportunity for a good work–life balance suggests that the opportunity will continue to grow into the mid-term. The Directors believe that, as a result of these trends, the UK legal services mid-market offers significant opportunity for Keystone far into the future. COMPETITIVE LANDSCAPE As the model has become increasingly accepted into the mainstream, a growing number of entrants to the legal industry have sought to emulate the Keystone model. This means that today there are approximately 50 law firms structured in a similar way to Keystone delivering services across the full extent of the legal industry. A recent report from Codex Edge, using Atlas Data, reported that there are now over 3,500 lawyers working in what they call “platform firms”. This is something which the Board considers to be a positive factor, as it demonstrates an evolutionary trend in favour of Keystone. Having enjoyed first mover advantage, Keystone has established itself as the premier organisation in this new genre, in terms of size, calibre of lawyer and market position such that for those lawyers whom we seek to attract, Keystone is the stand-out choice. Whilst Keystone is widely considered the market leader amongst these “new law” businesses, the Directors consider that the Group’s primary opportunity for growth exists across the entire mid-market, as Keystone’s lawyers are predominantly recruited from the conventional firms operating in this segment of the market and not other platform firms. 06 32095-Keystone-Law-AR2024.indd 6 32095-Keystone-Law-AR2024.indd 6 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:49:43 17/04/2024 09:49:43 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 CHAIRMAN’S STATEMENT BOARD AND GOVERNANCE The Board has continued to operate within the structures and governance requirements of the Quoted Companies Alliance (“QCA”) Code 2018 as set out in the corporate governance section. In November 2023, the QCA issued a revised code which is to apply to financial years starting on or after 1 April 2024. The Board has decided to adopt the new requirements regarding re-election of Directors early and accordingly, all Directors will stand for election / re-election on an annual basis with effect for the first time at our AGM in June 2024. We will look to implement all remaining new requirements on a timely basis to ensure that we remain compliant with the new code as it takes effect. Salar Farzad joined the Board in March 2023 as Non- executive Director and, following Simon Philips’ resignation in April 2023, assumed the role of Chair of the Audit Committee. OUTLOOK I am pleased to say that 2025 has started well. Our lawyers remain busy and early recruitment activity provides us with confidence in the year ahead. Robin Williams Non-executive Chairman 17 April 2024 I am pleased to introduce Keystone Law’s results for the year ended 31 January 2024. It has been another good year for the business, with sustained client demand and a return to recruitment levels last seen pre pandemic. The Group has delivered a strong set of financial results with revenue growing 15.1% to £87.9m (2023 (restated): £76.4m), and adjusted PBT(1) increasing to £11.3m representing an adjusted PBT margin of 12.8% (2023 (restated): £9.2m, 12.1%) (PBT of £10.3m (2023: £8.4m) and PBT margin of 11.7% (2023: 11.0%)). These impressive results reflect the high levels of activity among our lawyers and the continued growth of the firm, as well as the strength of our balance sheet in this period of higher interest rates. The cash generative nature of the business model has meant that cash generated from operations has increased to £10.4m (2023: £9.3m) representing an operating cash conversion of 96.1% (2023: 96.5%). DIVIDEND At the half year, in light of the strength of the balance sheet and our confidence in the future, we paid a special dividend of 12.5p per share. This brought the total dividends paid since IPO to just under 92p(2) per share, or 100% of the EPS earned over the same period. Having paid an ordinary interim dividend of 5.8p (2023: 5.2p) the Board is proposing to pay a final ordinary dividend for the year ended 31 January 2024 of 12.5p per share (2023: 10.9p), bringing the total ordinary dividend for the year to 18.3p (2023: 16.1p). OUR PEOPLE AND CULTURE Fundamental to the ongoing success of Keystone are its people and its culture. As we continue to grow, as a Board we are mindful to ensure that the factors which have made us successful are sustained and enhanced as we continue to evolve the business. We dedicate significant energy in ensuring that our culture is successful, enjoyable, inclusive and supportive and we work hard to ensure that this is firmly embedded in every aspect of life at Keystone. (1) Adjusted PBT is calculated by adding share-based payment costs and amortisation of intangible assets to PBT. Details of these calculations are shown in the Financial Review on page 10. (2) Sum of the Ordinary DPS paid for the years ended 31 January 2019 to 31 January 2023, together with the special dividends DPS paid to date. 32095-Keystone-Law-AR2024.indd 7 32095-Keystone-Law-AR2024.indd 7 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:49:44 17/04/2024 09:49:44 07 STRATEGIC REPORT CHIEF EXECUTIVE’S REVIEW INTRODUCTION AND HIGHLIGHTS I am delighted to report that Keystone has delivered a strong trading performance this year, with growth across all key performance indicators. We have experienced sustained client demand across practice areas and this, together with the impact of those Principals(1) who have joined us has continued to drive growth, increasing revenue by 15.1% to £87.9m (2023: £76.4m (restated)), whilst adjusted PBT increased to £11.3m (2023: £9.2m) (PBT of £10.3m (2023: £8.4m) and PBT margin of 11.7% (2023: 11.0%)). As always, the strongly cash generative nature of our model has ensured that these profits have converted to cash, with cash generated from operations of £10.4m (2023: £9.3m). The legal industry “war for talent” has also subsided somewhat this year, and, following a challenging couple of years on the recruitment front, it has been very gratifying to see a return to the level of recruitment we last experienced pre pandemic and very pleasing to welcome a further 51 high-calibre Principals(1) this year. QUALITY OF OUR LAWYERS DRIVING LONG-TERM STAKEHOLDER VALUE We have always held the view that the key to driving long-term stakeholder value in Keystone is the quality of the lawyers we recruit. Focusing on quality, and not just quantity, creates a virtuous circle, attracting lawyers who are, or who aspire to be, at the top of the profession. To date this approach has served us well, driving growth, reducing risk and continually enhancing our reputation within the legal profession; ensuring that as we have grown, we have moved up the value chain in terms of the lawyers attracted to join us. The recognition of our model by the mainstream legal establishment has undoubtedly been accelerated by the changes in attitude towards flexible working practices brought about by the pandemic lockdown. Our ability to offer an increasingly attractive proposition to those at the top of the profession is clearly evidenced by the fact that over a quarter of the Principals who joined us this year (up from less than 15% in each of the two years pre pandemic) came directly from the UK office of large US law firms or top 25 UK law firms(2). Furthermore, the vast majority of Keystone lawyers continue to be recruited from top 100 law firms, which demonstrates that quality is, the determining trait when considering whether to make an offer to a candidate or not. This continued focus on quality has been essential in building Keystone’s brand and it is extremely gratifying to see both the number of our lawyers who have been recognised in the Legal 500 UK Solicitors 2024 ranking(3) (172 listed) as well as the evolution of this recognition in recent years (65 Keystone lawyers listed in Legal 500 2019). 0808 32095-Keystone-Law-AR2024.indd 8 32095-Keystone-Law-AR2024.indd 8 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:49:48 17/04/2024 09:49:48 POSITIVE EVOLUTION IN THE RECRUITMENT MARKET This year we have seen a positive shift in the recruitment market as the extremely high levels of demand, which had characterised the “war for talent” during the previous couple of years, has subsided. That said, recently increased salaries across the industry, together with the high interest rates and general uncertainty in the economic outlook has continued to weigh on candidate appetite for change. Against this backdrop, the activity levels and results achieved in the year have been highly satisfactory. During the period we received 270 qualified applicants (2023: 232), made offers to 103 candidates (2023: 79) with 68 candidates accepting offers(4) (2023: 42), whilst welcoming 51 new joiners (2023: 32) meant that we have ended the year with 432 Principals (2023: 398). Our Principals have also continued to drive growth through the recruitment of Pod Members, ending the period with 102 (2023: 95), this aspect of the business model is now completely standard with between 15% and 20% of each year’s cohort of lawyers choosing to build and run their practice in this way. ONGOING SUPPORT FROM THE CENTRAL OFFICE TEAM As ever, the Central Office team have had a busy year, providing the full range of support that our lawyers need. It has been another active year for our community and engagement team as they have organised the regular networking and social activities which are such a fundamental element of the ongoing success of the business. These well-attended events deliver technical and commercial updates as well as professional networking and community building opportunities which ensure that our lawyers feel a real sense of belonging and cohesion within the firm. As we continue to grow, our focus is always to ensure that this important cultural aspect of the business scales with us. The constantly evolving world of IT ensures that the team is always busy. As always, IT security is a key focus for the team and ongoing investment of time and resources is essential to ensure that our IT platform remains safe and secure at all times. We also continue to monitor the evolution of AI, with particular interest in how this technology will affect how we do business. Many of the tools which we use already have some element of AI built into them, however, this is such a fast-moving area that it is likely we will see significant steps forward in wider adoption of AI in the years ahead. LOOKING AHEAD We have experienced a positive start to the new financial year with Keystone continuing to take advantage of ongoing client demand across practice areas. So far this year, conditions in the recruitment market remain as they were during 2024 and we continue to attract a good flow of high-quality candidates. All this provides us with confidence that 2025 will be another good year during which Keystone will deliver continued sustainable growth and strong results, in line with current market expectations. James Knight Chief Executive 17 April 2024 (1) Principal lawyers are the senior lawyers who own the service company (“Pod”) which contracts with Keystone. The relationship between Keystone and its lawyers is governed by two agreements: a service agreement (which governs the commercial terms and is between the Pod and Keystone) and a compliance agreement (which governs the behaviour of lawyers and is between each lawyer and Keystone). Pods can employ more than one fee earner. A junior lawyer who is employed by a Pod (“Pod Member”) is, to all intents and purposes, a Keystone lawyer and is presented to the outside world in much the same way as a conventional law firm would present a conventionally employed junior lawyer. Junior lawyers are interviewed and fully vetted by the recruitment team in central office to ensure that they are of the requisite quality and calibre. As is the case for the Principal lawyers, these juniors sign a compliance agreement with Keystone and are required to comply with all rules and regulations governing the professional conduct of Keystone’s lawyers. (2) The Lawyer Survey 2023 ranking by revenue. (3) The Legal 500 UK Solicitors 2024 rankings is the leading guide to law firms and solicitors in the UK (Source: Legal500.com). (4) Historically, approximately 15% of candidates who accept offers subsequently don’t join. 09 32095-Keystone-Law-AR2024.indd 9 32095-Keystone-Law-AR2024.indd 9 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:49:48 17/04/2024 09:49:48 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024STRATEGIC REPORT FINANCIAL REVIEW AND STRATEGIC REPORT KEY PERFORMANCE INDICATORS (KPIs) The following KPIs are used by the management to monitor the financial and operational performance of the Group: • Revenue growth: 15.1% increase (2023: 7.4% (restated)) • Adjusted PBT growth: 22.0% increase (2023: 1.1%) • Adjusted PBT margin(3): 12.8% (2023: 12.1% (restated)) • PBT growth: 22.9% increase (2023: 0.3%) • PBT margin: 11.7% (2023: 11.0% (restated)) • Adjusted basic EPS: 27.4p (2023: 24.2p) • Operating cash conversion 96.1%(1) (2023: 96.5%) • Trade receivables days: 34 (2023: 36) • Qualified new applicants(2): 270 (2023: 232) • Offers made(2): 103 (2023: 79) • Offers accepted(2): 68 (2023: 42) (1) Operating cash conversion is calculated utilising cash generated from operations and dividing it by the PBT before non-cash movements and net interest (£10,854,775 per cash flow statement 2024). (2) Non-financial KPIs are commented on with the Chief Executive’s review. Recruitment data refers to numbers of potential Principals. (3) The calculation of adjusted PBT, adjusted PBT margin and adjusted EPS is shown on the next page. INCOME STATEMENT I am pleased to report revenue for the year of £87.9m, an increase of 15.1% on the prior year. As a business, we have seen sustained client demand across practice areas this year which has been further supplemented by the growth in Principal numbers achieved (ending the period with 432 Principals and averaging 415 (2023: ended with 398 and averaged 396). This has enabled revenue per Principal to grow by 10% to £212k (2023: £193k (restated) £190k (reported)). GROSS PROFIT The gross profit of the business has risen this year by 15.4% to £22.8m (2023: £19.9m (restated)), with gross profit margins remaining stable at 26%. AMORTISATION, DEPRECIATION AND SHARE-BASED PAYMENTS Amortisation, both of right-of-use assets and intangible assets, remained unchanged year on year with no changes to the underlying assets, whilst there has been a marginal increase in depreciation. The charge in respect of share- based payments increased from £0.5m to £0.6m. OTHER ADMINISTRATIVE EXPENSES Other administrative expenses have increased by 16.6% to £11.6m (2023: £9.9m). Staff costs increased by 11% to £4.7m (2023: £4.2m), against the backdrop of ongoing wage inflation across the economy, whilst average headcount has increased from 59 to 63 as we have continued to invest in the Central office team to support the ongoing development of the business. Other administrative costs (per note 5) increased by 20.8% to £6.9m (2023: £5.7m), with the largest contributory factors to this being recruitment fees and professional indemnity insurance. Recruitment fees are up £0.4m, as both the number and size of practice of those Principals joining through agencies increased this year, whilst professional indemnity insurance costs have increased by £0.3m driven predominantly by revenue growth and to a lesser extent by the ongoing hardening of the insurance market. FINANCE INCOME AND COSTS The last two years have seen a significant step change in the interest rate environment, with rates having risen consistently from virtually nil at the start of the prior year to the current level, where it has remained since August 2023. Accordingly, as a cash positive business, our net finance income has risen significantly over the period, contributing £0.9m to profit this year (2023: £0.1m). 1010 32095-Keystone-Law-AR2024.indd 10 32095-Keystone-Law-AR2024.indd 10 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:49:54 17/04/2024 09:49:54 PBT, ADJUSTED PBT AND PBT MARGINS Adjusted PBT is calculated as follows: Profit before tax Amortisation of intangible assets Share-based payments 2024 £ 2023(1) £ 10,306,331 8,384,677 350,884 610,644 350,884 502,708 Adjusted PBT 11,267,859 9,238,269 Net finance income 889,204 74,721 Adjusted PBIT 10,378,655 9,163,548 PBT margin(1) Adjusted PBIT margin(1) Adjusted PBT margin(1) 11.7% 11.8% 12.8% 11.0% 12.0% 12.1% (1) 2023 margins have been restated to reflect the prior year restatement of revenue (see note 2). The growth in revenue and gross profits have driven a 13% increase in adjusted PBIT. This represents an 11.8% margin, which is slightly down on the prior year (2023: 12.0%) as we experienced a sizeable increase in recruitment costs, caused by more Principals with larger practices joining via recruitment agencies. Profit before tax and adjusted profit before tax have increased by 22.9% and 22.0% respectively, with margins also stepping up as the contribution of finance income more than compensated for the change in adjusted PBIT margin. TAXATION In April 2023, the standard rate of corporation tax increased from 19% to 25% and, accordingly, the average standard rate for this financial year has been 24%. The increase in the standard rate has caused a step up in the Group’s effective tax rate to 25.8% (2023: 19.7%). The effective rate of the Group is always higher than the standard rate due to the level of investment we make in providing networking opportunities in social environments for our lawyers, which are disallowable for corporation tax purposes. EARNINGS PER SHARE Basic earnings per share increased from 21.5p to 24.4p, with fully diluted EPS being 23.9p (2023: 21.2p). Adjusted basic earnings per share (calculated by making the same adjustments to earnings as have been made in calculating adjusted PBT and divided by the average shares in issue this year) increased to 27.4p (2023: 24.2p). STATEMENT OF FINANCIAL POSITION CASH The Group’s business model is strongly cash generative because its most significant cost, the fees paid to lawyers, is only paid once Keystone has been paid for the work it has delivered. Operating cash conversion, which had been particularly strong in 2023, has remained strong this year at 96.1% (2023: 96.5%), generating cash from operations of £10.4m (2023: £9.3m). Capital expenditure was £0.07m (2023: £0.06m). Corporation tax payments increased to £2.2m (2023: £2.0m), reflecting the increase in profits (corporation tax is paid in quarterly instalments with half being due after the financial year end). The change in the interest rate environment has manifested itself in the step up in net interest received of £0.9m (2023: £0.1m) and lease repayments of £0.6m (2023: £0.5m). As such, cash generated by the business in the year, being net cash flow pre dividend payments, was £8.4m (2023: £6.9m). The Group paid dividends of £9.2m, £5.3m in respect of ordinary dividends (2023: £5.2m ordinary dividend) and £3.9m as a special dividend, paid with the ordinary interim dividend (2023: £3.1m paid together with the final ordinary dividend from year ended 31 January 2022). This left closing cash of £8.4m (2023: £9.2m) and no debt. NET ASSETS The Group’s balance sheet is extremely strong with net assets having decreased from £17.9m to £16.9m by virtue of profit for the year of £7.6m, dividends paid of £9.1m and £0.6m movement in reserves to account for the vesting of LTIP awards. PRINCIPAL RISKS AND UNCERTAINTIES The Group’s principal risks and uncertainties are outlined on pages 17 and 18. SECTION 172 COMPANIES ACT STATEMENT The statements below address the reporting requirements of the Board under Section 172 of the Companies Act and the Companies (Miscellaneous Reporting) Regulations 2018. The Directors of the Company have a duty to promote the success of the Company. A Director of the Company must act in the way they consider, in good faith, to promote the 11 32095-Keystone-Law-AR2024.indd 11 32095-Keystone-Law-AR2024.indd 11 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:49:54 17/04/2024 09:49:54 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024STRATEGIC REPORT FINANCIAL REVIEW AND STRATEGIC REPORT CONTINUED success of the Company for the benefit of its members, and in doing so have regard (amongst other matters) to: • the likely consequences of any decision in the long term; • the interests of the Company’s employees; • the need to foster the Company’s operations on the community and the environment; • the desirability of the Company to maintain a reputation for high standards of business conduct; and • the need to act fairly between members and the Company. The Directors are committed to developing and maintaining a governance framework that is appropriate to the business and supports effective decision making coupled with robust oversight of risks and internal controls. Keystone has a very clear organic growth strategy aimed to ensure ongoing stakeholder value and all significant business decisions consider both their short and long-term impact on this strategy. Fundamental to delivering this strategy is to continue recruiting and retaining high-calibre lawyers who deliver work of the highest professional standards to our clients. Central to the success of the business is the development and maintenance of its open, welcoming and collegiate culture and we invest significant time and resources to ensure that these facets are maintained and developed for the benefit of all those involved with the Company. Keystone’s primary asset is its people, be it the central office staff, the lawyers, the clients or third-party suppliers with whom we work (such as counsel, experts and other professionals). As a business, we dedicate substantial time, effort and resources in working to develop and maintain strong relationships from which all parties benefit. As a people business, the impact of business decisions on our principal stakeholders is always central to the decision-making process. The nature of the Group’s business has a fundamentally low impact on the environment; we have an extremely small office footprint and the use of technology across the business further reduces the environmental impact as our lawyers have no need to commute to work. The Directors treat all members of the Group fairly and consistently, as required by both professional standards and in compliance with various pieces of legislation. We provide information to all shareholders and other third parties on an equal basis. APPROVAL OF ANNUAL BUDGET The Board has considered the financial and operational budget for the next financial year, focusing on driving continued growth of the lawyer base to underpin long-term sustainable growth. RENEWAL OF LEASES AT CHANCERY LANE In considering what course of action to take in relation to the renewal of the Group’s leases in Chancery Lane, the Directors considered the long-term implications of renewal, both financial and operational. The considerations of all stakeholders were considered, including how the renewal would impact upon our employees and lawyers, the role the offices play in our brand and reputation as well as the longer-term financial implications of renewal. PAYMENT OF SPECIAL DIVIDEND In reaching its decision to pay a special dividend this year, the Directors considered the interests of all relevant stakeholders. The Board concluded that the Group had accumulated surplus cash over and above the level needed to be conservatively held to meet ongoing working capital needs of the business, thereby satisfying its obligations to employees and creditors, and accordingly decided that such surplus should be returned to shareholders for their benefit. DIVIDEND In light of the strength of our balance sheet and our confidence in the future, at the half year the Board took the decision to pay both a special dividend of 12.5p per share (£3.9m) and an interim ordinary dividend of 5.8p per share (2023: 5.2p). The Board is now proposing to pay a final ordinary dividend for the year ended 31 January 2024 of 12.5p per share (2023: 10.9p). This brings the total ordinary dividend for the year to 18.3p per share (2023: 16.1p per share). Subject to approval at the Annual General Meeting, the final dividend will be paid on 21 June 2024 to shareholders on the register at the close of business on 14 June 2024. The cash value of dividends paid this year of £9.2m includes £3.9m of special dividend. On behalf of the Board Below are some examples of how the Directors have had regard to the matters set out in section 172 in decisions made when discharging their duties: Ashley Miller Finance Director 17 April 2024 12 32095-Keystone-Law-AR2024.indd 12 32095-Keystone-Law-AR2024.indd 12 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:49:54 17/04/2024 09:49:54 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) ESG addresses the broad topic of corporate responsibility towards both the Group’s stakeholders and society as a whole. These are areas to which the Board has always been committed and, this year, we have extended our reporting to provide further information beyond the boardroom. ENVIRONMENTAL By its nature, the legal services sector does not have a significant environmental impact. Over and above this, the Keystone model, with its minimal property footprint and a workforce which uses technology to support remote working and avoid commuting, further reduces that impact. That said, as a Board, we believe that we have a responsibility to minimise the impact we have, where possible, to support society’s response to the climate crisis. In the year ended 31 January 2022, having carried out our first assessment of our carbon footprint, we took the decision to become a certified carbon neutral business. We have achieved this by reducing our carbon impact where possible and, to the extent that this is not possible, purchasing carbon credits to offset the total emissions identified by both this initial and subsequent annual assessments. To date, the carbon credits purchased by us have helped support the Gola Rainforest REDD+ conservation project which aims to create a sustainable environment for the local community whilst rebuilding, protecting and strengthening the ecosystem for keystone species. Conservation actions directly resulting from this project will protect the species within the 68,515 ha of tropical forest, including African forest elephants, pygmy hippos, chimpanzees and the hornbill bird as well as other critically endangered animals. The project also provides a livelihood to the 114 impoverished communities that surround the area by helping them to adopt more sustainable production and farming techniques as well as developing income-generating activities such as ecotourism. Closer to home, we have also adopted 20 British honeybee hives from Bees & Co, a certified carbon neutral honey farm. These hives are handmade from British sustainable cedar wood and become home to over 1.5 million honeybees during the peak of summer. During the year a number of our lawyers have been able to spend a day “bee keeping”, bringing a real connection between our people and our environmental efforts, whilst the honey from our hives was sold at other charitable fundraising events which we ran during the year. Our aim is to continue to reduce our carbon intensity and minimise our footprint wherever possible and, to the extent it is not possible to avoid emissions, we will continue to offset the impact through the use of the carbon credit system. The table below shows the results of both this year and last year’s assessment, which has been carried out independently in accordance with the methodology outlined by the GHC protocol. KEYSTONE EMISSIONS tCO2e (pre purchase of carbon credits) tCO2e Scope 2 (1) Scope 3 (2) Scope 2 (kWh) (1) Scope 2 represents indirect emissions generated by the purchase of electricity, heating and cooling. (2) Scope 3 represents other indirect emissions generated by our business and people whilst carrying out their jobs. CARBON INTENSITY tCO2e per £m revenue Revenue £’m tCO2e per person No. of people (1) (1) No. of people is the average number of employees, Principals and Pod Members in the year. 2024 15.5 222.4 237.9 2023 13.4 233.8 247.2 79,879 69,192 2024 2.7 88.3 0.41 577 2023 (restated) 3.24 76.4 0.45 553 13 32095-Keystone-Law-AR2024.indd 13 32095-Keystone-Law-AR2024.indd 13 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:49:54 17/04/2024 09:49:54 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024STRATEGIC REPORT ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONTINUED This year we have seen a slight decline in overall emissions, principally resulting from a reduction in the level of business travel undertaken by the Central office team, whilst the increased usage of our Chancery Lane office facilities has resulted in an increase in scope 2 emissions. CORPORATE CULTURE AND OUR PEOPLE A fundamental aspect of the success of Keystone is its culture. For the lawyers, the flat structure, transparent and consistent remuneration policy and absence of politics creates an extremely positive, open and encouraging environment in which they can thrive and drive forward their practices. Within the central office team, we engender a positive client-focused culture; this extends beyond the clients of the law firm to include the lawyers themselves, whom we treat as if they were clients. By engendering this supportive culture with our lawyers, we ensure that they are free to focus on client development and delivering legal services which are wholly consistent with the Group strategy. As a business, we run regular social and networking events for our lawyers; these provide ample opportunities throughout the year to assess and monitor the state of the culture amongst our lawyers, whilst the annual lawyer survey provides a further channel through which lawyers provide feedback to the management team on a range of aspects both practical and cultural. Furthermore, the executive members of the Board work closely with the rest of the central office team, thus guiding and enhancing the positive behaviours and attitudes which underpin the corporate culture. As a law firm, Keystone is regulated by the SRA and, as such, has to comply with the SRA Code of Conduct. Central to this Code is a series of obligations placed on the Group and its lawyers to operate with integrity and uphold the rule of law. Keystone’s business model drives positive behaviour. It aligns the interests of clients and lawyers, both of which are fulfilled through the Group and the support the lawyers receive and use in advising the clients. EQUALITY AND DIVERSITY We firmly believe in equality of opportunity and build our business by attracting and retaining the best talent for all roles. We have recently been recognised for the diversity of our people in the Law.com International diversity survey 2023(1). Our business model offers genuine flexibility to our lawyers, giving them control over the hours they work and providing the technological platform which enables them to deliver their high-quality service from the location of their choice; all of this with a remuneration structure which is uncapped and identical for all Principals. Equally, the vast majority of our central office team are able to work remotely, benefitting from the same technology advantages enjoyed by our lawyers, using the offices as needed or desired. (1) Top 5 law firms with the most female partners, top 5 law firms for LGBTQ+ representation, top 25 law firms for racial diversity and top 25 law firms for disability representation. The table below sets out the gender of our people as at 31 January. Board Senior Management Other Central Office Lawyers Total OUR PEOPLE POLICIES The Group has an extensive range of policies in place to govern behaviour and protect the rights of our people. These include, but are not limited to, the following areas: • For employees, entitlements such as remuneration, pension, holiday, sickness, parental/bereavement leave and pay 14 2024 2023 Male 4 3 14 303 324 Female 1 2 43 246 292 Male 4 3 12 272 291 Female 1 2 42 235 280 • Internal procedures including complaints and grievances, disciplinary, whistleblowing • IT and other facilities usage • Anti-bribery and corruption, data usage, data protection and GDPR, anti-money laundering, anti-slavery, client confidentiality • Health and safety and diversity and inclusion • SRA (Solicitors Regulatory Authority) code of conduct also applies to all 32095-Keystone-Law-AR2024.indd 14 32095-Keystone-Law-AR2024.indd 14 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:49:54 17/04/2024 09:49:54 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 SHAREHOLDERS The Board places great emphasis on good communications with shareholders. The Group primarily communicates with shareholders via its annual and interim reports, which are issued following RNS announcements through the post and are also published on the Group’s website. Following the issue of these, the Chief Executive and the Finance Director meet with shareholders and analysts. Further announcements may be made during the course of the year via RNS, in satisfaction of the Board’s reporting obligations and in compliance with regulation and best practice. The Group’s AGM also provides an opportunity for shareholders to communicate directly with the Board and shareholder participation is encouraged. Details of the Group’s AGM, and the business to be transacted at it, are announced in the usual way and reproduced on the Group’s website. Following the celebration of the AGM, the results of votes taken are published on our website. In addition, the Chairman is available to meet major shareholders on request to discuss governance and strategy. Reports of these meetings, and any other shareholder communications during the year, are provided to the Board. Shareholders can contact the Group Secretary by emailing CS@keystonelaw.co.uk. Use the heading “Shareholder contact” to request that a matter be brought to the Board’s attention or to arrange a meeting with the Chairman. WIDER STAKEHOLDER ENGAGEMENT The Board recognises the importance of the wider stakeholder groups, principally being: consultants and employees, clients and the Group’s suppliers. The Group engages with each of these stakeholder groups regularly through a range of channels. CONSULTANTS AND EMPLOYEES Keystone’s success is built on the calibre and commitment of its consultants (Principals and Pod Members) and employees, who share a common commitment to go above and beyond client expectation. Keystone is characterised by its open and inclusive collegiate culture with consultants feeling free to share their views about the Group with management in an unhindered manner. The senior management and central office employees engage directly with the Group’s consultants daily and meet with them in a range of different formats regularly throughout the year, providing plentiful opportunity for dialogue. Furthermore, Keystone conducts a formal annual survey in which the consultants provide their feedback on the service, support and infrastructure they receive, as well as producing a quarterly internal magazine and sending out more regular bulletins by email or over Keyed In. Keystone’s employees are equally central to the success of the Group and the open culture engendered within the team encourages employees to speak freely. Management is encouraged to ensure good engagement within its teams. CLIENTS Keystone’s consultants have strong client relationships and, as such, normally have an open dialogue with their clients such that they receive regular feedback during the progression of each matter. Clients are also invited to give feedback directly to senior management in the Group’s engagement letter, which is sent to every client at the commencement of the matter. As a regulated law firm, the services we provide are governed by the highest standards of professional practice and our internal compliance function works with our lawyers, our clients, our regulator and our ombudsman in this respect. Our service and expertise regularly win awards. A number of industry publications, including The Lawyer, Legal Week, Chambers and Partners have independently attested to Keystone’s very high level of client satisfaction. SUPPLIERS Each of our Group unit heads engages directly with our suppliers in their area. We engage regularly with our key suppliers. The heads of our Group units have direct access to the Board and discuss supplier matters, both formally and informally, as and when necessary. 32095-Keystone-Law-AR2024.indd 15 32095-Keystone-Law-AR2024.indd 15 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:49:54 17/04/2024 09:49:54 15 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024STRATEGIC REPORT THE BOARD OF DIRECTORS EXECUTIVE DIRECTORS JAMES KNIGHT Chief Executive Officer James founded Keystone in 2002 when he set out to create a new type of law firm. Prior to that, he had a ten-year career as a commercial solicitor in London, Hong Kong and Dubai. James now focuses on business development, marketing and other drivers of growth. NON-EXECUTIVE DIRECTORS ASHLEY MILLER Finance Director Ashley joined Keystone in January 2015 and is a commercially orientated finance professional with over 25 years’ experience. Having trained with Price Waterhouse, Ashley has spent his career establishing and managing international finance departments for SME businesses operating across the professional services sector. ROBIN WILLIAMS Independent Non-executive Chairman ISABEL NAPPER Independent Non-executive SALAR FARZAD Independent Non-executive Robin joined the Board in October 2017 as Independent Non-executive Chairman. He is a chartered accountant with over 30 years’ experience with listed companies, initially as an adviser, then as a leading executive and, latterly, as a Non-executive. He is also currently Chairman of Churchill China Plc and Non-executive Director of Headlam Plc and The Manufacturing Technology Centre Limited. Isabel joined the Board in December 2020. Since April 2021, she is an Independent Non-executive Director and Chair of the Remuneration Committee. She is also a Non-executive Director and Chair of the Remuneration Committee of Skillcast Group Plc and Tristel Plc. She has a range of experience having acted as Non-executive Director for both private and public companies for over 15 years. Until 2015, she practised as a lawyer specialising in intellectual property and commercial law. Salar joined the Board in March 2023 as an Independent Non-executive Director and in April 2023 he became Chair of the Audit Committee. He is a chartered accountant with extensive commercial experience who has served as CFO for a range of organisations, including AIM Listed, private and divisions of large groups with Official Listings. He is also currently Chief Operating Officer of Gleeds, an international commercial property consulting firm and a Non-executive Member, sitting on the Nomination and Remuneration Committees, of Trinity College London. 16 32095-Keystone-Law-AR2024.indd 16 32095-Keystone-Law-AR2024.indd 16 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:00 17/04/2024 09:50:00 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 PRINCIPAL RISKS AND UNCERTAINTIES The Corporate Governance Statement includes an overview of the Group’s approach to risk management and internal controls. Set out below are the principal risks and uncertainties that the Group faces and the activities designed to mitigate these risks. The Board recognises that the nature and scope of risks can change and that there may be other risks to which the Group is exposed; therefore, the list is not intended to be exhaustive. Risk Mitigation GLOBAL PANDEMIC AND SUBSEQUENT ECONOMIC DOWNTURN ECONOMIC DOWNTURN A virus that causes material sickness levels in the population requiring national steps, which significantly impacts the mobility of people and the national economy, creating uncertainty and potential impact on the Group’s business. A significant downturn in the UK economy impacting the demand for legal services. LITIGATION, PROFESSIONAL LIABILITY AND UNINSURED RISKS Due to the nature of a law firm and its role in providing legal advice, the Group remains susceptible to potential liability for negligence, breach of contract and other client claims. From time to time, in the ordinary course of business, Keystone receives claims of professional negligence which it notifies to its insurers. Any potential claim may be expensive to defend, divert the time and focus of management away from the Group’s operations, and may result in the Group having to pay substantial monetary amounts, any of which could impact on the reputation of the Group and result in a material adverse effect on Keystone’s business and overall financial condition. REGULATORY RISK AND COMPLIANCE RISKS The Group, like most businesses, is subject to a range of regulations. Failure to comply with these could have significant implications for the business ranging from reputational damage to criminal prosecution and sentencing. The IT platform on which the Group operates is designed to support remote working, mitigating any impact caused by lack of physical mobility. For the mitigation of economic downturn, which a pandemic may cause, see below. We deliver our services across a broad range of legal services supporting clients across a large range of sectors, such that we have no dependence on any one area of law, sector of the economy or client. Furthermore, the remuneration structure of our lawyers (fully variable and pay when paid) provides a substantial cushioning effect in the event of economic volatility. Finally, an economic downturn may provide further impetus to recruitment as conventional firms, which have high fixed costs, may struggle in this environment, thereby increasing the candidate flow. We have a robust compliance and risk management team, which focuses on supporting lawyers to reduce the risk that such issues may arise and, to the extent that they do arise, we seek to mitigate any such risk by carrying professional indemnity insurance with a cap of £50 million. The business has an experienced and robust compliance and risk management team, which oversees the Group’s policies and procedures, ensuring that they meet the relevant regulatory requirements. The Group uses technology to support and drive compliant behaviour and to help the team to focus on areas of potential risk. Furthermore, the team calls upon external professional advice where needed to ensure that the business meets its compliance and regulatory obligations. 17 32095-Keystone-Law-AR2024.indd 17 32095-Keystone-Law-AR2024.indd 17 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:00 17/04/2024 09:50:00 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024GOVERNANCE PRINCIPAL RISKS AND UNCERTAINTIES CONTINUED PERSONNEL CONTRACTUAL ARRANGEMENTS WITH LAWYERS Risk Mitigation For any business, personnel is a particularly prominent asset heavily contributing to its strength and attractiveness. The Group is heavily reliant on its lawyers to attract new clients and maintain relationships with existing clients. If the Group was to lose the services of key lawyers with high client retention rates, or cease to be able to attract new lawyers, this could significantly impair the strategy and success of the firm from both a reputational and financial standpoint. The Group invests considerable time and effort in working to attract high-quality new lawyers as well as focusing on ensuring that all lawyers feel a part of the Keystone “family”. Furthermore, management continues to monitor the characteristics of the Keystone model to ensure that they remain commercially compelling and attractive to both existing and potential Keystone lawyers. The Group monitors the legislative landscape for any developments which could have a bearing upon this relationship. Where necessary, the Group would seek external professional advice to support it in assessing the implications of any such developments. Keystone’s lawyers are self-employed, contracting with the Group predominantly via personal service companies. The self-employed status of the Group’s consultants is not only based on the contractual structure, but also on the way in which the arrangements operate in practice. There is a risk that some of the consultant lawyers may be deemed to be workers or employees and, as such, would be entitled to additional benefits including, but not limited to, paid annual leave and sick pay. If this was to occur, then in addition to the rights for workers, such lawyers would gain rights for unfair dismissal. If the consultant lawyers were deemed to be employees, then the tax treatment would be different and the Group would be liable for PAYE and national insurance contributions for such people deemed to be employees. Furthermore, if there is a change in employment law or tax law, which means that the nature of the relationship which exists between the Group and its lawyers is not one of self- employment, then the rights and obligations referred to above could also be triggered. COMPETITION Keystone competes with other legal firms that offer commercial law services in which quality of advice, service, reputation and value operate as highly competitive factors to distinguish the Group. Despite this, there remains a risk that competitor firms or a newly established firm will acquire market share. Competition remains a core risk for the Group as any loss of market share could reduce revenue, reduce margins, reduce the ability to recruit new lawyers and reduce the retention rates of current personnel, any of which could materially adversely affect the Group’s business operations and overall financial condition. Keystone’s growth strategy continues to be focused on attracting good quality lawyers with strong client relationships. By maintaining the calibre of lawyers attracted and retained, management believes that they will maintain and enhance their position in the market. Management also continues to review and monitor the characteristics of the Keystone model to ensure that they stay ahead of any current or future competitors. INFORMATION SYSTEMS AND SYSTEM SECURITY BREACHES IT forms an integral part of the business’s operating model and, as such, any breakdown of the Group’s information technology system could be significant. Also, as Keystone processes sensitive personal data, it is possible that a security breach could result in some of this data becoming public. Were this to occur, then Keystone could face liability under data protection laws and could lose the goodwill of any clients affected by such a breach. Such a breach could also create reputational damage. Hosting and support of all systems is outsourced to a large, reputable business which is dedicated to the provision of these services. It is contracted to keep all data safe, secure and backed up, and utilises a number of tools and appliances to maintain Keystone’s data integrity and security. Over and above this, we continue to invest in IT security systems to reduce the risk that any breach / penetration can occur. 18 32095-Keystone-Law-AR2024.indd 18 32095-Keystone-Law-AR2024.indd 18 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:00 17/04/2024 09:50:00 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 CORPORATE GOVERNANCE STATEMENT INTRODUCTION The Directors acknowledge the importance of high standards of corporate governance and are pleased to confirm that the Group has continued to comply with the Quoted Companies Alliance Corporate Governance Code 2018 (the “QCA Code”) throughout the year and that it will review internal policies and procedures so as to ensure that it is compliant with the updated QCA Code 2023 in line with its effective date. BOARD EFFECTIVENESS During the year, the Group has carried out an annual Board effectiveness review. This was an internal review led by the Chairman and involving all of the Directors. The format taken this year was for each Director to complete a questionnaire about the performance of the Board as a whole, commenting on the overall approach, effectiveness and any areas they felt that the Board could enhance its effectiveness. The results of this were then discussed in an open forum and considered. No specific failings in effectiveness were identified and the review served to reinforce the Board’s focus on the monitoring and management of risk as well as the key drivers of growth in the business. RISK MANAGEMENT AND INTERNAL CONTROLS Risk management is a key area of focus for the Board, which is responsible for maintaining a sound system of internal controls to safeguard shareholders’ investments and the Group’s assets. Such a system is designed to reduce and manage the risk of failing to achieve the Group’s objectives. It is designed to provide a reasonable assurance against material misstatement or loss. The Board has considered the need for an internal audit function and has concluded that, given the size and complexity of the Group, the internal control system currently in place is the most appropriate solution. The Board revisits this decision periodically. The Board is responsible for the identification and evaluation of major risks faced by the Group and for determining the appropriate course of action to manage those risks. The Group maintains a risk register which the Board considers regularly. The risk register assesses both the risks and the controls in place to prevent the risk crystallising as well as any mitigation which would exist should they materialise. A summary of the principal risks and uncertainties, together with the relevant mitigation, is set out on pages 17 and 18 of this report. The Group takes a proactive approach to risk management, which starts at the strategic level with the Group identifying areas of the law in which it will not operate. The Group then recruits to this risk profile. The recruitment process is controlled by the senior management team, who are qualified and experienced solicitors with many years’ experience of recruiting consultants to Keystone. The Group focuses on attracting experienced and well qualified lawyers with a client following from highly respected law firms, thereby reducing the risk profile of the lawyer base. As a law firm, Keystone is regulated by the Solicitors Regulatory Authority (“SRA”) as well as being subject to other legal regulation governing its industry and the economy as a whole (e.g. anti-money laundering legislation, data protection rules (“GDPR”) etc.). As such, the Group has a dedicated compliance department, led by the Group’s Compliance Officer and staffed by employed qualified solicitors, whose role it is to ensure compliance with all such regulation as well as handling any complaints or claims received from the Group’s clients. The structure of Keystone ensures that this department is wholly independent of the lawyers, whilst the “open door” collegiate culture of the Group ensures that lawyers are more than happy to seek support and guidance from the team where they identify issues of potential concern. This department reports to the Chief Executive who is fully appraised of any regulatory matters being handled, complaints/claims made as well as the status of these, and the Board receives regular updates as to the status of any significant regulatory matter, any claims made or complaints which the CEO believes may proceed to a claim. The Group uses technology, with each new matter taken on being subjected to a risk questionnaire, as well as more traditional methods, such as file audits, to proactively monitor matters, and actively engages with consultants to assess, understand and manage any risk that should arise. The Group’s standard terms of business, provided to each client at the start of each engagement, advises the clients of the Group’s complaints procedure; this procedure directs the clients directly to the compliance department. Furthermore, under the terms of the compliance agreement, which each consultant enters into with the Group, the consultants are required to report all risks, complaints and regulatory matters to the compliance function. As the most significant risk for a law firm is associated with claims for professional negligence, one of the Group’s significant contracts (and, as such, an item which requires Board sign off) is the renewal of the professional indemnity insurance. This ensures that the Board is the body which is ultimately responsible for assessing the appropriateness of the level of cover which the Group holds. 19 32095-Keystone-Law-AR2024.indd 19 32095-Keystone-Law-AR2024.indd 19 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:00 17/04/2024 09:50:00 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024GOVERNANCE CORPORATE GOVERNANCE STATEMENT CONTINUED The financial procedures and controls of the Group are under the stewardship of the Finance Director (see Directors’ biographies on page 16). COMPOSITION OF THE BOARD, ITS SUBCOMMITTEES AND ITS MEMBERS The Board generally comprises five Directors, two Executives and three Non-executives, reflecting a blend of different experiences and backgrounds. Directors’ biographies, setting out their experience, skills and independence, are shown on page 16. The Board believes that the composition of the Board brings a desirable range of skills and experience in light of the Group’s challenges and opportunities, whilst, at the same time, ensuring that no individual (or small group of individuals) can dominate the Board’s decision making. The Non-executive Directors are expected to devote such time as is necessary for the proper performance of their duties. It is anticipated that this will require them to spend a minimum of 24 days a year working for the Company. The Non-executive Directors meet during the year without the Executive Directors and provide effective balance and challenge. The Executive Directors are full-time employees of the Company. The Non-executive Directors keep their skill set up to date with a combination of attendance at CPD events and experience gained from other Board roles. The Executive Directors are employed full time in the Group and this is the best way of their keeping up to date. The Group’s Nominated Adviser and the Company Secretary ensure the Board is aware of any applicable regulatory changes. All Directors are able to take independent professional advice in the furtherance of their duties, if necessary, at the Group’s expense. In addition, the Directors have direct access to the advice and services of the Company Secretary and Finance Director. The division of responsibilities between the Chairman and Chief Executive Officer has been agreed by the Board and is set out below. ROLES OF THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER The Chairman leads the Board ensuring its effectiveness and his role and responsibilities are clearly divided from those of the Chief Executive Officer. The Chairman: • sets the Board agenda; • ensures that the Directors receive accurate and timely information and that adequate time is available for discussion of all agenda items, in particular, strategic issues; • makes sure that all Directors, particularly the Non- executive Directors, are able to make an effective contribution; • maintains a constructive relationship between the Executive Directors and the Non-executive Directors; • initiates Board and Committee effectiveness reviews and the discussion of their outcomes; • has primary responsibility for leading the Board; and • chairs Board meetings. The Chief Executive Officer has responsibility for all operational matters, which include the implementation of strategy and policies approved by the Board. In addition, he has responsibility for managing the business of Keystone subject to the matters reserved for the Board. He has overall responsibility for the Group’s development and expenditure and delivering on the budget prepared by the Finance Director and approved by the Board. MATTERS RESERVED FOR THE BOARD The Board is responsible for reviewing, formulating and approving the Group’s strategy, budgets and corporate actions and overseeing the Group’s progress towards its goals. This is formally documented in a schedule of matters reserved for Board approval and includes: • strategy and business plans, including annual budget; • structure and capital including dividends; • financial reporting and controls; • internal controls on risk management and policies; • significant contracts and expenditure; • communication with shareholders; • remuneration and employment benefits; and • changes to the Board composition. 20 32095-Keystone-Law-AR2024.indd 20 32095-Keystone-Law-AR2024.indd 20 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:01 17/04/2024 09:50:01 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 BOARD DECISIONS AND ACTIVITY DURING THE YEAR The Board has a schedule of regular business comprising all the major financial and operational matters of the Group. The Board has established a number of committees, the work of which is described below. The Board has ensured that all areas for which it is responsible are addressed and reviewed during the course of the year. The Chairman, aided by the Company Secretary, is responsible for ensuring the Directors receive accurate and timely information. The Company Secretary provides minutes of each meeting and every Director is aware of the right to have any concerns minuted. In addition to the Board meetings, there is regular communication between Executive and Non-executive Directors, including where appropriate updates on matters requiring attention prior to the next scheduled Board meeting. It is the Board’s current practice that the Non- executive Directors meet periodically, and at least annually, without the Executive Directors. BOARD MEETINGS Board meetings are held monthly and arranged by the Company Secretary. Where the subjects to be discussed call for it, the Company Secretary arranges for or prepares suitable papers, which are then circulated to the Directors in advance. Additional ad hoc meetings and committee meetings are called as necessary, for example, to approve the release of the Group’s Annual Report, once it has been approved in principle in substantially the final form. At least annually, the Board will consider the Group’s strategy and annual budget. There are currently no plans in place for the evolution of the corporate governance framework in line with the Group’s plans for growth as the Board believes that the current structure of the Board is suitable for such growth plans in the short to medium term. However, the Board will keep this under regular review. The table below shows the Directors’ attendance at scheduled meetings of the Board and its committees during the year: Audit Remuneration James Knight Ashley Miller Robin Williams Isabel Napper Salar Farzad (Appointed 20 March 2023) Board 11/11 11/11 11/11 11/11 2/2 2/2 2/2 10/10 2/2 Simon Philips (Resigned 24 April 2023) 1/1 5/5 5/5 4/4 1/1 DISCLOSURE COMMITTEE The Disclosure Committee is available as needed to review how the Group should deal with price sensitive information. The purpose of the Disclosure Committee is to provide a rapid response to the potentially urgent matter of required disclosures. All Board members are members of the Disclosure Committee as is the Company Secretary. The quorum of the Disclosure Committee is one of the Chief Executive Officer, the Finance Director, or the Company Secretary and any Non-executive Director. NOMINATION COMMITTEE The Nomination Committee is available as needed to manage the process of appointing new Directors to the Board and to consider succession matters. The Committee is chaired by Robin Williams and is comprised of James Knight and the Non-executive Directors. During the year, the Committee oversaw the recruitment process of Salar Farzad and refreshed its understanding of succession planning. 32095-Keystone-Law-AR2024.indd 21 32095-Keystone-Law-AR2024.indd 21 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:01 17/04/2024 09:50:01 21 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024GOVERNANCE REPORT OF THE AUDIT COMMITTEE OVERVIEW The Audit Committee is charged with the oversight of the internal financial controls and risk management systems, making recommendations to the Board on the appointment of auditors and the audit fee, monitoring and reviewing the conduct and control of the audit work, as well as monitoring the integrity of all formal reports and announcements relating to the Group’s financial performance. The Committee has unrestricted access to the Group’s auditors. The Audit Committee considers all proposals for non-audit services and ensures that these do not impact on the objectivity and independence of the auditors. The Audit Committee, in its meetings with the external auditors, reviews the safeguards and procedures developed by the auditors to counter threats, or perceived threats, to their objectivity and independence and assesses the effectiveness of the external audit. The Group’s policy on non-audit services performed by the external auditors is to address any issues on a case by case basis. COMPOSITION AND MEETINGS The Audit Committee has three members, all of whom are independent Non-executive Directors, with one having recent and relevant financial experience with competence in accounting or auditing. The Finance Director attends the committee meetings by invitation. The members of the Audit Committee are: Salar Farzad (Chair), Isabel Napper and Robin Williams. The Audit Committee has met twice during the year, once following the annual audit of last year’s accounts and once following the half year. All members of the Committee attended both meetings as did the Finance Director by invitation for part of each meeting. The auditors attended both meetings to provide feedback on their work to the Committee. INTERNAL FINANCIAL CONTROLS AND RISK MANAGEMENT FRAMEWORK The Audit Committee is charged with oversight of the internal financial control and risk management framework in the business. This framework is intended to provide reasonable, but not absolute, assurance against material financial misstatement or loss. The Audit Committee has concluded that sound risk management and internal controls have been in operation throughout the period. FINANCIAL MANAGEMENT AND REPORTING The Committee is satisfied that the Annual Report and Financial Statements, taken as a whole, provide a fair, balanced and understandable assessment of the Group’s performance, its strategy and business model, as well as its financial position as at the end of the period, and has advised the Board accordingly. In reaching these conclusions, the Committee has considered the information provided by management and discussions held with the external auditors. INTERNAL AUDIT FUNCTION Given the Group’s size and complexity, the Board does not consider it necessary to have an internal audit function at this time. This position will be reviewed annually. EXTERNAL AUDIT The Committee has reviewed and agreed the scope and methodology of the work undertaken by the Group’s external auditors RSM. It has considered their independence and objectivity and has agreed the terms of their engagement and their fees. RSM has been the Group’s auditor since the Group’s shares were admitted to AIM. A review of their independence and audit process effectiveness is performed each year before a recommendation is made to the Board to propose their reappointment at the AGM. Salar Farzad Chair, Audit Committee 222222 32095-Keystone-Law-AR2024.indd 22 32095-Keystone-Law-AR2024.indd 22 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:04 17/04/2024 09:50:04 REPORT OF THE REMUNERATION COMMITTEE OVERVIEW The Remuneration Committee considers the performance of the Executive Directors and makes recommendations to the Board on matters relating to their total remuneration and terms of service. As part of that process, the Remuneration Committee sets the scale and structure of the Executive Directors’ remuneration package including share-based payments with due regard to best practice, corporate governance and the interests of shareholders. It is also responsible for the review and management of the Group’s share-based incentive scheme. The Remuneration Committee meets when required, but at least twice each year. The Committee has regard to the recommendations put forward in the QCA Code and, where appropriate, the QCA Remuneration Committee Guide and associated guidance. The Remuneration Committee comprises at least two independent Non-executive Directors and is chaired by a Non-executive Director, who is appointed by the Board in consultation with the two independent Non-executive Directors. COMPOSITION AND MEETINGS The members of the Remuneration Committee are: Isabel Napper (Chair) Robin Williams Salar Farzad (appointed 20 March 2023) Simon Philips (resigned 24 April 2023) During the year, the Committee met on four occasions and on each occasion all those who were members of the Committee at that time were present. DIRECTORS’ REMUNERATION SUMMARY (AUDITED) The remuneration of the Directors is set out in the table below: £’000 James Knight Ashley Miller Robin Williams Isabel Napper Salar Farzad (Appointed 20 March 2023) Simon Philips (Resigned 24 April 2023) Value of shares received under LTIP – 104 – – Salary & Fees 347 198 74 45 39 10 713 – – 104 Pension 4 9 – – – – 13 Value of shares received under LTIP – 106 – – Salary & Fees 330 183 68 42 – 42 665 – – 106 Pension 5 9 – – – – 14 Total 2024 351 311 74 45 39 10 830 Total 2023 335 298 68 42 – 42 785 During the year, the share awards granted in June 2019 and September 2020 vested. KEY ACTIVITIES During the year, the Committee: • assessed the level of performance achieved versus the performance criteria of each of the LTIP awards which vested during the year and confirmed the vesting; • considered whether the current LTIP scheme provided an appropriate means to incentivise those members of the Central office team who participate in it. It was concluded that the current scheme was fit for purpose and that there was no need, at this time, to introduce alternative share schemes; 23 32095-Keystone-Law-AR2024.indd 23 32095-Keystone-Law-AR2024.indd 23 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:05 17/04/2024 09:50:05 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024GOVERNANCE REPORT OF THE REMUNERATION COMMITTEE CONTINUED • reviewed best practice for AIM listed companies in relation to the length of holding periods post vesting for shares awarded under LTIP schemes. The review concluded that a one year holding period was the norm for AIM listed companies and, therefore, the terms of the Keystone Law Long Term Incentive Plan were amended to align these to best practice. Accordingly, all new awards made since this review will be subject to a one year holding period; In June 2023, performance share awards were issued to members of the senior management and an Executive Director. In accordance with the terms of the scheme, these awards were subject to performance criteria, with 80% of the award linked to EPS growth and 20% linked to comparative total shareholder return with both elements being measured over a three year period. The Remuneration Committee considers that the targets are appropriate and are aligned with shareholder interests. • considered which members of the senior management team should be qualifying individuals under the LTIP for the grant made during the year; • reviewed the share allocation to qualifying individuals under the LTIP; and • reviewed the remuneration arrangements for the Executive Directors and senior management team. LONG TERM INCENTIVE PLAN The Group operates a long term incentive plan (the Keystone Law Long Term Incentive Plan 2018). The main terms of the plan are as follows: • the Remuneration Committee is authorised to grant performance share awards or nil-cost options to qualifying employees; • awards are made subject to appropriate performance criteria; • any award made is subject to a three year vesting period followed by a one year holding period (awards made prior to June 2023 were subject to a two year holding period), during which time employees may not sell the shares except insofar as necessary to pay for the tax arising from the grant; • no single grant may have a value greater than 100% of the base salary of the individual to whom the grant is made; and • the total number of shares which may be granted (net of any cancelled) under this scheme may not exceed 5% of the total share capital of the Company. Also in June 2023, following the Committee’s assessment of the performance of the business against the performance criteria, 47.25% of the performance share awards granted in June 2019 vested. This was the result of achieving 67.5% of the EPS element of the award, whilst falling below the level of TSR required to qualify for any of that element of the award. In order to satisfy these awards, the business issued 32,599 ordinary shares in the capital of the Company. In September 2023, following the Committee’s assessment of the performance of the business against the performance criteria, 70% of the performance share awards granted in September 2020 vested. This was the result of achieving 100% of the EPS element of the award, whilst falling below the level of TSR required to qualify for any of that element of the award. In order to satisfy these awards, the Company issued 82,572 ordinary shares in the capital of the Company. The fair value of the employee services received in exchange for these grants is recognised as an expense on a straight-line basis over the vesting period. The total amount to be expensed is determined by reference to the fair value of the options or shares determined at the date of grant. The awards are valued using the Monte Carlo (TSR component) and Black–Scholes (EPS component) option pricing models. Non-market based vesting conditions are included in assumptions about the number of options that are expected to become exercisable or the number of shares that the employee will ultimately receive. This estimate is revised at each balance sheet date to allow for options that are not expected to vest and the difference is credited to the consolidated statement of comprehensive income with a corresponding adjustment to reserves. 24 32095-Keystone-Law-AR2024.indd 24 32095-Keystone-Law-AR2024.indd 24 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:05 17/04/2024 09:50:05 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 REPORT OF THE REMUNERATION COMMITTEE CONTINUED The following table shows Share Awards held by Directors: Ashley Miller Total 31 January 2023 74,789 74,789 Lapsed Vested Granted (13,893) (22,247) (13,893) (22,247) 31,942 31,942 31 January 2024 70,591 70,591 DIRECTORS’ INTERESTS According to the register of Directors’ interests maintained under the Companies Act, the following interests in shares of the Company were held by the Directors in office at the year end: James Knight Ashley Miller Robin Williams Salar Farzad Isabel Napper Chair, Remuneration Committee 2024 2023 8,965,512 8,965,512 220,164 208,492 11,000 2,050 12,500 – 32095-Keystone-Law-AR2024.indd 25 32095-Keystone-Law-AR2024.indd 25 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:05 17/04/2024 09:50:05 25 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024GOVERNANCE DIRECTORS’ REPORT The Directors have pleasure in presenting their report and the financial statements of the Group for the year ended 31 January 2024. PRINCIPAL ACTIVITIES AND BUSINESS REVIEW The principal activities of the Group during the year were the provision of legal services, whilst the Company acts principally as a holding company. The results for the year and the financial position of the Group are as shown in the annexed financial statements. A review of the business and its future development is given in the Chairman’s and Chief Executive’s statements together with the Financial Review and Strategic Report. RESULTS AND DIVIDENDS The results for the year are set out in the consolidated income statement on page 35. The Directors propose a final ordinary dividend of 12.5p per share subject to the approval at the Annual General Meeting on 18 June 2024. LIKELY FUTURE DEVELOPMENTS Our priorities for the following financial year are disclosed in the Chief Executive’s Statement on pages 8 to 9. SUBSTANTIAL SHAREHOLDINGS As far as the Directors are aware, the only notifiable holdings equal to, or in excess of, 3% of the issued ordinary share capital at 11 April 2024 were as shown in the table below: No. of Shares % Holding James Knight 8,965,512 Canaccord Genuity Wealth Management Liontrust Asset Management AssetCo Plc Stancroft Trust Royal London Asset Management Franklin Resources 4,142,343 3,640,464 1,968,760 1,630,000 1,194,318 1,014,511 28.5 13.1 11.7 6.3 5.2 3.8 3.2 DIRECTORS AND THEIR INTERESTS The Directors who served throughout the year, except where otherwise stated, and in place at the date of this report, are as follows: • James Knight • Ashley Miller • Robin Williams • Isabel Napper • Salar Farzad (Appointed 20 March 2023) • Simon Philips (Resigned 24 April 2023) The Directors’ interests are included within the Report of the Remuneration Committee. 26 32095-Keystone-Law-AR2024.indd 26 32095-Keystone-Law-AR2024.indd 26 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:05 17/04/2024 09:50:05 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 DIRECTORS’ REMUNERATION Directors’ remuneration, payable in the year ended 31 January 2024, is set out in the Report of the Remuneration Committee. DIRECTORS’ INDEMNITIES The Directors are entitled to be indemnified by the Company to the extent permitted by law and the Company’s articles of association in respect of certain losses arising out of, or in, connection with the execution of their powers, duties and responsibilities. The Company also purchased and maintained Directors’ and Officers’ Liability Insurance throughout the year. SHARE CAPITAL Details of share capital are given in note 18 to the financial statements. EMPLOYEES The Group operates an equal opportunities employment policy. The Group’s policy on recruitment, development, training and promotion includes provision to give full and fair consideration to disabled persons, having particular regard to their aptitudes and abilities. The Group appreciates and values the input of all its employees and encourages development and training to enhance employee skills. The Group ensures that employees are aware of any important matters that may impact on the performance of the Group. BUSINESS RELATIONSHIPS The manner in which the Directors have regard for the interests of the various stakeholders of the Group is set out within the ESG section of this report. GREENHOUSE GAS EMISSIONS, ENERGY CONSUMPTION AND ENERGY EFFICIENCY Reporting regarding these areas is included within the ESG section of this report. GOING CONCERN The Group and Company financial statements have been prepared on a going concern basis as the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group is cash positive, has no debt, has a model which is strongly cash generative and has, to date, a strong trading performance. The Group’s forecasts and projections show that the Group has sufficient resources for both current and anticipated cash requirements. FINANCIAL RISK MANAGEMENT Financial risk is managed by the Board on an ongoing basis. The key risks relating to the Group are outlined in more detail in note 28 to the consolidated financial statements. The Group’s principal risks and uncertainties are outlined in a separate section of this report. ANNUAL GENERAL MEETING The Company’s AGM will be held on 18 June 2024. POLITICAL DONATIONS No political contributions were made during the year. AUDITOR A resolution to reappoint RSM UK Audit LLP as auditor for the ensuing year will be proposed at the Annual General Meeting in accordance with Section 487(2) of the Companies Act 2006. DISCLOSURE OF INFORMATION TO AUDITOR The Directors confirm that, so far as they are each aware, there is no relevant audit information of which the Group’s auditor is unaware, and each Director has taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish that the Group’s auditor is aware of that information. On behalf of the Board Ashley Miller Finance Director 17 April 2024 32095-Keystone-Law-AR2024.indd 27 32095-Keystone-Law-AR2024.indd 27 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:05 17/04/2024 09:50:05 27 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024GOVERNANCE DIRECTORS’ RESPONSIBILITIES STATEMENT The Directors are responsible for preparing the Strategic Report, the Directors’ Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and Company financial statements for each financial year. The Directors have elected under company law and are required by the AIM Rules of the London Stock Exchange to prepare the Group financial statements in accordance with UK-adopted International Accounting Standards and have elected under company law to prepare the Company financial statements in accordance with UK-adopted International Accounting Standards and applicable law. The Group financial statements are required by law and UK- adopted International Accounting Standards to present fairly the financial position and performance of the Group. The Companies Act 2006 provides in relation to such financial statements that references in the relevant part of that Act to financial statements giving a true and fair view are references to their achieving a fair presentation. 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 of the Group and Company and of the profit or loss of the Group for that period. In preparing the Group and Company financial statements, the Directors are required to: a. select suitable accounting policies and then apply them consistently; b. make judgements and accounting estimates that are reasonable and prudent; c. state whether they have been prepared in accordance with UK-adopted International Accounting Standards; and d. prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s and Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and the Company and enable them to ensure that the financial statements comply with the requirements of the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and the Company and hence, for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 28 32095-Keystone-Law-AR2024.indd 28 32095-Keystone-Law-AR2024.indd 28 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:05 17/04/2024 09:50:05 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF KEYSTONE LAW GROUP PLC OPINION We have audited the financial statements of Keystone Law Group plc (the ‘parent company’) and its subsidiaries (the ‘group’) for the year ended 31 January 2024 which comprise the Consolidated Statement of Comprehensive Income, Consolidated Statement of Financial Position, Company Statement of Financial Position, Consolidated Statement of Changes in Equity, Company Statement of Changes in Equity, Consolidated Statement of Cash Flows, Company Statement of Cash Flows and notes to the financial statements, including significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and UK-adopted International Accounting Standards and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. In our opinion: • the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 January 2024 and of the group’s profit for the year then ended; • the group financial statements have been properly prepared in accordance with UK-adopted International Accounting Standards; • the parent company financial statements have been properly prepared in accordance with UK-adopted International Accounting Standards and as applied in accordance with the Companies Act 2006; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. BASIS FOR OPINION We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the group and parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed entities and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. SUMMARY OF OUR AUDIT APPROACH Key audit matters Materiality Group • Revenue recognition and year end accrued income Group • Overall materiality: £523,000 (2023: £431,000) • Performance materiality: £392,000 (2023: 323,000) Parent Company • Overall materiality: £200,000 (2023: £215,000) Scope • Performance materiality: £150,000 (2023: 161,000) Our audit procedures covered 100% of revenue, 100% of total assets and 100% of profit before tax. 32095-Keystone-Law-AR2024.indd 29 32095-Keystone-Law-AR2024.indd 29 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:05 17/04/2024 09:50:05 29 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024OUR FINANCIALS INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF KEYSTONE LAW GROUP PLC – CONTINUED KEY AUDIT MATTERS Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the group and parent company financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) we identified, including those which had the greatest effect on the overall audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the group (and parent company) financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. REVENUE RECOGNITION AND ACCRUED INCOME – GROUP Key audit matter description How the matter was addressed in the audit Revenue is the most significant balance in the financial statements and there is risk that this could be materially misstated due to revenue being recognised in the incorrect accounting period. In addition, recognised revenue is impacted by the year end accrued income balance which is subject to management judgement. Judgement is applied by management in respect of the forecasting of billing and percentages applied in calculating the element relating to prior year work as further explained below and in the notes to the financial statements. The Group recognised revenue of £87.9m (2023: £76.4m) in respect of lawyer fees billed and accrued in the year and revenue consists of a large number of relatively low value individual transactions. Due to the large volume of transactions in the year, there is risk that not all revenue in the year has been appropriately recognised. The accrued income balance is calculated by reference to the historical performance of the business as well as making forward looking assumptions. The Group has reviewed, over a number of years, the percentage of actual invoicing which relates to prior year activity and it applies these percentages to the Group’s monthly forecast billing. There are inherent uncertainties in the estimations used. For the above reasons, revenue recognition including accrued income is considered to be a key audit matter. Refer to notes 2, 3, 4 and 17 to the financial statements for disclosures relating to revenue and year end accrued income. Our audit procedures included: • Reviewing the appropriateness of the group’s revenue polices in conjunction with IFRS 15 Revenue from contracts with customers in order to gain comfort revenue has been recorded in accordance with the requirements of that standard; • Assessing the design effectiveness of key controls in respect of revenue recognition. We have not placed reliance on the operating effectiveness of controls relating to revenue recognition at the audit; • Performing data analytics testing to assess the occurrence and accuracy of revenue. The analytic tool assesses 100% of transactions affecting the relevant sales cycle (revenue, receivables, cash, etc) during the year, leveraging work completed in other parts of the audit to gain assurance over expected/in-cycle transactions. The remaining population of unexpected, unusual and out-of-cycle transactions was then sampled, reviewed and agreed to supporting documentation as necessary; • Separately testing revenue cut-off by reviewing a sample of invoices raised around the year end to ensure that the revenue has been accounted for in the correct period; • Considering management’s approach to calculating the year end accrued income balance and recalculating this to ensure it is reasonable with reference to post-year end trading. Key observations We concluded that the recognition and recoverability assumptions made by management with respect to revenue and accrued income are reasonable based on the audit evidence obtained. 30 32095-Keystone-Law-AR2024.indd 30 32095-Keystone-Law-AR2024.indd 30 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:05 17/04/2024 09:50:05 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 OUR APPLICATION OF MATERIALITY When establishing our overall audit strategy, we set certain thresholds which help us to determine the nature, timing and extent of our audit procedures. When evaluating whether the effects of misstatements, both individually and on the financial statements as a whole, could reasonably influence the economic decisions of the users we take into account the qualitative nature and the size of the misstatements. Based on our professional judgement, we determined materiality as follows: Overall materiality £523,000 (2023: £431,000) £200,000 (2023: £215,000) Group Parent Company Basis for determining overall materiality Rationale for benchmark applied 5% of profit before tax 1% of net assets Investors are interested in the return on their investment, particularly in relation to dividends; therefore the result for the year drives share price and the Group’s ability to pay dividends. The value of the parent company is driven by its investment in Keystone Law Limited and as such a net assets benchmark has been applied to determine overall materiality. Performance materiality £392,000 (2023: £323,000) £150,000 (2023: £161,000) Basis for determining performance materiality Reporting of misstatements to the Audit Committee 75% of overall materiality 75% of overall materiality Misstatements in excess of £26,100 and misstatements below that threshold that, in our view, warranted reporting on qualitative grounds. Misstatements in excess of £10,000 and misstatements below that threshold that, in our view, warranted reporting on qualitative grounds. AN OVERVIEW OF THE SCOPE OF OUR AUDIT The group consists of two components, each of which is based in the United Kingdom. The coverage achieved by our audit procedures was: Full scope audit Total Number of components 2 2 Revenue Total assets Profit before tax 100% 100% 100% 100% 100% 100% Full scope audits were undertaken for both components. 32095-Keystone-Law-AR2024.indd 31 32095-Keystone-Law-AR2024.indd 31 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:05 17/04/2024 09:50:05 31 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024OUR FINANCIALS INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF KEYSTONE LAW GROUP PLC – CONTINUED CONCLUSIONS RELATING TO GOING CONCERN In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate. Our evaluation of the directors’ assessment of the group’s and parent company’s ability to continue to adopt the going concern basis of accounting included explanation of how the auditor evaluated management’s assessment and the key observations arising in respect to that evaluation. Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the group’s or the parent company’s ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue. Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report. OTHER INFORMATION The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report thereon. The directors are responsible for the other information contained within the annual report. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the course of the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. OPINIONS ON OTHER MATTERS 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. MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION In the light of the knowledge and understanding of the group and the parent company and their environment obtained in the course of the audit, we have not identified material misstatements in the Strategic Report or the Directors’ Report. We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent 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. 32 32095-Keystone-Law-AR2024.indd 32 32095-Keystone-Law-AR2024.indd 32 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:05 17/04/2024 09:50:05 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 RESPONSIBILITIES OF DIRECTORS As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so. AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. THE EXTENT TO WHICH THE AUDIT WAS CONSIDERED CAPABLE OF DETECTING IRREGULARITIES, INCLUDING FRAUD Irregularities are instances of non-compliance with laws and regulations. The objectives of our audit are to obtain sufficient appropriate audit evidence regarding compliance with laws and regulations that have a direct effect on the determination of material amounts and disclosures in the financial statements, to perform audit procedures to help identify instances of non-compliance with other laws and regulations that may have a material effect on the financial statements, and to respond appropriately to identified or suspected non-compliance with laws and regulations identified during the audit. In relation to fraud, the objectives of our audit are to identify and assess the risk of material misstatement of the financial statements due to fraud, to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud through designing and implementing appropriate responses and to respond appropriately to fraud or suspected fraud identified during the audit. However, it is the primary responsibility of management, with the oversight of those charged with governance, to ensure that the entity’s operations are conducted in accordance with the provisions of laws and regulations and for the prevention and detection of fraud. In identifying and assessing risks of material misstatement in respect of irregularities, including fraud, the group audit engagement team: • obtained an understanding of the nature of the industry and sector, including the legal and regulatory framework that the group and parent company operate in and how the group and parent company are complying with the legal and regulatory framework; • inquired of management, and those charged with governance, about their own identification and assessment of the risks of irregularities, including any known actual, suspected or alleged instances of fraud; • discussed matters about non-compliance with laws and regulations and how fraud might occur including assessment of how and where the financial statements may be susceptible to fraud. 32095-Keystone-Law-AR2024.indd 33 32095-Keystone-Law-AR2024.indd 33 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:05 17/04/2024 09:50:05 33 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024OUR FINANCIALS INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF KEYSTONE LAW GROUP PLC – CONTINUED The most significant laws and regulations were determined as follows: Legislation / Regulation Additional audit procedures performed by the Group audit engagement team included: UK-adopted IAS and Companies Act 2006 Review of the financial statement disclosures and testing to supporting documentation; Completion of disclosure checklists to identify areas of non-compliance. Tax compliance regulations Review of information submitted to HMRC, for consistency with other financial information reported and inspection of any correspondence with local tax authorities. Employment tax law Review of HMRC IR35 guidance against the Group’s business model. Regulatory compliance Discussions with the management as to whether all required communications with the Solicitors Regulatory Authority (SRA) have been made. The Group undergoes a separate SRA audit. The areas that we identified as being susceptible to material misstatement due to fraud were: Risk Audit procedures performed by the audit engagement team: Revenue recognition and year end accrued income The key audit matters section of our report explains this matter in more detail and also describes the specific audit procedures performed in response. Management override of internal controls Testing the appropriateness of journal entries and other adjustments; Assessing whether the judgements made in making accounting estimates are indicative of a potential bias; Evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: http://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. USE OF OUR REPORT 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. William Farren FCA (Senior Statutory Auditor) For and on behalf of RSM UK Audit LLP, Statutory Auditor Chartered Accountants 25 Farringdon Street London EC4A 4AB 17 April 2024 34 32095-Keystone-Law-AR2024.indd 34 32095-Keystone-Law-AR2024.indd 34 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:05 17/04/2024 09:50:05 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME YEAR ENDED 31 JANUARY 2024 Revenue Cost of sales Gross profit Trade receivables impairment Corresponding reduction in trade payables Depreciation and amortisation Share-based payments Other administrative expenses Other operating income Operating profit Finance income Financing costs Profit before tax Corporation tax Profit and total comprehensive income for the year attributable to equity holders of the Parent Basic EPS (p) Diluted EPS (p) *See note 2. The above results were derived from continuing operations. 2024 £ 2023 (restated*) £ Note 4 87,930,626 76,405,908 (65,101,369) (56,545,943) 22,829,257 19,859,965 (1,471,291) (1,145,978) 1,088,755 859,483 (382,536) (286,495) 5 5 (897,814) (885,699) (610,644) (502,708) 5 (11,573,319) (9,927,058) 52,183 51,951 6 7 7 9,417,127 8,309,956 1,575,930 221,810 (686,726) (147,089) 10,306,331 8,384,677 11 (2,656,641) (1,650,968) 7,649,690 6,733,709 12 12 24.4 23.9 21.5 21.2 32095-Keystone-Law-AR2024.indd 35 32095-Keystone-Law-AR2024.indd 35 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:05 17/04/2024 09:50:05 35 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024OUR FINANCIALS CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 JANUARY 2024 Assets Non-current assets Property, plant and equipment Owned assets Right-of-use assets Total property, plant and equipment Intangible assets Investments Current assets Trade and other receivables Cash and cash equivalents Total assets Equity and liabilities Equity Share capital Share premium Share-based payments reserve Retained earnings Equity attributable to equity holders of the Parent Non-current liabilities Lease liabilities Deferred tax liabilities Provisions Current liabilities Trade and other payables Lease liabilities Corporation tax liability Total liabilities Total equity and liabilities Note 2024 £ 2023 £ 13 13 13 14 16 120,517 2,428,005 2,548,522 187,677 513,577 701,254 5,055,954 5,406,838 129,350 13,628 7,733,826 6,121,720 17 25,194,349 22,605,908 8,367,072 9,151,875 33,561,421 31,757,783 41,295,247 37,879,503 18 62,963 62,732 9,920,760 9,920,760 1,059,531 1,028,247 5,896,437 6,847,378 16,939,691 17,859,117 23 19 21 22 23 2,027,866 49,699 907,945 2,985,510 109,484 132,432 183,501 425,417 19,782,587 18,347,358 344,804 1,242,655 538,544 709,067 21,370,046 19,594,969 24,355,556 20,020,386 41,295,247 37,879,503 The financial statements on pages 35 to 67 were approved and authorised for issue by the Board of Directors on 17 April 2024 and were signed on its behalf by: Ashley Miller Director 17 April 2024 Keystone Law Group Plc Registered No. 09038082 36 32095-Keystone-Law-AR2024.indd 36 32095-Keystone-Law-AR2024.indd 36 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:06 17/04/2024 09:50:06 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 COMPANY STATEMENT OF FINANCIAL POSITION AS AT 31 JANUARY 2024 Assets Non-current assets Investment in subsidiary Current assets Trade and other receivables Total assets Equity and liabilities Equity Share capital Share premium Share-based payments reserve Retained earnings Equity attributable to equity holders of the Company Current liabilities Trade and other payables Total liabilities Total equity and liabilities Note 2024 £ 2023 £ 15 10,863,310 10,252,666 10,863,310 10,252,666 17 9,223,979 8,655,480 9,223,979 8,655,480 20,087,289 18,908,146 18 62,963 62,732 9,920,760 9,920,760 1,059,531 1,028,247 9,000,375 7,846,808 20,043,629 18,858,547 22 43,660 43,660 49,599 49,599 20,087,289 18,908,146 The Company’s profit for the financial year was £9,754,198 (2023: £7,500,000). Under s408 of the Companies Act 2006, the Company is exempt from the requirement to present its own income statement. The financial statements on pages 35 to 67 were approved and authorised for issue by the Board of Directors on 17 April 2024 and were signed on its behalf by: Ashley Miller Director 17 April 2024 32095-Keystone-Law-AR2024.indd 37 32095-Keystone-Law-AR2024.indd 37 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:06 17/04/2024 09:50:06 37 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024OUR FINANCIALS CONSOLIDATED STATEMENT OF CHANGES IN EQUITY YEAR ENDED 31 JANUARY 2024 Attributable to equity holders of the Parent Share-based payments reserve £ Share premium £ Retained earnings £ Share capital £ Total £ 62,548 9,920,760 749,958 8,150,365 18,883,631 Note 18 – – 184 – – – – – – – 6,733,709 6,733,709 (8,261,115) (8,261,115) (224,419) 224,419 184 502,708 – 502,708 18 62,732 9,920,760 1,028,247 6,847,378 17,859,117 – – 231 – – – – – – – 7,649,690 7,649,690 (9,179,991) (9,179,991) (579,360) 579,360 231 610,644 – 610,644 At 31 January 2022 Profit for the year and total comprehensive income Transactions with owners Dividends paid in the year Share-based payments vesting Share-based payment awards At 31 January 2023 Profit for the year and total comprehensive income Transactions with owners Dividends paid in the year Share-based payments vesting Share-based payment awards At 31 January 2024 18 62,963 9,920,760 1,059,531 5,896,437 16,939,691 38 32095-Keystone-Law-AR2024.indd 38 32095-Keystone-Law-AR2024.indd 38 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:06 17/04/2024 09:50:06 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 COMPANY STATEMENT OF CHANGES IN EQUITY YEAR ENDED 31 JANUARY 2024 At 31 January 2022 Profit for the year and total comprehensive income Transactions with owners Dividend paid in the year Share-based payments vesting Share-based payment awards At 31 January 2023 Profit for the year and total comprehensive income Transactions with owners Dividend paid in the year Share-based payments vesting Share-based payment awards Share capital £ Share premium £ Share-based payments reserve £ Retained earnings £ Total £ 62,548 9,920,760 749,958 8,383,503 19,116,769 Note 18 – – 184 – – – – – – – 7,500,001 7,500,001 (8,261,115) (8,261,115) (224,419) 224,419 184 502,708 – 502,708 18 62,732 9,920,760 1,028,247 7,846,808 18,858,547 – – 231 – – – – – – – 9,754,198 9,754,198 (9,179,991) (9,179,991) (579,360) 579,360 231 610,644 – 610,644 At 31 January 2024 18 62,963 9,920,760 1,059,531 9,000,375 20,043,629 32095-Keystone-Law-AR2024.indd 39 32095-Keystone-Law-AR2024.indd 39 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:06 17/04/2024 09:50:06 39 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024OUR FINANCIALS CONSOLIDATED STATEMENT OF CASH FLOWS YEAR ENDED 31 JANUARY 2024 Cash flows from operating activities Profit before tax Adjustments Depreciation and amortisation Share-based payments Revaluation of other assets Finance income Financing costs Working capital adjustments Increase in trade and other receivables Increase in trade and other payables Increase in provisions Cash generated from operations Interest paid Interest portion of lease liability Corporation taxes paid Cash generated from operating activities Cash flows from/(used in) investing activities Interest received Purchases of property, plant and equipment Investment in other assets Net cash generated by investing activities Cash flows from financing activities Proceeds from issue of ordinary shares Lease repayments Dividends paid in year Net cash used in financing activities Net decrease in cash and cash equivalents Cash at 1 February Cash at 31 January Note 2024 £ 2023 £ 10,306,331 8,384,677 5 5 16 7 7 897,814 610,644 (70,810) 885,699 502,708 – (1,575,930) (221,810) 686,726 147,089 10,854,775 9,698,363 (2,588,441) (2,632,094) 1,435,229 2,204,192 724,444 75,556 10,426,007 9,346,017 (615,726) (71,468) (70,791) (76,298) (2,205,784) (1,964,281) 7,533,029 7,234,647 1,575,930 221,810 (68,910) (44,812) (64,080) – 1,462,208 157,730 231 184 (600,280) (462,247) 25 (9,179,991) (8,261,115) (9,780,040) (8,723,178) (784,803) (1,330,801) 9,151,875 10,482,676 8,367,072 9,151,875 24 24 24 40 32095-Keystone-Law-AR2024.indd 40 32095-Keystone-Law-AR2024.indd 40 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:06 17/04/2024 09:50:06 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 COMPANY STATEMENT OF CASH FLOWS YEAR ENDED 31 JANUARY 2024 Cash flows from operating activities Profit before tax Working capital adjustments (Increase)/decrease in trade and other receivables (Decrease)/Increase in trade and other payables Cash generated in operations Cash generated from operating activities Cash flows from financing activities Proceeds from issue of ordinary shares Dividend paid Net cash used in financing activities Net movement in cash and cash equivalents Cash at 1 February Cash at 31 January Note 2024 £ 2023 £ 9,754,198 7,500,000 9,754,198 7,500,000 (568,500) 747,267 (5,938) 13,664 9,179,760 8,260,931 9,179,760 8,260,931 231 184 (9,179,991) (8,261,115) (9,179,760) (8,260,931) – – – – – – 32095-Keystone-Law-AR2024.indd 41 32095-Keystone-Law-AR2024.indd 41 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:06 17/04/2024 09:50:06 41 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024OUR FINANCIALS NOTES TO THE FINANCIAL STATEMENTS 1. GENERAL INFORMATION The Company was incorporated as Keystone Law Group Limited on 13 May 2014 under the Companies Act 2006 (registration no. 09038082) and, subsequently, used as the vehicle to acquire Keystone Law Limited (the main trading company in the Group) and its subsidiaries on 17 October 2014. The Company was re-registered as a Public Limited Company limited by shares on 10 November 2017. The Company was incorporated and is domiciled in England and Wales. The principal activity of the Group is the provision of legal services. The address of its registered office is: 48 Chancery Lane London WC2A 1JF The Financial Statements are presented in Pounds Sterling, being the functional currency of the companies within the Group. 2. ACCOUNTING POLICIES STATEMENT OF COMPLIANCE The Financial Statements have been prepared in accordance with UK-adopted International Accounting Standards. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND KEY ACCOUNTING ESTIMATES The principal accounting policies applied in the preparation of the Financial Statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. BASIS OF PREPARATION The preparation of Financial Statements, in conformity with UK-adopted International Accounting Standards requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. PRIOR YEAR RESTATEMENT In January 2024, the Financial Reporting Council (“FRC”) submitted a request for further information on the Group’s Annual Report and Accounts for the year ended 31 January 2023. The review conducted by the FRC was based solely on the Group’s published Annual Report and Accounts and does not provide assurance that the Annual Report and Accounts are correct in all material respects; the FRC’s role is not to verify the information provided but to consider compliance with reporting requirements. Following completion of this review, the Directors have concluded that although the “pay when paid” payment terms of our lawyers’ fees means that any impairment in trade receivables automatically generates a directly related adjustment to trade payables (being approximately 75% of the net value impaired), for statutory reporting purposes these items should be considered and disclosed separately. Accordingly, in order to reflect these transactions in full compliance with para 5.5.8 of IFRS 9 and IAS 1.82(ba), the consolidated statement of comprehensive income for the year ended 31 January 2023 has been restated to reflect the impairment charge separately and not as a reduction in revenue, with the corresponding adjustment to lawyer fee notes equally shown separately and not as a reduction to cost of sales. 42 32095-Keystone-Law-AR2024.indd 42 32095-Keystone-Law-AR2024.indd 42 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:06 17/04/2024 09:50:06 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 2. ACCOUNTING POLICIES CONTINUED As a result, the consolidated statement of comprehensive income for the year ended 31 January 2023 has been restated as follows: Revenue Cost of sales Gross profit Trade receivables impairment Corresponding reduction in trade payables 2023 (reported) £ Restatement £ 2023 (restated) £ 75,259,930 1,145,978 76,405,908 (55,686,460) (859,483) (56,545,943) 19,573,470 286,495 19,859,965 – – – (1,145,978) (1,145,978) 859,483 859,483 (286,495) (286,495) These restatements have Nil impact on operating profit, profit before tax, adjusted profit before tax, net assets or cash. BASIS OF CONSOLIDATION The consolidated financial statements incorporate the financial statements of the parent company and entities controlled by the parent company (its subsidiaries) made up to 31 January each year. Control is achieved when the parent company: • Has the power over the investee • Is exposed, or has rights, to variable returns from its involvement with the investee • Has the ability to use its power to affect its returns The parent company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. When the parent company has less than a majority of the voting rights of an investee, it considers that it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The parent company considers all relevant facts and circumstances in assessing whether or not the parent company’s voting rights in an investee are sufficient to give it power, including: • The size of the parent company’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders • Potential voting rights held by the parent company, other vote holders or other parties • Rights arising from other contractual arrangements • Any additional facts and circumstances that indicate that the parent company has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings Consolidation of a subsidiary begins when the parent company obtains control over the subsidiary and ceases when the parent company loses control of the subsidiary. Specifically, the results of subsidiaries acquired or disposed of during the year are included in profit or loss from the date the parent company gains control until the date when the parent company ceases to control the subsidiary. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with the Group’s accounting policies. All intra-Group assets and liabilities, equity, income, expenses and cash flows relating to transactions between the members of the Group are eliminated on consolidation. 32095-Keystone-Law-AR2024.indd 43 32095-Keystone-Law-AR2024.indd 43 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:06 17/04/2024 09:50:06 43 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024OUR FINANCIALS NOTES TO THE FINANCIAL STATEMENTS CONTINUED 2. ACCOUNTING POLICIES CONTINUED Non-controlling interests in subsidiaries are identified separately from the Group’s equity therein. Those interests of non- controlling shareholders that are present ownership interests entitling their holders to a proportionate share of net assets upon liquidation may initially be measured at fair value or at the non-controlling interests’ proportionate share of the fair value of the acquiree’s identifiable net assets. The choice of measurement is made on an acquisition-by-acquisition basis. Other non-controlling interests are initially measured at fair value. Subsequent to acquisition, the carrying amount of non-controlling interests is the amount of those interests at initial recognition plus the non-controlling interests’ share of subsequent changes in equity. Profit or loss and each component of other comprehensive income are attributed to the owners of the parent company and to the non-controlling interests. Total comprehensive income of the subsidiaries is attributed to the owners of the parent company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. Changes in the Group’s interests in subsidiaries that do not result in a loss of control are accounted for as equity transactions. The carrying amount of the Group’s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to the owners of the parent company. When the Group loses control of a subsidiary, the gain or loss on disposal recognised in profit or loss is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), less liabilities of the subsidiary and any non-controlling interests. All amounts previously recognised in other comprehensive income in relation to that subsidiary are accounted for as if the Group had directly disposed of the related assets or liabilities of the subsidiary (i.e. reclassified to profit or loss or transferred to another category of equity as required/permitted by applicable IFRS Accounting Standards). The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under IFRS 9 Financial Instruments when applicable, or the cost on initial recognition of an investment in an associate or a joint venture. BUSINESS COMBINATIONS Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interest issued by the Group in exchange for control of the acquiree. Acquisition-related costs are recognised in profit or loss as incurred. At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value at the acquisition date. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer’s previously held interest in the acquiree (if any), the excess is recognised immediately in profit or loss as a bargain purchase gain. 44 32095-Keystone-Law-AR2024.indd 44 32095-Keystone-Law-AR2024.indd 44 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:06 17/04/2024 09:50:06 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 2. ACCOUNTING POLICIES CONTINUED GOODWILL Goodwill is initially recognised and measured as set out above. Goodwill is not amortised but is reviewed for impairment at least annually. For the purpose of impairment testing, goodwill is allocated to the Group’s cash-generating unit (or groups of cash-generating units) expected to benefit from the synergies of the combination. The cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period. On disposal of a cash-generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. GOING CONCERN The Group and Company financial statements have been prepared on a going concern basis as the Directors have a reasonable expectation that the Group and Company have adequate resources to continue in operational existence for the foreseeable future. The Group is cash positive, has no debt, has a model which is strongly cash generative and has, to date, a strong trading performance. The Group’s forecasts and projections show that the Group has sufficient resources for both current and anticipated cash requirements for a period of at least one year from the approval of these financial statements. ACCOUNTING DEVELOPMENTS At the date of authorisation of these financial statements, there were amendments to standards which were in issue, but which were not yet effective and which have not been applied. The principal ones were: • Amendment to IAS 1 – non-current liabilities with covenants (effective for annual periods beginning on, or after, 1 January 2024); • Amendment to IAS 7 and IFRS 7 – supplier finance (effective for annual periods beginning on, or after, 1 January 2024); • Amendment to IFRS 16 – leases on sale and lease back (effective for periods beginning on, or after 1 January 2024). The Directors do not expect the adoption of these amendments to standards to have a material impact on the financial statements. SEGMENT REPORTING Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Executive Directors who make strategic decisions. The Executive Directors are of the opinion that the Group has only one reportable operating segment. REVENUE The Group generates revenue, primarily, from delivering legal services to its clients. The services delivered are largely bespoke in their nature, being specific to the legal needs of the client and the matter. The amount of consideration received for any given assignment varies significantly and matters are predominantly charged to clients on either an hourly rate or a fixed fee basis, although a small amount of work is also undertaken under conditional fee arrangements. Whilst billing arrangements vary according to the nature of the work being undertaken and the client relationship, most work is billed either monthly or at particular stages in the legal process. Whatever the billing arrangements, the value of the service transfers to the client over the course of the assignment and accordingly revenue is recognised as assignment activity progresses, except in respect of contingent fee assignments, which are only recognised in the period when the contingent event occurs and collectability of the fee is assured. Unbilled fee income on matters is included as accrued income within receivables and is valued according to the Group’s Work in Progress (“WIP”) valuation policy, which is set out in note 3. 32095-Keystone-Law-AR2024.indd 45 32095-Keystone-Law-AR2024.indd 45 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:06 17/04/2024 09:50:06 45 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024OUR FINANCIALS NOTES TO THE FINANCIAL STATEMENTS CONTINUED 2. ACCOUNTING POLICIES CONTINUED OPERATING PROFIT Operating profit is stated after all expenses but before finance income or expenses. ADJUSTED PROFIT BEFORE TAX (“PBT”) Adjusted PBT is utilised as a key performance indication for the Group and is calculated as follows: Profit before tax Amortisation Share-based payments Adjusted PBT 2024 £ 2023 £ 10,306,331 8,384,677 350,884 610,644 350,884 502,708 11,267,859 9,238,269 Management considers that the use of the alternative performance measure above, which removes the non-cash items charged to the income statement, provides a truer representation of the underlying performance of the Group. SHARE-BASED PAYMENTS The cost of providing share-based payments to employees is charged to profit or loss over the vesting period of the related awards. The cost is based on the fair value of the awards of shares made determined at the date of the award using a combination of the Black–Scholes and Monte Carlo pricing models as appropriate, given the vesting and other conditions attached to the awards. The value of the charge may be adjusted to reflect expected and actual levels of vesting. DISBURSEMENTS Disbursements are not included in income or expenses as these are incurred as agent for the client. When incurred, these are recognised as an asset and categorised within trade and other receivables with a corresponding liability recognised within trade and other payables. TAXATION The corporation tax expense for the period comprises current and deferred tax. Tax is recognised in the income statement, except that a change attributable to an item of income or expense recognised as other comprehensive income is also recognised directly in other comprehensive income. The current tax charge is calculated on the basis of tax rates and laws that have been enacted, or substantively enacted, by the reporting date in the UK, the country in which the Group operates, and generates taxable income. Deferred tax is recognised on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Financial Statements and on unused tax losses or tax credits available to the Group. Deferred tax is determined using tax rates and laws that have been enacted, or substantively enacted, by the reporting date. The carrying amounts of deferred tax assets are reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to enable their recovery. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated in the statement of financial position at cost, less any subsequent accumulated depreciation and subsequent accumulated impairment losses. The cost of property, plant and equipment includes directly attributable incremental costs incurred in its acquisition and installation. A right-of-use asset is recognised at commencement of the lease and initially measured at the amount of the lease liability, plus any incremental costs of obtaining the lease and any lease payments made when, or before, the leased asset is available for use by the Group. 46 32095-Keystone-Law-AR2024.indd 46 32095-Keystone-Law-AR2024.indd 46 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:06 17/04/2024 09:50:06 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 2. ACCOUNTING POLICIES CONTINUED DEPRECIATION Depreciation is charged so as to write off the cost of assets over their estimated useful lives, as follows: Asset class Depreciation method and rate Fixtures, fittings and equipment 25%–33% straight line Leased property Straight-line basis over the lease term GOODWILL Goodwill arising on the acquisition of an entity represents the excess of the cost of acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the entity, recognised at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less accumulated impairment losses. OTHER INTANGIBLE ASSETS Lawyer relationships have been separately identified on acquisition and were recognised at fair value at the acquisition date. The fair value of the asset was calculated by reference to the net present value of the future benefits accruing to the Group from the utilisation of the asset discounted at an appropriate discount rate. These lawyer relationships are subsequently held at cost less accumulated amortisation. Amortisation is charged to the income statement on a straight-line basis over the estimated useful life of the asset, which, in the case of lawyer relationships, is estimated to be ten years. IMPAIRMENT OF INTANGIBLE ASSETS Intangible assets that have an indefinite useful life or intangible assets not ready to use are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are largely independent cash inflows (CGU). INVESTMENTS IN SUBSIDIARIES Investments in subsidiaries are stated at historical cost less provision for any impairment in value. FINANCIAL INSTRUMENTS The Group classifies financial instruments, or their component parts, on initial recognition as a financial asset, a financial liability or an equity instrument in accordance with the substance of the underlying contractual arrangement. Financial instruments are recognised on the date when the Group becomes party to the contractual provisions of the instrument. Financial instruments are initially recognised at fair value. Financial instruments cease to be recognised at the date when the Group ceases to be party to the contractual provisions of the instrument. Financial assets are included on the statement of financial position as investments in subsidiaries, trade and other receivables, other assets, or cash and cash equivalents. A. TRADE AND OTHER RECEIVABLES Trade and other receivables are stated at their original invoiced value, as the interest that would be recognised from discounting the future cash receipts over the short credit period is not considered to be material. Trade receivables are amounts due from clients for services performed in the ordinary course of business. Trade receivables are initially recognised at the amount of consideration and subsequently at amortised cost, less expected credit losses. The expected credit losses are measured by applying an expected loss rate to the gross carrying amount. The expected loss rate comprises the risk of a default occurring and the expected cash flows given default, based on the ageing of the receivable together with other specific information of which the Group is aware, which is likely to affect the likely recoverability of the receivable. 47 32095-Keystone-Law-AR2024.indd 47 32095-Keystone-Law-AR2024.indd 47 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:06 17/04/2024 09:50:06 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024OUR FINANCIALS NOTES TO THE FINANCIAL STATEMENTS CONTINUED 2. ACCOUNTING POLICIES CONTINUED B. OTHER ASSETS Other financial assets comprise the minority investment held in Keypoint Law Pty Limited. This investment is included in non-current assets and, as management does not intend to dispose of it within twelve months of the end of the reporting period, is held at fair value. C. TRADE AND OTHER PAYABLES Trade and other payables are stated at their original invoiced value, as the interest that would be recognised from discounting the future cash payments over the short credit period is not considered to be material. Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Trade payables are classified as current liabilities if the Company does not have an unconditional right, at the end of the reporting period, to defer settlement of the creditor for at least twelve months after the reporting date. If there is an unconditional right to defer settlement for at least twelve months after the reporting date, they are presented as non-current liabilities. CASH AND CASH EQUIVALENTS Cash and cash equivalents comprise cash on hand and call deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. PROVISIONS Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, when it is probable that the Group will be required to settle that obligation, and when a reliable estimate can be made of the amount of the obligation. Provisions are measured at the Directors’ best estimate of the expenditure required to settle the obligation at the reporting date and are discounted to present value where the effect is material. Where a provision is made in respect of a professional negligence claim, which is covered by the Group’s professional indemnity insurance, the amount provided would be the amount payable by the Group whether due to the policy excess or otherwise. Amounts in respect of any claims that are agreed (i.e. the timing and amount of payments are well understood) are recognised in accrued expenses rather than provisions. LEASES The Group assesses whether a contract is or contains a lease at inception of the contract. A right-of-use asset and a lease liability are recognised for all leases. The total liability under the lease is discounted with the discounted value being recognised as both an asset (right-of-use assets) and a lease liability (split between current and non-current). The right-of- use asset is then depreciated on a straight-line basis over the term of the lease. During the course of the lease, interest is accrued on the lease liability such that the total value of the original discount is unwound over the life of the lease. In the statement of cash flows, the settlement of lease liabilities is included within financing activities for the repayment of principal and within operating activities for the interest paid. INITIAL MEASUREMENT OF THE LEASE LIABILITY The lease liability is initially measured at the present value of the lease payments during the lease term discounted using the interest rate implicit in the lease, or the incremental borrowing rate if the interest rate implicit in the lease cannot be readily determined. The Group has applied a discount rate of 5%. The lease term is the non-cancellable period of the lease plus extension periods that the Group is reasonably certain to exercise and termination periods that the Group is reasonably certain not to exercise. Leases are cancellable when each party has the right to terminate the lease without permission of the other party or incurring more than an insignificant penalty. The lease term includes any rent-free periods. 48 32095-Keystone-Law-AR2024.indd 48 32095-Keystone-Law-AR2024.indd 48 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:06 17/04/2024 09:50:06 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 2. ACCOUNTING POLICIES CONTINUED SUBSEQUENT MEASUREMENT OF THE LEASE LIABILITY The lease liability is subsequently increased for a constant periodic rate of interest on the remaining balance of the lease liability and reduced for lease payments. Interest on the lease liability is recognised in profit or loss, unless interest is directly attributable to qualifying assets, in which case it is capitalised in accordance with the Group’s policy on borrowing costs. SHARE CAPITAL Ordinary shares are classified as equity. Equity instruments are measured at the fair value of the cash or other resources received or receivable, net of the direct costs of issuing the equity instruments. If payment is deferred and the time value of money is material, the initial measurement is on a present value basis. DEFINED CONTRIBUTION PENSION OBLIGATION Contributions to defined contribution plans are recognised as employee benefit expense when they are due. If contribution payments exceed the contribution due for service, the excess is recognised as a prepayment. 3. OTHER AREAS OF JUDGEMENT AND ACCOUNTING ESTIMATES In the application of the Group’s accounting policies, management is required to make judgements and accounting estimates. These estimates and underlying assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of revision and future periods if the revision affects both current and future periods. Whilst these do not meet the definition under IAS 1 of significant accounting estimates or critical accounting judgement, the recognition of certain material assets and liabilities is based on assumptions and/or is subject to longer-term uncertainties. The other areas of judgement and accounting estimates are set out below. RECOVERABILITY OF TRADE RECEIVABLES Due to the nature of the business, there are high levels of trade receivables at the year end and, therefore, a risk that some of these balances may be irrecoverable. Because amounts due to lawyers are only payable when the Group has been paid, there is a built-in hedge to this exposure to the extent of approximately 75%. A variance of 1% in the loss ratio reflected in the impairment provision would equate to a movement in trade receivables impairment of £153,170 (2023: £132,731) which, in turn, would result in a change in the corresponding reduction in trade payables of £115,177 (2023: £99,548) and an impact to profit of £37,993 (2023: £33,183). 32095-Keystone-Law-AR2024.indd 49 32095-Keystone-Law-AR2024.indd 49 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:06 17/04/2024 09:50:06 49 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024OUR FINANCIALS NOTES TO THE FINANCIAL STATEMENTS CONTINUED 3. OTHER AREAS OF JUDGEMENT AND ACCOUNTING ESTIMATES CONTINUED AMOUNTS RECOVERABLE ON CONTRACTS (ACCRUED INCOME) AND ASSOCIATED ACCRUED LIABILITY During each financial year, the business carries out a review of billing activity to identify what share of each month’s billing relates to a period prior to the start of that financial year. The results of these reviews are then added to the data derived from similar reviews in previous financial years and demonstrate a materially consistent performance insofar as to the share of each given month’s billing which relates to a prior financial year. A fundamental judgement made when performing these reviews is that the contracts entered into each year have performance obligations with similar characteristics to those entered into in previous years; for example that the value of the services provided to the client is transferred evenly over the period of time that the services are provided. We use this data to generate a profile of the share of post year-end billing which relates to a previous financial year. This profile is then applied to the current year’s budgeted billing to calculate the gross value of accrued income at the year end, a further adjustment is made to this value to reflect the estimated recoverable value, this adjustment is not material and as such is not separately disclosed. The accrued income valuation is then validated by reviewing the actual billing between the year end and the time the accounts are prepared (representing approximately 60% of the value of accrued income) to ensure that actual performance is in line with the expected profile. Keystone’s lawyers’ fees are 100% variable and directly associated with the value of fee income produced. Accordingly, when the Group recognises a value of accrued income, it also recognises a directly associated accrued liability in respect of the fees payable to its lawyers for that work which equates to approximately 75% of the value of accrued income. Were the actual billing to differ to the budget but all other things remained equal, then a 1% variance in billing would equate to a movement in revenue of £70,383 (2023: £61,873). This, in turn, would result in a change in the associated cost of sale of £52,263 (2023: £45,515) and an impact to profit of £18,120 (2023: £16,358). 4. REVENUE The Group’s revenue for the year from continuing operations is as follows: Rendering of services Other revenue All revenue is derived from a single segment. 2024 £ 2023 (restated) £ 87,450,484 76,025,066 480,142 380,842 87,930,626 76,405,908 As required to be disclosed by IFRS 8 Operating Segments, no single customer represented more than 10% of revenue for any of the years ended 31 January 2024 or 2023. 50 32095-Keystone-Law-AR2024.indd 50 32095-Keystone-Law-AR2024.indd 50 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:06 17/04/2024 09:50:06 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 5. EXPENSES BY NATURE Expenses are comprised of: Depreciation Amortisation – intangible assets Amortisation – right-of-use assets Share-based payments Staff costs Other administrative expenses 2024 £ 136,070 350,884 410,860 610,644 2023 £ 123,955 350,884 410,860 502,708 5,834,699 5,102,472 6,858,305 5,676,239 14,201,462 12,167,118 Included within staff costs above are the costs of employed fee earners who are included within cost of sales (2024: £1,119,685, 2023: £851,653). 6. OPERATING PROFIT Operating profit is arrived at after charging: Depreciation expense Amortisation – intangible assets Amortisation – right-of-use assets Fees to auditors: audit fee Fees to auditors: interim review 7. FINANCE INCOME AND COSTS Finance income Interest income on bank deposits Finance costs Interest on client monies held Interest on leases for own use Total finance costs Net finance income/(costs) 2024 £ 136,070 350,884 410,860 106,000 9,000 2023 £ 123,955 350,884 410,860 92,500 7,500 2024 £ 2023 £ 1,575,930 221,810 (615,258) (71,468) (70,791) (76,298) (686,726) (147,089) 889,204 74,721 51 32095-Keystone-Law-AR2024.indd 51 32095-Keystone-Law-AR2024.indd 51 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:07 17/04/2024 09:50:07 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024OUR FINANCIALS NOTES TO THE FINANCIAL STATEMENTS CONTINUED 8. STAFF COSTS The aggregate payroll costs (including Directors’ remuneration but excluding share-based payment charges disclosed separately in note 5) were as follows: Wages and salaries Social security costs Pension costs, defined contribution scheme 2024 £ 2023 £ 5,049,463 4,347,674 573,268 211,968 579,237 175,561 5,834,699 5,102,472 Included within the social security costs above is an amount of £Nil (2023: £74,626) in respect of employer’s national insurance contributions, which will be payable in respect of shares granted under the Group’s LTIP scheme. The average number of persons employed by the Group (including Directors) during the year, analysed by category, was as follows: Fee earners Administration and support Total 2024 £ 13 63 76 2023 £ 12 59 71 The Company does not employ any employees and, as such, has no staff costs. 9. DIRECTORS’ AND KEY MANAGEMENT PERSONNEL REMUNERATION Salary and fees Pension Employers NIC Share-based payments charge Total 2024 £ 2023 £ 714,232 665,190 13,000 105,701 95,549 14,643 96,095 79,134 928,482 855,062 Details of the Directors’ remuneration is disclosed within the Report of the Remuneration Committee with details of share- based payments disclosed in note 10. The Directors are considered to be the only key management personnel. 52 32095-Keystone-Law-AR2024.indd 52 32095-Keystone-Law-AR2024.indd 52 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:07 17/04/2024 09:50:07 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 10. EQUITY-SETTLED SHARE-BASED PAYMENT PLANS (“LTIP”) The Group operates a long term incentive plan which has been approved by shareholders (the Keystone Law Long Term Incentive Plan 2018 (the “Plan”)). The Plan is a discretionary benefit offered for the benefit of selected key employees. Its main purpose is to increase the alignment of interest of the employees with the long-term goals and performance of the business and its shareholders. Under the terms of the scheme, awards may either be granted as nil cost options or performance share awards and the type, value, performance conditions and periods, as well as to whom the grants are to be made, are at the discretion of the Remuneration Committee. A summary of the structure of the rules of the Plan is set out below: • Awards may either be granted as nil cost options or performance share awards; • Awards may be granted under this Plan during the ten year period following the date of approval; • Maximum number of shares awarded (excluding those which have lapsed) under the Plan may not exceed 5% of the share capital of the Company; • Maximum number of shares which may be awarded under any share plan for the Company may not exceed 10% of the share capital of the Company in ten years preceding the date of issue; • No individual may receive awards in any single year with a value greater than 100% of that individual’s base salary; • Awards are personal and non-transferable; • Grants shall be subject to a three year vesting period; • Following vesting, shares are subject to a further one year holding period (save for allowing shares to be sold to pay the tax liability arising on the vesting of the award); and • Reduction of awards and clawback provisions are included. In order to ensure that the scheme targets reflected the disruption caused by the Covid-19 pandemic, in June 2020, the Remuneration Committee approved the variation of the performance criteria, vesting and holding periods in respect of the award made in July 2018, and, in April 2021, the Remuneration Committee approved a similar variation to the award made in June 2019. Under the terms of these variations, the vesting period for these awards became four years and the holding period post vesting became one year. The target EPS at the end of the vesting periods remained the same as the original targets. Accordingly, the awards from June 2019 and September 2020 both vested during this financial year. The table below reflects the movement in the number of performance share awards outstanding during the year: Outstanding at 1 February Vested Lapsed Granted Outstanding at 31 January 2024 2023 464,522 410,398 (115,171) (92,202) (71,775) 248,690 526,266 – 146,326 464,522 The weighted average remaining contractual life of the performance shares was 1.59 years at 31 January 2024. 32095-Keystone-Law-AR2024.indd 53 32095-Keystone-Law-AR2024.indd 53 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:07 17/04/2024 09:50:07 53 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024OUR FINANCIALS NOTES TO THE FINANCIAL STATEMENTS CONTINUED 10. EQUITY-SETTLED SHARE BASED PAYMENT PLANS (“LTIP”) CONTINUED The following table shows share awards held by Directors: Ashley Miller Outstanding at 1 February Vested Lapsed Granted Outstanding at 31 January 2024 2023 74,789 (22,247) (13,893) 31,942 70,591 76,491 (20,820) – 19,118 74,789 The performance share awards issued include market-based performance conditions and have been valued using a combination of the Monte Carlo options pricing model (TSR tranche) and Black–Scholes method (EPS tranche). The fair value of the share awards granted during the year is £785,363 (2023: £716,343) and the charge for the year is £610,644 (2023: £502,708). The key assumptions used in the calculation of the fair value of the share-based payments are as follows: Granted June 2021 Share price at grant date Exercise price Risk free rate Dividend yield Expected term Volatility (simulated TSR performance) Grant date TSR performance of Company Grant date median/upper quartile TSR performance of comparator group Correlation Discount for post-vesting transfer restrictions The fair value of the share awards granted was £564,113. Granted June 2022 Share price at grant date Exercise price Risk free rate Dividend yield Expected term Volatility (simulated TSR performance) Grant date TSR performance of Company Grant date median/upper quartile TSR performance of comparator group Correlation Discount for post-vesting transfer restrictions The fair value of the share awards granted was £716,343. 54 EPS Tranche TSR Tranche £6.40 £0.00 – 2.17% 3 years – – £6.40 £0.00 0.155% 2.17% 3 years 36% -1.8% – 1.06%/2.97% – 19.1% 13% 19.1% EPS Tranche TSR Tranche £7.10 £0.00 – 2.21% 3 years – – – – 17.2% £7.10 £0.00 1.79% 2.21% 3 years 32% 9.4% 0.0%/1.7% 13% 17.2% 32095-Keystone-Law-AR2024.indd 54 32095-Keystone-Law-AR2024.indd 54 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:07 17/04/2024 09:50:07 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 10. EQUITY-SETTLED SHARE BASED PAYMENT PLANS (“LTIP”) CONTINUED Granted June 2023 Share price at grant date Exercise price Risk free rate Dividend yield Expected term Volatility (simulated TSR performance) Grant date TSR performance of Company Grant date median/upper quartile TSR performance of comparator group Correlation Discount for post-vesting transfer restrictions The fair value of the share awards granted was £785,363. 11. CORPORATION TAX EXPENSE TAX CHARGED IN THE INCOME STATEMENT Current taxation UK corporation tax Deferred taxation Unwinding of deferred tax liability Tax expense in the income statement EPS Tranche TSR Tranche £4.35 £0 – 3.7% 3 years – – £4.35 £0 4.98% 3.7% 3 years 29.5% 0.0% – -0.1%/0.8% – 11.3% 4% 11.3% 2024 £ 2023 £ 2,727,818 1,721,146 (71,177) (70,178) 2,656,641 1,650,968 The actual tax charge is higher than the standard rate of corporation tax in the UK applied to the profit before tax 2024: 25.8% (2023: 19.7%). The differences are reconciled below: Profit before tax Corporation tax at standard rate 24%(1) (2023: 19%) Increase from effect of expenses not deductible in determining taxable profit Total tax charge 2024 £ 2023 £ 10,306,331 8,384,677 2,473,519 1,593,089 183,121 57,879 2,656,640 1,650,968 (1) Corporation tax rates were 19% until 6 April 2023, then 25% thereafter. 24% is a blended rate based on pro rating the standard rates and period. 32095-Keystone-Law-AR2024.indd 55 32095-Keystone-Law-AR2024.indd 55 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:07 17/04/2024 09:50:07 55 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024OUR FINANCIALS NOTES TO THE FINANCIAL STATEMENTS CONTINUED 12. EARNINGS PER SHARE The calculations of earnings per share are based on the following profits and number of shares: Profit attributable to owners of the Parent Amortisation(1) Share-based payments(1) Adjusted earnings Weighted average number of shares For basic earnings per share Dilutive effect of grants under LTIP For diluted earnings per share Basic earnings per share (p) Diluted earnings per share (p) Adjusted basic earnings per share (p) Adjusted diluted earnings per share (p) (1) Amounts shown are before tax. 2024 £ 2023 £ 7,649,690 6,733,709 350,884 610,644 350,844 502,708 8,611,218 7,587,261 2024 No. of shares 2023 No. of shares 31,386,062 31,307,540 563,260 472,212 31,949,322 31,779,752 24.4 23.9 27.4 27.0 21.5 21.2 24.2 23.9 Adjusted basic earnings per share is calculated by taking adjusted basic earnings and dividing it by undiluted average shares for the year. 56 32095-Keystone-Law-AR2024.indd 56 32095-Keystone-Law-AR2024.indd 56 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:07 17/04/2024 09:50:07 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 13. PROPERTY, PLANT AND EQUIPMENT Cost or valuation At 31 January 2022 Additions Disposals At 31 January 2023 Additions Disposals At 31 January 2024 Depreciation/Amortisation At 31 January 2022 Charge for the year Disposals At 31 January 2023 Charge for the year Disposals At 31 January 2024 Carrying amount At 31 January 2024 At 31 January 2023 At 31 January 2022 Right-of-use assets(1) £ Furniture, fittings and equipment £ Total property, plant and equipment £ 2,054,303 618,354 2,672,657 – – 64,080 64,080 – – 2,054,303 682,435 2,736,738 2,325,290 68,910 2,394,200 – (12,698) (12,698) 4,379,593 738,647 5,118,240 1,129,866 370,803 1,500,669 410,860 123,955 534,815 – – – 1,540,726 494,758 2,035,484 410,862 136,070 546,932 – (12,698) (12,698) 1,951,588 618,130 2,569,718 2,428,005 120,517 2,548,522 513,577 924,437 187,677 701,254 247,551 1,171,988 (1) Right-of-use assets relate to property leases. During the year, the Group renewed its existing leases on the offices in Chancery Lane. The existing leases run to April 2024 and the new leases are for a five year term starting at that time. The Company had no property, plant and equipment in either 2024 or 2023. 32095-Keystone-Law-AR2024.indd 57 32095-Keystone-Law-AR2024.indd 57 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:07 17/04/2024 09:50:07 57 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024OUR FINANCIALS NOTES TO THE FINANCIAL STATEMENTS CONTINUED 14. INTANGIBLE ASSETS Cost or valuation At 31 January 2023 and 2024 Amortisation At 31 January 2022 Charge for the year At 31 January 2023 Charge for the year At 31 January 2024 Carrying amount At 31 January 2024 At 31 January 2023 At 31 January 2022 Lawyer relationships £ Goodwill £ Total intangibles £ 3,508,840 4,807,411 8,316,251 2,558,529 350,884 2,909,413 350,884 3,260,297 – – – – – 2,558,529 350,884 2,909,413 350,884 3,260,297 248,543 4,807,411 5,055,954 599,427 4,807,411 5,406,838 950,311 4,807,411 5,757,722 For the purpose of impairment testing, goodwill arising from the acquisition of Keystone Law Limited is allocated to the cash generating unit (CGU) that is expected to benefit from the synergies of the combination. Goodwill reviews are undertaken annually or more frequently if events or changes in circumstances indicate potential impairment. An impairment review has been performed for the year ended 31 January 2024 and recoverable amounts have been determined based on value-in-use calculations. These calculations have assessed the projected future cash flows over the next five years based on financial budgets approved by management for the year ended 31 January 2025 and then looking forwards a further four years. A discounted cash flow model was prepared assuming no growth in profits over the period to stress test the carrying value of the goodwill, using a pre tax discount rate of 11% (2023: 11%). Management does not foresee any realistic adverse movement in the assumptions used in the impairment review which would trigger the requirement for an impairment. 58 32095-Keystone-Law-AR2024.indd 58 32095-Keystone-Law-AR2024.indd 58 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:07 17/04/2024 09:50:07 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 15. INVESTMENTS IN SUBSIDIARY COMPANY SUBSIDIARIES Details of the Company’s subsidiaries as at the end of each year were as follows: Name of subsidiary Principal activity Country of incorporation and principal place of business Keystone Law Limited Provision of legal services England and Wales Keystone Law (Guernsey) Limited Dormant England and Wales Proportion of ownership interest and voting rights held by the Group 2024 100% 100% 2023 100% 100% Keystone Law Limited is owned by the Company, whilst Keystone Law (Guernsey) Limited is owned by Keystone Law Limited. The registered office of all subsidiaries above is 48 Chancery Lane, London, WC2A 1JF. The movement in the Company investment value, which is £610,644 (2023: £502,708) represents the cost of share awards granted under the Company’s Long Term Incentive Plan. For further details see note 10. 16. INVESTMENTS Non-current financial assets At 1 February Additions Revaluation At 31 January 2024 £ 2023 £ 13,628 44,812 70,910 13,628 – – 129,350 13,628 Investments represent the value of the Group’s minority holding in Keypoint Law Pty Limited, an Australian law firm, which is carried at fair value. 32095-Keystone-Law-AR2024.indd 59 32095-Keystone-Law-AR2024.indd 59 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:07 17/04/2024 09:50:07 59 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024OUR FINANCIALS NOTES TO THE FINANCIAL STATEMENTS CONTINUED 17. TRADE AND OTHER RECEIVABLES Trade receivables Provision for impairment of trade receivables Net trade receivables Receivables from related parties Accrued income Prepayments Unbilled disbursements Reimbursement asset Other receivables Company 2024 £ 2023 £ Group 2024 £ 2023 £ – – – – – – 15,308,230 13,285,914 (4,812,995) (4,114,670) 10,495,235 9,171,244 9,204,894 8,636,669 – – – – 11,571,696 10,030,078 19,085 18,811 1,843,276 2,271,739 – – – – – – 793,825 280,000 210,317 970,078 – 162,769 Total current trade and other receivables 9,223,979 8,655,480 25,194,349 22,605,908 The fair value of those trade and other receivables classified as financial instruments are disclosed in the financial instruments note 27. The Group’s exposure to credit and market risks, including impairments and allowances for credit losses, relating to trade and other receivables, is disclosed in the financial risk management and impairment of financial assets note. Trade receivables stated above include amounts due at the end of the reporting period for which an allowance for expected credit loss has not been recognised as the amounts are still considered recoverable and there has been no significant change in credit quality. The provision for impairment of trade receivables (analysed below) is the difference between the carrying value and the present value of the expected proceeds. For all other categories of current receivables, there is no difference between the carrying value and the expected proceeds. In the Company, there is no expected credit loss in respect of the receivables from related parties due to the low credit risk of Keystone Law Limited, being the counter party. 0 to 30 days 31 to 60 days 61 to 90 days 91 to 120 days 4 to 6 months 6 months to 1 year Over 1 year 2024 Gross £ 2024 Provision £ 2024 Expected Loss Rate % 2023 Gross £ 2023 Provision £ 2023 Expected Loss Rate % 5,555,147 2,361,527 1,306,762 752,254 396,358 278,200 236,153 130,676 206,870 216,965 2,291,042 1,260,901 2,645,140 2,483,230 15,308,230 4,812,995 5.0 10.0 10.0 27.5 54.7 55.0 93.9 31.4 4,982,633 2,096,401 1,029,435 781,767 367,305 – – – 2,904 131,825 2,146,285 2,097,853 1,882,088 1,882,088 13,285,914 4,114,670 – – – 0.4 35.9 97.7 100.0 31.0 The Directors consider that the carrying value of trade and other receivables approximates to fair value. 60 32095-Keystone-Law-AR2024.indd 60 32095-Keystone-Law-AR2024.indd 60 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:07 17/04/2024 09:50:07 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 17. TRADE AND OTHER RECEIVABLES CONTINUED The movement in the provision for impairment of trade receivables was as follows: Balance at 1 February Charge for the year Amounts written off Balance at 31 January 2024 £ 2023 £ 4,114,670 4,082,672 1,471,291 1,145,978 (772,966) (1,113,980) 4,812,995 4,114,670 Because the payment terms of the Group’s lawyers is “pay when paid”, the impairment of a trade receivable balance automatically generates a directly related adjustment to trade payables (being approximately 75% of the net value impaired). Accrued income has increased year on year largely in line with revenue, with accrued income days of 48 as at 31 January 2024 (2023: 48 days). 18. ALLOTTED, CALLED UP AND FULLY PAID SHARES – GROUP AND COMPANY Ordinary shares of £0.002 As at 31 January 2024 As at 31 January 2023 No. £ No. £ 31,481,314 62,963 31,366,143 62,732 RIGHTS, PREFERENCES AND RESTRICTIONS Ordinary shares have the following rights, preferences and restrictions: Ordinary shares have attached to them full voting, dividend and capital distribution (on winding up) rights; they do not confer any rights of redemption. 19. DEFERRED TAX Accelerated capital allowances Timing differences on intangible assets Deferred tax Company Group 2024 £ 2023 £ – – – – – – 2024 £ – 49,699 49,699 2023 £ 12,555 119,877 132,432 32095-Keystone-Law-AR2024.indd 61 32095-Keystone-Law-AR2024.indd 61 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:07 17/04/2024 09:50:07 61 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024OUR FINANCIALS NOTES TO THE FINANCIAL STATEMENTS CONTINUED 20. PENSION AND OTHER SCHEMES DEFINED CONTRIBUTION PENSION SCHEME The Group operates a defined contribution pension scheme. The pension cost charge for the year represents contributions payable by the Group to the scheme and amounted to £211,968 (2023: £175,561). The amount outstanding for payment to the scheme at 31 January 2024 was £18,804 (2023: £15,508). 21. PROVISIONS At 31 January 2022 Additional provision in the year At 31 January 2023 Reclassified from accruals Additional provision in the year Utilisation of provision At 31 January 2024 Dilapidation £ Professional Indemnity £ Total Provision £ 107,945 75,556 183,501 – 44,444 – – – 492,250 410,000 107,945 75,556 183,501 492,250 454,444 – (222,250) (222,250) 227,945 680,000 907,945 The dilapidation provision in respect of leased premises in Chancery Lane. The professional indemnity provision represents the current best estimates of the amounts likely to be needed to settle claims in respect of alleged professional negligence. These estimates are subject to a high level of uncertainty as they depend on the outcome of a range of future events and accordingly may need to be updated as circumstances evolve. Separately, the Group recognises expected reimbursements from professional indemnity insurance associated with this provision within trade and other receivables (note 17). No separate disclosure is made in relation to the detail of any such claims as to do so would be seriously prejudicial to the position of the Group. Note that in the prior year, the professional indemnity provision and the reimbursement asset, the value of which were not material, were presented net within accruals. The Company has no provisions. 22. TRADE AND OTHER PAYABLES Trade payables Accrued expenses Social security and other taxes Total trade and other payables Company 2024 £ – 2023 £ Group 2024 £ 2023 £ – 8,984,449 8,466,313 43,660 49,599 10,393,799 9,462,974 – – 404,339 418,071 43,660 49,599 19,782,587 18,347,358 Included within the above accrued expenses is the liability for lawyer fees associated with the accrued income (2024: £8,636,465; 2023: £7,435,836). The fair value of the trade and other payables classified as financial instruments is disclosed in the financial instruments note. The Group’s exposure to market and liquidity risks related to trade and other payables is disclosed in the financial risk management and impairment of financial assets note. The Group pays its trade payables on terms and as such trade payables are not yet due at the reporting dates. 62 32095-Keystone-Law-AR2024.indd 62 32095-Keystone-Law-AR2024.indd 62 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:08 17/04/2024 09:50:08 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 23. LEASE LIABILITIES Disclosures of the carrying amounts of the right-of-use assets by class and additions to right-of-use assets have been provided in the Property, plant and equipment note. Current lease liabilities Lease liabilities Non-current lease liabilities Lease liabilities Company 2024 £ 2023 £ Group 2024 £ 2023 £ – – 344,804 538,544 Company 2024 £ 2023 £ Group 2024 £ 2023 £ – – 2,027,866 109,484 The Group leases two floors of an office building for use in its operations. The Group has recently signed new leases for these floors with lease terms of five years, which do not contain an automatic option to extend the term; therefore, this has not been included in the lease liability. There are no material future cash outflows which the Group is exposed to, which are not reflected in the measurement of the lease liabilities. The incremental borrowing rate applied to the Group’s lease arrangements is 5%. The carrying amounts of the lease obligations are all denominated in Pounds, with the fair value of the Group’s lease obligations being approximately equal to their carrying amounts. The amounts charged to the income statement in respect of leases is comprised of two elements: the amortisation of the right-of-use asset (note 5) and the interest element (note 7). The total cash outflow in respect of leases was £672,215 (2023: £538,544). 24. RECONCILIATION OF CHANGES IN CASH AND LIABILITIES ARISING FROM FINANCING ACTIVITIES Cash and cash equivalents Lease liabilities due within 1 year Lease liabilities due after 1 year Total net debt Cash and cash equivalents Lease liabilities due within 1 year Lease liabilities due after 1 year Total net debt 1 February 2023 £ Cash flow £ Non-cash movement £ 31 January 2024 £ 9,151,875 (784,803) – 8,367,072 (538,544) 600,747 (407,007) (344,804) (109,484) – (1,918,382) (2,027,866) 8,503,847 (184,056) (2,325,389) 5,994,402 1 February 2022 £ Cash flow £ Non-cash movement £ 31 January 2023 £ 10,482,676 (1,330,801) – 9,151,875 (538,544) 538,544 (538,544) (538,544) (571,730) – 462,246 (109,484) 9,372,402 (792,257) (76,298) 8,503,847 63 32095-Keystone-Law-AR2024.indd 63 32095-Keystone-Law-AR2024.indd 63 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:08 17/04/2024 09:50:08 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024OUR FINANCIALS NOTES TO THE FINANCIAL STATEMENTS CONTINUED 25. DIVIDENDS During the year, the Company paid both a special dividend of 12.5p per share (£3,934,549) and an interim ordinary dividend of 5.8p per share (2023: 5.2p). The Directors will propose a resolution at the coming AGM to pay a final ordinary dividend of 12.5p per share, being £3,935,164 (2023: 10.9p, being £3,418,910). This will bring the total value of ordinary dividend paid and declared for the year to 18.3p, being £5,761,080 (2023: 16.1p, being £5,049,949). The total cash value of dividends paid in the year was £9,179,991 (2023: £8,261,115). 26. RELATED-PARTY DISCLOSURES During the period, the Group received income in respect of a management charge from Keypoint Law Pty Limited, an Australian law firm in which the Group holds a minority shareholding. The amount received was £100,343 (2023: £137,238) and £Nil (2023: £37,689) was outstanding at the year end. In note 17, the Company shows amounts owed by related parties of £9,204,894 (2023: £8,637,484). This relates to amounts owed by the subsidiary Keystone Law Limited, as Keystone Law Group plc does not have a bank account and, as such, Keystone Law Limited acts as the treasury function for the Group. The balances are unsecured, interest free and repayable on demand. 27. FINANCIAL INSTRUMENTS In common with other businesses, the Group is exposed to risks that arise from its use of financial instruments. This note describes the Group’s objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout these financial statements. The significant accounting policies regarding financial instruments are disclosed in note 2. There have been no substantive changes in the Group’s exposure to financial instrument risks, its objectives, policies and processes for managing those risks or the methods used to measure them from previous years unless otherwise stated in this note. The principal financial instruments used by the Group, from which financial instrument risk arises, are as follows: FINANCIAL ASSETS INVESTMENTS Investments held at FVTPL Company Group 2024 £ – 2023 £ – 2024 £ 129,350 2023 £ 13,628 64 32095-Keystone-Law-AR2024.indd 64 32095-Keystone-Law-AR2024.indd 64 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:08 17/04/2024 09:50:08 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 27. FINANCIAL INSTRUMENTS CONTINUED FINANCIAL ASSETS AT AMORTISED COST Cash and cash equivalents Trade and other receivables Company 2024 £ – 2023 £ Group 2024 £ 2023 £ – 8,367,072 9,151,875 9,204,894 8,637,669 23,351,073 20,334,169 9,204,894 8,637,669 31,718,145 29,486,044 The fair values of the financial assets are not materially different to their carrying values due to the short-term nature of the current assets. Impairment losses on trade receivables disclosed in note 17 represent the only impairment gains or losses on financial instruments during the year. FINANCIAL LIABILITIES Trade payables Accrued expenses Lease Liabilities At 31 January 2024 Trade payables Accrued expenses Lease Liabilities At 31 January 2023 0 to 6 months £ 181,900 7 to 12 months £ – 1,944,230 588,104 1 to 5 years £ Pay when paid £ Total £ – – 8,802,549 8,984,449 7,861,465 10,393,799 47,380 297,424 2,379,392 – 2,724,196 2,173,510 885,528 2,379,392 16,664,014 22,102,444 0 to 6 months £ 89,574 1,384,052 269,272 7 to 12 months £ 615,709 643,086 269,272 1 to 5 years £ Pay when paid £ Total £ – – 7,761,030 8,466,313 7,435,836 9,462,974 109,484 – 648,028 1,742,898 1,528,067 109,484 15,196,866 18,577,315 Financial liabilities are held at amortised cost. There is no significant difference between the fair value and carrying value of financial instruments. Amounts shown as pay when paid in the tables above, principally, reflect amounts payable in respect of lawyers’ fees, as well as amounts payable to third-party counsel and experts whose fees have been incurred on behalf of the Group’s clients as disbursements. Lease liabilities are shown at their undiscounted value. The Company had accrued expenses of £43,660 (2023: £49,599) all of which would fall within the 0 to 6 months category above. 32095-Keystone-Law-AR2024.indd 65 32095-Keystone-Law-AR2024.indd 65 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:08 17/04/2024 09:50:08 65 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024OUR FINANCIALS NOTES TO THE FINANCIAL STATEMENTS CONTINUED 28. FINANCIAL RISK MANAGEMENT AND IMPAIRMENT OF FINANCIAL ASSETS GENERAL OBJECTIVES, POLICIES AND PROCESSES The Board has overall responsibility for the determination of the Group’s risk management objectives and policies and, whilst retaining ultimate responsibility for them, it has delegated the authority for designing and operating processes that ensure the effective implementation of the objectives and policies to the Group’s finance function. The Board receives regular reports from the Finance Director through which it reviews the effectiveness of processes put in place and the appropriateness of the objectives and policies it sets. The overall objective of the Board is to set policies that seek to reduce risk as far as possible without unduly affecting the Group’s competitiveness and flexibility. Further details regarding these policies are set out below: CREDIT RISK AND IMPAIRMENT Credit risk arises, principally, from the Group’s trade and other receivables. It is the risk that the counterparty fails to discharge its obligation in respect of the instrument. The maximum exposure to credit risk equals the carrying value of these items in the financial statements. As the lawyers are only paid for the work once the client has paid the invoice, the credit exposure is minimised to the gross profit margin element of any given invoice. Credit risk with cash and cash equivalents is reduced by placing funds with banks with high credit ratings. LIQUIDITY RISK The Group’s policy is to ensure that it will always have sufficient cash to allow it to meet its liabilities when they become due. Any liquidity risk is substantially reduced as the Group’s principal liability, that of the lawyers’ fees, is only payable once the clients have paid the invoices to which these fees relate. The Board receives cash flow projections on a regular basis, which are monitored regularly. The Board will not commit to material expenditure in respect of its ongoing development programme prior to being satisfied that sufficient funding is available to the Group to finance the planned programmes. INTEREST RATE RISK AND FAIR VALUE RISK There is no significant interest rate risk in respect of temporary surplus funds invested in deposits and other interest-bearing accounts with financial institutions, as the operations of the Group are not dependent on the finance income received. CAPITAL RISK MANAGEMENT The Group considers its capital to comprise its ordinary share capital and retained profits as its equity capital. In managing its capital, the Group’s primary objective is to provide return for its equity shareholders through capital growth and future dividend income. The Group’s policy is to seek to maintain a gearing ratio that balances risks and returns at an acceptable level and to maintain a sufficient funding base to enable the Group to meet its working capital and strategic investment needs. In making decisions to adjust its capital structure to achieve these aims, either through new share issues or the issue of debt, the Group considers not only its short-term position, but also its long-term operational and strategic objectives. Details of the Group’s capital are disclosed in the Statement of Changes in Equity. There have been no other significant changes to the Group’s management objectives, policies and procedures in the year, nor has there been any change in what the Group considers to be capital. CURRENCY RISK The Group is not exposed to any significant currency risk. 66 32095-Keystone-Law-AR2024.indd 66 32095-Keystone-Law-AR2024.indd 66 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:08 17/04/2024 09:50:08 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 29. RESERVES SHARE PREMIUM The balance of the share premium account represents the value received for shares issued above their nominal value net of transaction costs. SHARE-BASED PAYMENTS RESERVE The balance of the share-based payments reserve represents the cumulative expense charged to the statement of comprehensive income in respect of share-based payments. RETAINED EARNINGS The balance of the retained earnings reserve represents the cumulative profits of the business net of distributions made to shareholders. 32095-Keystone-Law-AR2024.indd 67 32095-Keystone-Law-AR2024.indd 67 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:08 17/04/2024 09:50:08 67 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024OUR FINANCIALS SHAREHOLDER NOTES 68 32095-Keystone-Law-AR2024.indd 68 32095-Keystone-Law-AR2024.indd 68 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:08 17/04/2024 09:50:08 Keystone Law Group plc Annual Report and Accounts for the year ended 31 January 2024 The production of this report supports the work of the Woodland Trust, the UK’s leading woodland conservation charity. Each tree planted will grow into a vital carbon store, helping to reduce environmental impact as well as creating natural havens for wildlife and people. 32095-Keystone-Law-AR2024.indd 3 32095-Keystone-Law-AR2024.indd 3 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:50:08 17/04/2024 09:50:08 Keystone Law 48 Chancery Lane London WC2A 1JF www.keystonelaw.co.uk 32095-Keystone-Law-AR2024.indd 3 32095-Keystone-Law-AR2024.indd 3 32095-Keystone-Law-AR2024 17 April 2024 9:49 am V2 17/04/2024 09:49:41 17/04/2024 09:49:41