i
K
n
g
h
t
s
p
c
A
n
n
u
a
l
l
R
e
p
o
r
t
a
n
d
A
c
c
o
u
n
t
s
2
0
2
0
Registered Office
The Brampton
Newcastle-Under-Lyme
Staffordshire
ST5 0QW
Tel: 0844 371 2562
Annual Report and Accounts
30 April 2020
A diversified platform
for profitable, cash
generative growth
Knights plc
Financial Highlights
Empowering a thriving future.
For our clients, our people and
our communities.
We empower our people
to deliver outstanding advice
that enables our clients to
achieve their goals, allowing
us all to thrive.
We do this by delivering legal and professional
services in a new way - our unique culture,
‘one team’ approach and commercial mindset
enables us to put our clients at the heart
of everything we do.
We believe we provide our clients with the best
service in the sector, combining the flexibility
to service their needs at scale, drawing from
our extensive high-quality legal expertise
and deep sector specialisms, and the value
associated with operating outside London.
We invest in the very best talent and enable
the team, through our structure, modernised
approach and supporting technology, to focus
on understanding our clients’ drivers and
building strong, longstanding and growing
relationships with our clients.
This approach is at the heart of our vision
to build the leading, full service legal and
professional services business outside London.
Delivered ahead of IPO aspirations
In line with the Group’s strategy to accelerate organic growth with carefully targeted
acquisitions which enhance or expand the Group’s core offering outside London
and are considered a strong cultural fit, Knights has grown substantially, surpassing
all of the aspirations set out at the time of its IPO in 2018:
Fee earners
Fee earner to
support staff ratio
Geographical
footprint
Acquisitions
At IPO
350
4.5:1
Aspirations at IPO
for FY 2020
750
Increase leverage
of overheads
Achieved in FY 2020
934
4.8:1
6 offices
9+ offices
13 offices
3
(includes TP)
3+ acquisitions
10 acquisitions
since IPO
Contents
Strategic Report
01 Highlights
02 At a Glance
Investment Case
04
06 Market Opportunity
08 Chairman’s Statement
10 Chief Executive’s Review
14 Business Model
16 Our Strategy
18 Strategic Progress
20 Strategy in Action
28 Corporate Sustainability
39 Engaging with Stakeholders
40 Non-Financial Report
42 Financial Review
50 Principal Risks and Uncertainties
Corporate Governance
56 Board of Directors
58 Chairman’s Introduction
60 Corporate Governance Statement
62 Remuneration Committee Report
64 Audit Committee Report
66 Directors’ Report
68 Statement of Directors’ Responsibilities
Financial Statements
Independent Auditor’s Report
Consolidated Statement
of Comprehensive Income
72
76
77 Consolidated Statement of Financial Position
78 Consolidated Statement of Changes in Equity
79 Consolidated Statement of Cash Flows
80
Notes to the Consolidated
Financial Statements
116 Company Statement of Financial Position
117 Company Statement of Changes in Equity
118 Notes to the Company Financial Statements
122 Glossary of Terms
125 Shareholder Information
Our innovative approach has driven significant year on
year growth, through a mix of double digit organic growth,
and selective acquisitions, including six this year.
Revenue
Organic revenue growth rate %
£74.3m
+41% (2019: £53m)
+10%
2019: 15%
Underlying PBT 1
Reported PBT 1
£13.6m £4.1m
-16.3% (2019: £4.8m1)
+45% (2019: £9.4m1)
Cash conversion 1
Net debt
80%
2019: 131%
£15.9m
2019: £14.1m
Underlying EPS2
Reported EPS
14.33p
2019: 11.31p1
2.44p
2019: 5.27p1
Note
1
2
2019 figures have been updated to reflect the impact of IFRS 16. A full reconciliation is included in the Financial Review
on page 42. All movements from 2019 to 2020 have been calculated based on the 2019 IFRS 16 adjusted comparative.
The Group reports certain Alternative performance measures (APMs) as management believe these measures provide
valuable additional information for the understanding of the underlying trading performance of the business. In particular,
adjusted profit measures are used to provide the users of the accounts a clear understanding of the underlying profitability
of the business over time. Full definitions and explanations of these measures and reconciliations to the most directly
referenceable IFRS line item, are provided in pages 122-124.
1
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc
At a Glance
Who we are
Knights has grown to be
a leading legal and professional
services business outside
London, with 934 fee earners
operating from 13 offices across
the UK.
Our team’s deep expertise, sector insight
and understanding of our clients underpins
our reputation as a trusted adviser.
Our high-quality advice enables our clients
to make informed decisions to make the
most of their opportunities and navigate
their challenges.
Our unique culture and early adoption
of a corporate structure which underpins
our ‘one team’ approach are key drivers
of our competitive advantage. It ensures
our professionals are always working in
the best interests of our clients and the
success of the Group as a whole, rather
than focusing on an individual’s or an
individual team’s performance.
Our modern way of working ensures we always
deliver on our clients’ requirements in the most
efficient way possible, delivering value to them
without carrying unnecessary cost.
This allows our lawyers to thrive on quality
work with quality clients, while professional
managers focus on running the business.
Service Line
Service
Real Estate
All contentious and non-contentious
matters across the real estate
lifecycle from town planning
to asset management.
- Asset management
- Business parks
- Construction
- Development
- Mines & minerals
- Plot sales
- Property litigation
- Retail
- Town planning
Dispute
Resolution
Resolving disputes across the
full spectrum of services.
- Arbitration
- Litigation
- Mediation
Corporate
Advising on all operational
activities across a variety
of matters and sectors.
- Banking
- Commercial
- Data protection
- Debt recovery
- Intellectual property
- Mergers,
acquisitions
and disposals
- Restructuring
and insolvency
- Tax and regulatory
Employment
Providing strategic HR advice
on a range of contentious and
non-contentious issues across
a variety of sectors.
- Litigation/Tribunals
- Management
- Strategic projects
- Strategic
training
audits/reports
- Reorganisation
- TUPE
Private Client
Advising on a full range of needs
for high net worth individuals and
their families.
- Complex
family matters
- Conveyancing
- Landed estates
- Tax and trusts
- Wills over
large estates
What we do
Knights provides a full service offering to corporate clients as
well as synergistic services to high net worth individuals, who are
typically clients of the Group’s corporate and commercial services.
Our extensive expertise has been strengthened further through the
recruitment of high-calibre talent and acquisitions during the year.
Who we work with
We build longstanding
relationships with a range
of clients from multinational
corporations to national
corporates and small and
medium enterprises.
We have the scale to flexibly deliver
high-calibre expertise across a range of
services whilst retaining our trusted partner
approach, which ensures we really understand
our clients’ priorities and drivers.
By operating outside London we deliver value
to our clients as we support them in achieving
their goals.
We are proud to work with a highly diversified
client base of over 18,000 businesses and
private clients, with no one client accounting
for more than 3.5% of revenue.
Sector
specialisms
A full suite of services strengthened by sector specialisms
and non-legal services
Agriculture and the food supply chain
Consumer-facing
Energy, waste and natural resources
Financial and professional services
Healthcare
Industrials, transport and support services
Property management and development
Technology, media and telecommunications
%
of total revenues
Real Estate
34.6%
Dispute Resolution
27.5%
Corporate
17.2%
Employment
6.3%
Private Client
14.4%
Where we operate
We are focused on key,
attractive markets in the
UK outside London, currently
operating from 13 offices where
we can be close to our client base
and build strong local market
knowledge and networks.
- Birmingham
- Cheltenham
- Chester
- Crawley
- Leeds
- Leicester
- Maidstone
- Manchester
- Nottingham
- Oxford
- Stoke
- Wilmslow
- York
2
3
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc Investment Case
A strong track record in a highly
attractive market.
City quality
from a competitive
cost base
Underlying profit before tax
£13.6m
Read more on pages 42-49
We generally avoid developing a presence
in markets dominated by institutional firms.
We will however enter these markets where
there is an opportunity to acquire an existing
business that meets our criteria to deliver
accretive value sustainably.
Lower competition in our markets means
there is less upward pressure on salaries,
allowing us to offer greater value for money
for our clients.
Lawyers with
a commercial
mindset
Working capital lockup days*
85
Read more on pages 42-49
A scalable
model
Fee earner:
Non-fee earner ratio
4.8:1
Read more on pages 42-49
Industry leading working capital days
facilitated by Knights’ culture and training of
professionals on client management, supported
by technology and actionable analytics.
Fee earners concentrate on client service,
while professional managers run the
business. Lawyers focus on earning fees
with no distractions of running the business,
which is operated by an experienced senior
leadership team who can act with agility.
A fragmented market worth £2.6bn outside
London provides a clear market opportunity
to grow organically, complemented by carefully
targeted acquisitions.
Proven and compelling platform for legal
professionals, with lawyers attracted by lack
of ownership risk associated with partnership
structures, sustainability of commercial
success and development opportunities.
Culture and market positioning
drives organic recruitment and low churn.
Operating outside of major city centres
contributes to reduced property costs, and
provides a more sustainable work-life balance
for our colleagues.
Fee earner to non-fee earner ratio well
above market average, aided by the use
of technology.
Profitable
growth
Deep client relationships and limited
sector and fee earner concentration brings
diversity and resilience to our revenue base.
Highly cash
generative
Track record of unlocking value from
acquisitions, with systems, processes
and culture fully integrated by our expert
team in under 2 months.
Investment in operational backbone
in 2019 provides bandwidth for future
growth, with fixed costs diluted as we grow.
This year we have scaled the business
in two existing locations and entered
five new locations.
Robust
platform
for growth
Experienced
operator
delivering first
class returns
Note
* Excluding acquisitions
4
5
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc
Market Opportunity
The UK legal services market
is large and growing yet highly
fragmented despite the increasing
pressures on smaller firms.
A large and growing market outside London
Estimated worth of overall
UK legal services market
£33.4bn
2017/2018
Revenue of our addressable
market outside London
£2.6bn
per year
Growth rate of our addressable
market outside London
3–5%
per year
£90m
£440m
£440m
£90m
£160m
£250m
£200m
£300m
£440m
£250m
A fragmented and traditional market
The legal services market in the UK
is largely polarised between the major
law firms who operate from London and
internationally, and are typically focused
on the largest UK and international clients
and deals, high street law firms focused
on consumers, and small to medium sized
B2B focused independent law firms, who
are often subscale and operate out of a
single office regionally, serving businesses
typically headquartered outside London.
This latter market is our focus.
Strong market drivers
There are a number of structural market
drivers in the UK professional and legal
services market, driven by evolving client,
regulatory and employee requirements.
In our addressable market, there are c.160
firms operating outside London typically
having annual revenues of £2m-£60m.
The majority operate under the traditional
partnership model, rather than operating
as corporate businesses with a clear division
between management and fee earners.
Ambitious and forward-looking fee earners are
attracted by the opportunity to do high-quality
work for exciting clients within a flexible,
inclusive, and friendly culture that will enable
them to fulfil their career choices, without the
need to take on the financial risk associated
with partnership. Fee earners typically build
trusted and long-lasting relationships with their
clients, so that clients often follow them when
they move firms.
Clients are seeking a trusted adviser whose
in-depth understanding of their business
and their drivers better enables them to
achieve their goals. They are becoming more
demanding, as they look for value without
compromising on quality of service and
a firm that can deliver all of their needs
at scale, including niche expertise.
The cost of operating is rising due to the
investment and expertise required to meet
ever-increasing security, compliance and
regulatory standards. For instance, increasing
requirements for due diligence to ‘know your
client’ so as not to become a conduit for
crime, terrorism or money-laundering. Scale
is therefore an increasing advantage to support
these costs.
The market opportunity
These market drivers, together with a
clear desire across the sector for a more
rewarding working environment, mean that
there is a substantial opportunity for Knights
to continue to grow its market share from
its current level of 3%.
With the benefit of scale and low overheads,
Knights is an attractive choice for clients
seeking both city quality work and value,
and our unique culture provides excellent
opportunities for talented lawyers to fulfil
their career choices, underpinning our strong
momentum in recruitment. We have worked
with over 25 clients who sit within the FTSE
100 or have similar market capitalisation.
COVID-19 is only exacerbating the structural
market drivers and is likely to accelerate
consolidation in the industry, as firms and
individuals increasingly look for change.
Knights is well placed to take advantage of this
trend with its strong balance sheet, scalable
operating platform and reputation for quality
work, larger clients, and an attractive culture.
* Source:
Bureau van Dijk, Mintel UK Legal Services Report 2019, The Lawyer UK Top 200 and Top 100 2019.
6
7
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc Chairman’s Statement
Knights has delivered another
strong performance as it grew
organically and by acquisition,
in line with our strategy to
build the leading legal and
professional services business
outside London.
Revenue*
£74.3m
Financial year 2019 £52.7m
Underlying profit before tax*
+45%
Organic revenue growth
10%
Note
* See Glossary on pages 122-124.
8
Revenue increased by
41% to £74.3m (2019: £52.7m).
This reflected 10% or £5.2m
of organic growth, aided by
the recruitment of 108 new,
high-calibre fee earners. It also
includes a £10.5m contribution
from the six carefully selected
acquisitions made during
the year, which substantially
broadened our geographical
reach and depth of expertise,
as well as £5.9m relating
to the full year effect of prior
year acquisitions.
The Group’s ongoing focus on profitable
growth enabled us to improve underlying PBT1
margin to 18.3% (2019: 17.9%), resulting in
a 45% increase in underlying profit before tax2
to £13.6m (2019: £9.4m) and a 27% increase
in underlying EPS3 to 14.33p (2019: 11.31p).
Importantly, this strong performance was
achieved whilst substantial investment was
also made in the operational backbone of the
business, in the first half in particular, with
a focus on growing operational leadership,
technology and office upgrades, as well as
increased automation. This investment is
already being leveraged, making possible the
significant organic and acquisitive expansion
during the year.
This investment, combined with our culture
and strong business model, is enabling us
to continue to deliver industry-leading working
capital management, fee earner productivity
and colleague retention, which underpin
the building of a sustainable business for
the future.
A distinct business model and culture
Having been the first business of our type to
corporatise in 2012, Knights is a modernised
and well-invested legal services business that
operates as one team on a common process,
data and technology platform. This enables
the team to work together collaboratively and
with the agility to efficiently match the right
specialist expertise to clients’ needs. Since
we were already operating in a paperless way,
it also meant that the team has been able to
transition seamlessly to working from home,
with our ability to transact unaffected.
Unlike many legal service providers that focus
on the performance of individuals, Knights
fosters a highly collegiate culture where we
always work in the best interests of our clients
and the success of the Group as a whole.
Central to this, is that there are no fee earner
targets. We take a proactive approach to serve
clients as one team, so clients receive the best
quality service and value, whilst allowing all
of our team to develop and thrive. This unique
culture combined with the quality of clients
and work, means we are able to attract and
retain the highest calibre of legal talent.
A strengthened and diversified platform
Following ongoing recruitment and
the acquisitions made since our IPO, we
now have over 930 fee earners operating
from 13 locations outside London (up from
350 and 6 respectively at IPO). We now
serve over 18,000 clients, including over
25 FTSE100 companies (or equivalent
by market capitalisation).
The expansion of our geographic reach and
client base, with an average matter size of
c.£3,000, together with integrating acquisitions
into existing locations, has reinforced Knights’
resilience, leaving us relatively well placed in
the face of current uncertainty. It has also left
us even better balanced for the different stages
of the economic cycle, having strengthened
the depth and breadth of our expertise
across our core areas of Real Estate, Dispute
Resolution, Corporate, Employment and
Private Client.
In this context, our investments during
the year are strengthening our competitive
advantage in a highly fragmented market
through our greater capacity to deliver
a broader range of high-quality and good
value services closer to our clients, as their
trusted partner.
Environmental, social and
governance matters
The Board recognises the importance of our
role in environmental, social and governance
matters (“ESG”). To reinforce the importance
our business places on ESG, we have
appointed one of Knights’ Non-Executive
Directors, Jane Pateman, as the Board
member responsible for driving our initiatives
in this area across the Group. An overview
of the Board’s approach to ESG is provided
on pages 28-38.
Current trading and COVID-19 update
The health and wellbeing of Knights’ people
has always been the Group’s priority and all
of our employees have been working from
home since 13 March 2020, ahead of the UK
government lockdown due to COVID-19.
Our focus on flexible working and business
continuity, supported by our previous
investments in secure, robust technology
have enabled our team to work effectively
from home and continue to deliver outstanding
client service.
As announced on 26 March, we moved
quickly to put in place a number of prudent
cost saving measures in relation to the
uncertainty created by COVID-19 that do not
compromise the prospects of the business in
the medium to long-term. This ability to act
swiftly demonstrated the benefit of a corporate
structure in which the senior leadership was
able to act with agility whilst supporting its
lawyers to remain focused on delivering
value to clients. These measures included
stopping or deferring all non-essential capital
expenditure, eliminating discretionary spend,
reducing Board salaries by 30% and the
salaries of all staff earning over £30,000 by
10%, and making staffing reductions to reflect
a more prudent approach to resourcing.
These early actions have positioned the Group
well for the current market environment, albeit
it remains difficult to predict the impact on the
activity levels of our clients. As a result, the
Board believes it would not be appropriate
to provide forward-looking financial guidance
to investors and analysts at this time. However,
whilst the market remains uncertain, we are
encouraged that early signs of a recovery in
instructions indicate an initial improvement in
market conditions compared with the disruption
experienced at the beginning of April.
We remain confident in the Group’s resilient
business model, with our full service offering
and geographic reach supporting a highly
diversified revenue and client base, industry
leading working capital management, and
advantageous market positioning. These
strengths, together with a strong management
team, will see Knights emerge from the
near-term uncertainties in a strong position
in its market.
Balance sheet and liquidity
The Group has a strong balance sheet with
a conservative gearing level, good liquidity,
and is highly cash generative. Having
conducted robust stress testing, we are
confident that it is in a strong position to trade
through this uncertain period and beyond.
Dividend
The Board has decided it is not appropriate
to recommend paying a dividend given the
recent cost saving measures put in place
in relation to COVID-19.
Summary and medium-term outlook
Our resilient business model, combined
with a strong financial position and being both
well invested and cash generative, provides
us with a robust platform from which to build
upon Knights’ unique proposition in the highly
fragmented and often under-invested market
for legal services outside London.
The Board is, therefore, confident that our
talented team will continue to deliver on our
long-term strategy to become the leading legal
and professional services business outside
London, and that the near term challenges
for our industry due to COVID-19 will only
accentuate our market opportunity in the
medium-term.
Note
1 See Financial Review on pages 42-49
2 See Financial Review on pages 42-49
3 See Financial Review on pages 42-49
9
Balbinder (‘Bal’) Johal Non-Executive Chairman 21 July 2020Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc
Chief Executive’s Review
We delivered a year of strong,
profitable, cash generative growth
and demonstrated progress in line
with our strategy to complement
organic growth with carefully
targeted acquisitions.
David Beech
Chief Executive Officer
21 July 2020
Revenue increase
£74.3m
(2019: £52.7m)
Acquisitions
£10.5m
Contribution to revenue
Underlying PBT* margin
18.3%
(2019: 17.9%)
Note
* See Glossary on pages 122-124.
10
This was reflected in both
clear momentum in the
recruitment of high-calibre
talent, up 135% on the prior
year, which drove organic
revenue growth of 10%, and
strong contributions from six
acquisitions. The acquisitions
strengthened our presence in
the East Midlands and Greater
Manchester, and expanded our
footprint into Yorkshire, the
South East and Birmingham.
Our investments in operational management,
technology and infrastructure, enabled
this significant expansion to be executed
effectively, with the Group’s staff more than
tripling since IPO in June 2018 to over 1,100
(or doubling in the last 12 months), and offices
expanding from 6 to 13.
The c.400 increase in fee earners and the
expansion of our fee earner:support staff ratio
to 4.8:1 was significantly ahead of the FY20
aspirations we set out at the time of IPO in
June 2018. This has left the Group well placed
to take advantage of the £2.6bn addressable
market for legal services outside London
(source: Bureau van Dijk, Mintel UK Legal
Services Report 2019).
Throughout this expansion of the business,
we have worked hard to retain and develop
the Knights’ ‘one team’ culture which
ensures a collaborative approach to providing
high-quality services to our clients and
development opportunities for all of the
Group’s talent. In turn, our continued high
levels of client and colleague retention are a
key pillar of our sustained profitable growth.
During the year, our banks and shareholders
demonstrated their support for our strategy
through a £40m extended revolving credit
facility, agreed in February 2020, and a £20m
placing which was completed in March 2020
to primarily fund the Shulmans and ASB
acquisitions. These left us in a strong financial
position as we entered the more uncertain
environment created by COVID-19.
In February 2020, Knights also welcomed
a significant milestone as we became
a constituent of the FTSE AIM 50 which
recognises our rapid growth since IPO.
Driving organic growth
We continued to attract high calibre talent
during the year, with the strong momentum
in recruitment in the first half continuing into
the second half. Overall, 108 new fee earners
joined Knights organically during the year,
compared with 46 new fee earners in the
prior financial year. In addition, 18 senior fee
earners who have accepted positions and will
be joining us in the current financial year.
A significant proportion of these new
recruits join from Top 50 law firms looking
to further their careers at Knights, which
is testament to our reputation for interesting
work for a high-quality client base and the
development opportunities we offer the team.
Our business model and culture remains a clear
differentiator for many who wish to move away
from partnerships and/or work in a modern
professional services business. They are
primarily attracted by the highly collaborative
and agile work environment, as well as the
reduced financial risks that are associated
with a classic partnership model.
We have also continued to invest to increase
the scale of our operational backbone and
geographical reach through new and improved
premises. This investment provides an
enhanced working environment for existing
team members and also attracts further talent
to the business.
Following the appointment of Richard King
as Chief Operating Officer in January 2019,
we have built a robust operational management
and support team to enable our growth. During
the year we have recruited 15 operational staff;
6 directors (including an operations director,
a recruitment director and two client service
directors) and a compliance manager, which
has provided the capability to scale up the
business effectively.
Alongside building out the operational team,
significant investment was made in the
Group’s IT and communications infrastructure.
This investment has underpinned a system
that now offers firm-wide information across
one platform. The system has supported our
increased headcount and the swift integration
of acquired businesses. At Knights we
are constantly reviewing and adopting new
technology where it will improve efficiency or
provide insight to enhance our client service.
A great example of where the investment
in premises and platform have delivered for
the Group is in Manchester and in York.
During the first half of the year, the team in
Manchester relocated into new, larger offices
where the improved working environment and
more central location has enabled us to grow
by 79% to 86 fee earners, (including 16 who
joined as part of the acquisition of Croftons).
Our growth in Manchester has also added
momentum to our nearby Wilmslow office
which has grown by 33% to 80 fee earners
(since April 2018: 56), necessitating
additional space.
In the second half of the year, the Group was
able to leverage its existing operating platform
to enter York with a new office opening, and
a team of 15, including 5 partners. We have
also invested during the year in expanding our
capacity in Oxford, providing capacity for up
to 200 fee earners.
Recruited
108
Fee earners including 24 partners
Client satisfaction
+60
> 10 years average relationship
for top 10 clients
Acquisitions as a platform for
organic growth
We continued to build on our strong track
record in selecting and integrating high quality
acquisitions with a strong cultural fit that
either take the Group into new key markets
or strengthen Knights’ service offering
in existing locations.
We have an industry-leading integration
methodology that ensures we deliver value
throughout our programme of acquisitions.
The methodology ensures clear management
ownership of individual transactions and
puts in place an experienced support team
to migrate acquired businesses onto our IT,
payroll, billing and cash collection platforms.
Rebranding, onboarding clients and teams,
migrating to new platforms, enhancing office
environments, securing culture carriers,
training, and modernising acquired teams’
approach to both delivering and being paid for
their legal services, have all become very much
‘business as usual’ tasks for the Group.
As a result of our approach, the Group’s prior
year acquisitions have all performed well and
have provided platforms for further growth
in their respective regions during this year.
Strengthening our offering
in existing geographies
On 3 February 2020, we completed the
acquisition of Croftons Solicitors LLP
(‘Croftons’), bringing to the Group a specialist
housing, regeneration and commercial real
estate law firm in Manchester.
Established in the 1840s, Croftons has a
strong reputation for a broad spectrum of work
and is a trusted adviser to over 50 housing
associations, which is typically a very defensive
segment of the market with a high proportion
of recurring revenues.
11
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc Lastly, and most certainly not least, I would
like to pass on a sincere thanks to the Board,
to the leadership team and to all my colleagues
at Knights for their continual hard work,
support and fantastic contribution this year in
delivering a strong set of results and achieving
considerable further strategic progress.
David Beech
Chief Executive Officer
21 July 2020
Chief Executive’s Statement continued
Croftons’ 33 fee earners have integrated well
within Knights, bolstering the Group’s presence
in Manchester and Wilmslow and broadening
its real estate offering. Initial synergies were all
delivered as expected and Croftons continues
to perform well.
On 27 March 2020, Knights completed
the acquisition of Fraser Brown, bringing
to the Group one of Nottingham’s largest
independent law firms.
Established over 250 years ago, Fraser Brown
grew to offer a broad spectrum of commercial
and private client legal services to clients across
the East Midlands, significantly strengthening
the Group’s presence and breadth of offering
in the region.
Its 81 fee earners have integrated well with
the Group’s existing team in the East Midlands,
with initial synergy savings delivered in line
with expectations. We plan to build upon
our expanded East Midlands presence
by combining our current teams in Derby,
Lincoln and Nottingham into new offices in
Nottingham, providing critical mass in this
important market.
Birmingham acquisitions position us well
in the important West Midlands market
We entered Birmingham with the acquisition
of EGL on 1 November 2019, bringing to the
Group one of the only full service commercial
independent law firms in Birmingham and
further extending Knights’ strength in its
existing corporate, dispute resolution, real
estate and private client service offering.
The Group subsequently expanded its
offering further in Birmingham through
the acquisition of ERT Law Limited (ERT),
a specialist in commercial litigation, servicing
a number of blue-chip and listed companies,
on 17 January 2020.
ERT added 24 fee earners to the 28 acquired
as part of the EGL acquisition, providing us
with a significant and high quality platform from
which to grow in the important West Midlands
region, which is estimated to have a £250m
legal services market (source: Bureau van Dijk,
Mintel UK Legal Services Report 2019).
Both acquisitions were a strong cultural fit
which enabled them to integrate well and they
have performed in line with our expectations
following the realisation of synergies.
Establishing the Group in the attractive
South East market
On 17 April 2020, Knights completed the
acquisition of ASB Law LLP, including ASB
Aspire LLP (‘ASB’), bringing us an entry into
the South East with a leading full service
commercial law firm in the region.
ASB is a culturally aligned, commercial law firm
offering commercial, corporate finance, dispute
resolution and employment advice from offices
in Crawley and Maidstone, with 89 fee earners
and large corporate relationships.
12
Its ambitious and innovative team has
successfully challenged conventional ways
of working in the legal sector despite a limited
ability to invest for growth. However, they will
benefit from investment as part of a broader
Group and we expect that our investments
in technology and training will allow the full
potential of the business to be realised.
The acquisition of ASB provides a platform
for growth in the strategically attractive South
East market, which is estimated to be valued at
£250m excluding London (source: Bureau van
Dijk, Mintel UK Legal Services Report 2019).
ASB has integrated well, with initial synergies
realised as anticipated and we expect to
be able to continue to grow our presence
in this region given ASB’s well located base
for the recruitment of high-calibre talent,
including lawyers who no longer wish to
commute to London.
Knights also brings additional expertise,
scale and breadth of services to ASB’s large
corporate relationships (particularly regulatory,
tax and intellectual property), whilst we expect
to leverage the niche specialisms that ASB
brings, e.g. in the aviation sector, across our
wider geographical footprint.
Leeds entry provides a strong platform
in one of the largest regional markets
On 24 April 2020 we completed the
acquisition of Shulmans LLP, providing us with
an entry into the Leeds market with a leading
independent law firm (source: The Lawyer UK
Top 200 2019). Having been founded in 1981,
Shulmans brought to the Group one of the
longest established independent commercial
law firms in Leeds, with 90 commercial fee
earners operating from a single office. Its full
commercial legal services offering includes
corporate, litigation, employment and real
estate, which is well matched to Knights’
existing specialisms.
Shulmans provides Knights with a platform
for growth in one of the largest regional
markets for legal services in the UK; the
Yorkshire market is estimated at £440m
(source: Bureau van Dijk, Mintel UK Legal
Services Report 2019). It also brings
capacity for material organic growth through
recruitment, with capacity to expand to
up to 225 fee earners, and further bolt-on
acquisitions in the region, in time.
Shulmans also brings access to city
relationships for our York office, which we
recently established organically and we expect
the combination of the two offices in this region
to be able to replicate Knights’ successful
strategy for entering the North West market
by opening the Wilmslow office organically in
May 2017, followed by the acquisition of Turner
Parkinson in Manchester in June 2018 with 44
fee earners. The combination of the two offices
generated material organic growth opportunities
resulting in circa 166 fee earners across the
combined offices today, with the Manchester
acquisition adding momentum to recruitment
efforts in the nearby Wilmslow office.
We are working towards a similar outcome
for Leeds and York.
Shulmans is culturally aligned to Knights
but provides an opportunity to modernise
a business which has operated under a more
traditional model previously. It has now been
integrated, with the significant anticipated
initial synergies having been realised as we
continue to enhance its margins, through the
implementation of Knights’ operating model.
The acquisition provides a strong platform
in this key market for further organic growth
through enhanced recruitment, investment
in people and technology, client wins and
cross selling.
COVID-19 update and medium-term outlook
We are proud of the way in which our people
have responded to working from home, as
they continue to deliver outstanding service
to our clients, without any impact on our ability
to transact, and we are planning to continue to
work from home until September at the earliest.
We believe our early and prudent actions
to manage costs have positioned the Group
well to trade through the current environment.
With the benefit of recent acquisitions, we
have built upon our resilient business model
with a well-balanced, full service offering and
highly diversified revenues by client, sector
and geography. During lockdown, the benefits
of this model were evident, and the integration
of recent acquisitions has been ahead
of expectations.
Whilst the market remains uncertain, early
signs of a recovery in instructions across
the Group provides an initial indication that
market conditions have started to improve
compared with the disruption experienced
at the beginning of April.
In the near term, our focus is on further
embedding fee earners from recent
acquisitions and on recruiting senior fee
earners, who typically bring a client following.
We are seeing a high level of quality
recruitment opportunities with a strong
pipeline of candidates, many of whom come
from Top 50 firms, as they consider a move
away from traditional partnerships.
Beyond the near term, we anticipate that
COVID-19 will only accentuate the recruitment
and acquisition opportunities for our resilient,
well-invested, diversified and cash generative
business in the highly fragmented and often
under-invested market for legal services
outside London.
We are, therefore, confident that our model
and culture will enable us to emerge in a
stronger position from this current environment,
underpinning the Board’s confidence in the
Group’s medium to long-term success.
We are proud of the way in which our people have
responded to working from home, as they continue
to deliver outstanding service to our clients, with
no impact on our ability to transact.
We believe our early and prudent actions to manage
costs have positioned the Group well to trade through
the current environment.”
David Beech
Chief Executive Officer
13
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc Business Model
Fuelled by our passion for creating the leading legal and
professional services business outside London, our business model
enables us to deliver value by executing our four strategic pillars:
1 Grow
Organically
2 Strategic
Acquisitions
3 Scale the
Operation
4 Exploit Technology
and Data
Inputs
Key Strengths
Creating Value
Outputs
Clients
Seeking
business advice
that matters
Fee Earners
Seeking
opportunities to
grow in a supportive
environment
Law Firms
Seeking
a platform to get
to the next stage
Principles
14
Culture
Delivering value for clients
Clients
F
i
n
a
n
c
i
a
l
s
n
O peratio
We deliver results that matter to our clients as we are led
by their goals, and use our commercial mindset, market insight
and legal expertise, to deliver optimal business solutions.
We are trusted advisors, as a result of our understanding
of our clients, their experience of our advice, and because
of who we are as people.
We structure our resources to deliver the best solution,
underpinned by a high-quality efficient service, enabled
by our one team approach and low overheads.
+60 25
NPS
No. of FTSE 100
clients
Culture
Operations
Financial
Accelerating career ambitions
Employees
70%
Growth of clients
using more than
one service
108
New fee earners
An empowering culture
Corporate structure
Cash and capital
- Unleashing fee earners’
talent through our
collaborative and friendly,
target free environment
- ‘One team’ culture, where
resources flow quickly
to create the right team
for the client
- Entrepreneurial, can-do
mindset, where fee earners
can be themselves.
- Separate and strong
leadership team,
with broad experience
beyond the legal sector
- Enabling fee earners to
focus entirely on what they
do best, servicing clients
- Commercial and
entrepreneurial approach
is embedded in our culture.
Efficient and
Trusted advisors to clients
scalable platform
- Commercial, business
outcome mindset,
underpinned with expertise
and local knowledge
- Single technology platform
delivers efficiency, speed
of service, and makes
collaboration easy
- Big enough to deliver,
small enough to care
- Long-term partnering with
clients that want the best
and respect those that
deliver it.
- Flowing work to the
right expert or level of
experience, to optimise
value for clients
- Rapidly assembling teams
to deliver on short lead
time or high volume needs
of clients.
- Highly cash generative
model, supports
investment in people,
technology and
infrastructure
- Strong balance sheet,
aided by industry-
leading working capital
management
- Support of the
UK’s strongest quality
growth funds.
Acquisition track record
- Identifying the right
businesses, driven
by a strong cultural
and strategic fit
- Integration is
‘business as usual’,
led by an experienced
and dedicated team
- Rapidly unlocking
existing and creating
new value sustainably.
We provide an environment that attracts energetic,
commercially minded innovative professionals.
Our fast growing business, one team approach and drive
to change the delivery of professional services, provides
outstanding opportunities to flourish.
Fee earners focus on what they do best and love, servicing
clients, without the time and emotional drains of targets,
politics and management meetings.
95% +36
Retention
ENPS
Unlocking value from acquisitions
Shareholder
We carefully select strategic acquisitions that have a strong
cultural fit, with people who share our belief there is a better
way to deliver professional services.
We quickly release value from cost synergies by implementing
the Knights operating model.
We accelerate growth by bringing scale and new expertise
to acquired teams to be better able to serve their existing
clients, win new ones, and expand their reach to serve
existing Knights clients.
14.33p 39% 27%
3 year profit CAGR
TSR
Adjusted earnings
per share
Communities
4
working hours a
month per employee
available to the
community
1.6m 9%
printed pages
saved per year
Energy reduction
through use of
LED lighting
One team
Quality
Commercial
Pioneer
Agile
Ambitious
15
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc
Our Strategy
To build the leading legal and professional
services business outside London.
We have made considerable progress in line with this strategy by accelerating
organic growth with carefully targeted acquisitions which enhance or expand
the Group’s core offering and are considered a strong cultural fit.
Strategic pillars
What we did this year
What are our priorities
10%Organic growth
108Net new fee-earners
39%Joined from Top 50 law firms
17Fee earners entered York with
capacity to grow to 50
4Market expansions
2Scale-up existing markets
425New fee earners via acquisition
100%On track to deliver target cost synergies
4.8:1
Fee earner ratio
1Dedicated integration team created
3Group operation hubs established 6New Directors
8%of admin work automated
3Acquisitions’ IT integrated in parallel
70%Growth of clients using
more than one service
0%COVID-19 impact on ability
to transact
Grow
Organically
Read more on pages 20-21
Strategic
Acquisitions
Read more on pages 22-23
Scale the
Operation
Read more on pages 24-25
Exploit Technology
and Data
Read more on pages 26-27
16
Serving existing and new high-quality clients with more than one service
Develop and promote existing talent and continue to hire high-quality fee earners
Expanding to select new geographies.
Remain a leading consolidator in the mid-tier UK legal services sector through selective,
high-quality acquisitions
Target firms to accelerate growth in existing markets, or those with attractive positions
in new geographies and niche specialisms
Continue to realise targeted cost and revenue benefits, then accelerated growth under
Knights ownership.
Continue to create economic scale through the Knights platform
Continue to invest to create sufficient capacity ahead of growth
Accelerate how quickly new fee earners master the Knights business model.
Expand the capacity and increase the economic scale of our operations backbone
Grow the business through actionable business intelligence
Enhancing service to clients through real time delivery and one team collaborative working.
17
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc Strategic Progress
Driving synergistic growth
A presence in the largest
city in the region provides
Knights’ local offices with
access to city relationships
and boosts recruitment.
Knights successfully entered the legal
market in the North West in 2017/2018 through
a combination of both organic growth and
an acquisition.
The Wilmslow office was opened organically
in May 2017 and grew to 56 fee earners
before the acquisition of Turner Parkinson
in Manchester in June 2018, adding a further
44 fee earners. The combination of the two
offices added momentum to recruitment
efforts in both offices, with new hires, including
many from Top 50 law firms, attracted to the
combination of working close to home with
the optionality of a city centre presence.
The recent acquisition of Croftons in
February 2020 has also boosted our Real
Estate services in the region with a new
specialism in housing associations and
regeneration and is already providing further
opportunities for our wider North West team,
where Croftons would previously have had to
outsource certain work. The benefit of our dual
locations in the region was also seen when we
integrated Croftons, with some of the team
having moved into Manchester whilst some
joined the Wilmslow offices, where they didn’t
need to be in central Manchester.
The resulting organic growth opportunities in
the North West have led to a strong recruitment
drive which has seen us grow to 166 fee
earners across the combined offices today.
Having not placed in the top rankings for the
region in previous years, our ranking as the top
legal service provider for corporate M&A in the
North West in 2019 is testament to Knights’
growth in the region in recent years.
This approach to entering
a new market is currently
being replicated in Yorkshire.
Following the organic opening
of our York office in February
2020, we announced the
acquisition of a leading
independent firm Shulmans
(Source: The Lawyer UK Top
200, 2019), based in Leeds.
Strengthening our core services
A growing team of 382 professionals, with new practices established in the Midlands, Yorkshire and
the South East, as well as increasing breadth and depth of our offering in the North West
Real
Estate
Built critical mass in our conveyancing and development teams and added to our expertise in remortgaging
and housing and regeneration
Newly instructed by Barrett Homes to advise on planning and broadened our relationship with longstanding
client Dunelm.
Expanded from 126 to 247 fee earners, with a team of new recruits joining us from a Top 50 law firm in Manchester
and a strong presence established in Birmingham following the acquisition of litigation specialists ERT
Dispute
Resolution
Delivered property litigation services to a number of notable FTSE 100 retail clients
Added relationship with Mitchells and Butler and Biffa plc to our already impressive client base which includes
two international energy providers, FTSE 100 and Euro 200 companies, shareholders of SMEs, partners and
directors of professional firms.
Corporate
Our 109 strong team now includes a sizeable presence in Birmingham and Leeds, following the acquisitions
of EGL and Shulmans
Advised on a number of high-profile restructuring, insolvency and refinancing matters across the UK,
as well as being recognised as the North West’s Leading Adviser for deals in Experian’s M&A review
Notable deals include acting for BGF to advise on a reinvestment of £13m to international web hosting
business Miss Group.
Expanded from 31 to 47 fee earners, with a team of new recruits joining us from a Top 50 law firm in Manchester
Employment
Advising on a number of strategic HR projects following the COVID-19 pandemic
Added relationships with Moneysupermarket.com and Hertz Europe to our already impressive client base.
A specialist team continue to deliver high-quality services to high net worth individuals and their families
Private
Client
Advise landed estates clients throughout the UK
A 149 strong team of fee earners (2019: 81).
Sector specialisms
Agriculture and the
food supply chain
Consumer-facing
Energy, waste and
natural resources
Financial and
professional services
Healthcare
Industrials, transport
and support services
Property management
and development
Technology, media and
telecommunications
Manchester
2018
Wilmslow
2017
18
York
2020
Leeds
2020
Knights is very important to us as
a partner, representing great value,
but also trust and integrity.
When we need to get things done very quickly, Knights will
do everything they can to get our projects over the line and, when
we deal with complex issues, they will put the right expertise our
way to deal with those situations. We hope our longstanding
relationship continues a long way into the future.”
Ed Gretton
Head of Legal at Hanson
Knights is an integral part of our
business - for all intents and purposes,
almost our in-house lawyers.
Over the more than ten years we’ve worked with them, they
have been involved in every single acquisition. Knights’ team
is very approachable and they have depth to their teams across
commercial property and litigation, where they are able to bring
in additional expertise quickly and in a cost-effective manner.
I would describe Knights as commercial, efficient, professional.”
Martin Pryce
Fprop plc
19
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc Strategy in Action
Grow
Organically
We have continued to deliver
double-digit organic growth
in a growing market.
The key ways in which we delivered on our organic strategy
this year were by:
Attracting new talent
39% of the 108 net new recruits this year
joined Knights from Top 50 law firms, which
is testament to our reputation for interesting
work and a high-quality client base as well
as the development opportunities and culture
on offer. Many of these new colleagues have
been attracted by a move from partnerships
to a highly collaborative work environment
in which they can focus on delivering quality
work to their clients unburdened by the
financial risks associated with partnership.
Our career-supporting culture is not only
ensuring we have an exciting recruitment
pipeline but, importantly, it is also enabling
us to maintain market-leading retention rates.
Targeting new geographies: York
Knights entered its tenth city in February
2020 with the announcement of a new office
opening in York. The move into the Yorkshire
region, with an estimated market size of £440m
(source: Bureau van Dijk, Mintel UK Legal
Services Report 2019), was in line with Knights’
strategy to target new geographies that have
been identified as suitable for consolidation
of the highly fragmented independent law
firm space. Led by Jonathan Moore, who has
more than 20 years’ experience in York’s legal
services market, the opening of a new office
with a team of 16 marked our entry into the
region with a full service offering and capacity
to support further growth in the city.
Building out our specialisms: Dental
We continue to expand the depth and breadth
of our service offering, including with new
specialisms. This year, we have expanded
our existing specialisms of Healthcare and
Employment and recruited talent in other niche
areas, including Aviation.
Knights operates very differently to the
traditional law firm model which is refreshing
and makes so much sense.
I was particularly attracted to its strong team culture and ethos that people
come first, always. I’m already finding that our team-based approach has
connected me to new and exciting clients, with my colleagues actively drawing
upon my expertise and introducing me to their contacts. I was delighted to join
Knights at an exciting juncture and to have the opportunity to help accelerate
the growth trajectory of the team here.”
Sally Hulston
Partner, Employment, Wilmslow
I was attracted to the idea of being part of
a new office startup in York because the Knights’
culture that is genuinely centred around trust,
transparency, teamwork and the development
of people is something very different in the
legal sector.
Without the pressures of individual or team billing targets and traditional partnership
distractions, our primary focus is on delivering a premium client service and that
is the perfect foundation upon which to build a new office from a standing start.
The lateral hires we’ve made from national and international law firms, together
with our full legal service capability means that the businesses and individuals
of York and North Yorkshire now have a legal services business local to them
that can cater for all of their legal requirements - the potential is enormous.”
Jonathan Moore
Office Partner, Real Estate, York
Having previously worked in a smaller firm
specialising in advising dental practices, I joined
Knights because it gave me a platform to grow
my client offering and work on a greater number
and variety of transactions.
The corporate structure at Knights has allowed me to provide a better
and fuller service to clients, with its clear separation between management
and lawyers allowing me to focus on doing my job as a lawyer, which has
enabled me to grow our client base significantly.”
Jonathan Tyson
Partner, Corporate, Stoke
20
21
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc
Knights plc
Annual Report and Accounts 2020
Strategy in Action continued
Strategic
Acquisitions
Our pipeline of acquisition
candidates grew through 2019,
as we continued to build upon
our reputation as a good owner
of acquired businesses.
This is providing a breadth of potential opportunities for
Knights to bolt on and integrate businesses in areas that
we have identified as suitable for consolidation of the
highly fragmented independent law firm sector. During
the year we continued to build on our strong track record,
successfully completing the acquisitions of a number
of firms, with the respective sellers attracted by the
opportunities that Knights offers.
Knights plc, Manchester
22
We have also shown over time that we are able to support the
ambitions of the people that join us via acquisition through:
Unleashing the potential of the talented people we acquire
For many of the individuals that join Knights
as part of acquired businesses, it offers the
opportunity to expand their role, which in turn
provides Knights with broader talent across
its management team to drive the business
forward. For instance, James Sheridan has
become one of the Group’s Client Services
Directors, with responsibility for the North West
region and for leading the recent integration
of Shulmans, the Group’s largest acquisition
to date. Since joining the Group in 2018, James
has grown our presence in the North West
to c.180 fee earners, with Knights providing
the financial, operational and cultural platform
to allow him to develop his skills and apply
them to maximum effect.
Benefitting from increased scale
Knights completed the acquisition of ASB
Law LLP in April 2020, a firm which had built
up strong relationships with a number of large
corporates as well as a niche specialism in the
aviation industry, amongst others. Following
the acquisition by Knights, the business was
able to attract work from major clients requiring
greater scale and breadth than ASB was
previously able to provide due to resource
constraints. The scaled-up support offered to
clients encompasses the ‘one team’ approach
at Knights, with clients able to draw on an
ever-growing network of talented lawyers
across a broader range of expertise as part
of a larger business.
Accelerating growth into the wider region
Shortly after its acquisition of Spearing
Waite, Knights acquired Leicester-based
Cummins Solicitors in January 2019 to
bolster its offering in the city. The high-calibre
employment specialist allowed Knights to
bring a full service offering to Leicester, and
the Group has seen significant growth in the
Midlands since, increasing the number of fee
earners in the region to 213.
We have significantly developed our North West
presence since becoming a part of Knights, with
the acquisition enabling me to broaden and deepen
my client base much more quickly than I was
previously able to within a partnership.
Our team was ranked as #1 for M&A by volume of deals in the North West
in 2019, which is a huge testament to our growth. I was also delighted to take
on a broader role in developing Knights through leading the integration of
Shulmans earlier this year, and believe that coming from a business that was
acquired by Knights gave me invaluable experience for ensuring the smooth
integration of future acquisitions.”
James Sheridan
Client Services Director, Manchester
Joining Knights has enabled us to engage with
our network of contacts on matters they previously
thought our firm did not have the capacity to deliver.
In recent months we have built on our strong relationships and attracted some
high-profile work – most recently we have provided employment advice and
collective consultation support for employees of a large tour operator and airport,
which wouldn’t have been possible without utilising the wider pool of talented
lawyers across Knights. The cultural fit has been great and the opportunities
we are already seeing is a hugely exciting motivator for the whole team.”
Lyndsey Ratcliffe
Partner, Dispute Resolution, Crawley
We built a strong reputation as a small independent
specialist in the employment sector but felt that
further expansion beyond our existing local client
base would be difficult without further backing.
In particular, we found it hard to break in to the Birmingham market alone. We had
followed Knights’ impressive growth story in the region prior to acquisition and were
delighted to join a strong and independent group that we knew would help us to fulfil
our ambitions to win in the wider market. Since that time, I have helped Knights to
expand into Birmingham with the acquisitions of EGL and ERT, giving us a leading
position across the region.”
Michael Cummins
Client Services Director, Birmingham
23
Strategic ReportCorporate GovernanceFinancial Statements Strategy in Action continued
Scale the
Operation
During the year, we built
operational strength in the
business in preparation for
anticipated growth.
Significant investment was made during the first half of
the year to ensure the Group had the capabilities to harvest
future opportunities as they arose throughout the year.
This investment in our platform ensures the sustainability
of our success into future periods, with operational capacity
across our leadership and systems allowing us to continue
to benefit from economies of scale.
Our investment in professionals
who have built their careers in
operations leadership and delivery,
together with our systems and office
space investments, means we have a
sustainable and scalable backbone to
support our rapidly growing business.
During the year this has resulted in us doubling fee earner
recruitment, automating c.8% of administration work, alongside
the successful integration of 6 acquisitions, 3 of which were
delivered remotely during the COVID-19 pandemic.
The strength of our operational backbone means we can
operate with both excellence and efficiency, as evidenced
by our fee to non-fee earner ratio, which increased to 4.8:1
in the period against an industry norm of 1.5-2:1.”
Richard King
Chief Operating Officer
New fee earners:
108
24
Investments
Added 6 Directors
to our leadership team
Upgraded technology
and infrastructure
Formed specialist
integration team
Modernisation
of office space
Successful integration: How we do it
Our tried and tested formula allows us to treat acquisitions as a ‘business as usual’ task:
Phase 1
Phase 2
Phase 3
Phase 4
Our specialist in-house
team manages the M&A
and integration process,
including due-diligence,
finance and HR
Acquisitions are selected
with cultural fit in mind
as full cultural integration
is a top priority to ensure
retention of key staff
Integration workstreams are
established before the deal
is finalised, with a Client
Services Director providing
clear senior ownership at
every stage of the process.
Planning for the transfer
of IT systems begins well
in advance and takes place
over a weekend, ensuring
negligible disruption to
the lawyer workflow
Split exchange and
completion facilitates
a smooth and
efficient process
Rebranding always takes
place on completion, with
support to ensure continuity
of service to clients.
Back office restructured
to remove support service
inefficiencies, in line with
our 4.8:1 fee earner to
support staff ratio
A structured and ongoing
programme of training
and one to one support
to help new colleagues
adapt to Knights’ Operating
Platform and master our
business model.
Continually building
value by helping fee
earners to adopt Knights’
modernised way of working,
collaborative culture and
commercial mindset,
to deliver improved fee
earner service quality and
efficiency over time
Building a business
externally by focusing
our sales, marketing and
recruitment teams to create
a strong reputation and
develop relationships
in the new market.
Initial synergies generally achieved 2 months after completion, releasing significant value from the acquisitions in the short term.
Prior to joining Knights,
the Shulmans team didn’t
have the systems to work
seamlessly from home.
Knights’ IT team were able to quickly
support our entire infrastructure to allow
for remote working, an impressive feat and
one that was crucial to our ability to weather
this crisis. When Knights completed the
acquisition, our systems were integrated
over the weekend meaning we could continue
client work on Monday morning.”
Having full access to
the enthusiastic sales,
marketing and recruitment
professionals of Knights
has been a game changer
for me.
Knights has supported me to build business
in a way that I’ve not experienced before.”
Knights’ results-driven
and collaborative
culture has proven to be
a real motivator for our
ambitious team.
With the best-in-class technology we have
adopted, as well as the commercial acumen
built through training and mentoring, our
original team and client base has gone
from strength to strength.”
Marcus Armstrong
commenting on the recent acquisition
of Shulmans
Richard Wilson
commenting on his experience
of joining Knights
Martin Billings
commenting following the acquisition
of BrookStreet des Roches in April 2019
25
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc
Strategy in Action continued
Exploit Technology
and Data
We have continued to
expand the depth and breadth
of our use of technology to
develop the scalability and
efficiency of our operations,
and increasingly, to enhance
our services to clients.
Our strong foundation of a fee earner base skilled in using
technology, together with a single IT and data platform
for the business, has enabled us to continue our progress
in expanding the business impact of IT.
Most visible has been our ability to instantly
switch to home working with no impact on
productivity during the pandemic, the 20%
efficiency increase in fee earner to operations
staff ratio, and the integration of 6 businesses
onto our platform with shut down of all their
systems in a matter of weeks after acquisition.
Equally, we have made significant progress in
using technology to enable fee earners to work
more seamlessly and ‘real time’ with clients.
One platform
Technology
Data
Processes
26
Scaling our operating backbone
Measures of success
Our single platform is a key strength
that we continue to invest in, to sustain
our ability to operate as one business
as we rapidly grow, create efficiencies
at scale, and increase our acquisition
integration capacity.
Growing the business
We are increasingly creating value
by exploiting rich sources of data and
codifying our knowhow, to identify
and action opportunities to grow
revenue and cash conversion.
Enhancing service to clients
Growing our capability to work more
seamlessly, transparently and faster
with clients, is a continued focus,
with cloud technologies creating
many new opportunities.
We have reduced administration work
by c.8% through automation of many
time intensive transactional processes
particularly in Finance and IT. This has
been a key contributor to our fee earner
to non-fee earner ratio increasing from
4.0:1 to 4.8:1
Our upgraded acquisition integration
capability enables us to manage the
transition of multiple acquisitions in
parallel, notably delivering three in
parallel whilst in COVID-19 lockdown.
We have increased our success in
attracting new clients and growing the
number of services existing clients use,
by creating a system using algorithms on
market and proprietary data, that better
identifies prime prospects for our sales
team and fee earners to target. This has
been a key contributor to us successfully
winning 57% additional clients and
increasing the number of clients using
more than one service by 70%
Created a system that takes faster
action and reduces the effort to deliver
timely cash conversion and low bad debt,
by automating some steps and creating
exception alerts for others, powered
by combining payment history data
and our best practice.
Accelerated document signing from hours
to minutes by introducing e-signatures,
as a result of working with a software
provider to enhance our capability to meet
the complex legal signoff process needs
Our existing online collaboration suite
proved invaluable during the COVID-19
pandemic. The pandemic and our
investment into new capabilities such
as shared tasklists and group chat is fueling
our clients and ourselves to reimagine how
we can work together even more efficiently
We now offer bespoke interactive client
dashboards so clients can get updated
progess information faster, with less effort,
at anytime, from anywhere.
Fee earner: non-fee earner ratio
4.8:1
Acquisitions integrated in parallel
3
Growth in clients
using more than one service
70%
Additional clients
57%
Efficiency increase in fee earner to operations staff ratio
20%
27
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc Corporate Sustainability
Building a sustainable business that
enables all its stakeholders to thrive.
Knights is committed to building
a sustainable business that enables all
its stakeholders to thrive: a business that
minimises its impact on the environment,
looks after its people and communities
and operates ethically with the highest
levels of governance.
Taken together, these goals form a key
part of the Group’s overall drive to transform
legal services away from the traditional
model of working and are critical to its wider
investment case.
Knights is proud of the progress it has made
in enhancing the sustainability of its operations
but wants to go further. This year the Group
appointed Jane Pateman as its Board Director
with overall responsibility for Environmental,
Social and Governance strategy. Jane and
the Executive Directors will focus on shaping
the Group’s strong existing activity into
a strategic programme to support Knights
in making an increasingly positive impact
into 2020 and beyond.
Managing our
business for
the long-term
Our
sustainability
pillars
Caring for our
people and our
communities
Looking after
the environment
Corporate Governance
Financial Statements
The Group focuses on three key pillars within its
sustainability approach:
Managing our business
for the long-term
Caring for our people
and our communities
Looking after
the environment
Aiming for the highest
standards of corporate
behaviour and running
its operations with high
ethical standards
Through fostering a
diverse, team-based,
meritocracy-driven
culture and encouraging
community contributions
With a focus on cutting
our carbon footprint
and paper consumption
Read more on page 30
Read more on pages 32-34
Read more on pages 36-38
Key performance indicators
Whilst the Group is continually evolving its measurement of these areas, it currently focuses on
the following KPIs to measure the effectiveness of its support of colleagues and the community.
Managing our business
for the long-term
Caring for our people and
our communities
Looking after the
environment
Board role and diversity
The Board has an effective blend of financial
and public market experience, diversity,
skillsets and capabilities with backgrounds
in operations, human resources, accounting
and finance disciplines across a wide range
of industries.
Business ethics
Knights has a rigorous ‘Know Your Client’
process to ensure that its business is not
used as a conduit for the proceeds of crime,
terrorism or money-laundering.
Compliance
Fee earning colleagues receive mandatory
compliance training during the onboarding
process and are required to refresh this
every year.
Retention
Knights enjoys relatively strong employee
retention levels, with less than 5% churn*.
Flexibility
Knights tries to offer a working environment
to suit everyone; last year, a total of 24%
of colleagues worked flexibly or part time.
Employee ownership
Knights is proud to be able to offer
colleagues a stake in the business;
as at February 2020 78% of employees
are shareholders via the Group’s various
share plans, meaning they retain a direct
interest in its future prospects.
Community
Our aspiration is to deliver four hours per
month, per colleague to our communities
through the 4OurCommunity programme.
Paper consumption
Within the Group’s physical office estate,
the number one environmental impact
is paper consumption, saving 1.6m pages
per year.
Energy reduction
There is also an ongoing upgrade of all
light bulbs to LED across all our sites which
target a reduction in energy use of 9%.
Business travel
The recent impact of COVID-19 has
seen many more internal and client
business meetings conducted by video
conference, a trend that will support
stronger client delivery, improved working
conditions and staff welfare, and reducing
its environmental impact.
Knights is a business where the day job is intrinsically linked to doing the right
thing; whether that’s developing and empowering colleagues to deliver the best
advice, creating a fulfilling and purposeful environment for our people, or holding
ourselves to the highest standards of conduct throughout our business operations.
I’m delighted to be overseeing the drive for greater sustainability at Knights,
and I’m looking forward to bringing some of my own background to bear in shaping
a strategy for 2020 and beyond.”
Jane Pateman, Non-Executive Director: Knights plc, Group HR Director: Biffa plc
Note
* See Glossary on pages 122-124
28
29
Strategic ReportAnnual Report and Accounts 2020Knights plc Managing our Business for the Long-Term
Knights runs its operations
with the highest standards
of corporate governance and
conduct. All of this is overseen
by a Board of Directors who bring
a wide range of relevant skills
and experience to bear.
Board role, diversity and independence
The Board guides Knights’
approach and is committed
to extending its values to
all stakeholder groups,
including shareholders, clients,
employees, governments and
regulators, and the communities
in which it operates.
Further details of the Board’s outreach
are detailed in our Section 172 statement
on page 39 of this Annual Report.
The Board is comprised of three
executive directors, the Non-Executive
Chairman, and a further two independent
Non-Executive Directors.
The Board believes that the Directors have an
effective blend of financial and public market
experience, diversity, skillsets and capabilities.
Only one member of our Board - CEO, David
- has a legal background, with the rest of the
Directors bringing broad experience from
operations, human resources, accounting
and finance disciplines across a wide range
of industries.
Board members
6
Business ethics and compliance
Building a culture where
the Knights team operates
responsibly, sustainably and
with integrity is essential to the
long-term success as a Group.
The Group is governed by the Solicitors’
Regulation Authority and its rigorous
approach to conducting its business
to the highest standards.
Knights has a rigorous ‘Know Your Client’
process to ensure that its business is not used
as a conduit for the proceeds of crime, terrorism
or money-laundering. The Group conducts
thorough audits on clients’ background
before working with them, and its dedicated,
independent in-house compliance teams
rigorously monitor all work being conducted
throughout the business on an ongoing basis.
All fee-earning colleagues receive mandatory
compliance training during the onboarding
process and are required to refresh this
every year.
Anti-Bribery and Corruption
Knights is committed to maintaining the highest
standards of ethics and compliance with all
relevant laws wherever it does business. The
Group does not tolerate any form of bribery or
corruption and requires all individuals working
for it to comply with anti-bribery and corruption
laws and ethical standards.
Whistleblowing
All employees of Knights should feel able
to raise concerns about any safety, legal
or ethical issues. If they feel unable to report
these concerns to a manager, the Group also
provides a whistleblowing process, which
is detailed on its website.
Modern Slavery
The Group has a zero-tolerance approach
to modern slavery anywhere in its supply
chain and a full copy of its policy is detailed
on its website.
Corporate Governance
Financial Statements
I joined Knights plc in November 2018
having worked in-house as a senior
member of the Ethics & Compliance
function at a global energy company and
within financial institutions managing
compliance and investigations.
I am excited to be part of such a forward thinking and agile
team at Knights where risk and compliance is held in high regard
and plays a key part in each step the business takes.”
Elinor Lloyd
Compliance Director, Knights plc
30
31
Strategic ReportAnnual Report and Accounts 2020Knights plc Caring for our People and Communities
Knights’ team-based
culture is focused on helping
both its colleagues and their
communities to thrive.
Knights is a friendly,
down-to-earth business
with low hierarchy and
a culture of respect,
collaboration, positivity
and transparency.
The Group is proud of its recent employee
net promoter score of +36 and believe it reflects
a supportive environment that empowers
colleagues to be themselves and use their
judgement to do what’s right for clients, the
business and the wider community.
Knights’ values are both a key part of its
competitive advantage and a route to long-term
sustainability. The Group approaches its work
in the following areas:
Employee engagement and culture
Knights’ culture is a source
of immense pride and the
Group firmly believes that
it’s a key differentiator for
clients and colleagues alike
in a crowded market.
Above all, Knights aims to create a positive
environment that empowers colleagues
to be themselves, supports them to take
responsibility and provides them with a
fulfilling role and development opportunities.
The Group has a culture of productivity and
encourages a high level of flexible working.
Last year it saw 24% of colleagues work
part-time, enabling them to choose a work
and personal life balance.
The Group’s senior management teams
maintain regular communications with
colleagues and encourage them to share
feedback. Senior management have hosted
regular calls through the COVID-19 situation,
with the CEO holding several ‘all hands’
meetings with over 80% participation
and over 200 questions answered.
Diversity and inclusion
Knights’ core ethos is focusing
on what people contribute,
not their background.
This approach delivers excellent outcomes
when it comes to diversity and we believe
that these diverse teams make the best
long-term decisions and ultimately position
businesses for sustainable growth.
The Group has market-leading levels
of gender diversity, with 45% of our upper
quartile fee earners being female.
Whilst we are proud of our gender diversity,
we continue to look at this area more broadly.
Our strategy is based on understanding each
individual and creating an environment where
everyone can thrive. Whilst we don’t formally
measure it, we subsequently see people from
many different socioeconomic, ethnic and
religious backgrounds thriving at Knights.
Health and safety/wellbeing
Knights is committed
to ensuring the wellbeing
and safety of employees
in all offices.
Policies and procedures comply with
relevant local safety, health and welfare
at work legislation, as appropriate.
The Group also uses Grade A office space
fitted to high standards in order to provide
the best working environment.
As Knights acquires other businesses and
operates multiple sites with legacy policies,
it overlays a single Knights Health and Safety
framework that ensures a consistent approach
within the organisation.
The Group places significant focus on
the wellbeing of its colleagues providing
an Employee Assistance Programme and
a Helpline where colleagues can speak
to a professional about any professional
or personal issues. During the COVID-19
lockdown, world renowned performance
coach Jamil Qureshi ran group sessions
and 1:1s on mindfulness and wellbeing,
attended by over 440 employees.
Pay and conditions
Knights’ structure enables
the Group to maintain fair
and appropriate levels of pay
throughout the organisation.
Due to the Group’s corporate PLC model,
colleagues do not have to take on the
financial risks associated with a partnership,
and the majority of its Board are not lawyers,
meaning they retain an external perspective
when setting remuneration levels.
The Group also operates various share plans
which enables all employees to become
shareholders and share in the future success
of the Group. Since our IPO, where we
launched our first share incentive plan,
we have rolled out two ShareSave schemes
and also launched a Long-Term Incentive Plan
for key non-fee earning roles. Over 75%
of employees are currently enrolled in a plan.
32
33
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc Knights plc
Annual Report and Accounts 2020
Caring for our People and Communities continued
The Group is, therefore, focused on
enabling colleagues to support their local
communities through its flagship programme
4OurCommunity. This gives colleagues
4 hours of work time per month to spend
helping local causes.
The Group believes the programme has a huge
impact on the wellbeing of staff and enables
them to use their individual skills to best effect.
People helping others
Knights believes that people
who help other people are
more engaged and have
deeper perspectives on their
community. It’s those people
who are best placed to drive
a business forward in the
long-term.
Community
Our aspiration is to deliver
50,000+ hours to our
community through the
4OurCommunity programme.
Hospice of the Good
Shepherd in Chester
Europe Corporate
Games 2019
The Hospice have been working on their
grounds for some time, but there was a parcel
of land - a steep incline which, crucially, faces
on to a number of residents’ rooms - that
needed to be de-weeded and prepped for
seeds to be planted.
Colleagues took part in the Europe Corporate
Games 2019 hosted in Coventry, whose official
Charity was Zoë’s Place Baby Hospice.
The Trussell Trust/
West Chester Foodbank
Harvest Festival for Alice
Charity in Stoke
Bridie Conboy and Emma Scott from
Chester volunteering for The Trussell Trust/
West Cheshire Foodbank at Tesco.
Colleagues donated over 100 items of non
perishables foods and personal hygiene
products for the charity’s ‘peoples pantry’.
34
34
35
35
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc Case study
Knights rapidly modernises
the businesses it acquires
and invests a substantial
amount in improving their
digital infrastructure.
The Group recently acquired EGL and
immediately migrated the business on to
the Knights platform from its older systems,
digitised all paperwork onto the Knights
platform and equipped all fee earners with
technology and training on ‘paper-lite’
ways of working.
The pictures below show the office
space before and after it became part
of the Knights organisation.
Looking After the Environment
Knights is conscious of its
impact on the environment
and committed to making
positive changes at every
level of its business.
In comparison with other sectors, the Group is fortunate that
its environmental impact is relatively low, but climate change
is a global challenge and every business has to play its part
in minimising the footprint of its operations.
Offices
Within the Group’s physical
office estate, the number
one environmental impact is
paper consumption, which has
traditionally been used heavily
in law firms. The Group is also
conscious of the impact of other
forms of office consumption,
including electricity and
other consumables.
In recent years, Knights has made
significant investments into digital working
practices, which is enabling the Group to
cut the use of paper across its operations
and recently enabled a rapid response
to ‘work from home’ measures imposed
during the COVID-19 lockdown.
These investments range from the extensive
roll-out of software that enable the creation,
review and sharing of information digitally
across the organisation to increasing the
use of electronic signatures. We have also
made positive changes to our storage and
transportation policies which are reducing
the number of journeys connected to sharing
documentation within our business.
The Group has specific targets around
the use of paper, which are detailed
at the end of this section.
Alongside cutting paper consumption, the
Group has several other waste management
policies in place which are designed to reduce
its carbon footprint.
These initiatives are led by Chief Operating
Officer Richard King, who brings significant
experience in environmental sustainability from
his previous roles, and focus on many other
areas of the business, including full recycling
in all offices, eliminating the use of single-use
water bottles, coffee pods, cups, cutlery and
crockery and enhancing energy efficiency,
with the ongoing upgrade of all light bulbs
to LED across all our sites set to reduce
energy consumption by 9.9%.
Outside the office
Outside its office estate, the
Group’s greatest environmental
impact is from travel by
employees going to, from
and between offices, and to
and from clients. The Group
therefore aims to encourage
and sustain flexible working
amongst its employee base,
reducing the amount of times
people need to travel to, from
and between offices to conduct
their roles.
This involves investment in digital working
practises, including the roll-out of platforms
such as Microsoft Teams and Zoom, and
training for senior managers across the
organisation in how to manage remote working.
Where possible, the Group is also entering into
sensible, forward-thinking conversations around
business travel with our clients, many of whom
share similar overall goals.
The recent impact of COVID-19 has seen many
more internal and client business meetings
conducted by video conference, a trend that
will only grow.
Looking to the future, the Group is determined
to continue to be proactive in changing what
is a traditional sector, believing that greater
flexibility can support stronger client delivery,
improved working conditions and staff welfare,
and reducing its environmental impact.
36
37
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc Looking After the Environment continued
Engaging with Stakeholders
Strategic Report
SECR
Greenhouse gas emissions (GHG) statement
In line with the Companies Act 2006 (2013 Regulations) and the
recently introduced Streamlined Energy and Carbon Reporting
(SECR) requirement, Knights plc is disclosing its annual Global
Greenhouse Gas (GHG) emissions here. We are required to report
the Company’s emissions of carbon dioxide equivalence (CO2e),
a CO2e intensity value, and the consumption of supplied electricity
in the UK. The methodologies and processes used to calculate
these emissions are also disclosed.
Paper consumption reduction
68%
vs. industry standard
Energy reduction
9%
through use of LED lighting
The table below includes emissions for the
combustion of fuel (Scope 1) and purchased
electricity (Scope 2) of the premises
and other assets owned or operated by
Knights plc. Knights plc purchases natural
gas for a small number of premises; however
measured consumption values are not widely
available. As the level of consumption is
estimated to be immaterial, these figures
are omitted from this report. Going forward,
Knights plc aims to improve its collection and
reporting of gas consumption and subsequent
GHG emissions. Knights plc does not directly
own or lease company vehicles; therefore,
only Scope 2 emissions are disclosed in this
report. All of Knights plc’s operations are in the
UK, therefore all values below are both Group
totals and UK totals. They are, therefore, not
separated out as required by SECR regulations
for organisations that have an international
carbon footprint.
This is the first year of GHG emission reporting
for Knights. In future reports, year-over-year
data will be disclosed to show performance
and progress. Despite only reporting
performance data for the first time this year,
Knights has made reducing its environmental
impact a key focus area of the business.
Significant investments into digital working
practises has enabled the Group to cut its use
of paper while decreasing the need for physical
business travel. These investments range from
the extensive roll-out of software that enable
the creation, review and sharing of information
digitally to increasing the use of electronic
signatures. Positive changes have also been
made to our storage and transportation
policies which reduce the number of journeys
associated with sharing documentation across
our business. The Group has specific targets
around the use of paper and has several other
waste management and recycling policies in
place that are designed to reduce the Group’s
carbon footprint; these include full recycling
in all offices, eliminating the use of single-use
water bottles, coffee pods, cups, cutlery and
crockery and enhancing energy efficiency.
There is also an ongoing upgrade of all light
bulbs to LED across all our sites which target
a reduction in energy use of 9.9%.
Energy consumption
Scope 11
Scope 22
Total
CO2e emissions
Scope 11
Scope 22
Total
Carbon intensity
Reference 1: Area
Reference 2: Revenue
CO2e by area
CO2e by revenue
2020
Unit
0
378,537
Kilowatt hours of energy used
Kilowatt hours of energy used
378,537
Kilowatt hours of energy used
2020
Unit
0
96.8
96.8
Tonnes of CO2e
Tonnes of CO2e
Tonnes of CO2e
2020
Unit
5,309
74 mil
18.23
1,308
Square metres (office area for Group)
GBP (revenue for Group in 2020)
Kg CO2e per m2
Kg CO2e per £GBP million of revenue
1
2
Scope 1 emissions are traditionally emitted from fuel consumption in either buildings or company leased/owned vehicles. Emissions from personal or privately-hired vehicles used for company
business are considered to be Scope 3 (under the GHG protocol) and as such are not included in the ‘Operational control’ boundary approach adopted by Knights plc (see ‘Methodology and
scope’). Energy and emissions from the small amount of natural gas consumed are not included in this report, but it is planned that they be included in future years.
Scope 2 emissions are derived from electricity consumption at Knights plc’s offices. They are a mix of measured electricity consumption and estimated values (see ‘Methodology and scope’).
Methodology and scope
Carbon Dioxide equivalence (CO2e)
emissions data have been collected,
calculated, consolidated and analysed
following the GHG Protocol (Corporate
Accounting & Reporting Standard) following
the ‘operational control’ approach. Emission
factors of supplied electricity for locations
were sourced from the UK Government
GHG Conversion Factors for Company
38
Reporting (DEFRA agency) – this is the
annual average CO2e emissions of the UK’s
electricity grid. The boundary for reporting
includes assets (in the case of Knights these
are offices) that are owned or operated by
the organisation. Energy consumption values
and their corresponding GHG emissions are a
mix of measured data such as electricity bills
(approximately 55% of data) and estimated
values based on office area size (approximately
45% of data). Data estimation is primarily due
to offices being in shared locations where
supplied energy is not specifically provided to
Knights by the landlord or building manager.
Going forward, Knights plc intends to collect
more ‘measured’ energy data and reduce the
need for estimations.
Section 172(1) statement
The Knights Board recognises that the Group has a number of stakeholders and that it needs
to seek and understand their views in order for the Company to enjoy sustainable growth.
This section of the Strategic Report describes how the Directors act in line with
Section 172 of the Companies Act 2006, and continue to have regard for:
the likely consequences of any decision
in the long-term;
the impact of the Company’s operations
on the community and the environment;
the interests of the Company’s employees;
the need to foster the Company’s business
relationships with suppliers, customers
and others;
the desirability of the Company maintaining
a reputation for high standards of business
conduct; and
the need to act fairly between members
of the Company.
The Board identifies the Group’s key
stakeholders as shareholders, employees,
clients, regulators, suppliers and community
participants, and it is committed to effective
engagement with these stakeholders ensuring
the interests of all stakeholders are given equal
importance when making key decisions.
Set out below is a summary of how the Board fulfils these duties in respect of each of their key stakeholders.
Shareholders
The Board regularly engages with shareholders
and is committed to an open dialogue and
fair and equal treatment of all shareholders.
The Chairman meets shareholders without
management present and reports to the
Board. The Board receives regular updates
on shareholder engagement and analyst
commentary and receives presentations
from corporate brokers on investor perception.
The Knights CEO has a full programme of
engagement with shareholders and presents
to the Group’s largest shareholders, as well
as sell-side analysts, following the full and half
year results. The CEO and CFO also meet
regularly with individual shareholders.
Our Annual General Meeting (AGM) is
an important part of effective shareholder
communication, with all shareholders having
the opportunity to hear from the Company
and ask questions. The Board welcomes the
opportunity to engage with our shareholders,
typically providing a brief update presentation
at each AGM and with all Directors available
to answer questions.
The Board would, however, welcome greater
participation from shareholders, and the current
COVID-19 crisis may alter the dynamics of these
meetings in the future. The Company is looking
at other ways to broaden the participation
of all shareholders.
Employees
The Board receives regular updates in relation
to employees and, during 2019, conducted
a number of Board visits to key offices and
received regular updates via one-on-one
meetings, Board presentations and via the
Executive Directors.
The Group holds annual strategy days and,
as the Board is in attendance, it is able to get
both formal and informal instant feedback
from the Senior Management team.
Regulators
The Board has a clear and robust process
for engaging with regulators, as and when
appropriate, and monitoring risk registers. The
Board conducts regular regulatory compliance
reviews, with a dedicated Compliance section
in every board pack to analyse client risks.
Through the CEO and CFO, the Board is in
contact with the Solicitors Regulation Authority
at least once a month and, as an AIM listed
company, the Group is in regular contact with
our Nominated Advisor and the Financial
Conduct Authority.
Clients
Knights takes a proactive approach to
communicating with clients and updates are
provided to the Board by the Chief Executive
Officer. During the year, the Board receives
updates from senior management on key
client issues via the business reviews.
The CEO and selected members of the
Board also meet existing and potential clients
at conferences and events (in light of the
COVID-19 pandemic these meetings have
occurred regularly through video conferencing
to maintain our strong relationships). The CEO
independently regularly meets with key clients
to strengthen relationships.
Suppliers
The Group’s procurement policy includes
a commitment to sustainable procurement and
mitigation against the risk of modern slavery,
bribery or corruption anywhere in our supply
chain. The Group also aims to conduct itself
to the highest standards and pay all invoices
promptly. The Board plays a key oversight
role in these policies.
Community participants
Knights’ Environmental, Sustainability and
Governance strategy is focused on adding value
to the communities in which we operate and is
detailed on pages 28-38 of this report. Detailed
updates on this strategy and associated
programmes of work are provided to the Board
and discussed on its Risk Committee.
Decision making
Acquisitions, refinancing and placing
during the year, the Group acquired six law
firms, providing additional scale, additional
practice areas and presence in a number of
key geographical markets in order to allow it
to deliver its strategy to be the leading legal
and professional services business outside
London. The acquisitions provide enhanced
revenue generation which in turn provide
returns to shareholders in the longer term and
provide enhanced employment opportunities
as part of a wider Group. Prior to completing
the acquisitions the Board considered the
effects that the acquisitions would have on the
Group’s gearing and creditors in order to ensure
that executing the strong pipeline of acquisitions
would not adversely impact creditors interests.
In considering this the Group agreed to
refinance its existing facilities by extending its
revolving credit facility with HSBC UK and Allied
Irish Bank providing total committed funding
of £40m to provide the Group with additional
flexibility to further grow its presence across the
UK, and raised gross proceeds of £20m through
a placing which allows it to maintain a strong
balance sheet. See page 22 of this report.
Addressing the impact of COVID-19
As a result of the COVID-19 pandemic and
the measures that have been taken by the
government to counteract the impact on public
safety the Board had to take swift and decisive
action to protect the health and well-being of the
Group’s employees. In considering the needs
of the employees the Board took the decision
on 13 March 2020 prior to the government lock
down to require all employees to work from
home. The Board believes that the Group’s
previous investments in secure, robust systems,
infrastructure and technology platforms have
enabled teams to work effectively from home
and that its investment, along with a strong
team culture, has enabled Knights to protect
its colleagues without adversely disrupting
service levels to clients which in turn maintains
both client relationships and in the longer term
shareholder returns.
In addition, in order to preserve jobs in light
of the rapidly changing economic environment,
the Board took the decision to reduce Board
members’ salaries by 30%, and the salaries
of employees earning in excess of £30,000
by 10% with effect from 1 April 2020, in
addition to other cost cutting measures in
relation to non-essential capital expenditure.
These actions have been well received by
employees, our funders and our investors.
39
Corporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc
Non-Financial Report
Described below is how the Group
aims to comply with the Non-Financial
Reporting Regulation requirements as set
out in sections 414CA and 414CB of the
Companies Act 2006.
We have set out where information related to
these disclosures can be found in our Annual
Report, including our business model which
is set out on page 14. The principal risks
relating to these matters and due diligence
undertaken in pursuance of our policies is set
out in the Risk Management section of our
Annual Report, on pages 50-53 respectively.
Requirement
Where to find
information
Policy overview
Environmental
matters
Looking after the
environment
pages 36-38
Employees
Investment case
pages 4-5
Chairman’s
statement
pages 8-9
Chief Executive’s
statement
pages 10-13
Business model
pages 14-15
Caring for our
people and
communities
pages 32-34
Section 172
statement
page 39
The Group’s materiality assessment has determined that Knights’ environmental impact is
relatively low. As a people and services business, Knights’ key impacts are the consumption
of paper and wider energy usage. We recognise the need to minimise our impact and continually
measure and monitor the environmental sustainability of its operations and, where possible,
sets targets to ensure that it operates with the minimal impact. Knights provides regular
environmental and progress updates to employees, clients and other interested stakeholders.
A summary of its progress in 2019 is detailed on page 36 and KPIs relating to the Group’s
streamlined energy and carbon reporting (SECR) is available on page 38.
As set out in the Investment case, pages 4-5, Chairman’s statement, pages 8-9, Chief Executive’s
statement, pages 10-13 and Business Model, pages 14-15, our employees are an essential
component of our business with their health and wellbeing remaining a Group priority.
Health & Safety Policy: Knights ensure that, so far as is reasonably practicable, the health,
safety and welfare of all employees working for the company and other persons who may be
affected by its undertakings. The policy of management is to do all that is reasonably practicable
to prevent personal injury and damage to property. All employees are informed of their personal
responsibilities to take due care of the health and safety of themselves and to ensure that they
do not endanger others.
Knights ensures continued consultation with the workforce to enable all viewpoints and
recommendations to be discussed at regular intervals. The organisation has a systematic
approach to identifying hazards, assessing the risks, determining suitable and sufficient control
measures and informing employees of the correct procedures needed to maintain a safe working
environment. We will provide, so far as is reasonably practicable, safe places and systems
of work, safe plant and machinery, safe handling of materials and substances, the provision
of adequate safety equipment and ensure that appropriate information, instruction, training
and supervision is given. Management are committed to continually measure, monitor and revise
an annual plan to ensure that health and safety standards are adequately maintained. The policy
is implemented by our Quality, Health and Safety Manager, who recommends any changes
to meet new circumstances.
Training: A wide range of training and development opportunities are available for all employees.
Fee-earning colleagues receive mandatory compliance training during the onboarding process
and are required to refresh this every year.
Diversity & Inclusion Policy: Knights is an equal opportunities employer, committed to ensuring
the workplace is free from unlawful discrimination, victimisation or harassment on the grounds of
age, disabillity, race, sex, sexual orientation, religion or belief. Knights values and is committed to
promoting equality and diversity within the workplace by seeking to ensure that all individuals are
treated fairly with dignity and respect and by recognising and encouraging individual contribution
within the organisation. Knights is committed to ensuring that all its employees and all applicants
for employment are protected from unlawful discrimination. Knights does not discriminate against
employees. Knights has leading levels of gender diversity for any professional services business
and publishes an update of its gender pay gap report on its website.
Conflicts of Interest and Related Parties: The policy covers our interest conflicts, which states
that Knights can never act where there is an own interest conflict with a new or existing client.
The SRA Standards and Regulations do not allow a client to waive or consent to a conflict of
interests with the business. Fee earners are expected to use their judgment and seek further
guidance and approval from Compliance in all cases where there may be a potential conflict.
Client conflicts are covered under the SRA Standards and Regulations. Where there is a conflict
between new or existing clients, Knights cannot accept/continue instructions unless the affected
clients have a substantially common interest or are competing for the same objective. Information
conflict and duty conflict are also covered by our policy. Knights provides periodic training on the
identification of conflicts of interest and compliance is monitored by the Compliance Officer for
Legal Practice, who is responsible for this policy. Policies are reviewed at least annually.
Whistleblowing: Employees are encouraged to report any serious wrongdoing by the firm or its
employees that fall short of its business principles. If they feel unable to report these concerns
to a manager, the Group also provides a whistleblowing process, which is detailed on its website
and provided to employees. Knights undertakes that no employee who raises bona fide concerns
under this Policy will be subjected to any detriment as a result.
Requirement
Social matters
Where to find
information
Caring for our
people and
communities
pages 32-34
Respect for
human rights
Anti-corruption
and anti-bribery
Managing our
Business for the
long-term
page 30
Section 172
statement
page 39
Managing our
Business for the
long-term
page 30
Section 172
statement
page 39
Policy overview
As outlined in Caring for Colleagues and Communities, Knights is actively engaged in its
communities through both employment and community activities. Knights’ legal services
are also aimed at helping local businesses thrive and grow.
The Group enables colleagues to support their local communities through its 4OurCommunity
programme, where colleagues can spend four hours of work time per month to offer assistance
to organisations, such as charities, schools, care homes, food banks and youth centres or any
organisation providing a social, educational, voluntary or charitable service to the community.
Knights’ aspiration is to deliver 50,000+ hours to its communities through the programme.
Modern Slavery: The Group has a zero-tolerance approach to modern slavery anywhere
in its supply chain and a full copy of its policy is detailed on its website.
The Group’s procurement policy includes a commitment to sustainable procurement and
mitigation against the risk of modern slavery, bribery or corruption anywhere in our supply chain.
The Group also aims to conduct itself to the highest standards and pay all invoices promptly.
The Board plays a key oversight role in these policies.
Knights has a rigorous ‘Know Your Client’ process to ensure that its business is not used
as a conduit for the proceeds of crime, terrorism or money-laundering. The Group conducts
thorough audits on clients’ background before working with them, and its dedicated,
independent in-house compliance teams rigorously monitor all work being conducted
throughout the business on an ongoing basis.
Anti-Money Laundering: Knights ensures its employees are aware of the law and are regularly
provided with training in how to recognise and deal with transactions that may be related to
money laundering. Knights provides employees with training and a manual to explain its policies
and procedures, including reference to its Money Laundering Reporting Officer. Policies apply to
all clients and all matters. The firm is required to maintain records of client identification evidence
for at least five years from the end of our business relationship with a client. Employee obligations
are to carry out “customer due diligence” and to recognise and report suspicious transactions,
as well as avoiding tipping off a suspect about a report.
Anti-Bribery and Corruption: Knights is committed to maintaining the highest standards
of ethics and compliance with all relevant laws wherever it does business. The Group does
not tolerate any form of bribery or corruption and requires all individuals working for it to
comply with anti-bribery and corruption laws and ethical standards.
Whistleblowing: All employees of Knights should feel able to raise concerns about any
safety, legal or ethical issues. If they feel unable to report these concerns to a manager,
the Group also provides a whistleblowing process, which is detailed on its website.
Other relevant
policies
Summary
Duties
to clients
Confidentiality
Knights is committed to providing an excellent level of service to its clients and to acting with integrity in all of its
dealings which is fundamental to our business strategy. We will only accept instructions and provide advice where
we are able to meet our commitment to client service. Where instructions or advice are outside the expertise or capability
of the business, they will be declined. Employees are aware of specific work types which require specific referral to
team risk supervisors. We will always consider the most appropriate style of communication bearing in mind the needs
and characteristics of the client. A member of the management team is responsible for client care at Knights and
reviews this policy at least annually to ensure continued excellence.
Confidentiality is a fundamental feature of our relationship with our clients. This duty continues beyond the end of the
retainer and even after the death of the client. The protection of confidential information is balanced against the duty
of disclosure. In practical terms, this means not speaking about clients, their details or their cases outside the office
or in situations where they might be overheard. This duty also applies to information about the Knights business itself.
Where employees cannot reconcile these two duties the protection of confidential information is paramount. Employees
can contact Mark Beech or consult the SRA handbook for further information. Breaches of confidentiality are reportable
offences and should be referred to the COLP. Breaches of confidentiality may be treated as a serious disciplinary offence.
Business
continuity
Unforeseen events could cause considerable disruption to Knights’ normal business activity, the potential impact of which
could be long lasting, having an effect on health and safety, reputation, market confidence, operating efficiency and financial
security. To this end, Knights’ policy is to take measures to protect itself to ensure it is prepared and efficient in responding
to such adverse situations. Best practice business risk management principles balance risk with the economics of investing
in cost effective loss prevention and minimisation. These principles include the highest regard for the safety and health
of employees, clients and the public, the continuation of the highest quality service to our clients and the protection and
preservation of property and the environment. This has been amply demonstrated in our response to the COVID-19 crisis.
40
41
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc 13.6
9.4**
Our continued focus on cash flow has resulted in strong
cash conversion of 80% for the year, with net debt being
lower than expected, positioning the Group well to deal with
the current economic uncertainty from the impacts of the
COVID-19 pandemic and to continue with our future growth
strategy via recruitment and carefully selected acquisitions.
5.1
4.8
4
Revenue
Financial Review
Revenue (£m)
Reported profit before tax (£m)
Underlying profit before tax* (£m)
74.3
52.7
34.9
32.1
20.2
70
60
50
40
30
20
10
0
7
6
5
4
3
2
1
0
4.9**
4.3
4.3
4.1
2.5
14
12
10
8
6
4
2
0
2016
2017
2018
2019
2020
2016
2017
2018
2019
2020
2016
2017
2018
2019
2020
Adjusted EPS (p)*
Average number of fee earners
Underlying PBT margin*
2020
2019
14.33
2020
622
2020
11.31
2019
402
2019
18.3%
17.9%
Fees per fee earner*
(£’000)
Underlying PBT per fee earner*
(£,000)
Reported EPS
2020
2019
119
2020
131
2019
22
2020
2.44p
23
2019**
5.27p
Financial results
Revenue
Staff costs
Other underlying costs and charges
Underlying profit before tax*
Amortisation of acquisition related intangibles
Non-recurring finance costs*
One-off costs on acquisitions and IPO*
Profit before tax
EPS
Adjusted EPS
2020
£’000
74,254
(45,578)
(15,060)
13,616
(1,427)
(41)
(8,090)
4,058
2.44
14.33
2019**
£’000
52,662
(30,137)
(13,098)
9,427
(693)
(2,038)
(1,847)
4,849
5.27
11.31
I am pleased to report strong performance
for the Group in the financial year, despite
suffering from the economic impact of the
COVID-19 pandemic during April, which
historically is the strongest trading month for
the Group. We have continued to build on our
historic strong track record of growth in both
turnover and profitability over the past six years
with a further 41% increase in turnover and a 45%
increase in Underlying Profit Before Tax (PBT).”
42
Reported revenue for the period was £74.3m
compared with £52.7m in 2019 representing
a 41.0% increase.
Of this increase 20%, or £10.5m, was a result
of the acquisitions made during the financial
year, £5.9m relates to the full year impact of
acquisitions made in FY19 with the balance
coming from organic revenue growth.
The Group achieved strong organic growth,
of £5.2m (10%), which is testament to our
commitment to continue to strengthen our
core business. The organic growth is primarily
a result of the increased fees from individuals
recruited in the later part of FY19 and fees
generated by the net new recruitment of
108 fee earners during FY20.
2020
2019
£74,254,000
£52,662,000
+41%
Staff Costs
Total staff costs represent 61.4% of revenue
compared with 57.2% in 2019.
Fee earner staff costs have increased from
49.6% of turnover to 52.1% of turnover
reflecting the investment in fee earners across
all levels during the year. As many of our new
fee earners joined us during the second half
they have been with Knights for less than the
six months it would typically take to achieve
the full expected fee earning run rate.
As reported in the second half of FY19 we have
continued to invest in our support functions in
FY20, focusing on increasing the management
resource available within the Group to ensure
we have a properly structured support team
with sufficient bandwidth to guarantee the
continued efficient integration of acquisitions.
In addition to the COO appointed in
January 2019, this investment has included
the appointment of a projects director,
a client services director, an operations
director, the expansion of our sales team
and further investment in the HR, IT and
finance support functions.
During the unprecedented period of working
from home due to nationwide lockdown we
have benefited from previous investments in
operational resource and IT as the business
was able to continue to operate as normal
with no interruption to our ability to transact.
We also completed three acquisitions and the
related data transfers, onboarding and staff
training on Knights’ operating systems whilst
working remotely, which is testament to the
strength of our platform and dedication
of our teams.
These investments, together with the costs
of the Executive and Non-Executive Directors
as discussed in the Remuneration Committee
report, has increased our support staff costs
from 7.6% of revenue in FY19 to 9.3% of
revenue in the current year.
Management anticipates that these costs will
now start to be leveraged by the increased fee
generating capacity of the business, supported
by the fact that, as at the end of the financial
year, the fee earning to support staff ratio
was at a level of 4.8 fee earners to every one
support staff (on a FTE basis) compared with
the average of 4.2 during the year.
Total staff costs
Direct staff costs
Net fee earner recruits
61.4%
(2019: 57.2%)
Support staff costs
9.3%
(2019: 7.6%)
52.1%
(2019: 49.6%)
Investment in support
function £,000
850
108
(2019: 46)
Note
* See Glossary on pages 122-124
** The 2019 figures have been adjusted to reflect the impact of IFRS 16 as explained on page 124
43
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc
Financial Review continued
Underlying profit before tax*
During the period we have adopted IFRS 16 in
relation to the accounting for lease contracts.
As set out in note 37 to the financial statements
this has resulted in reduction in profit before tax
of £0.5m compared with the level that would
have been reported under previous accounting
standards. The table below shows the impact
of IFRS 16 adoption on the results for the
financial year to 30 April 2020 and restates
the period to 30 April 2019 for the adoption
of IFRS 16 for comparison purposes. All of the
commentary below is provided on an IFRS 16
basis in both years, in order to provide a more
meaningful comparison.
2020
2019
£13,616,000
£9,427,000
+45%
Revenue
Other operating income
Staff costs
Depreciation and amortisation charges
Impairment of trade receivables and
contract assets
Other operating charges
Non-underlying costs
Operating profit
Finance costs
Non-recurring finance costs
Profit before tax
Taxation
Profit and total comprehensive income
for the year attributable to equity owners
of the parent
Basic EPS (pence)
Underlying earnings per share (pence)
Underlying Profit Before Tax
Underlying Profit After Tax
IAS 17
April 20
£’000
74,254
894
(45,578)
(2,281)
(112)
(13,770)
(8,090)
5,317
(677)
(41)
4,599
(2,239)
2,360
3.16
14.30
14,158
11,247
Reported
IFRS 16
April 20
£’000
74,254
894
(45,578)
(4,276)
(112)
Change
£’000
-
-
-
(1,995)
-
2,266
(11,504)
-
271
(812)
-
(541)
-
(541)
(8,090)
5,588
(1,489)
(41)
4,058
(2,239)
1,819
2.44
14.33
13,616
10,706
Reported
IAS 17
April 19
£’000
52,662
415
(30,137)
(1,473)
(439)
(11,164)
(1,847)
8,017
(738)
(2,038)
5,241
(1,240)
4,001
5.84
11.88
9,819
8,141
Change
£’000
-
-
-
(1,316)
-
1,603
-
287
(679)
-
(392)
-
(392)
Comparable
under
IFRS 16
April 19
£’000
52,662
415
(30,137)
(2,789)
(439)
(9,561)
(1,847)
8,304
(1,417)
(2,038)
4,849
(1,240)
3,609
5.27
11.31
9,427
7,749
Underlying PBT excludes amortisation
of acquired intangibles, non-underlying
transaction costs relating to the placing in
March 2020 and acquisitions made during
the year, restructuring costs as a result of
acquisitions and the cost saving exercise
undertaken in response to the COVID-19
pandemic and contingent consideration
payments required to be reflected through the
Statement of Comprehensive Income under
IFRS. It also excludes share-based payments
for one-off share awards made at IPO and
as part of the acquisitions, and the one-off
Share Incentive Plan offered to employees
as a result of the listing. Any share-based
payments charges relating to ongoing
SAYE and LTIP schemes are recognised
as underlying costs of the Group.
Underlying profit before tax has been
calculated as an alternative performance
measure in order to provide a more meaningful
measure and year on year comparison of
the profitability of the underlying business.
Underlying profit before tax has increased
by 45% compared with the same period last
year to £13.6m (2019: £9.4m), representing
a margin of 18.3% as compared with 17.9%
in the prior year. The improvement in margin
is a result of the increase in fee income
leveraging general overheads and finance
costs in the business which is particularly
encouraging given the level of investment
in the business. In addition to the investment
in fee earning and support staff as discussed
above, during the year there has also been
investment in other areas of the business
in preparation for future organic growth.
For example the investment in the increased
office premises in Manchester at the start
of the financial year has led to an increase in
costs of approximately £750k. This investment
has allowed organic and acquisitive growth
in Manchester during the year with scope for
further expansion of up to 70 fee earners in the
future, providing opportunity to further leverage
overheads and improve profitability over time.
Reported profit before tax
The reported profit before tax for the year has
decreased by 16.3% to £4.1m (2019: £4.8m
on a comparable IFRS 16 basis). The decrease
in reported profit before tax of £0.7m in the year
reflects the net impact of increased revenue, the
leveraging of overheads of £3.5m, the decrease
in non-underlying finance costs of £2m and
the increased non-underlying costs of £6.2m.
Note
* See Glossary on pages 122-124
44
The significant increase in the non-underlying
costs incurred due to the six acquisitions (FY19
four) and restructuring exercise undertaken as
a result of the COVID-19 pandemic. The non
underlying costs relating to acquisitions include
the recognition of some contingent payments
on acquisitions and the restructuring costs.
2020
2019
£4,058,000
£4,849,000
-16.3%
Earnings per share (EPS)
The weighted average number of shares
in 2020 was 74,675,462 (2019: 68,533,094)
which gives a basic earnings per share (Basic
EPS) for the year of 2.44p (2019: 5.27p). Taking
into account the number of share options that
the Group has outstanding at the year end
gives a diluted EPS of 2.41p (2019: 5.24p).
In order to compare the EPS year on year, the
underlying EPS has been calculated showing
14.33p in 2020 compared with 11.31p in the
prior year. This measure eliminates the effect
of any non-recurring and non-underlying costs
on the EPS calculation.
Corporation tax
Underlying EPS
Basic EPS
2020
2019
14.33p
2020
2.44p
11.31p
2019
5.27p
14.33p
2.44p
The Group’s tax charge for the year was £2.2m
(2019: £1.2m) which was made up of a current
corporation tax charge of £1.9m and a deferred
tax charge of £0.3m (2019: credit of £0.1m).
The deferred tax charge arises due to the
charge on the acquired intangible assets and
the increase in the expected future corporation
tax rate from 17% to 19%.
The total effective rate of tax is 55% based
on reported profits before tax. This has been
adversely affected by non-underlying items
(largely amortisation of acquired intangible
assets and the recognition of contingent
consideration on acquisitions against profits)
that are not tax deductible. The effective rate of
tax on the underlying profits of the business is
21% (see note 16 of the financial statements).
Effective rate of tax
21%
2019: 17%
Dividend
Due to the COVID-19 pandemic and the
resultant uncertainty of the effects on the UK
economy the board has introduced cost cutting
measures across the Group to ensure that the
business is in the best possible position given
the current uncertainty. Whilst these cost cutting
measures are in place, the Board has decided
that it would not be appropriate to propose
Balance sheet
a final dividend for the financial year at this
time. As such the total dividend for the year
ended 30 April 2020 will be the amount
already paid as an interim dividend, being
1.10p per share (2019: 1.87p per share).
Pence per share
1.10p
2019: 1.87p
The Group adopted IFRS 16 Leases during the period. The table below shows the impact of IFRS 16 adoption on the Balance Sheet as at 30 April
2020 and shows the comparatives as at 30 April 2019 after adoption of IFRS 16 for comparison purposes. As explained in note 3 to the financial
statements, the Group adopted the transition method for implementing IFRS 16 which does not require the restatement of comparative figures.
Goodwill and intangible assets
Right of use assets
Working capital
Other net assets (liabilities)
Lease liabilities
Cash and cash equivalents
Borrowings
Net debt
Deferred consideration
Net assets
IAS 17
April 20
£’000
69,135
-
27,681
(2,012)
Change
£’000
-
23,749
-
-
-
(23,844)
94,804
12,741
(28,650)
(15,909)
(2,850)
76,045
(95)
-
-
-
-
(95)
Reported
IFRS 16
April 20
£’000
69,135
23,749
27,681
(2,012)
(23,844)
94,709
12,741
(28,650)
(15,909)
(2,850)
75,950
Reported
IAS 17
April 19
£’000
46,444
-
11,762
(1,616)
Change
£’000
-
19,470
-
-
-
(19,018)
56,590
4,904
(19,000)
(14,096)
(3,239)
39,255
452
-
-
-
-
452
Comparable
under IFRS 16
April 19
£’000
46,444
19,470
11,762
(1,616)
(19,018)
57,042
4,904
(19,000)
(14,096)
(3,239)
39,707
The Group’s net assets as at 30 April 2020 increased by £36.2m reflecting the shares issued in relation to acquisitions in the year and the placing
in March 2020, and profit net of dividends paid during the year. The working capital as at the end of the year shows a disproportionate increase
when compared with the increase in turnover due to the three large acquisitions at the year end, with the full impact of the acquired working capital
but only two months of income included in turnover for the year.
45
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc
Cash conversion of 80% in the year to 30 April 2020 reflected the
extended lockup in recent acquisitions.
Capital expenditure
During the year the Group has continued to invest in its systems
and premises to expand our capacity and ensure our professionals
continue to benefit from a high quality working environment, with
consistent systems across the Group to aiding integration and
supporting our one firm culture.
The total £2.2m invested in capital expenditure (excluding right
of use assets capitalised as part of the adoption of IFRS 16) included
the following one-off non-recurring significant items required as a result
of the acquisitions and continued growth of the Group:
Refurbishment of new Manchester premises
Refurbishment of Oxford premises (to expand capacity)
Refurbishment of additional office space in Wilmslow
Provision of new / upgraded IT equipment
for acquisitions
Total
£m
0.5
0.3
0.3
0.5
1.6
Other capital spend in the financial year relates to general investment in IT,
communications and infrastructure required for the increase in the number
of employees, and to support our programme of rolling IT replacements
to ensure our technology is up to date and sufficient to meet the needs
of the business.
Due to the current economic uncertainty the Directors wish to monitor
the impact on the business closely before committing to significant
expenditure. As such, the capital budgets for FY21 have not yet been
finalised. Nonetheless, the Group remains committed to ensuring all
acquisitions are fully integrated onto Knights’ operating system with
a comparable high quality working environment.
Following entry into new markets through acquisition, we expect some
expenditure on new premises in Nottingham and Birmingham where
leases are due to expire in the next financial year. We have also committed
to new modern offices in a central Leeds location and we are reviewing
the need for investment in Maidstone and Crawley offices before finalising
budgets for the year.
Acquisitions
During the year we completed six acquisitions. The table
below summarises the net impact of the acquisitions during the
year and in FY19 on cash during the current year and in future
years. This shows the impact of consideration payable net of any
cash in the acquired businesses.
Cash
impact from
acquisitions
in the year
£m
18.96
6.08
5.25
Cash
impact from
acquisitions
in 2019
£m
3.75
2.32
0.65
Total cash
impact from
acquisitions
£m
22.71
8.40
5.90
Financial
year ended
2020
2021
2022
The above includes estimated contingent consideration charged
as remuneration in the Income Statement.
Acquisitions completed during the year were structured with a lower
initial cash outlay, altering the balance between cash, shares and
deferred or contingent consideration agreed, as confidence in the
value of the Group’s shares has increased.
The strong cash and lock up management systems in the
Group mean that often we generate cash from the balance sheets
of acquired businesses.
Tax - Cash flow impact
Corporation tax
In FY20 the Group and Company fell under the large Quarterly
Payments regime for corporation tax for the first time. This had the
effect of advancing the corporation tax payments such that the full
estimated corporation tax for the financial year has been paid during
the year rather than only 50% under the prior year’s tax regime.
The cash impact of these additional tax payments during the year
was approximately £1.1m.
VAT
During the COVID-19 pandemic the Group benefitted from the
temporary ability to defer VAT payments until June. As at 30 April 2020
this had a positive impact on cash of approximately £0.8m. This deferral
of VAT will reverse impacting cash flow in FY21.
Financial Review continued
Goodwill and intangible assets
Included within intangible assets and goodwill
is £29.4m of intangible assets, identified
on current and prior acquisitions, such as
customer relationships, brand and computer
software. The balance relates to goodwill
of £39.7m arising from acquisitions.
The Board carries out an impairment review
of goodwill each year to ensure the carrying
value is supportable. Although the Board
cannot predict with any certainty the level
of future trading of the business given the
Working capital
Lock up days is the primary metric used by
the Group to measure the length of time it takes
to convert work recorded into cash received.
It is calculated as the combined debtor and
WIP days for the Group. Management of lock
up has continued to be a key focus of the Group
over the period as it drives the cash generation
necessary to support the growth strategy of the
Group. Total lock up days at 30 April 2020 were
105 compared with 93 the previous year.
Management are satisfied with the level of lock
up at the year end which remains significantly
better than the industry average despite being
adversely affected by the acquisitions during
the year that had longer lock up profiles when
acquired. Excluding the impact of extended lock
Net debt, financing and leverage
The strong cash conversion in the period,
together with the funds raised during the
Placing in March 2020 have resulted in net
debt of £15.9m at the year end which was
over £1m better than expectations. This figure
represents an increase in net debt from the
£14.1m as at April 2019 due to an aggregate
cash outlay of £3m relating to consideration
for acquisitions made during the period and
deferred consideration paid in relation to
acquisitions in prior years, net of the £20m
proceeds from the placing.
Cash conversion
current economic uncertainty, the value
in use of the goodwill was calculated using
a number of different scenarios, some of which
assumed a considerably worse outcome than
is anticipated by the directors. In all instances
the future trading of the business was more
than sufficient to justify the carrying value
of goodwill. Therefore as at 30 April 2020,
the Board concluded that the goodwill and
intangible assets were not impaired.
2019: £46.4m£69.1m
up on acquisitions during the year, the lock up
at 30 April 2020 was 85 days (2019: 88 days).
Lock up days
Average lock up days of acquisitions was
137 days pre-acquisition which has reduced
to 130 days at the year end. Due to the
proximity of a number of the larger acquisitions
to the year end, lock up has not reduced
significantly in acquisitions as at 30 April 2020.
We anticipate lock up of recent acquisitions
to reduce to levels in line with the rest of the
Group during the first half of FY21.
The Group’s strong control over debtors is
reflected in a low level of bad debts. Total bad
debt charge for the year has reduced to just
0.2% of turnover (2019: 0.8%).
85 days
2019: 88 days
Excludes the impact of the extended lock up on
acquisitions made during the year
Bad debt
0.2%
2019: 0.8%
of turnover
During the year, the Group increased its RCF
facility to £40m (split between two banking
partners: AIB and HSBC). This increased
facility, together with the additional £19.2m
funds raised through a placing of shares on
6 March 2020 gives the Group good headroom
and positions the Group well to both deal
with the economic uncertainty created by the
ongoing COVID-19 pandemic to continue its
growth strategy into 2021 through continued
organic recruitment and carefully selected,
culturally aligned aquisitions.
Net debt
£15.9m
2019: £14.1m
Leverage
(multiple of adjusted EBITDA)
0.9
2019: 1.2 times
Net cash generated from underlying operating activities*
Tax paid
Cash outflow for IFRS 16 leases (rental payments excluded from operating activity cash flows under IFRS 16)
Free cash flow
Underlying profit after tax*
Cash conversion
2020
£’000
13,791
(2,907)
(2,366)
8,518
10,706
80%
2019
(IFRS 16 adjusted)
£’000
11,706
(1,076)
-
10,630
7,749
137%
The cash conversion percentage measures the Group’s conversion of its underlying profit after tax into free cash flows. Cash conversion of 137% in 2019
was an exceptional result reflecting the cash flow benefit of reducing the lock up in acquired businesses down to a level in line with the rest of the Group.
46
47
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc
Financial Review continued
Key performance indicators
The Group uses a number of key performance
indicators (KPIs) to monitor the Group’s
performance against its strategic objectives.
These comprise a number of financial and
non-financial measures which are agreed
and monitored regularly at Board meetings.
The financial indicators are calculated
based on underlying results excluding any
one-off transactional and acquisition related
costs. The Board is of the opinion that these
operational factors are key drivers for the
Group’s financial success.
Number of fee earners/Fees per fee earner
Top line growth is a product of the number of fee earners employed and the fees per fee
earner that they are generating, therefore these are two KPIs that the Board monitors closely
on a monthly basis.
Average full time equivalent
fee earners during the year
The number of full time equivalent fee earners in the Group more than doubled to 865 at the
end of the financial year from 426 at the start of the year, which reflected a combination of new
recruits and new joiners via acquisition partially offset by the restructuring exercise undertaken
as a result of the COVID-19 pandemic.
622
(2019: 402)
Fees per fee earner
£119k
(2019: £131k)
Overall fees per fee earner of £119k were generated during the year compared with
£131k in 2019.
As a business that has always been focused on cash and profits rather than fees, fees per
fee earner, although a useful benchmark, needs to be considered alongside other profit based
KPIs as the fees per fee earner can vary from period to period based on a range of factors.
For instance, in the reporting year:
- As anticipated, the Group’s strong recruitment in the financial year reduced the reported fees
per fee earner. In the first year of recruitment, due to the necessary training and onboarding
processes that take place for all new recruits, it typically takes three to six months for new
recruits to achieve their expected run-rate on fee generation.
- During the year the Group continued to invest in paralegal and trainee resource to support
the more experienced recruits joining the business and to ensure teams had sufficient resource
at all levels. As Knights includes paralegals and trainees as fee earners, this change in mix
brings down the average fee per fee earner.
- Acquisitions typically bring a lower fee per fee earner prior to full onboarding.
New recruits during the year generated £71k per recruit and acquisitions during the year
generated £119k per fee earner, many of which have only been with the business for less
than six months.
From our first acquisition in 2012, management has been more focused on growth in
profitability and the cash generation of the business; therefore a more important KPI and area
for focus by the Board is the underlying profitability of the business for the year and by fee earner.
The key drivers impacting underlying profit before tax for the year are discussed below.
Underlying profit before tax (PBT)
With the adoption of IFRS 16 during the year
the Board views the KPI of underlying PBT
as a more accurate measure of its performance
as this reflects all of the property and lease
costs incurred by the Group. The Board believes
that it is an important metric for monitoring
the profitability of ongoing operations.
Underlying PBT excludes amortisation
of acquired intangible assets and one-off
transaction costs relating to the placing
of shares in March 2020, acquisitions
made during the year and restructuring
costs as a result of the acquisitions and the
cost saving exercise undertaken in response
to the COVID-19 pandemic. It also excludes
share-based payments for one-off share
awards along with contingent consideration
payments required to be reflected
Note
* See Glossary on pages 122-124
48
through the Statement of Comprehensive
Income as remuneration under IFRS
accounting conventions.
2020
2019
18.3%
17.9%
The underlying PBT for 2020 has grown
by 39% over the 2019 comparative level.
This represents a PBT margin of 18.3%
compared with 17.9% in 2019 reflecting the
fact that the increased scale of the business
is further leveraging the overheads of the
business whilst also allowing the Group to
invest in new fee earners, support staff and
larger premises to provide a stable base for
future growth. As a result, underlying PBT
per fee earner remained relatively stable
at £22,000 per fee earner compared with
£23,000 in FY19, despite the additional
investment and recruitment in the year.
+45%
Underlying PBT per fee earner
£22k
(2019: £23k)
Fee earner to non-fee earner ratio*
The business model and use of IT systems
have been key in enabling the Group to
maintain a fee earner to non-fee earner staff
ratio that is much higher than the average for
the sector. This continues to be one of the key
differentiators in our business model enabling
the Group to generate such strong margins.
As at 30 April 2020, due to the growth in
the business via acquisitions and organic
recruitment the Group is operating at a ratio
of 4.8 fee earners for every one support staff.
4.8
(2019: 4.0)
This is despite the investment in support
staff during the year and now places the
Group in an excellent position to continue to
leverage overhead costs in the coming year.
However, the Board recognises the importance
of ensuring that the support function is always
sufficient for the business and that capacity
is in place before any significant planned
growth. Therefore the Group will accordingly
continue to invest in support staff to create
the required sustainable base for future
growth meaning that this ratio may vary
over time dependant on where the Group
is in its investment and growth cycle.
In summary
The Board is pleased with the growth in fee income and
profitability during the year which has been achieved whilst
also investing significantly in the strengthening of the
management and support staff function as well as organic
income growth via recruitment.
The ability of the Group to deliver such strong results is
particularly pleasing given the significant impact of COVID-19
in the last month of the financial year. The Group’s performance
together with the lower than anticipated levels of net debt,
due to the Group’s excellent cash management, places us
in a strong position to continue to grow the business both
organically through recruitment, and through selective
acquisition opportunities.
Kate Lewis
Chief Financial Officer
21 July 2020
49
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc Principal Risks and Uncertainties
The Board is responsible for continually reviewing and assessing the principal risks
facing the Group, both from a financial and non financial perspective and to ensure that
controls are put in place to ensure the Groups’ exposure to these risks is minimised.
Although risks and uncertainties are formally reviewed annually by the Board, they are
continually considered by the Board in all business and strategic decisions.
The principal risks are identified as follows but the Board recognises that the nature
and scope of risks that the Group is exposed to may change and as such this list is not
intended to be exhaustive:
Principal risk
Description
Mitigation
Professional
liability and
uninsured risks
The Group provides, amongst other things, legal, tax, and town planning services which gives rise
to a potential liability for negligence, breach of regulatory duties or other similar third party claims.
Such claims have the potential to cause financial loss and could also negatively impact the reputation
of the Group which ultimately could adversely affect the financial performance of the Group.
The Group maintains comprehensive professional liability insurance to reduce or mitigate against any financial impact of claims made.
Claims are dealt with by a central team to ensure that they are dealt with effectively and in line with the Group’s compliance policy.
The Compliance team works closely with Insurers and the Regulatory bodies to ensure any risks are minimised.
The Directors consider compliance to be of paramount importance and feels that it has appropriate processes in place to ensure
compliance. Procedures are continually reviewed and amended to take into account up to date guidelines and advice.
The Board consider the Group to have a good claims history.
Regulatory and
compliance risk
The legal sector is heavily regulated and as a result, in addition to the normal government guidelines and
regulations that a business is subject to, the Group is also regulated by the Solicitors Regulation Authority
(SRA) and Information Commissioners Office (ICO). Non-compliance with any regulations could result
in reputational damage to the business and may have financial implications.
The Group has a strong Compliance and Regulatory team which ensures compliance with all necessary regulations. External advice
is taken if required. The Board is regularly updated on any regulatory developments so that it can ensure these are fully considered
in all business and strategic decisions.
Restrictions imposed by the Legal Services Act 2007 (LSA)
Knights Group Holdings Plc is a Licensed Body. The LSA places restrictions on the holding of ‘restricted interests’
in Licensed Body law firms. This restricts the maximum shareholding that can be held, without prior SRA approval,
by a non-lawyer shareholder to 10 percent of the issued share capital. If a non-authorised shareholder were to
obtain a shareholding in excess of 10 per cent this would be classed as a criminal offence and the SRA could force
divestment or revoke the Licensed Body status of the Group.
Employee misconduct and litigation
As a professional services provider, the Group is exposed to the risk that personnel may engage in misconduct
or improper use of confidential client information. Such misconduct could damage the Groups’ reputation or result
in regulatory sanctions and financial damage.
Personnel
Ability to attract and retain personnel
The ability to attract and retain suitably qualified and experienced personnel is critical to the Group’s success
as they constitute the principal assets and contributors to revenue. There is strong competition in the marketplace
for such personnel and any difficulties in attracting and retaining such high quality personnel could impact
on the Group’s ability to deliver the financial forecasts.
Succession planning and dependence on key personnel
The Group’s future success and strategy is dependent on the performance and retention of the Executive Directors
and senior management team. The loss of a key individual or the inability to expand the senior management team
as the business grows could negatively impact the reputational and financial performance of the Group.
The Directors work closely with the SRA to ensure there are no breaches and review shareholding regularly. The Board ensure that advisors
and shareholders are aware of this issue.
Knights adheres to an Information Security policy that draws on best practice from ISO 270001 and Cyber Essentials plus. This policy
is delivered annually to all colleagues and new recruits on induction.
The Group takes data protection seriously and has in place robust data protection procedures to ensure it is compliant with GDPR regulations.
The Group invests heavily in working to attract high quality personnel with organic growth being a key focus for the Board. In the last year
the Group has employed a Recruitment Director whose primary focus is ensuring that high quality people with the right culture are identified
to join our group.
The Group also offers competitive remuneration packages in its current locations, flexible working conditions and a no targets team culture
allowing individuals to maximise their job satisfaction and work/life balance.
The Group enjoys low staff turnover and the Board strive to continuously engage with its employees to ensure that employees understand
the drivers of the business and there is a continuous reinforcement of the transparent and collaborative culture despite the changing working
environment as a result of COVID-19 with employees having worked from home since 16th March 2020, with these working practices expected
to continue until at least 1 September 2020.
Employee contracts include restrictive covenant provisions to protect the business where possible.
During the year the Board has worked hard to expand and strengthen the management team of the Group to ensure the management structure
in place is sufficient to support the future growth of the business. In particular in the last year the Client Services team has grown with the
introduction of two new directors, a new Operations Director has been recruited and the operations team has been strengthened considerably
in order to seek to ensure that the execution and integration of acquisitions and the ongoing focus on organic growth and strengthening the
existing business can be maintained with a wider team taking responsibility for these activities.
50
51
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc Principal Risks and Uncertainties continued
Principal risk
Description
Mitigation
Acquisition risk
A key part of the Group’s strategy is to expand the business through the acquisition of culturally aligned,
earnings enhancing acquisitions. Detailed financial and legal due diligence is carried out however there
is the risk that there are unforeseen issues that adversely affect the reputation or forecast financial
performance of the Group.
If newly acquired businesses are not properly aligned and integrated this could have negative impacts on the
rest of the business and cause reputational damage. There is also the financial risk that the acquired business
does not perform as expected.
Macro and
micro economic
environment
Current uncertainty in the market as a result of the global pandemic of COVID-19 which is expected
to result in a general economic downturn which may have a negative impact on the financial performance
of the Group.
There are a large number of potential competitors within the legal and professional services market competing
for the Group’s professionals and clients, any loss of which could impact the financial performance of the Group.
Reputation
and brand risk
Knights’ brand and the reputation of the Group and its professionals are driving factors behind the success
of the Group. Anything that damages the Group’s brand or reputation could negatively impact the future
success of the business.
The Group has an experienced in house acquisitions team that undertakes a robust due diligence process with expert external advice
being sought where necessary. Warranties and disclosures are obtained from the sellers as appropriate.
The Board recognises that cultural integration is critical to the success of every acquisition. During the year the acquisition and integration
teams have continued to be strengthened and the full integration plan utilised by the Group is under continuous review and built upon.
This ensures that all acquisitions are fully integrated onto the Group’s Operating System as soon as possible and a full training programme
is delivered to all new colleagues, which can be delivered both remotely and in person so that integration of acquisitions is not compromised
despite the business currently working from home in line with government advice. Cultural integration of the new colleagues is key at all stages
of the acquisition and integration process and continues to be a focus with continuous reinforcement by the leadership team and the existing
employees of the business.
The Board believes its exposure to both macro and micro environmental factors is limited due to there being no reliance on any one
practice area, client or professional, and the Group’s continuous focus on cash collection resulting in it having good headroom to counteract
the impact of the lock down measures taken by the government in March 2020.
As announced on 26 March 2020, the Group moved quickly to put in place a number of prudent cost saving and efficiency measures
in relation to the uncertainty created by COVID-19, demonstrating the benefit of a corporate structure in which the senior leadership were
able to act with agility whilst supporting its lawyers to remain focused on delivering value to clients.
The Board believes that the swift actions taken position the Group well to trade through the current environment, which has resulted
in a circa 20% decline in instructions. However, the Board is encouraged by early signs that market conditions have stabilised following
the particular disruption experienced since early April.
The Group expects that the number of law firms may decrease due to the uncertainty within the market and the traditional partnership structure
operated by many law firms resulting in such firms having limited cash resources to counteract any decline in revenue as a result of the lock down
measures taken by the government. The Board believes that this positions the Group well to attract talent from potential competitors.
The Board also believes by maintaining the high quality work and strong client base, lawyers will continue to be attracted to Knights’ business
which can be seen by its double digit organic growth in the last year.
Management have in place detailed processes to ensure that all work is undertaken in accordance with the Code of Conduct
and Professional Ethics. Internal audits take place to identify any areas of non-compliance.
An open, candid and non-hierarchical culture is nurtured whereby all colleagues are expected to behave in accordance with the
internal processes in place.
Damage to the Knights’ brand could have a detrimental impact reputationally which ultimately could have
financial implications for the Group.
The Group takes appropriate steps to protect its intellectual property rights. Corporate profile is a key part of the Boards strategy
and external public relations advisers are engaged to assist where necessary.
Information
systems and
data security
The Group is heavily reliant on its information technology systems for all day to day processes. A major IT system
failure or a malicious attack, data breach or virus accidental could impact the ability of the Group to operate having
both reputational and financial implications.
The Groups systems are supported by appropriately qualified and experienced individuals and third parties. External expert advice
and support is sought when necessary. Critical systems fail over and recovery are regularly tested and no issues have been identified.
The Group liaise regularly with their key suppliers to continue to develop and improve the Operating Systems utilised by the Group.
Knights’ Information Security Awareness training helps colleagues to identify and prevent fraud\misuse of information and this training
is regularly updated to ensure that where certain risks are increased as a result of environmental factors (such as cybercrime in light
of COVID-19), the business and colleagues are aware of any heightened risk. Beyond training Knights’ candid culture and team ethos
delivers a supportive high communication environment which ensures colleagues can ask questions and be guided as required.
This strategic report and the information referred to herein was approved on behalf of the board on 21 July 2020.
Kate Lewis
Chief Financial Officer
52
53
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc Knights plc
Annual Report and Accounts 2020
Corporate Governance
56 Board of Directors
58 Chairman’s Introduction
60 Corporate Governance Statement
62 Remuneration Committee Report
64 Audit Committee Report
66 Directors’ Report
68 Statement of Directors’ Responsibilities
54
55
Corporate GovernanceFinancial StatementsStrategic Report Board of Directors
David Beech
Chief Executive Officer
Richard King
Chief Operating Officer
Kate Lewis
Chief Financial Officer
Balbinder (Bal) Johal
Non-Executive Chairman
Steve Dolton
Senior Independent Non-Executive Director
Jane Pateman
Non-Executive Director
A corporate lawyer and former manager of a
private equity fund, David joined Knights in 2011
with the vision to transform the business into
the UK’s number one legal and professional
services business outside London.
David acquired and remodelled Knights in 2012
with a clear strategy to transform the business
into a growth platform. Knights became a
pioneer in the UK legal sector being one of
the first law firms to secure external funding
in 2012 to fully corporatise the business and
create a clear separation between ownership/
management and partners.
Richard has extensive experience of
transforming operating models, integrating
acquisitions and exploiting technology to scale-
up and deliver operational efficiency in large
enterprises such as Procter & Gamble, Shell
and a B2B cloud services start-up (Transora).
Previously, Richard was European
Commercial Capabilities Director at Procter
& Gamble. He joined Knights as COO
in January 2019, overseeing the scale-up
of the operating backbone and increased
use of technology to improve service quality
and operating efficiency.
Kate qualified as a Chartered Accountant
and has been a member of the ICAEW since
1996 having trained as an accountant at Dean
Statham. Kate spent over 10 years as an Audit
Manager at Baker Tilly and KPMG.
Kate joined Knights in 2012 as Finance Director,
overseeing the Knights’ corporatisation and
subsequent refinancing with both Allied Irish
Bank and Permira and the IPO in June 2018.
Bal is CEO of MML Capital Partners,
an international private equity firm based
in London, New York, Paris and Dublin.
Bal has led a number of investments for
MML including investments into CSI Ltd,
PIE/PSG Group, Banner Group, Arena Group
(now plc), Clean Linen & Workwear, Instant
Offices, Optionis Group, ParkingEye and
The Regard Partnership and worked on others
including Vanguard, EiC and Redmill Snack
Foods. Bal is a Director on the Board of
most of these companies.
Prior to MML, Bal was Investment Director
at 3i leading a range of high-profile investments
such as SmartStream, Jungle.com, Workplace
Systems plc, Telecity, Complete Care and
Recognition. Bal started his career as a
Management Consultant with Accenture later
working as a Financial Analyst at HSBC.
Steve qualified as a Chartered Accountant
and has been a member of the ICAEW since
1989 having qualified with Grant Thornton.
He has spent over 20 years in senior financial
roles including CFO of NAHL plc, NSL Services
Group, Azzurri Communications, Safety Kleen
Europe, Walker Dickson Group and Peek plc
(including a 2 year period in Asia as
Regional Controller).
He is also currently Chairman of the Go Inspire
Group and Total Managed Document Solutions
Limited was previously a Non-Executive Director
of Oxford United Football Club until its sale
in February 2018.
Steve is Chair of the Audit Committee and
sits on the Remuneration Committee.
Jane brings over 20 years’ experience
in senior HR roles at listed businesses
including Centrica and British Gas, and
culminating in her current role as Group HR
Director at Biffa plc where she is responsible
for developing the People Strategy for
approximately 8,000 employees across
4 operating divisions.
Jane has a strong track record in driving
business benefits through the development
and delivery of human capital strategies.
During her 10 years at Biffa, she has provided
significant support in delivering solutions
during major growth periods, including during
its IPO as well as driving people and cultural
integration for the multiple acquisitions Biffa
has made over the past 5 years.
Jane chairs the Remuneration Committee
and has taken responsibility for overseeing
the Knights ESG strategy. She also sits on
the Audit Committee.
56
57
Corporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plcStrategic Report Chairman’s Introduction
Governance principle
Compliant
Explanation
The Board recognises the importance of high standards of
corporate governance as the basis for promoting long-term
growth for the benefit of all of the Group’s stakeholders.
As Chairman, I am responsible for leading
the Board to ensure that it has in place the
strategy, people, structure and culture
to deliver value to its stakeholders, and for
ensuring that the governance arrangements
that the Group has in place are proportionate
and appropriate for the size and the
constitution of the Board and the complexity
of the business. In accordance with the AIM
rules the Group has elected to comply with the
principles set out in the Corporate Governance
Code for small and mid-sized companies
published by the Quoted Companies Alliance
in April 2018 (the QCA Code) as the basis of
its governance framework.
The underlying principle of the QCA Code
is to “ensure the company is managed in
an efficient, effective and entrepreneurial
manner for the benefit of all shareholders
over the longer term”. As a Board, we are
committed to providing the leadership
required to ensure that the culture that is
so integral to the success of the business
is embedded within the business and work
hard to engage with employees and other
key stakeholders to ensure that this healthy
corporate culture continues to be delivered
through open and honest dialogue and we
are delighted to set out below how we comply
with the QCA Code.
The QCA Corporate Governance Code
The Board has adopted the QCA Code. Set out below is how the Board currently complies with the key principles set out in the code.
Governance principle
Compliant
Explanation
Further reading
See pages 16-17
1
Establish a strategy and
business model which
promotes long-term value
for shareholders
Seek to understand and
meet shareholder needs
and expectations
Take into account
wider stakeholder and
social responsibilities
and their implications
for long-term success
2
3
58
Our strategy is to be the leading legal and professional
services business outside London and we aim to achieve
this through:
organic growth which in particular includes;
attracting new talent (be that individuals or teams) wishing
to be part of a progressive legal services business;
roll-out of new offices into target regional locations;
outsourcing from national and international firms;
increasing productivity through better use of IT;
enhanced cross-selling through the addition of new service
lines within the existing business; and
acquisitive growth by continuing to acquire legal teams
or firms offering geographic expansion into attractive
new regional markets for Knights, and to further expand
offerings in existing regional locations.
The CEO and CFO communicate regularly with shareholders,
investors and analysts, including at our half-yearly and full year
results roadshows. The full Board is available at the Annual
General Meeting (‘AGM’) to communicate with shareholders.
www.knightsplc.
com/investors/
corporate-
governance
Aside from our shareholders, our clients, employees, suppliers,
and regulators are our most important stakeholders. We engage
with these communities via regular communications in our
day-to-day activities, and via formal feedback requests. We also
understand the importance that we can play in giving back
to our communities and our ESG report refers to the role that
we play in this regard.
See pages 61-62
4
5
6
7
8
Embed effective risk
management, considering
both opportunities and
threats, throughout the
organisation
Maintain the Board
as a well-functioning,
balanced team led
by the Chair
Ensure that between
them the Directors
have the necessary
up-to-date experience,
skills and capabilities
Evaluate Board performance
based on clear and
relevant objectives, seeking
continuous improvement
Promote a corporate culture
that is based on ethical
values and behaviours
9
Maintain governance
structures and processes
that are fit for purpose and
support good decision-
making by the Board
10
Communicate how the
Company is governed
and is performing by
maintaining a dialogue
with shareholders and
other relevant stakeholders
The Board considers risk to the business at each Board
meeting and via its standing committees: the Audit Committee,
Remuneration Committee and Disclosure Committee.
Both the Board and senior managers are responsible for
reviewing and evaluating risk and the Executive Directors
meet at least monthly to review ongoing trading performance,
discuss budgets, forecasts and new risks associated with
ongoing changing trading.
The Board has three established Committees for Audit
and Remuneration and Disclosure. The composition and
experience of the Board is reviewed regularly by the Board,
with external advice where required as given the size and
composition of the Board, the Board does not consider
that a Nominations Committee is required.
Further reading
See pages 50-53
See pages 60-65
The Board is satisfied that its current composition includes
an appropriate balance of skills, experience and capabilities,
including experience of the recruitment, people management,
technology and funding requirements.
See pages 56-57
The Board regularly considers the effectiveness and relevance
of its contributions, any learning and development needs and
the level of scrutiny of the Senior Management Team but at this
stage has considered that internal review is sufficient given the
size of the Board. This will be kept under continuous review.
See page 61
See pages 28-34
and 40-41
See pages 60-61
www.knightsplc.
com/investors
Being a regulated law firm the Group is focused on
progressing a strong ethical corporate culture. The Board
implements a policy of equal opportunities in the recruitment
and engagement of employees during the course of their
employment and recognises the importance of honest
and open feedback at all times to facilitate the growth
of individuals and teams within the business.
The Group prides itself on its culture, and maintaining that
culture through consistent engagement with its staff which
is integral to the Group’s success. The Group achieves this
consistent messaging in a number of ways including: regular
meetings with team leaders to understand the issues that the
staff are facing, all staff calls, particularly during COVID-19
to ensure all staff are fully informed about key developments,
and a clear and collaborative management structure which
encourages engagement at all levels.
The Board is responsible for the Group’s overall strategic
direction and management and meet regularly to review,
formulate and approve the Group’s strategy, budgets,
corporate actions and oversee the Group’s progress
towards its goals. The Group has a set of Reserved Matters
for approval by the Board has been established and
is regularly reviewed given the growth of the business.
The Group is committed to maintaining good communication
and having constructive dialogue with its shareholders.
Regular institutional shareholder meetings and PCFM
days are held with the Chief Executive Officer and Chief
Financial Officer to discuss Company performance,
particularly following publication of the Group’s interim
and full year results.
In addition a range of corporate information (including copies
of presentations and announcements, and an overview of
activities of the Group) is available on the Group’s website.
59
Corporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plcStrategic Report Corporate Governance Statement
Board composition
Operation of the Board
The Board comprises six Directors, three
of whom are Executive Directors and three
of whom are Non-Executive Directors,
reflecting a blend of different experiences
and backgrounds further details of which are
set out on pages 56-57. 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
as a public company, while at the same time
ensuring that no individual (or a small group
of individuals) can dominate the Board’s
decision-making.
Whilst the Chairman has a considerable
length of service and previous interest
in the Group, it has been determined that in
terms of interest, perspective and judgement
he remains independent and is supported
by the two additional independent
Non-Executive Directors.
Committees
The Group has established an audit committee
(the Audit Committee) and a remuneration
committee (the Remuneration Committee)
with formally delegated duties, authority, and
responsibilities, and written terms of reference.
These terms of reference are kept under review
to ensure that they remain appropriate and
compliant with changes to legislation.
Each Committee is comprised of the Non-
Executive Directors (excluding the Chair) with
Stephen Dolton chairing the Audit Committee
and Jane Pateman chairing the Remuneration
Committee. Each Committee has unrestricted
access to employees of the business or external
advisors to meetings, to the extent that they
consider it necessary in relation to any specific
matter under consideration. Both Committees
have sought to utilise external advice with the
Remuneration Committee liaising with FIT
Remuneration Consultants LLP for the purposes
of advising on the terms of the performance
share awards granted to certain PDMRs within
the business, and the Audit Committee meeting
with RSM, the Group’s auditors, both with and
without the presence of Executive Directors.
60
The Board is responsible for delivering
the Group’s strategy and for its overall
management of the business and meets
regularly to review, formulate and approve
the Group’s strategy, budgets, corporate
actions and to constructively challenge the
Executive Directors who are responsible for
the day-to-day running of the Group. The
operation of the Board is documented in a
formal schedule of matters reserved for its
approval which is reviewed annually to ensure
that it remains current in light of changes to
legislation, the size and growth of the Group
and changes within the sector that the Group
operates within.
Directors are expected to attend all meetings
of the Board and of the Committees on which
they sit, and to devote sufficient time to
enable them to fulfill their roles as Directors.
In circumstances where Directors are unable
to attend any meeting they are provided all
papers to be considered at that meeting and
can provide any comments in advance of any
meeting for consideration by the rest of the
Board. The table below details the Directors’
attendance at scheduled monthly Board and
Committee meetings in the financial year
2019/2020:
Name
Balbinder Johal
David Beech
Jane Pateman
Kate Lewis
Richard King
Steve Dolton
Board
9/10
10/10
9/10
10/10
9/10
10/10
Remuneration
Audit
1/7
-
7/7
-
-
7/7
-
-
3/3
-
-
3/3
* During the year additional meetings were held principally to approve the terms of the acquisitions undertaken within the
period, the placing and the refinancing.
In addition to the scheduled meetings the
Board holds periodic strategy days to review
the strategic priorities and growth opportunities
for the business. The next strategy day is
expected to be scheduled once the effects
of the COVID-19 pandemic are clearer, as the
evolving nature of the situation may present
additional opportunities in the short and
medium-term strategy adopted by the Board.
The Company Secretary supports the Board
with compliance and governance matters
and ensures that all Directors are aware of
their right to have any concerns minuted, to
ask questions regarding ongoing governance
requirements and to seek independent advice
at the Group’s expense where appropriate.
The Group has elected not to constitute
a dedicated nomination committee, instead
retaining such decision-making with the
Board as a whole given the size and nature
of the Board composition. The Board has
used external advisors to introduce any other
individuals with skills that the Board believe may
be required in delivering its overall strategy and
this was how Jane Pateman was identified to
act as Non-Executive Director in January 2019.
Remuneration Committee
The Remuneration Committee
is responsible for:
reviewing the performance of the Executive
Directors and making recommendations
to the Board on matters relating to their
employment and remuneration; and
the granting of share options under the
Group’s Omnibus Plan or any other share
scheme which it may adopt.
Audit Committee
The Audit Committee is responsible for:
ensuring the financial performance of
the Group is properly reported on; and
monitoring the internal controls
of the business.
Each of the Committees meets regularly and
at least twice a year and the Chief Financial
Officer also attends meetings of the Audit
Committee by invitation to discuss any
matters of relevance. Details of the reports
of the Remuneration Committee and Audit
Committee can be found on pages 62-63
and 64-65 respectively of this Report.
The Board has also constituted a disclosure
committee (the Disclosure Committee) to
enforce the Knights Group’s inside information
policy and ensure compliance with the Market
Abuse Regulation (MAR) and the AIM Rules for
Companies in respect of inside information.
Corporate Governance
Board effectiveness and culture
The Board considers the evaluation of its
performance to be an integral part of corporate
governance to ensure it has the necessary
skills, experience and abilities to fulfil its
responsibilities. The internal evaluation process
undertaken seeks to identify and address
opportunities for improving the performance
of the Board and to solicit honest, genuine and
constructive feedback. The Board considers
the evaluation process is best carried out
internally at this stage of the Company’s
development however this decision shall
be kept under review.
In undertaking its internal review
process in particular the following matters
are reviewed at least annually or more
frequently should the need arise:
the Board’s composition in terms
of skills, experience and balance;
the independence of the
Non-Executive Directors;
Board operational effectiveness
and decision-making;
conduct of meetings and effective
sharing of information and communication
amongst the members of the Board;
engagement with shareholders and
other stakeholders;
Director contribution; and
the Board’s strategy and its implementation.
The Chairman is responsible for ensuring the
process is appropriate for the business’ needs,
and deals with matters raised throughout
such periodic review processes to ensure
that constructive feedback is provided and
if required external support can be made
available in respect of any areas that may
require improvement.
The Board carries a breadth of experience
in sectors outside of the legal services market
with strengths aligned with enhancing Knights’
culture. Following the evaluation undertaken
during the financial year 2019/2020, the
Board is satisfied that it has a good balance
of experience and skills allowing for both
collaborative working and robust challenge.
Internal controls and risk management
The Group has implemented policies
on internal control and corporate
governance. These have been prepared
in order to ensure that:
proper business records are maintained
and reported on, which might reasonably
affect the conduct of the business;
monitoring procedures for the performance
of the Group are presented to the Board at
regular intervals;
budget proposals are submitted to the
Board no later than one month before the
start of each financial year albeit this policy
has been adapted during the COVID-19
pandemic given the evolving impact of the
pandemic on the economy;
accounting policies and practices suitable
for the Group’s activities are followed in
preparing the financial statements;
the Group is provided with general
accounting, administrative and secretarial
services as may reasonably be required; and
interim and annual accounts are prepared
and submitted in time to enable the Group
to meet statutory filing deadlines.
The Group continues to review its system
of internal control to ensure compliance with
best practice, whilst also having regard to
its size and the resources available. Details
of the Group’s principal risks and how these
are addressed can be found on pages 50-53
of this Report.
As might be expected in a business such
as Knights, a key control in the business is
the day-to-day supervision by the Executive
Directors supported by the senior management
team who maintain responsibility for key
areas of the operations. The adequacy of the
systems for internal controls is also reviewed
by the Audit Committee on an annual basis
and compliance issues are discussed at each
Board meeting in order to ensure that any risks
arising in a changing and evolving environment
can be mitigated and/or eliminated.
Relations with stakeholders
The Board is aware that the long-term
success of the Group is reliant upon its
employees, clients, shareholders, suppliers,
communities and regulators. As such the
Group is committed to building a sustainable
business that enables all its stakeholders to
thrive: minimising the Group’s impact on the
environment, looking after employees and
communities and operating ethically with the
highest levels of governance to ensure that the
Group’s continued growth in accordance with
its strategy reflects its stakeholders needs and
expectations as well as those of the Group.
In order to achieve these aims the Group’s
senior management teams maintain regular
communications with colleagues and
encourage them to share feedback and
to allow the candid flexible culture to thrive.
The level of communication with employees
has only increased during the COVID-19
situation with senior management hosting
regular calls with team leaders, the CEO
holding several ‘all employees’ meetings,
during which 75% of the time was dedicated
to Q&A and questions being answered
candidly in the moment. These sessions
had over 80% participation with over 200
questions answered.
The Group also encourages regular feedback
from its clients and tracks its net promoter
score to indicate the willingness of clients to
recommend the Group’s services. Based on
client responses in the week commencing the
Group’s net promoter score was out of which
is considered above average amongst its peer
group. The Group endeavors to ensure that
clients are met with regularly to canvas their
opinion on the service levels received and to
allow them to provide any feedback as to how
these relationships and/or services can be
improved. The Group has a strong track record
of retaining deep client relationships with some
of these relationships remaining in place for in
excess of 25 years across a number of service
lines provided within the Group’s business.
The Group’s business places a strong
reliance on technology and consequently
the Group works closely with its practice
management system provider to enhance
the practice management platform for the
benefit of the Group which in turn benefits
our suppliers’ technology.
The Group maintains regular dialogue with
its regulator, the Solicitors Regulatory Authority
(SRA) given its acquisitive nature and this
constant transparent communication has
enabled the Group to deliver 6 acquisitions
within the financial year.
The Board is proud of the progress it has
made in enhancing the sustainability of its
operations and in the current financial year
has appointed Jane Pateman as its Director
with overall responsibility for Environmental,
Social and Governance strategy. Further
details of the steps that Knights has taken
to ensure it can uphold these principles are
detailed on page 29 of this report.
The Executive Directors meet with the
institutional shareholders both on an ad
hoc basis and on a more structured basis
around the publication of the Group’s interim
and end of year results. General information
about the Group is available on the website
at www.knightsplc.com but both the Chair
and Stephen Dolton as Senior Independent
Director are available to discuss any matter
any shareholder may wish to raise if required.
Annual General Meeting (AGM)
The AGM of the Group
will take place on the
21st September 2020.
61
Financial StatementsAnnual Report and Accounts 2020Knights plcStrategic Report
Remuneration Committee Report
Dear Shareholder,
I am pleased to present the Directors’ Remuneration Report for
the year ended 30 April 2020.
The Remuneration Committee comprises me as Chair of the Committee and Steve Dolton is the
other current member of the Committee. We are both independent Non-Executive Directors.
The Remuneration Committee continues to consider how best to respond to the uncertainty created
by COVID-19. As announced on 26 March 2020, all Board members' salaries have been temporarily
reduced by 30% and the salaries of all staff whose salaries are £30,000 or more have been
temporarily reduced by 10% (or to £30,000 where the reduction would take them below £30,000)
with effect from 1 April 2020.
Jane Pateman Chair of the Remuneration Committee
Responsibilities
The Remuneration Committee reviews the performance of the Executive
Directors and makes recommendations to the Board on matters
relating to their remuneration and terms of service. The Remuneration
Committee also makes recommendations to the Board on proposals
for the granting of share options and other equity incentives pursuant
to any employee share option scheme or equity incentive plans in
operation from time to time. During the year this included the grant of
options to employees as part of the Group’s Save As You Earn (‘SAYE’)
share option scheme for 2020.
The Remuneration Committee meets as and when necessary and
met 7 times during the year.
In exercising their role, the Remuneration Committee has regard to the
recommendations put forward in the QCA Code and, where appropriate,
the QCA Remuneration Committee Guide and associated guidance.
During the year FIT Remuneration Consultants LLP (FIT) provided
the Committee with external remuneration advice, including on
all aspects of remuneration policy for the Executive Directors. The
Remuneration Committee is satisfied that the advice received was
objective and independent. FIT is a member of the Remuneration
Consultants Group and the voluntary code of conduct of that body
is designed to ensure that objective and independent advice is given
to Remuneration Committees.
Our performance and link to remuneration
As summarised in the Chairman’s Statement on page 8, the Group
continued to grow both organically and through targeted acquisitions
over the year. The Group performed well with a strong financial
performance continuing up until the last month of the financial year
where the impact of COVID-19 did result in some disruption to activity.
As disclosed last year an annual bonus arrangement was introduced
for Richard King for the 30 April 2020 financial year with a maximum
opportunity of 35% of salary based on an underlying EBITDA
performance range set at the beginning of the year. The EBITDA for
the year was below the threshold range and therefore no annual bonus
is payable.
Minimum
threshold
18.24
25%
Target
19.2
75%
Maximum
threshold
20.2
100%
Actual
18.00
0%
EBITDA (£m)
% Payable
Kate Lewis was entitled to be issued with a Restricted Stock Award
subject to the Group meeting an underlying EBITDA threshold for
the 30 April 2020 financial year. Although this performance threshold
was met, Ms Lewis requested the award not be made in light of the
COVID-19 related cost savings being operated across the Group.
No long-term incentives were granted to Executive Directors or vested
during the year.
Executive Director remuneration
Each of the Executive Directors has a service agreement with the Group.
Each service contract may be terminated by either party serving six
months’ written notice. At its discretion, the Group may make a payment
in lieu of such notice or place the Executive Director on garden leave.
The service contracts also contain provisions for early termination in
the event of various scenarios and contain typical restrictive covenants.
The key remuneration components of executive packages are
summarised as follows:
Base salary: The salary of an Executive Director will be reviewed
annually by the Remuneration Committee without any obligation
to increase such salary. The current base salaries are shown below.
As noted above these salaries have been temporarily reduced by
30% with effect from 1 April 2020:
-
David Beech: £250,000 (effective from 1 August 2019). As outlined
in the Admission Document, it was recognised that a market-standard
salary for an equivalent CEO of an AIM listed company with a similar
market capital of the Group is £250,000 (‘reference salary’) and that
this salary would become payable when the Remuneration Committee
agreed that it had become appropriate for the Group to do so.
The Remuneration Committee determined that Group performance
warranted the increase to the reference salary.
Kate Lewis: £175,000 (effective from 1 March 2020). The salary
of the Chief Financial Officer was increased from £140,000 during
the year. The Remuneration Committee recognised that this was
a significant increase in percentage terms but was determined to be
appropriate considering both performance and external market data.
Richard King: £200,000 (effective from 1st August 2019). The salary
of the COO was increased from £175,000 during the year to reflect
performance and external market benchmarks.
-
-
Pension and benefits: Ancillary benefits include the reimbursement
of all reasonable and authorised out of pocket expenses, provision
of a private healthcare cover up to £2,000 and 2x salary life cover.
The Group also contributes to pension plans or as an additional
cash supplement in respect of the Executive Directors at a rate of
3% in line with the automatic enrolment guidelines and which mirrors
the contribution across all employees, positioned competitively
to the market in which the Group operates.
Annual bonus: A plan was operated for Richard King for the
30 April 2020 financial year with a maximum opportunity of 35%
of salary with performance criteria based on profit-based targets as
set by the Remuneration Committee. The Remuneration Committee
intends to agree a similar plan for the 30 April 2021 financial year with
targets to be set once the full implications of COVID-19 are understood.
-
-
A discretionary share plan, the Omnibus Plan: Share-based
awards may be granted in 3 forms as considered appropriate by the
Remuneration Committee:
-
Restricted Stock Awards: Awards granted in the form of nil
or nominal cost share options, subject to time-based vesting
requirements and continued employment within the Group.
No performance conditions will apply to Restricted Stock Awards.
Performance Share Awards: Awards granted in the form
of nil or nominal cost share options, whereby vesting is subject
to satisfaction of performance conditions and continued
employment within the Group.
Share Options: Awards granted in the form of a share option with
an exercise price equal to the market value of an Ordinary Share at
the time of grant, subject to continued employment within the Group.
Share options may or may not be subject to performance conditions.
The intention is to grant Performance Share Awards to Richard
King and Kate Lewis in July 2020 with EPS performance conditions
attached. The Remuneration Committee has determined that the
unprecedented COVID-19 circumstances means it will be unable
to set robust targets until later in the year and intends to set such
EPS targets within 6 months of the date of grant.
Non-Executive Directors
Bal Johal, was appointed Non-Executive
Chairman of the Group by letter of appointment
dated 1 June 2018. The appointment is subject
to re-election at the Annual General Meeting and
thereafter is terminable on 3 months’ notice by
either the Group or Bal. The annual fee payable
to the Chairman increased from £50,000 to
£60,000 with effect from 1 February 2020.
The other Non-Executive Directors were
appointed subject to re-election at the Annual
General Meeting and are terminable on one
months’ notice by either party.
The current fee payable for services as
a Non-Executive Director was unchanged
throughout the year at £40,000 with an
additional £10,000 payable to the senior
independent Non-Executive Director with
effect from 1 February 2020.
As noted above these fees have been
temporarily reduced by 30% with effect
from 1 April 2020.
As it is listed on AIM, the Group is not required
to provide all of the information included
in this Report. However, in the interests of
transparency this has been included as a
voluntary disclosure. The Report is unaudited.
I do hope that this Report clearly explains
our approach to remuneration and enables you
to appreciate how it underpins our business
growth strategy.
Jane Pateman
Chair of the Remuneration Committee
21 July 2020
Directors’ emoluments
Executive Directors
David Beech
Kate Lewis
Richard King1
Non-Executive Directors
Balbinder Johal
Steve Dolton2
Jane Pateman3
Aggregate
Fees/
basic salary
£’000
Benefits
Bonus
LTIP
Pension
2020 Total
2019 Total
£’000
£’000
£’000
£’000
£’000
£’000
231
141
189
51
45
39
-
-
2
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
4
6
-
-
-
231
145
197
51
45
39
708
143
126
83
43
41
13
449
Note
1 Richard King was appointed a Non-Executive Director of the Group on 1 June 2018 and subsequently appointed Chief Operating Officer on 15 January 2019
2
3
Steve Dolton was appointed a Non-Executive Director of the Group on 1 June 2018
Jane Pateman was appointed a Non-Executive Director of the Group on 15 January 2019
Long-term incentives
Type of award Date of grant
Number
of shares
Exercise price
per share
Fair value
at grant
Performance
conditions
Vesting date
Kate Lewis
Richard King
Restricted
Stock Award
Performance
Share Award
29 June 2018
241,379
£0.002
350.001 N/A
June 2021
29 March 2019
63,352
£0.002
183.752 EPS3
July 2022
Note
1 Based on IPO price of £1.45
2 Based on 3-day average share price of £2.900482
3
3-year performance period with vesting dependent on adjusted EPS performance in financial year 30 April 2022 EPS. 25% vesting for EPS of 20p and increasing
on a straight-line basis to 100% vesting for EPS of 25p
62
63
Corporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plcStrategic Report
Audit Committee Report
Dear Shareholder,
I am pleased to present the Audit Committee report for the
year ended 30 April 2020.
The Audit Committee is responsible for ensuring that the financial performance of the Group
is properly reported and reviewed. Its role includes monitoring the integrity of the financial
statements (including annual and interim accounts and results announcements), reviewing
risk management and internal control systems, reviewing any changes to accounting policies,
reviewing and monitoring the extent of the non-audit services undertaken by RSM and
overseeing the relationship with them. In addition the Committee has considered the impact
of new accounting standards and COVID-19 particularly around Going Concern.
Steve Dalton Chair of the Audit Committee
Members of the Audit Committee and attendance
The Committee consists of two independent Non-Executive
Directors: myself (as Chair) and Jane Pateman. Kate Lewis,
the Chief Financial Officer and other Executive Directors may
attend the Committee meetings by invitation.
The Committee met three times during the period and attendance
of the members is shown on page 60 of the Corporate Governance
Report. The Committee has also held discussions with RSM, without
Executive Directors being present to discuss any issues arising from
their audit work. Neither the Group nor its Directors have any
relationships that impair the external auditor’s independence.
Duties
The main duties of the Audit Committee during the year included:
1
Monitoring the integrity of financial statements
The Committee reviewed both the interim and the annual financial
statements as well as related results announcements made as
part of their disclosure. This process included a review of any
judgements made in preparing the results, ensuring sufficient
attention was given to matters where significant estimation
was involved. This includes revenue recognition, accounting for
acquisitions and the use of alternative performance measures
which are used to enhance shareholders understanding of the
Group’s financial performance.
In consideration of the significant accounting judgements used,
the Committee reviewed the recommendations of the Chief
Financial Officer and received reports from RSM on their findings.
These judgements are as follows:
-
Revenue recognition policy
The Group recognises revenue on legal and professional
services provided based on the methodology set out
in IFRS 15 Revenue from Contracts with Customers.
There is estimation involved in establishing the value that
will eventually be recovered on all of its contracts.
Management use the expected outcomes as at the period
end to establish the estimated value and compare to historic
outcomes to ensure reasonableness. Estimates are updated
as work progresses and any changes in revenue recognition
as a result of a change in circumstances is recognised in the
Statement of Comprehensive Income for that year. In relation to
any contingent matters, where the likelihood of success is less
than highly probable, the value recognised in contract assets
is further reduced to reflect this uncertainty. The Committee
considers that the approach adopted by management is
prudent and minimises the risk of overstatement of income
resulting in future revenue write-offs.
-
-
Accounting for acquisitions
During the year the Group made six acquisitions. Accounting
for these acquisitions involves significant judgement to
determine the allocation of purchase price, the treatment
of deferred consideration, assessment of the requirement
for any fair value adjustments, identification and valuation of
the intangible assets arising, and estimation of the useful lives
of these assets. Having reviewed management’s approach
and the resulting accounting treatment, the Committee is
satisfied that the approach adopted is reasonable and fairly
represents the underlying transactions.
Use of alternative performance measures
The Board uses a number of alternative performance measures
to assess business performance. The key driver for revenue
is the number of fee earners employed by the Group and as
a result the Board uses measures based on underlying profit
before tax, fee earner numbers, ratios and fees generated
by fee earners. Another key focus for the Board is management
of its net debt position. The Board uses cash conversion and
lock up days to closely monitor these key drivers of the net
debt position.
The Audit Committee is satisfied that these are
appropriate measures to use as they monitor the inputs
that underpin the trading and cash performance of the
Group. These measures are discussed in more detail
in the CFO’s Review on pages 42-49.
2
3
4
5
6
7
Risk management and internal controls
As described on page 39 of the Strategic Report and
page 61 of the Corporate Governance Statement, the Board has
established a framework of risk management and internal control
systems, policies and procedures. The Committee is responsible
for reviewing the risk management and internal control framework,
ensuring that it operates effectively. The Committee is satisfied
that the internal controls currently in place are sufficient and
operating effectively for a business of this size.
At present the Group does not have an internal audit function
and the Committee believes that in view of the current size and
nature of the Group’s business, management is able to derive
sufficient assurance as to the adequacy and effectiveness
of the internal controls and risk management procedures without
a formal internal audit function. This will be kept under review
as the business evolves.
Changes to accounting policies
During the year the Group has adopted one new accounting
standard namely IFRS 16, Leases. The implementation of this
standard involved judgements on the appropriate interest rates
to be used.
The Committee has reviewed the implementation of this
accounting standard and has reviewed the external auditors
assessment on its application.
The Committee is satisfied with the application of IFRS 16 in
the financial statements.
The Committee is satisfied that there are no other changes in
accounting policies impacting the reported results for the year.
Reviewing the extent of non-audit services provided by RSM
The Committee monitors the provision of non-audit services by
RSM to ensure this has no impact on their independence.
A breakdown of the fees between audit and non-audit services is
provided in note 15 to the financial statements. The non-audit fees
are not significant and relate mainly to independent tax advice.
This work was conducted by individuals independent of the audit
team and therefore the Committee are satisfied the provision
of these non-audit services does not impact the independence
of the audit team.
Overseeing the relationship with RSM
The Committee considers a number of areas when reviewing
the external auditor relationship, namely their performance
in discharging the audit, the scope of the audit and terms
of engagement, their independence and objectivity
and remuneration.
The external auditor prepares a plan for its audit of the full year
financial statements which is presented to the Committee before
the commencement of the audit.
The plan sets out the scope of the audit, areas of perceived
significant risk where work will be focused, the audit timetable
and any proposed remuneration. This plan is reviewed and
agreed by the Committee in advance of the detailed audit work
taking place.
Following its external audit process, RSM presented its findings
to the Committee for discussion. No major areas of concern were
identified by RSM during the year.
The Committee has confirmed that it is satisfied with the
independence, objectivity and effectiveness of RSM UK Audit
LLP and has recommended to the Board that the auditors be
reappointed. There will be a resolution to reappoint the auditors
at the forthcoming AGM.
Application of IFRSs, and new and forthcoming standards
There are no significant IFRS’s yet to be adopted that the
Committee expects to be relevant or have a significant impact
on the financial statements.
Impact of COVID-19 and Going Concern
Given the pandemic that arose during the year the Committee
has paid particular attention to the disclosures made in the
accounts in relation to Going concern. The Committee has
reviewed management’s approach to assess the potential impact
of on the business. The Going concern assessment focuses on
the Group’s ability to meet its debts as they fall due and being
able to operate within its banking facility. The Committee has
considered the following:
-
-
-
The Group’s current Revolving Credit Facility of £40m
available until June 2023. At the time of writing this has
£24m of undrawn availability.
The mitigating actions and cost cutting exercises already
undertaken by management.
The range of possible scenarios modelled by management
and the impact these have on resulting financial forecasts.
The Committee is satisfied that the Group would have
sufficient liquidity to meet its liabilities as they fall due and
that the disclosures included in the accounts on page 80
on Going Concern and the impact of the COVID-19
pandemic are reasonable.
Steve Dolton
Chair of the Audit Committee
21 July 2020
64
65
Corporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plcStrategic Report
Directors’ Report
The Directors have pleasure in
submitting their report and the
financial statements of Knights
Group Holdings plc.
Principal activities and business review
Directors and their Interest in the shares of the parent company
Political donations
The principal activity of the Group is that of the provision of legal
and professional services. The principal activity of the Company is
that of a holding company. The results for the year and the financial
position of the Group are disclosed in the detailed financial statements
included on pages 71-121. A review of the performance of the business
during the year and potential future developments is included in the
Chairman’s report, CEO’s report and the financial review.
Dividends
Due to the COVID-19 pandemic and the resultant uncertainty of the
effects on the UK economy the Board has decided that it would not
be prudent to propose a final dividend at this time. The decision will
be reviewed before the AGM when there is more visibility of the likely
economic impact. An interim dividend of 1.10p per share was paid
on 16 March 2020.
The following Directors have held office since 1 May 2019.
The Group has not made any political donations.
Name
DA Beech
KL Lewis
RA King
BS Johal
S Dolton
J Pateman
Number of shares
%
32,500,000
39.60
2,820
105,460
510,000
74,999
10,000
-
0.13
0.62
0.09
0.01
Director’s remuneration payable in the year ended 30 April 2020 is set
out in the Remuneration Committee Report on pages 62–63.
Disabled persons
The Group operates an equal opportunities employment policy.
The Group will employ disabled persons where they appear to be
suitable for a particular vacancy and every effort is made to ensure
that all candidates are given full consideration when any vacancies
arise within the business. Should any employee become disabled
during their employment full training will be provided and relevant
adaptations to their working environment made, where possible,
to ensure that they can continue their employment within the Group.
The Group works with all employees to ensure that their working
environment is appropriate and to ensure that all employees are
provided with sufficient training, development and support to enable
them to develop to their full potential.
Future developments
Substantial shareholdings
Employee consultation
The Board plans to continue to invest in technology, recruitment and
acquisitions within both the legal and non-legal sectors to support the
Group’s strategy of becoming the leading legal and professional services
business outside London. Further details of the Group’s future strategy
can be found in the Strategic Report on pages 16-17.
Post balance sheet events
As at the date of signing the accounts, other than the consideration
of the potential impact of the COVID-19 pandemic that is discussed
in the Going Concern section, there are no significant Post Balance
Sheets Events that require any further disclosure.
As far as the Directors are aware the only notifiable holdings equal
to or in excess of 3% of the total issued share capital as at 30 April 2020
were as detailed below:
Name
David Beech
Merian Global Investors
Canaccord Genuity Wealth
Management (inst)
Kames Capital
Invesco
Number of shares
%
32,500,000
39.60
6,965,940
5,186,475
3,537,731
2,764,012
8.49
6.32
4.31
3.37
Directors’ indemnity provisions
During the period, and up to the date of approval of the financial
statements, the Group purchased and maintained Directors and Officers
Liability Insurance for all of the Directors and Officers to indemnify them
from any losses that may arise in connection with the execution of their
duties and responsibilities to the extent permitted by the Companies
Act 2006.
Risk management
The Board manages financial risk on an ongoing basis. The key
financial risks relating to the Group are discussed in more detail
in note 32 to the financial statements.
The Group’s other principal risks and uncertainties are outlined
in the Strategic Report.
The Group places considerable value on the involvement of its
employees in the future success of the Group. Although the overall
strategic direction of the Group is managed by the Board, the Group
manages its day-to-day operations with the assistance of its central
management team. Local supervision is provided in each office by
the involvement of office and team leaders who assist in ensuring a
common culture and working practice across the Group as a whole.
The management team regularly liaise with all employees to ensure
they are fully aware of any key matters that impact the Group. As well
as regular informal meetings between management and employees,
the Group holds an annual conference where the strategy of the Group
is discussed through presentations and open discussion.
Further information on how the Group liaises with employees and
includes them in decision-making where relevant and encourages
participation in share schemes to enable them to share in the success
of the Group is included in the ESG report on page 28-38.
Engaging with stakeholders
The Directors have considered who the key stakeholders in the business
are and documented how they engage with each of these groups, noting
any key decisions made during the year. Details of this are included
within the S172 report on page 39.
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 strongly cash generative and as at
the end of the financial year had headroom of over £24m within its current
debt facilities.
Kate Lewis
Chief Financial Officer
21 July 2020
The Group’s forecasts show that the Group has sufficient resources
for both current and anticipated cash requirements. In the period since
the COVID-19 pandemic broke, the Group has seen a meaningful
decline in the number of new instructions. The Group moved quickly
to implement a number of cost saving and efficiency measures to
make sure it was best placed to deal with the uncertainty arising from
the pandemic and continues to monitor the level of new business
and costs on a weekly basis.
Although the impact of the pandemic appears to be reducing, the
situation is ongoing and the long-term outcome of this and the impact
on the wider economy and hence the Group’s business and clients is
still unknown. This makes it difficult to assess the impact on the Group
and Company’s future trading with any certainty.
The Directors have therefore modelled a number of scenarios, some
of which are much worse than the Directors anticipate the most likely
outcome for the Group. Under all circumstances the Group remains
profitable and operates within its current available banking facilities
with no breach of covenants for the foreseeable future.
Auditor
Each of the persons who is a Director at the date of approval of this
Annual Report confirms that:
So far as the Director is aware, there is no relevant audit information
of which the Company’s auditor is unaware.
The Director has taken all the steps that he/she ought to have
taken as a Director in order to make himself/herself aware of any
relevant audit information and to establish that the Company’s
auditor is aware of that information.
This confirmation is given and should be interpreted in accordance
with the provisions of s418 of the Companies Act 2006.
RSM UK Audit LLP have expressed their willingness to continue
in office as auditor and a resolution to reappoint them will be
proposed at the forthcoming Annual General Meeting.
The Directors’ Report was approved by the Board of Directors
on 21 July 2020 and signed on its behalf by:
66
67
Corporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plcStrategic Report
Statement of Directors’ Responsibilities
The Directors are responsible for
preparing the Strategic Report and
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 are required
by the AIM Rules of the London Stock Exchange to prepare Group
financial statements in accordance with International Financial Reporting
Standards (‘IFRS’) as adopted by the European Union (‘EU’) and
have elected under company law to prepare the Company financial
statements in accordance with United Kingdom Generally Accepted
Accounting Practice (United Kingdom Accounting Standards and
applicable law) including FRS101 Reduced disclosure Framework.
The Group’s financial statements are required by law and IFRS
adopted by the EU to present fairly the financial position and the
financial 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 the Company and of
the profit or loss of the Group for that period.
In preparing each of 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 IFRSs
adopted by the EU; 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 the
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 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
Knights Group Holdings plc website.
Legislation in the United Kingdom governing the preparation
and dissemination of financial statements may differ from legislation
in other jurisdictions.
68
69
Corporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plcStrategic Report Financial Statements
Independent Auditor’s Report
72
76 Consolidated Statement of Comprehensive Income
77 Consolidated Statement of Financial Position
78 Consolidated Statement of Changes in Equity
79 Consolidated Statement of Cash Flows
80 Notes to the Consolidated Financial Statements
116 Company Statement of Financial Position
117 Company Statement of Changes in Equity
118 Notes to the Company Financial Statements
122 Glossary of Terms
125 Shareholder Information
70
71
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc Independent Auditor’s Report
to the Members of Knights Group Holdings plc
Opinion
Key audit matters
We have audited the financial statements of Knights Group Holdings plc (the ‘parent company’) and its subsidiaries (the ‘Group’) for the year ended
30 April 2020 which comprise the Consolidated Statement of Comprehensive Income, Consolidated and Company Statement of Financial Position,
Consolidated and Company Statement of Changes in Equity, Consolidated Statement of Cash Flows and notes to the financial statements, including
a summary of significant accounting policies. The financial reporting framework that has been applied in the preparation of the Group financial
statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting
framework that has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting
Standards, including Financial Reporting Standard 101 “Reduced Disclosure Framework” (United Kingdom Generally Accepted Accounting Practice).
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 30 April 2020 and
of the Group’s profit for the year then ended;
•
the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;
•
the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting
Practice; 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 the 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 SME 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.
Conclusions relating to going concern
We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where:
•
the directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or
•
the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the
group’s or the parent company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months
from the date when the financial statements are authorised for issue.
Summary of our audit approach
Key audit matters - Group
•
Valuation and recoverability of amounts recoverable on contracts and impact on revenue recognition
• Acquisition accounting and valuation of intangibles assets acquired
Key audit matters - Parent Company
• None identified
Materiality - Group
• Overall materiality: £539,000 (2019: £500,000)
• Performance materiality: £404,000 (2019: £250,000)
Materiality - Parent Company
• Overall materiality: £365,000 (2019: £65,000)
• Performance materiality: £273,000 (2019: £32,500)
Scope
Our audit procedures covered 92.6% of revenue, 100% of net assets and 88.8% of profit before tax.
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the Group 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 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 contract assets
Key audit matter description
The Group’s accounting policy in respect of revenue recognition is set out in note 2.5. Note 4 sets out the critical judgements and estimates
applied by the Directors in relation to the valuations of unbilled contingent fee agreements and of amounts recoverable on contracts, which
may have a material effect on the amount of revenue recognised in the period, and note 5 to the financial statements gives detail on revenue.
There is a risk that revenue could be materially misstated due to recognising revenue in the wrong accounting period, or in the wrong amount.
Revenue is materially impacted by changes in the contract assets balance (amounts recoverable on contracts) which is subject to judgemental
decisions by management. The Group has recognised revenue of £74.3million in respect of fees billed and accrued in the year, which consists
of a large number of relatively low value transactions.
Due to the large volume of transactions in the year there is a risk that not all of the matters in the year have been appropriately billed. The Group’s
contract assets balance at the year end is £21.5million (see note 22). The contract assets are valued on a line by line (case by case) basis using an
estimated recovery rate at the period end. The process of valuing contract assets and, in particular, estimating recovery rates, is judgemental and
therefore considered to be a key audit matter.
How the matter was addressed in the audit
Our response to the key audit matter included:
• assessing management’s revenue recognition policy for fixed fee arrangements, unconditional fee-for-service arrangements, and variable
or contingent fee arrangements for compliance with IFRS 15 – Revenue from contracts with customers
• assessing the reasonableness of the revenue figure in relation to fee-earner numbers and salary costs in comparison to prior financial years
• performing data analytics to test the revenue recognised by ensuring that the revenue transaction cycle was completed through to cash receipt
or inclusion in trade receivables
• comparing the current and prior year work in progress recovery rates to the recovery rate achieved for the year ended 30 April 2020 for each
office (excluding those acquired in the year)
• comparing recovery rates used to estimate the value of contract assets at a month end during the financial year with subsequent actual
recovery rates on bills
• period-end cut off testing to ensure that contract assets and revenue had been recognised in the correct accounting period
• reviewing the utilisation rates during the year for all staff and enquiring where these appeared to be unusually low to test completeness
of the time being recorded to matters
• agreeing the recoverability of the balance of unbilled revenue to post year end billing and cash receipts, and where billing has not yet occurred,
challenging fee-earners about the expected recovery, confirming unbilled revenue is recorded in the correct period and at the correct amount
and is supported by time costs incurred.
Acquisition accounting and valuation of intangible assets acquired
Key audit matter description
Refer to notes 2.4 (business combinations), 2.7 (goodwill) and 2.8 (intangible assets other than goodwill) which set out the accounting policies
in respect of business combinations and note 20 to the financial statements which gives details of the acquisitions made in the year.
During the year the Group made six acquisitions involving aggregate consideration of £35.9 million, including deferred consideration of £1.3 million
(note 20). There are significant intangible assets arising as a result of each acquisition, including goodwill of £13.3 million and customer relationships
of £11.1 million. The determination and allocation of the purchase price, the identification and valuation of the intangible assets arising, and the useful
lives of these assets, particularly the customer relationships, involve the exercise of a significant degree of management judgement and is therefore
considered to be a key audit matter.
72
73
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc Independent Auditor’s Report continued
to the Members of Knights Group Holdings plc
How the matter was addressed in the audit
Our response to the key audit matter included:
• obtaining copies of purchase documentation and considering which party has control, the date of acquisition, the date control
was obtained, the percentage acquired, the consideration offered and details of any deferred consideration
• agreeing the amounts of consideration to cash amounts paid and the share consideration to share certificates issued and the market
price on issue
• confirming that the accounting treatment applied for each transaction is in accordance with relevant accounting standards
• reviewing and challenging the appropriateness of the assumptions used in the fair value calculations to value the customer relationships
and agreeing these to supporting evidence, including the growth rate, customer attrition rate and discount rate applied
• considering whether there are any other intangible assets which should be recognised as part of the fair value exercise
• reviewing the useful life applied to customer lists and comparing this to historic client retention rates in the acquired businesses,
and considering the estimated remaining employment term for fee earners brought in with the acquisition
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:
• confirming that the disclosures made in respect of each acquisition are in accordance with the relevant standard.
• adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received
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:
Group
Parent company
Overall materiality
£539,000 (2019: £500,000)
£365,000 (2019: £65,000)
Basis for determining overall materiality
3% of Adjusted EBITDA
0.5% of Net Assets
Rationale for benchmark applied
The key metric used by management
and shareholders in assessing performance
of the Group is adjusted EBITDA.
The parent company does not trade;
its function is to hold investments in
the Group’s trading entities.
As a result the benchmark for this entity
is net assets.
Materiality in 2019 was calculated using
a blend of rates applied to income, profit
before tax and gross assets.
Performance materiality
£404,000 (2019: £250,000)
Basis for determining performance materiality 75% of overall materiality
£273,000 (2019: £32,500)
75% of overall materiality
Reporting of misstatements
to the Audit Committee
Misstatements in excess of £26,900 and
misstatements below that threshold that, in our
view, warranted reporting on qualitative grounds.
Misstatements in excess of £18,200
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 nine components, all of which are based in the UK.
The coverage achieved by our audit procedures was:
Full scope audit
Total
Number of
components
Revenue
Net assets
3
3
92.6%
92.6%
100%
100%
Profit
before tax
88.8%
88.8%
Analytical procedures at group level were performed for the remaining six components.
Other information
The directors are responsible for the other information. The other information comprises the information included in the annual report, other than
the financial statements and our auditor’s report thereon. 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.
In connection with our audit of the financial statements, 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 audit or otherwise appears to be materially
misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material
misstatement in the financial statements or a material misstatement of the other information. 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.
74
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.
Responsibilities of directors
As explained more fully in the directors’ responsibilities statement set out on page 68, 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.
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.
GEOFF WIGHTWICK (Senior Statutory Auditor)
For and on behalf of RSM UK Audit LLP, Statutory Auditor
Chartered Accountants
Festival Way
Stoke on Trent
Staffordshire
ST1 5BB
21 July 2020
75
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc
Consolidated Statement of Comprehensive Income
For the year ended 30 April 2020
Consolidated Statement of Financial Position
As at 30 April 2020
Revenue
Other operating income
Staff costs
Depreciation and amortisation charges
Impairment of trade receivables and contract assets
Other operating charges
Operating profit before non underlying charges
Non-underlying operating costs
Operating profit
Finance costs
Profit before tax
Taxation
Profit and total comprehensive income for the year attributable to equity owners of the parent
Earnings per share
Basic earnings per share
Diluted earnings per share
Year ended
30 April 2020
£’000
Year ended
30 April 2019
£’000
Note
5
7
8
11
12
13
14
16
17
17
74,254
894
(45,578)
(4,276)
(112)
(11,504)
13,678
(8,090)
5,588
(1,530)
4,058
(2,238)
1,820
Pence
2.44
2.41
52,662
415
(30,137)
(1,473)
(439)
(11,164)
9,864
(1,847)
8,017
(2,776)
5,241
(1,240)
4,001
Pence
5.84
5.81
Assets
Non-current assets
Intangible assets and goodwill
Property, plant and equipment
Right-of-use assets
Current assets
Contract assets
Trade and other receivables
Cash and cash equivalents
Total assets
Equity and liabilities
Equity
Share capital
Share premium
Merger reserve
Retained earnings
Equity attributable to owners of the parent
Non-current liabilities
Lease liabilities
Borrowings
Deferred consideration
Deferred tax
Current liabilities
Lease liabilities
Trade and other payables
Deferred consideration
Contract liabilities
Corporation tax liability
Provisions
Total liabilities
Total equity and liabilities
30 April 2020
£’000
30 April 2019
£’000
Note
19
21
21
22
23
24
25
26
26
37
27
28
29
37
30
28
22
31
69,135
5,562
23,749
98,446
21,507
27,046
12,741
61,294
159,740
164
66,252
(3,536)
13,070
75,950
21,078
28,650
127
5,429
55,284
2,766
20,019
2,723
177
675
2,146
28,506
83,790
159,740
46,444
3,319
–
49,763
11,112
13,671
4,904
29,687
79,450
147
32,486
(3,536)
10,158
39,255
–
19,000
1,611
3,488
24,099
–
12,105
1,628
120
796
1,447
16,096
40,195
79,450
The financial statements were approved by the Board and authorised for issue on 21 July 2020 and are signed on its behalf by:
Kate Lewis
Director
Registered No. 11290101
76
77
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc
Consolidated Statement of Changes in Equity
For the year ended 30 April 2020
Consolidated Statement of Cash Flows
For the year ended 30 April 2020
At 1 May 2018
Profit for the period and total comprehensive income
Transactions with owners in their capacity as owners:
Credit to equity for equity-settled share-based payments
Issue of shares
Dividends
Balance at 30 April 2019
IFRS 16 impact
As at 1 May 2019 - restated
Profit for the period and total comprehensive income
Transactions with owners in their capacity as owners:
Credit to equity for equity-settled share-based payments
Issue of shares
Dividends
Balance at 30 April 2020
Note
9
24, 25
18
37
9
24, 25
18
Share
capital
£’000
Share
premium
£’000
Merger
reserve
£’000
Retained
earnings
£’000
–
–
(3,536)
–
6,234
4,001
Total
£’000
2,798
4,001
356
32,533
(433)
39,255
2,058
41,313
1,820
789
33,783
(1,755)
–
32,486
–
32,486
–
32,486
–
–
33,766
–
66,252
–
–
–
(3,536)
–
(3,536)
–
–
–
–
356
–
(433)
10,158
2,058
12,216
1,820
789
–
(1,755)
(3,536)
13,070
75,950
100
–
–
47
–
147
–
147
–
–
17
–
164
Operating activities
Cash generated from operations
Non-underlying operating costs paid
Interest received
Tax paid
Net cash from operating activities
Investing activities
Acquisition of subsidiaries
Purchase of intangible fixed assets
Purchase of property, plant and equipment
Proceeds from sale of property, plant and equipment
Payment of deferred and contingent consideration
Net cash used in investing activities
Financing activities
Proceeds from issue of share capital
Proceeds of new borrowings
Repayment of borrowings
Repayment of debt acquired with subsidiaries
Repayment of lease liabilities
Interest and other finance costs paid
Dividends paid
Net cash generated from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at end of period
Note
34
20
19
21
20
Year ended
30 April 2020
£’000
Year ended
30 April 2019
(Restated)
£’000
13,791
(3,398)
328
(2,907)
7,814
(11,907)
(26)
(2,501)
21
(3,966)
(18,379)
20,543
44,800
(35,150)
(7,049)
(1,576)
(1,411)
(1,755)
18,402
7,837
4,904
12,741
11,706
(1,443)
142
(1,076)
9,329
(11,760)
(90)
(1,214)
1
(1,095)
(14,158)
28,582
14,750
(24,940)
(8,308)
–
(2,036)
(433)
7,615
2,786
2,118
4,904
2019 cashflow restated to show £3,865,000 of cash acquired from subsidiaries as part of investing activities instead of financing activities.
78
79
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc
Notes to the Consolidated Financial Statements
For the year ended 30 April 2020
1. General information
Knights Group Holdings plc (‘the Company’) is a public company limited by shares and is registered, domiciled and incorporated in England.
The Company was incorporated in England as Knights Group Holdings Limited on 4 April 2018 as a private company limited by shares
(registered no. 11290101) and subsequently acquired Knights 1759 Limited (the previous parent company in the Group) and its subsidiaries
on 18 June 2018 through a share for share exchange. The Company was re-registered as a public limited company on 20 June 2018 and
became Knights Group Holdings plc.
The Group consists of Knights Group Holdings plc and all of its subsidiaries.
The principal activity and nature of operations of the Group is the provision of legal and professional services. The address of its registered office is:
The Brampton
Newcastle-under-Lyme
Staffordshire
ST5 0QW
2. Accounting policies
2.1 Basis of preparation
The financial statements have been prepared in accordance with International Financial Reporting Standards adopted by the European Union (IFRSs).
Applying IFRS requires the Directors to exercise judgement and use certain critical accounting estimates, the judgments and estimates that the
Directors deem significant in the preparation of these financial statements are explained in note 4.
The financial statements have been prepared on the historical cost basis unless IFRSs requires an alternative treatment. Historical cost is generally
based on the fair value of the consideration given in exchange for goods and services.
Monetary amounts are presented in Sterling, being the functional currency of the Group, rounded to the nearest thousand except where otherwise indicated.
Audit exemption of subsidiaries
The following subsidiaries are exempt from the requirements of the UK Companies Act 2006 relating to the audit of individual accounts by virtue
of s479A of the Act.
Name
Turner Parkinson LLP
Spearing Waite LLP
Cummins Solicitors Limited
BrookStreet Des Roches LLP
Dakeyne Emms Gilmore Liberson Limited
ERT Law Limited
Croftons Solicitors LLP
Fraser Brown
Shulmans LLP
ASB Law LLP
ASB Aspire LLP
Registered number
OC312799
OC361998
07403259
OC317863
06850969
09182964
OC343375
N/A
OC348166
OC351354
OC327667
The outstanding liabilities at 30 April 2020 of the above named subsidiaries have been guaranteed by the Company pursuant to s479A to s479C
of the Act. In the opinion of the Directors, the possibility of the guarantee being called upon is remote since the trade, assets and majority of liabilities
of these subsidiaries were transferred to Knights Professional Services Limited before 30 April 2020.
2.4 Business combinations
The cost of a business combination is the fair value at the acquisition date, of the assets given, equity instruments issued and liabilities
incurred or assumed.
The excess of the cost of a business combination over the fair value of the identifiable assets, liabilities and contingent liabilities acquired
is recognised as goodwill.
Costs related to the acquisition, other than those associated with the issue of debt or equity securities, are expensed as incurred.
The principal accounting policies adopted are set out below. These policies have been consistently applied to all periods presented in the financial
statements, unless otherwise stated.
2.5 Revenue
2.2 Going concern
The accounts are prepared on a going concern basis as, at the time of approving the financial statements, 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
has a strong trading performance, is cash generative and has banking facilities of £40,000,000 available until June 2023. The Group’s forecasts
show sufficient cash generation, and headroom in banking facilities and covenants, in relation to anticipated future requirements to support the
Directors’ conclusion that the assumption of the going concern basis of accounting in preparing the financial statements is appropriate.
In the period since the pandemic arose and the UK entered lockdown at the end of March 2020, the Group has continued to trade profitably
and cash generation has remained strong, but during the initial stages of lockdown there was a meaningful decline in the number of new instructions
arising. This decline has levelled out and there are early indications of new instructions beginning to increase. However given the unprecedented
nature of the situation and the wider impact on the economic environment it is impossible to forecast the future impact on trading of the Group
and Company with any certainty. Therefore in order to satisfy the validity of the going concern assumption, a number of different trading scenarios
have been modelled and reviewed. Some of these scenarios forecast a significantly more negative trading performance than is expected. In all of
these scenarios the Group remained profitable and with significant headroom in its cash resources for the 12 months from the date of the approval
of the accounts.
2.3 Basis of consolidation
The consolidated financial statements incorporate the results of Knights Group Holdings plc and all of its subsidiaries. Subsidiaries results are
consolidated in the financial statements from the earlier date that economic benefit is obtained or control commences until the date that control ceases.
On 18 June 2018, the whole of the share capital of Knights 1759 Limited was acquired by the Company via a share for share exchange agreement.
The acquisition is outside the scope of IFRS 3 because Knights Group Holdings Limited did not meet the definition of a business. In the absence of
specific guidance in IFRS, the Group has selected an appropriate accounting policy using the hierarchy described in paragraphs 10 to 12 of IAS 8,
which permits the consideration of other Financial Reporting Standards. The Group has adopted the principles of merger accounting from FRS 102.
Accordingly, the consolidated financial statements for the Group have been presented as if Knights 1759 Limited had been owned by Knights Group
Holdings plc throughout the preceding period.
Subsidiaries
Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its
involvement with the entity and has the ability to affect those returns through its power over the entity. In assessing control, the Group takes into
consideration potential voting rights that are currently exercisable. The acquisition date is the date on which control is transferred to the acquirer.
The financial statements of subsidiaries are included in the consolidated financial statements from the earlier date that control commences until
the date that control ceases.
Transactions eliminated on consolidation
All intra-Group transactions, balances and unrealised gains on transactions between Group companies are eliminated on consolidation.
Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
Where necessary, adjustments are made to the financial information of subsidiaries to bring the accounting policies used into line with those
used by the Group.
The Group earns revenue from the provision of legal and professional services. Revenue for these services is recognised over time in the
accounting period when services are rendered.
Fee arrangements for legal and professional services include fixed fee arrangements, unconditional fee-for-service arrangements
(‘time and materials’), and variable or contingent fee arrangements.
For fixed fee arrangements, revenue is recognised based on the stage of completion with reference to the actual services provided as
a proportion of the total services expected to be provided under the contract. The stage of completion is tracked on a contract-by-contract
basis using the hours spent by fee-earners providing the services.
In fee-for-service contracts, revenue is recognised up to the amount of fees that the Group is entitled to bill for services performed to date
based on contracted rates.
Under variable or contingent fee arrangements, fees may be earned only in the event of a successful outcome of a client’s claim. Fees under
these arrangements may be fixed or may be variable based on a specified percentage of damages awarded under a claim.
For variable or contingent fee arrangements management makes a detailed assessment of the amount of revenue expected to be received
and the probability of success of each case. Variable consideration is recognised only to the extent that it is highly probable that the amount
recognised will not be subject to significant reversal when the matter is concluded. In such circumstances, a level of judgement is required
to determine the likelihood of success of a given matter, as well as the estimated amount of fees that will be recovered in respect of the matter.
Where the likelihood of success of a contingent fee arrangement is less than highly probable, the value recognised in contract assets is further
reduced to reflect this uncertainty.
Certain contingent fee arrangements are undertaken on a partially funded basis. In such arrangements, the funded portion of fees is not contingent
on the successful outcome of the litigation and in these instances the revenue is recognised up to the amount of fees that the Group is entitled to bill
for services performed to date based on contracted rates. The remaining consideration is variable and conditional on the successful resolution of the
litigation. The variable consideration is included in revenue only to the extent that it is highly probable that the amount recognised will not be subject
to significant reversal when the uncertainty is resolved.
The Group’s contracts with clients each comprise a single distinct performance obligation, being the provision of legal and professional services
in relation to a particular matter and the transaction price is therefore allocated to this single performance obligation.
Estimates of revenues, costs or extent of progress toward completion are revised if circumstances change. Any resulting increases or decreases
in estimated revenues or costs are reflected in the Statement of Comprehensive Income in the period in which the circumstances that give rise
to the revision become known by management.
The Group has determined that no significant financing component exists in respect of the provision of legal and professional services because
the period between when the entity transfers its services to a client and when the client pays for that service will generally be one year or less.
Consideration for services provided under contingent or variable fee arrangements may be paid after a longer period. In these cases, no significant
financing component exists because the consideration promised by the customer is variable subject to the occurrence or non-occurrence of a future
event that is not substantially within the control of the client or the Group.
80
81
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc
Notes to the Consolidated Financial Statements continued
For the year ended 30 April 2020
2. Accounting policies continued
A receivable is recognised when a bill has been issued to the client, as this is the point in time that the consideration is unconditional because
only the passage of time is required before the payment is due.
2.10 Impairment of non-current assets
An assessment is made at each reporting date of whether there are indications that non-current assets may be impaired or that an impairment
loss previously recognised has fully or partially reversed. If such indications exist, the Group estimates the recoverable amount of the asset or,
for goodwill, the recoverable amount of the cash-generating unit.
Unbilled revenue is recognised as contract assets. Costs incurred in fulfilling the future performance obligations of a contract are recognised
as contract assets if the costs are expected to be recovered.
Shortfalls between the carrying value of non-current assets and their recoverable amounts, being the higher of fair value less costs to sell and
value-in-use, are recognised as impairment losses. All other impairment losses are recognised in the Statement of Comprehensive Income.
Contract liabilities are recognised in respect of consideration billed in advance of satisfying the performance obligation under the contract.
2.6 Taxation
The tax expense represents the sum of the current tax expense and the deferred tax expense. Current tax assets are recognised when the tax
paid exceeds the tax payable. Current tax is based on taxable profit for the year. Current tax assets and liabilities are measured using tax rates
that have been enacted or substantively enacted by the reporting date.
Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled based
on tax rates that have been enacted or substantively enacted by the reporting date.
Deferred tax liabilities are recognised in respect of all timing differences that exist at the reporting date. Timing differences are differences
between taxable profits and total comprehensive income that arise from the inclusion of income and expenses in tax assessments in different
periods from their recognition in the financial statements. Deferred tax assets are recognised only to the extent that it is probable that they will
be recovered by the reversal of deferred tax liabilities or other future taxable profits.
Deferred tax is recognised on differences between the value of assets (other than goodwill) and liabilities recognised in a business combination
and the amounts that can be deducted or assessed for tax. The deferred tax recognised is adjusted against goodwill.
Current tax assets and current tax liabilities and deferred tax assets and deferred tax liabilities are offset, if and only if, there is a legally enforceable
right to set off the amounts and the entity intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.
2.7 Intangible assets – 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. Goodwill is tested annually by the Directors
for evidence of impairment.
2.8 Intangible assets – Other than goodwill
Intangible assets purchased, other than in a business combination, are recognised when future economic benefits are probable and the cost
or value of the asset can be measured reliably.
Intangible assets arising on a business combination, such as customer relationships, are recognised at estimated fair value, except where the
asset does not arise from legal or contractual rights, and there is no history or evidence of exchange transactions for the same or similar assets
and estimating the assets fair value would depend on immeasurable variables. The fair value represents the Directors best estimate of future
economic benefit to be derived from these assets discounted at an appropriate rate.
Intangible assets are initially recognised at cost (which for intangible assets acquired in a business combination is the fair value at acquisition date)
and are subsequently measured at cost less accumulated amortisation and accumulated impairment losses.
Intangible assets are amortised to the Statement of Comprehensive Income on a straight-line basis over their estimated useful lives, as follows:
Purchased computer software
Customer relationships
Brand
–
–
–
4 years
5-25 years
100 years
Purchased computer software is amortised over a period of 4 years, being the minimum period expected to benefit from the asset.
Customer relationships are amortised over a period of 5-25 years being the average length of relationship with key clients for acquired entities.
Brand value is amortised over a period of 100 years based on the Directors’ assessment of the future life of the brand. This is supported by
a trading history dating back to 1759. Brand value relates to the ‘Knights’ brand only. Other acquired brands are not recognised as an asset
as the acquired entities are rebranded as Knights and the impact of such recognition would not be material.
2.9 Property, plant and equipment
Property, plant and equipment are stated at cost net of depreciation and any provision for impairment.
Depreciation is provided on property, plant and equipment at rates calculated to write each asset down to its estimated residual value over
its expected useful life, as follows:
Expenditure on short leasehold property
Office equipment
Furniture and fittings
Motor vehicles
Right-of-use assets
–
–
–
–
–
10% on cost
25% on cost
10% on cost
25% on cost
Useful life of the lease (between 1 and 21 years)
Residual value is calculated on prices prevailing at the reporting date, after estimated costs of disposal, for the asset as if it were at the age
and in the condition expected at the end of its useful life.
Recognised impairment losses are reversed if, and only if, the reasons for the impairment loss have ceased to apply. Reversals of impairment
losses are recognised in the Statement of Comprehensive Income. On reversal of an impairment loss, the depreciation or amortisation is adjusted
to allocate the asset’s revised carrying amount (less any residual value) over its remaining useful life.
2.11 Provisions
In common with comparable practices, the Group is involved in a number of disputes in the ordinary course of business which may give rise
to claims. Provision is made in the financial statements, within provisions for all claims where costs are likely to be incurred. This represents the
cost of defending and concluding claims and any excesses that may become payable. The Group carries professional indemnity insurance and
no separate disclosure is made of the cost of claims covered by insurance as to do so could seriously prejudice the position of the Group.
2.12 Leases
The Group leases offices, equipment and vehicles. Rental contracts are for periods of between 3 and 25 years. Lease terms are negotiated
on a lease by lease basis and contain a variety of terms and conditions.
The Group assesses whether a contract is or contains a lease at inception of the contract. The Group recognises a right-of-use asset and
a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases
with a lease term of 12 months or less) and leases of low-value assets (being those assets with a value less than £4,000). For these short-term
and low-value leases, the Group recognises the lease payments as an operating expense on a straight-line basis over the term of the lease.
Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value
of the following lease payments:
• fixed payments (including in-substance fixed payments), less any lease incentives receivable;
• variable lease payments that are based on an index or a rate;
• amounts expected to be payable by the Group under residual value guarantees;
•
the exercise price of a purchase option if the Group is reasonably certain to exercise that option, and
• payments of penalties for terminating the lease, if the lease term assumed reflects the Group exercising that option.
The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the Group’s incremental
borrowing rate is used, being the rate that the Group would have to pay to borrow the funds necessary to obtain an asset of similar value
in a similar economic environment with similar terms and conditions.
The lease liability is presented as a separate line in the Consolidated Statement of Financial Position.
Right-of-use assets are recognised at commencement of the lease and initially measured at the amount of the lease liability, plus any
incremental cost of obtaining the lease and any lease payments made at or before the leased asset is available for use by the Group.
Subsequent to initial recognition, the lease liability is reduced for payments made and increased to reflect interest on the lease liability (using the
effective interest method). The related right-of-use asset is depreciated over the term of the lease or, if shorter, the useful economic life of the leased
asset. The lease term shall include the period of an extension option where it is reasonably certain that the option will be exercised. Interest on
the lease liability is recognised in the Statement of Comprehensive Income.
An estimate of the costs to be incurred in restoring the leased asset to the condition required under the terms and conditions of the lease
is recognised as part of the cost of the right-of-use asset when the Group incurs the obligation for these costs. The costs are incurred at the start
of the lease or over the lease term. The provision is measured at the best estimate of the expenditure required to settle the obligation.
The Group remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever:
•
•
the lease term has changed or there is a significant change in the assessment of exercise of a purchase option, in which case the lease
liability is remeasured by discounting the revised lease payments using a revised discount rate;
the lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value,
in which cases the lease liability is remeasured by discounting the revised lease payments using the initial discount rate (unless the lease
payments change is due to a change in a floating interest rate, in which case a revised discount rate is used);
• a lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability
is remeasured by discounting the revised lease payments using a revised discount rate.
The Group did not make any such adjustments during the periods presented.
The following accounting policies were applied to leases in the year ended 30 April 2019:
Where assets are financed by leasing agreements that give rights approximating to ownership (‘finance leases’), the assets are treated
as if they had been purchased outright. The amount capitalised is the present value of the minimum lease payments payable during the
lease term. The corresponding leasing commitments are shown as obligations to the lessor.
Lease payments are treated as consisting of capital and interest elements, and the interest is charged to the Statement of Comprehensive
Income in proportion to the remaining balance outstanding.
82
83
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc
Notes to the Consolidated Financial Statements continued
For the year ended 30 April 2020
2. Accounting policies continued
All other leases are ‘operating leases’ and the annual rentals are charged to the Statement of Comprehensive Income on a straight-line
basis over the lease term.
Borrowings
Borrowings are initially recognised at the fair value of the consideration received net of issue costs associated with the borrowings.
Borrowings are subsequently measured at amortised cost using the effective interest method. Interest expense is recognised on the basis
of the effective interest method and is included in interest payable and other similar charges.
During the year ended 30 April 2019, operating lease rentals of £2,104,000 were charged to other operating charges.
Derecognition of financial assets and liabilities
2.13 Retirement benefits
2.13a Defined contribution scheme
The Group operates a defined contribution scheme. The amount charged to the Statement of Comprehensive Income in respect of pension
costs is the contributions payable in the year. Differences between contributions payable in the year and contributions actually paid are shown
as either accrued expenses or prepayments and other receivables.
2.13b Defined benefit pension scheme
For defined benefit schemes the amounts charged to operating profit are the current service costs and gains and losses on settlements and
curtailments. They are included as part of staff costs. Past service costs are recognised immediately in the Statement of Comprehensive Income
if the benefits have vested. If the benefits have not vested immediately, the costs are recognised over the period until vesting occurs. The interest
cost and the expected return on assets are shown as a net amount of other finance costs or credits adjacent to interest. Actuarial gains and
losses are recognised immediately in the Statement of Comprehensive Income.
Defined benefit schemes are funded, with the assets of the scheme held separately from those of the Group, in separate trustee administered
funds. Pension scheme assets are measured at fair value and liabilities are measured on an actuarial basis using the projected unit method and
discounted at a rate equivalent to the current rate of return on a high-quality corporate bond of equivalent currency and term to the scheme
liabilities. The actuarial valuations are obtained at least triennially and are updated at each balance sheet date.
Defined benefit assets are not recognised in the Statement of Financial Position on the basis that future economic benefits are not available
to the Group in the form of a reduction in future contributions or a cash refund.
For the ‘With Profits Section’ contributions are recognised in the Statement of Comprehensive Income in the period to which they relate
as there is insufficient information available to use defined benefit accounting. A liability will be recognised based on the agreed share of the
Group in the scheme. No liability has been recognised as at 30 April 2020 as it is not deemed to be material and is as a result of a temporary
timing difference.
2.14 Share-based payments
The cost of providing share-based payments to employees is charged to the Statement of Comprehensive Income over the vesting period
of the awards. The cost is based on the fair value of awards at the date of grant of the award using an appropriate valuation model. The amount
recognised as an expense will be adjusted to reflect differences between the expected and actual vesting levels. Further details of the schemes
are included in note 9.
2.15 Financial instruments
Financial instruments are recognised on the date when the Group becomes a party to the contractual provisions of the instrument.
Financial instruments are recognised initially at fair value. Financial instruments are derecognised when the Group is no longer party
to the contractual provisions of the instrument.
Financial assets
Contract assets and trade receivables
Contract assets and trade receivables which are receivable within one year are initially measured at fair value. These assets are subsequently
measured at amortised cost, being the transaction price less any amounts settled and any impairment losses.
Impairment of financial assets
The Group recognises a loss allowance for expected credit losses (‘ECL’) on contract assets and trade receivables. The expected credit
losses on trade receivables includes specific provisions against known receivables and an estimate using a provision matrix by reference
to past experience and an analysis of the debtor’s current financial position on the remaining balance. The expected credit losses on contract
assets and other receivables is assessed based on historical credit loss experienced on these types of assets adjusted for known foreseeable
estimated losses.
Financial liabilities and equity
Financial instruments are classified as liabilities and equity instruments according to the substance of the contractual arrangements entered into.
An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.
Trade and other payables
Trade and other payables due within one year are initially measured at fair value and subsequently measured at amortised cost, being the
transaction price less any amounts settled.
Deferred consideration
Deferred consideration is initially recognised at the fair value of the amounts payable and subsequently at amortised cost of the agreed payments
in accordance with the agreement. Any interest payable on the balance is reflected in the value of the liability and charged monthly to the Statement
of Comprehensive Income as it arises.
A financial asset is derecognised only when the contractual rights to cash flows expire or are settled, or substantially all the risks and
rewards of ownership are transferred to another party. A financial liability (or part thereof) is derecognised when the obligation specified
in the contract is discharged, cancelled or expires.
3. Accounting developments
New and amended IFRSs that are effective for the current year
In the year, the Group adopted one new IFRS, issued by the International Accounting Standards Board (IASB) that is effective for an annual
period that begins on or after 1 January 2019 (and has been endorsed for use within the EU). IFRS 16 replaces IAS 17 ‘leases’.
-
IFRS 16 Leases
The Group leases offices, equipment and vehicles. Rental contracts are for periods of between 3 and 25 years. Lease terms are negotiated
on a lease by lease basis and contain a variety of terms and conditions.
The main change on application of IFRS 16 is the accounting for ‘operating leases’ where rentals payable (as adjusted for lease incentives)
were previously expensed under IAS 17 on a straight-line basis over the lease term.
Under IFRS 16 a right-of-use asset and a lease liability are recognised for all leases except ‘low-value’ and ‘short-term’ leases where lease
payments are recognised on a straight-line basis over the lease term.
The Group has applied IFRS 16 retrospectively to all leases but has elected to recognise the cumulative effect against opening reserves at
1 May 2019. Therefore the comparative figures are as previously reported under IAS 17. The Group has applied this approach subject to the
transition provisions as set out below:
•
the use of a single discount rate for a portfolio of leases with reasonably similar characteristics;
• reliance on previous assessments on whether leases are onerous at 1 May 2019 and reducing the right-of-use asset value by that amount;
•
initial direct costs have been excluded from the measurement of the right-of-use asset; and
•
the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease.
On the Statement of Financial Position, a new category of fixed asset (right-of-use) has been created to recognise the value of right-of-use
assets, whilst the full liability of leases has been recognised within both current and non-current liabilities. Over the life of the leases, the
right-of-use asset will be depreciated and interest will be charged on the liability; these charges will replace the cost of operating leases which
has previously been charged as part of administrative expenses. On the Statement of Cash Flows, payments of leases are treated as financing
activities; these payments previously formed part of operating cash flow.
The Group has also elected not to reassess whether a contract is, or contains a lease at the date of initial application. Instead, for contracts
entered into before the transition date the Group relied on its assessment made applying IAS 17 and IFRIC 4 Determining whether an Arrangement
contains a Lease.
Operating leases under IAS 17, except ‘low-value’ and ‘short-term’ leases
The lease liability is measured and the present value of the remaining lease payments at 1 May 2019, discounted at the leasee’s
incremental borrowing rate at that date.
The right-of-use asset is either
•
•
measured as if IFRS 16 had been applied from commencement of the lease, but using the lessee’s incremental borrowing rate
at 1 May 2019 to discount future payments; or
measured at the amount of the lease liability recognised in accordance with the measurement set out above, adjusted for accrued
or prepaid operating lease payments at 1 May 2019.
This measurement has been made on a ‘lease by lease’ basis.
‘Low-value’ leases
When the value of an underlying asset (if new) at 1 May 2019 is £4,000 or less, the Group has continued to recognise the lease payments
associated with those leases on a straight-line basis over the lease term.
‘Short-term’ leases
Where the lease ends before 30 April 2020, the Group has continued to recognise the lease payments associated with those leases
on a straight line basis over the lease term.
The impact of IFRS 16 is detailed further in note 37.
84
85
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc Notes to the Consolidated Financial Statements continued
For the year ended 30 April 2020
3. Accounting developments continued
New and revised IFRS in issue but not yet effective
At the date of authorisation of these financial statements, the Group has not applied the following new and revised IFRSs that have been issued
but are not yet effective and in some cases have not yet been adopted by the EU:
Revised IFRS
IFRS 3
IFRS 17
Business Combinations
Insurance Contracts
Effective date
1 January 2020
1 January 2021
The Directors do not expect that the adoption of the Standards listed above will have a material impact on the financial statements of the Group
in future periods.
4. Critical accounting judgements and key sources of estimation uncertainty
In the application of the Group’s accounting policies, which are described in note 2, the Directors are required to make judgements, estimates and
assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated
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 the revision and future periods if the revision affects both
current and future periods.
Critical accounting judgements
The following are the critical judgements, apart from those involving estimations (which are dealt with separately below), that the Directors have
made in the process of applying the Group’s accounting policies and that have the most significant effect on the amounts recognised in the
financial statements.
Amounts recoverable on contracts – contingent fee arrangements
A level of judgement is required to determine the likelihood of success of a given matter for contingent fee arrangements. This is determined
on a contract-by-contract basis after considering the relevant facts and circumstances surrounding each matter. The valuation exercise
is conducted by experienced fee earners with detailed understanding of the cases. The carrying value of contingent fee arrangements work
in progress at 30 April 2020 was £4,114,000 (2019: £2,201,000).
IFRS 16
The Group has applied judgement in applying the following transition provisions of IFRS 16:
- determining whether leases have similar characteristics to apply a single discount rate; and
- lease portfolios have been grouped between leases of properties and office equipment. These classes of assets have similar lease terms.
In applying IFRS 16, the Group uses judgement to assess whether the interest rate implicit in the lease is readily determinable. When the interest
rate in the lease is not readily determinable, the Group estimates the incremental borrowing rate based on its external borrowings secured against
similar assets, adjusted for the term of the lease. An increase in the rate adopted of 2% would have the following impact on the reported results
for 30 April 2020:
Statement of Financial Position: Right-of-Use Assets – reduction of £2,190,000; Lease liabilities – reduction of £2,096,000.
Statement of Comprehensive Income: Interest costs – increase of £260,000; Depreciation – reduction of £166,000.
Key sources of estimation uncertainty
The key assumptions concerning the future, and other key sources of estimation uncertainty in the reporting period that may have a significant
risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.
IFRS 16
The Group makes estimates of the cost of restoring leased assets to their original condition when required to do so under the terms and conditions
of the lease. Those estimates are based on the current condition of the leased assets and past experience of restoration costs.
Amounts recoverable on contracts – recoverable amounts
The valuation of amounts recoverable on contracts (‘AROC’) involves the use of estimates of the likely recovery rate which will be made on the
gross value of chargeable time recorded to each matter.
This percentage represents management’s best estimate of future value following a line by line review of the matters by fee earners.
The estimation process takes into account the progress of the case at the reporting date, the estimated eventual fee payable by the client and
the amount of time which will be incurred by fee earners in bringing the matter to a successful conclusion. The amount recognised in AROC
at the year end was £21,507,000 (2019: £11,112,000), a 3% change in the estimated recovery of all matters would impact the profit for the
period by approximately £990,000 (2019: £455,000).
Accounting for business combinations and valuation of intangibles
Business combinations are accounted for at fair value. The valuation of goodwill and acquired intangibles is calculated separately on each
individual acquisition. In attributing value to intangible assets arising on acquisition, management has made certain assumptions in relation
to the expected growth rates, profitability, length of key customer relationships and the appropriate weighted average cost of capital (‘WACC’)
or internal rate of return (‘IRR’).
The value attributable to the intangible assets acquired on acquisitions also impacts the deferred tax provision relating to these items.
The total carrying value of acquired intangibles arising from business combinations in the year is £24,365,000 (2019: £27,247,000).
In order to assess the impact of the key assumptions on the values disclosed in the accounts the Directors have applied the following sensitivities
to the acquisitions the current year:
Key assumption
Long-term growth rate
WACC and IRR rate
Length of customer relationships
Rate applied in the
financial statements
Sensitivity tested
0%
16% - 33%(1)
5-15 years
2%
5%
5 years
Annual profit
impact
£’000
Value of intangible
assets
£’000
4
126
(165)
30
(340)
(356)
(1) Each acquisition has been reviewed and, dependent upon the structure of the acquisition, an appropriate WACC or IRR rate has been applied. These sensitivities have been
calculated adjusting the adopted rates as noted above.
Growth rate are estimated based on the current conditions at the date of each acquisition with reference to independent surveys of future
growth rates in the legal profession in real, inflation adjusted terms.
The length of customer relationships is estimated by considering the length of time the acquiree has had its significant client relationships
up to the date of acquisition and historic customer attrition rates as appropriate.
The Directors consider the resulting valuations used give a reasonable approximation as to the value of the intangibles acquired and that
any reasonably possible change in any one of the estimations in isolation would not have a material impact on the financial statements.
The Directors undertake an annual impairment review of goodwill to assess whether the carrying value is still supported by using a discounted
the cash flow model to derive the value in use of the cash generating unit (‘CGU’). Cash flow forecasts are derived from the most recent financial
budgets approved by management for the next two years and extrapolates cash using a terminal value calculation.
The key assumptions for the value in use calculations are those regarding the discount rates and growth rates for the Group’s revenue from
legal and professional services and the gross profit margin. Management estimates discount rates using pre-tax rates that reflect current market
assessments of the time value of money and the risk specific to the CGU.
Revenue growth over the two years of the forecast period reflects, for 2021, the current run rate of revenue from the Group’s existing business
and a full year of revenue from acquisitions made during the year ended 30 April 2020, with an element of growth in 2022. The long term growth
rate of 2% (2019: 3%) is based on UK economic growth forecasts for the legal services market.
The Group has conducted sensitivity analysis on the impairment test of the CGU value in use. A reduction in projected revenues for 2021
and 2022 of 10% per annum would result in the carrying value equalling the value in use.
5. Revenue
All revenue is derived from contracts with customers and is recognised over time. As more fully explained in note 6, the Group’s legal and
professional services business operates as a single business unit so there are no relevant categories into which revenue can be disaggregated.
The transaction price allocated to unsatisfied performance obligations of contracts at 30 April 2020 is not required to be disclosed because
it comprises contracts that are expected to have a duration of one year or less.
6. Segmental reporting
The Board of Directors, as the chief operating decision-making body, reviews financial information for and makes decisions about the Group’s
overall legal and professional services business and has identified a single operating segment, that of legal and professional services operating
entirely in the UK.
The legal and professional services business operates through a number of different service lines and in different locations; however, management
effort is consistently directed to the firm operating as a single segment. No segmental reporting disclosure is therefore provided as all revenue
is derived from this single segment.
86
87
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc
Notes to the Consolidated Financial Statements continued
For the year ended 30 April 2020
7. Other operating income
Other income
Bank interest
8. Staff costs
The average monthly number of employees (including Executive Directors) of the Group was:
Fee earners
Other employees
Their aggregate remuneration comprised:
Wages and salaries
Social security costs
Other pension costs
Other employment costs
Aggregate remuneration of employees
One off redundancy costs analysed as non-underlying costs (note 13)
Movement in contract assets relating to staff costs
Members’ costs
Underlying staff costs in the Statement of Comprehensive Income
Members’ costs relate to the remuneration of members of the Group’s LLPs.
Directors’ remuneration
Companies Act disclosures
Year ended
30 April 2020
£’000
Year ended
30 April 2019
£’000
495
399
894
253
162
415
Year ended
30 April 2020
Number
Year ended
30 April 2019
Number
664
168
832
430
123
553
Year ended
30 April 2020
£’000
Year ended
30 April 2019
£’000
40,290
4,244
2,938
1,058
48,530
(2,952)
–
–
45,578
26,284
2,792
614
628
30,318
(712)
(73)
604
30,137
The total amounts for Directors’ remuneration in accordance with Schedule 5 to the Accounting Regulations were as follows:
Salaries, fees, bonuses and benefits in kind
Money purchase pension contributions
The number of Directors to whom benefits are accruing under money purchase pension schemes is 2 (2019: 3).
The remuneration of the highest paid Director was:
Salaries, fees, bonuses and benefits in kind
Money purchase pension contributions
Year ended
30 April 2020
£’000
Year ended
30 April 2019
£’000
698
10
708
444
5
449
Year ended
30 April 2020
£’000
Year ended
30 April 2019
£’000
231
–
231
142
1
143
9. Share-based payments
The Group issues equity-settled share-based payments to its employees. The Group recognised total expenses of £789,000 (2019: £356,000)
relating to equity-settled share-based payment transactions in the year.
Any charges relating to schemes introduced as one-off schemes as part of the listing are included in non-underlying costs because the
directors view these schemes as a reward to employees for their past performance prior to the IPO. All charges relating to other recurring LTIP
or SAYE schemes are included as a normal operating expense.
The following schemes were in place during the period:
Omnibus Plan
The Omnibus Plan is a discretionary share plan, which is administered, and the grant of awards is supervised by, the Remuneration Committee.
Three forms of award are available under the Omnibus Plan, as considered appropriate by the Remuneration Committee, as follows:
a) ‘Restricted Stock Awards’: Awards granted in the form of nil or nominal cost share options, subject to time-based vesting requirements
and continued employment within the Group. No performance targets will apply to Restricted Stock Awards.
b) ‘Performance Share Awards’: Awards granted in the form of nil or nominal cost share options, whereby vesting is subject to satisfaction
of performance conditions and continued employment within the Group.
c) ‘Share Options’: Awards granted in form of a share option with an exercise price equal to the market value of an Ordinary share at the
time of grant, subject to continued employment within the Group. Share Options may or may not be subject to performance conditions.
Outstanding at 1 May 2018
Granted during the period
Outstanding at 30 April 2019
Granted during the period
Forfeited during the period
Exercised during the period
Outstanding at 30 April 2020
Exercisable at 30 April 2020
Restricted stock awards
Performance share awards
Weighted
average
exercise price
Pence
–
0.2
0.2
–
–
–
0.2
0.2
Number
–
451,845
451,845
129,112
(11,104)
(28,967)
540,886
53,819
Weighted
average
exercise price
Pence
–
0.2
0.2
–
–
–
0.2
–
Number
–
63,352
63,352
142,862
–
–
206,214
–
The options outstanding at 30 April 2020 had a weighted average exercise price of 0.2p and a weighted average remaining contractual life
of 2.1 years.
In the period, the following restricted stock awards were granted : 21,353 options were granted on 9 July 2019, 31,250 options were granted
on 1 November 2019, 18,669 options were granted on 9 March 2020 and 57,840 options were granted on 24 April 2020. In addition 142,862
performance share awards were granted on 10 March 2020.
The aggregate of the estimated fair values of the options granted on these dates is £1,051,000. The inputs into the valuation model are as follows:
Weighted average share price
Weighted average exercise price
Weighted average expected life
387p
0.2p
2.1 years
88
89
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc
Notes to the Consolidated Financial Statements continued
For the year ended 30 April 2020
9. Share-based payments continued
Share Incentive Plan (‘SIP’)
The SIP is an ‘all employee’ scheme under which every eligible employee within the Group was invited to participate. Eligible employees could
apply to invest up to £1,800 from pre-tax income in partnership shares; matching shares were awarded on the basis of 2 free matching shares
for each partnership share purchased. The matching shares are forfeited if the employee leaves within 3 years of the grant date.
Outstanding at 30 April 2018
Granted during the period
Withdrawn during the period
Forfeited during the period
Outstanding at 30 April 2019
Withdrawn during the period
Forfeited during the period
Outstanding at 30 April 2020
Unrestricted at 30 April 2020
Sharesave Scheme (‘SAYE’)
Partnership
Shares
Number
–
219,244
(15,071)
–
204,173
(22,649)
–
181,524
–
Matching
Shares
Number
–
438,488
–
(30,141)
408,347
–
(45,298)
363,049
–
This is an HMRC approved scheme and is open to any person that was an employee or officer of the Group at the launch date of each scheme.
Under the scheme, members save a fixed amount each month for 3 years. Subject to remaining in employment by the Group, at the end of the
3-year period they are entitled to use these savings to buy shares in the Company at 80% of the market value at launch date.
February 2020 scheme
In the period, 664,796 options were granted on 21 February 2020. The aggregate of the estimated fair values of the options granted
is £1,163,000. The inputs into the Black-Scholes model are as follows:
Exercise price
Expected volatility
Expected life
Risk-free rate
Expected dividend yield
361p
34.3%
3.1 years
1.1%
0.7%
Expected volatility was determined by using historical share price data of the Company since it listed on 29 June 2018. The expected life used
in the model has been based on management’s best estimate after considering exercise restrictions and behavioural considerations.
Warrants
Warrants were issued to Numis Securities Limited on Admission in respect of their services and shall be exercisable for a period of five years.
Outstanding at 30 April 2019
Exercised during the period
Outstanding at 30 April 2020
Warrants
Weighted
average
exercise price
Pence
1.7
–
–
Number
706,897
(706,897)
–
The first scheme was launched in November 2018 and a new SAYE scheme was launched in February 2020.
The warrants were exercised in the period and raised £1,230,000.
Outstanding at 30 April 2018
Granted during the period
Forfeited during the period
Outstanding at 30 April 2019
Granted during the period
Forfeited during the period
Exercised during the period
Outstanding at 30 April 2020
Exercisable at 30 April 2020
SAYE options
Weighted
average
exercise price
Pence
–
162
–
162
361
221
162
251
–
Number
–
900,785
(4,350)
896,435
664,796
(188,681)
(12,361)
1,360,189
–
The options outstanding at 30 April 2020 had a weighted average exercise price of 251p and a weighted average remaining contractual life of 2.3 years.
November 2018 scheme
The aggregate of the estimated fair values of the options granted is £500,000. The inputs into the Black-Scholes model are as follows:
Exercise price
Expected volatility
Expected life
Risk-free rate
Expected dividend yield
162p
39.2%
3.1 years
1.4%
1.1%
10. Retirement benefit schemes
The Group operates a defined contribution pension scheme for employees. The total cost charged to income of £2,931,000 (2019: £614,000)
represents contributions payable to the scheme by the Group. As at 30 April 2020, contributions of £281,000 (2019: £207,000) due in respect
of the reporting period had not been paid over to the schemes.
The defined benefit impact is discussed in note 38. There were no charges against income in the year ended 30 April 2020.
11. Depreciation and amortisation charges
Depreciation
Depreciation on right-of-use assets
Amortisation
Loss on disposal of property, plant and equipment
12. Other operating charges
Establishment costs
Short-term and low-value lease costs
Other overhead expenses
Year ended
30 April 2020
£’000
Year ended
30 April 2019
£’000
858
1,909
1,501
8
4,276
702
–
757
14
1,473
Year ended
30 April 2020
£’000
Year ended
30 April 2019
£’000
2,335
161
9,008
11,504
3,184
–
7,980
11,164
90
91
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc
Notes to the Consolidated Financial Statements continued
For the year ended 30 April 2020
13. Non-underlying operating costs
16. Taxation
Corporation tax:
Current year
Adjustments in respect of prior years
Deferred tax:
Origination and reversal of temporary differences
Tax expense for the year
The charge for the period can be reconciled to the Statement of Comprehensive Income as follows:
Profit before tax
Tax at the UK corporation tax rate of 19% (2019: 19%)
Expenses that are not deductible in determining taxable profit
Adjustment in respect of prior years
Tax expense for the year
The impact of non-underlying costs on the effective rate of tax is set out below:
Year ended
30 April 2020
£’000
Year ended
30 April 2019
£’000
1,915
(20)
1,895
343
2,238
1,327
–
1,327
(87)
1,240
Year ended
30 April 2020
£’000
Year ended
30 April 2019
£’000
4,058
771
1,487
(20)
2,238
5,241
995
245
–
1,240
Profit before tax
Tax expense
Effective rate of tax
Year ended 30 April 2020
Year ended 30 April 2019
Total
£’000
4,058
(2,238)
55%
Underlying
£’000
13,616
(2,910)
21%
Non-
underlying
£’000
(9,558)
672
(7%)
Total
£’000
5,241
(1,240)
24%
Underlying
£’000
Non-underlying
£’000
9,819
(1,678)
17%
(4,578)
438
(10%)
Redundancy and reorganisation costs
Transaction costs
Loss of disposal
Share based payment charges
Contingent consideration
Year ended
30 April 2020
£’000
Year ended
30 April 2019
£’000
2,952
1,532
97
513
2,996
8,090
712
602
–
300
233
1,847
Non-underlying costs relate to redundancy costs to streamline the support function following acquisitions of the Group and in FY20 as a result
of reorganisation actions taken in relation to the impact of COVID-19, transaction costs in respect of acquisitions, the placing of new shares during
the period and share-based payment charges relating to one-off share schemes offered to employees as part of the IPO. Contingent consideration
is included in non-underlying costs as it represents payments agreed under the terms of the sale and purchase agreements with vendors of certain
businesses acquired which are contingent on the continued employment of those individuals with the Group. The payments extend over periods
of 1 to 3 years and are designed to preserve the value of goodwill and customer relationships acquired in the business combinations. IFRS requires
such arrangements to be treated as remuneration and charged to the Statement of Comprehensive Income. The individuals also receive market rate
salaries for their work, in line with other similar members of staff in the Group. The contingent earnout payments are significantly in excess of these
market salaries and would distort the Group’s results if not separately identified.
14. Finance costs
Interest on borrowings
Interest on leases
Bank arrangement fees
Exit and release of arrangement fees arising on the repayment of debt at the IPO
Interest on deferred consideration
Other interest payable
15. Auditor’s remuneration
Fees payable to the parent company’s auditor and their associates for the audit of the parent company’s
annual accounts
Fees payable to the auditor and their associates for other services to the Group:
– The audit of the Company’s subsidiaries
Total audit fees
– Audit–related assurance services
– Taxation advisory services
– Corporate finance services
– Other advisory services
Total non-audit fees
Year ended
30 April 2020
£’000
Year ended
30 April 2019
£’000
628
790
71
–
41
–
1,530
695
–
39
1,924
114
4
2,776
Year ended
30 April 2020
£’000
Year ended
30 April 2019
£’000
29
95
124
21
–
–
3
24
21
38
59
21
7
80
63
171
In addition to the above in the year ended 30 April 2020, £5,000 of non-audit costs relating to tax services have been charged to the share premium
account in the year. For the year ended 30 April 2019 £95,000 was charged to the share premium account in relation to corporate finance services.
Fees payable to the auditor and its associates for non-audit services to the Company are not required to be disclosed because the consolidated
financial statements disclose such fees on a consolidated basis.
92
93
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc
Notes to the Consolidated Financial Statements continued
For the year ended 30 April 2020
17. Earnings per share
19. Intangible assets and goodwill
Basic and diluted earnings per share have been calculated using profit after tax and the weighted average number of Ordinary Shares
in issue during the period.
Weighted average number of Ordinary Shares for the purposes of basic earnings per share
Effect of dilutive potential Ordinary Shares:
Share options
Warrants
Year ended
30 April 2020
Number
Year ended
30 April 2019
Number
74,675,462
68,533,094
724,543
–
194,389
117,350
Weighted average number of Ordinary Shares for the purposes of diluted earnings per share
75,400,004
68,844,833
Profit after tax
Earnings per share
Basic earnings per share
Diluted earnings per share
£’000
1,820
Pence
2.44
2.41
£’000
4,001
Pence
5.84
5.81
The denominators for the purposes of calculating both basic and diluted earnings per share have been adjusted to reflect the Group
reorganisation with Knights 1759 Limited and the subdivision of Ordinary Shares in the period ended 30 April 2019.
Adjusted earnings per share is calculated as an alternative performance measure in note 36.
18. Dividends
Amounts recognised as distributions to equity holders in the year:
Final dividend for the year ended 30 April 2019, paid September 2019
Interim dividend for the year ended 30 April 2020 of 1.10p per share, pad in March 2020 (2019: 0.60p per share)
Proposed final dividend for the year ended 30 April 2020 of 0p per share (2019: 1.27p per share)
Year ended
30 April 2020
£’000
Year ended
30 April 2019
£’000
931
824
1,755
–
–
433
433
931
Due to the COVID-19 pandemic and the resultant uncertainty of the effects on the UK economy the Board has decided not to propose
a final dividend for the year ended 30 April 2020.
Cost
As at 1 May 2018
Acquisitions of subsidiaries
Additions
As at 30 April 2019
Acquisitions of subsidiaries
Adjustment in respect of consideration not payable
Additions
As at 30 April 2020
Amortisation and impairment
As at 1 May 2018
Amortisation charge
As at 30 April 2019
Amortisation charge
As at 30 April 2020
Carrying amount
At 30 April 2020
At 30 April 2019
At 1 May 2018
Goodwill
£’000
12,244
14,363
–
26,607
13,270
(199)
–
39,678
–
–
–
–
–
39,678
26,607
12,244
Brand
£’000
5,401
–
–
5,401
–
–
–
5,401
162
54
216
54
270
5,131
5,185
5,239
Customer
relationships
£’000
Purchased
computer
software
£’000
2,496
12,884
–
15,380
11,095
–
–
26,475
268
639
907
1,373
2,280
24,195
14,473
2,228
256
–
90
346
–
–
26
372
103
64
167
74
241
131
179
153
Total
£’000
20,397
27,247
90
47,734
24,365
(199)
26
71,926
533
757
1,290
1,501
2,791
69,135
46,444
19,864
The carrying amount of goodwill of £39.7 million (2019: £26.6 million) has been allocated to the single cash generating unit (CGU) present
in the business, which is the provision of legal and professional services.
The recoverable amount of the Group’s goodwill has been determined by a value in use calculation using a discounted cash flow model.
The Group prepared cash flow forecasts derived from the most recent financial budgets approved by management for the next 2 years
and extrapolates cash using a terminal value calculation based on an estimated growth rate of 2% (2019: 3%). This rate does not exceed
the expected average long-term growth rate for the UK legal services market.
The key assumptions for the value in use calculations are those regarding the discount rates and growth rates for the Group’s revenues
from legal and professional services and the gross profit margin. Management estimates discount rates using pre-tax rates that reflect
current market assessments of the time value of money and the risks specific to the CGU.
The rate used to discount the forecast cash flows is 19.4% (2019: 16.6%).
Revenue growth over the two years of the forecast period reflects, for 2021, the current run rate of revenue from the Group’s existing
business and a full year of revenue from acquisitions made during the year ended 30 April 2020, with an element of growth in 2022.
The long-term growth rate is based on UK economic growth forecasts for the legal services market.
The Group has conducted a sensitivity analysis on the impairment test of the CGU value in use. A reduction in the projected revenues
for 2021 and 2022 of 10% per annum would result in the carrying value equalling the value in use.
94
95
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc Notes to the Consolidated Financial Statements continued
For the year ended 30 April 2020
20. Acquisitions
Acquisitions summary
During the year the Group has completed six acquisitions. The table below summarises the consideration paid and the net cash flow arising
on all acquisitions in the period.
Total identifiable assets and liabilities acquired
Goodwill
Total consideration
Satisfied by:
Cash
Equity instruments (3,240,644 Ordinary Shares of Knights Group Holdings plc)
Deferred consideration arrangement
Total consideration transferred
Net cash outflows arising on acquisition:
Cash consideration (net of cash acquired)
Net investing cash outflow arising on acquisition
Repayment of debt acquired
Net financing cash outflow arising on acquisition
Details for the individual acquisitions are included below
Dakeyne Emms Gilmore Liberson Limited (EGL)
Total
£’000
22,628
13,270
35,898
21,424
13,167
1,307
35,898
11,907
11,907
7,049
7,049
On 1 November 2019, the Group exchanged contracts to acquire EGL, through the agreement to purchase the shares of the entity. This acquisition
completed on 29 November 2019. EGL is a law firm based in Birmingham and it was acquired to assist the Group in entering the Birmingham legal
and professional services market.
The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are as set out in the table below.
Identifiable assets
Identifiable intangible assets
Property, plant and equipment
Contract assets
Trade and other receivables
Cash and cash equivalents
Liabilities
Trade and other payables
Provisions
Deferred tax
Total identifiable assets and liabilities
Goodwill
Total consideration
Satisfied by:
Cash
Equity instruments (515,057 Ordinary Shares of Knights Group Holdings plc)
Total consideration transferred
Net cash outflow arising on acquisition:
Cash consideration (net of cash acquired)
Repayment of debt
Net cash outflow arising on acquisition
96
Carrying
amount
£’000
Fair value
adjustment
£’000
–
45
874
992
2,524
(1,155)
(71)
(11)
3,198
1,448
(45)
–
–
–
–
–
(246)
1,157
Total
£’000
1,448
–
874
992
2,524
(1,155)
(71)
(257)
4,355
661
5,016
3,349
1,667
5,016
1,125
82
1,207
The goodwill of £661,000 arising from the acquisition represents the assembled workforce. None of the goodwill is expected to be
deductible for income tax purposes.
The fair value of the Ordinary Shares issued as part of the consideration was determined on the basis of the volume weighted average
share price for the 5 days prior to completion.
A contingent consideration arrangement was entered into as part of the acquisition. This is contingent on the sellers remaining in
employment by the Group so it has been excluded from the consideration and will be recognised in the Statement of Comprehensive Income
on a straight-line basis over the 2-year post acquisition period. The maximum undiscounted amount of all potential future payments under the
contingent consideration arrangement is £1,667,000 and is payable from 31 May 2020 to 31 October 2021 in regular instalments.
EGL contributed £1,890,000 of revenue to the Group’s Statement of Comprehensive Income for the period from 1 November 2019
to 30 April 2020. The profit contributed is not separately identifiable due to the hive-up of its trade and assets being incorporated into
Knights Professional Services Limited from 29 November 2019.
ERT Law Limited (ERT)
On 3 January 2020, the Group exchanged contracts to acquire ERT, through the agreement to purchase the shares of the entity.
This acquisition completed on 17 January 2020. ERT is a law firm based in Birmingham and it was acquired to enhance the Groups
presence in the Birmingham legal and professional services market.
The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are as set out in the table below.
Carrying
amount
£’000
Fair value
adjustment
£’000
–
29
–
267
419
462
(464)
–
(100)
(1)
612
906
(11)
101
–
–
–
–
(101)
–
(154)
741
Identifiable assets
Identifiable intangible assets
Property, plant and equipment
Right-of-use assets
Contract assets
Trade and other receivables
Cash and cash equivalents
Liabilities
Trade and other payables
Lease liabilities
Provisions
Deferred tax
Total identifiable assets and liabilities
Goodwill
Total consideration
Satisfied by:
Cash
Equity instruments (262,899 Ordinary Shares of Knights Group Holdings plc)
Total consideration transferred
Net cash outflow arising on acquisition:
Cash consideration (net of cash acquired)
Repayment of debt
Net cash outflow arising on acquisition
The goodwill of £644,000 arising from the acquisition represents the assembled workforce. None of the goodwill is expected to be
deductible for income tax purposes.
The fair value of the Ordinary Shares issued as part of the consideration was determined on the basis of the volume weighted average
share price for the 5 days prior to completion.
ERT contributed £778,000 of revenue to the Group’s Statement of Comprehensive Income for the period from 3 January 2020 to
30 April 2020. The profit contributed is not separately identifiable due to the hive-up of its trade and assets being incorporated into
Knights Professional Services Limited from 17 January 2020.
Total
£’000
906
18
101
267
419
462
(464)
(101)
(100)
(155)
1,353
644
1,997
1,097
900
1,997
635
143
778
97
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc Notes to the Consolidated Financial Statements continued
For the year ended 30 April 2020
20. Acquisitions continued
Croftons Solicitors LLP (‘Croftons’)
On 31 January 2020, the Group acquired Croftons, by purchasing the controlling membership interests of the entity. Croftons is a law firm
based in Manchester and it was acquired to further expand the Group’s legal and professional services offering in the Manchester market.
The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are as set out in the table below.
Identifiable assets
Identifiable intangible assets
Property, plant and equipment
Contract assets
Trade and other receivables
Cash and cash equivalents
Liabilities
Trade and other payables
Provisions
Deferred tax
Total identifiable assets and liabilities
Goodwill
Total consideration
Satisfied by:
Cash
Equity instruments (163,086 Ordinary Shares of Knights Group Holdings plc)
Total consideration transferred
Net cash outflow arising on acquisition:
Cash consideration (net of cash acquired)
Repayment of debt
Net cash outflow arising on acquisition
Carrying
amount
£’000
Fair value
adjustment
£’000
300
174
296
682
980
(431)
(8)
–
1,993
483
(119)
–
–
–
–
(81)
(133)
150
Total
£’000
783
55
296
682
980
(431)
(89)
(133)
2,143
471
2,614
1,910
704
2,614
519
410
929
The goodwill of £471,000 arising from the acquisition represents the assembled workforce. None of the goodwill is expected to be deductible
for income tax purposes.
The fair value of the Ordinary Shares issued as part of the consideration was determined on the basis of the volume weighted average share
price for the 5 days prior to completion.
A contingent consideration arrangement was entered into as part of the acquisition. This is contingent on the sellers remaining in employment
by the Group so it has been excluded from the consideration and will be recognised in the Statement of Comprehensive Income on a straight-line
basis. The maximum undiscounted amount of all potential future payments under the contingent consideration arrangement is £704,000 and is
payable in equal installments over the 2 years post completion.
Croftons contributed £921,000 of revenue to the Group’s Statement of Comprehensive Income for the period from 31 January 2020
to 30 April 2020. The profit contributed is not separately identifiable due to the hive-up of its trade and assets being incorporated into
Knights Professional Services Limited from 31 January 2020.
Fraser Brown Solicitors (Fraser Brown)
On 14 February 2020, the Group exchanged contracts to acquire Fraser Brown, through the agreement to purchase the controlling membership
interests of the partnership. This acquisition completed on 27 March 2020. Fraser Brown is a law firm based in Nottingham and it was acquired
to assist the Group in entering the Nottingham legal and professional services market.
The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are as set out in the table below.
Identifiable assets
Identifiable intangible assets
Property, plant and equipment
Right-of-use assets
Contract assets
Trade and other receivables
Cash and cash equivalents
Liabilities
Trade and other payables
Lease liabilities
Borrowings
Directors loan accounts
Provisions
Deferred tax
Total identifiable assets and liabilities
Goodwill
Total consideration
Satisfied by:
Cash
Equity instruments (680,911 Ordinary Shares of Knights Group Holdings plc)
Deferred consideration arrangement
Total consideration transferred
Net cash outflow arising on acquisition:
Cash consideration (net of cash acquired)
Repayment of debt
Net cash outflow arising on acquisition
Carrying
amount
£’000
Fair value
adjustment
£’000
–
762
–
807
1,293
1,404
(1,513)
–
(651)
1,253
–
–
3,355
1,492
(591)
84
–
(208)
–
–
(84)
–
–
(159)
(254)
280
Total
£’000
1,492
171
84
807
1,085
1,404
(1,513)
(84)
(651)
1,253
(159)
(254)
3,635
4,006
7,641
4,258
3,033
350
7,641
2,055
197
2,252
The goodwill of £4,006,000 arising from the acquisition represents the assembled workforce. None of the goodwill is expected to be
deductible for income tax purposes.
The fair value of the Ordinary Shares issued as part of the consideration was determined on the basis of the volume weighted average
share price for the 5 days prior to completion.
A contingent consideration arrangement was entered into as part of the acquisition. This is contingent on the sellers remaining in employment
by the Group so it has been excluded from the consideration and will be recognised in the Statement of Comprehensive Income on a straight-line
basis. The maximum undiscounted amount of all potential future payments under the contingent consideration arrangement is £2,066,000.
This is payable in installments from May 2020 to February 2022.
There are also deferred consideration payments totalling £350,000 outstanding. This is payable in installments on the first and second anniversary
of completion.
Fraser Brown contributed £1,674,000 of revenue to the Group’s Statement of Comprehensive Income for the period from 14 February 2020
to 30 April 2020. The profit contributed is not separately identifiable due to the hive-up of its trade and assets being incorporated into Knights
Professional Services Limited from 27 March 2020.
98
99
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc Notes to the Consolidated Financial Statements continued
For the year ended 30 April 2020
20. Acquisitions continued
ASB Law (‘ASB’) and Aspire LLP (‘Aspire’)
Shulmans LLP (‘Shulmans’)
On 5 March 2020, the Group exchanged contracts to acquire ASB and Aspire, through the agreement to purchase the controlling membership
interests of the entities. This acquisition completed on 17 April 2020. ASB and Aspire are law firms based in Maidstone and Crawley, they were
acquired to assist the Group in entering the legal and professional services market in the South East region.
On 5 March 2020, the Group exchanged contracts to acquire Shulmans, through the agreement to purchase the controlling membership interests
of the entity. This acquisition completed on 24 April 2020. Shulmans is a law firm based in Leeds and it was acquired to assist the Group in entering
the Leeds legal and professional services market.
The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are as set out in the table below.
The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are as set out in the table below.
Identifiable assets
Identifiable intangible assets
Property, plant and equipment
Right-of-use assets
Contract assets
Trade and other receivables
Cash and cash equivalents
Liabilities
Trade and other payables
Lease liabilities
Borrowings
Provisions
Deferred tax
Total identifiable assets and liabilities
Goodwill
Total consideration
Satisfied by:
Cash
Equity instruments (181,675 Ordinary Shares of Knights Group Holdings plc)
Deferred consideration arrangement
Total consideration transferred
Net cash outflow arising on acquisition:
Cash consideration (net of cash acquired)
Repayment of debt
Net cash outflow arising on acquisition
Carrying
amount
£’000
Fair value
adjustment
£’000
616
186
–
3,274
6,189
40
(4,572)
–
(2,477)
(155)
–
3,101
1,168
(11)
1,204
–
–
–
109
(1,204)
–
–
(303)
963
Total
£’000
1,784
175
1,204
3,274
6,189
40
(4,463)
(1,204)
(2,477)
(155)
(303)
4,064
1,438
5,502
4,282
770
450
5,502
1,508
5,212
6,720
The goodwill of £1,438,000 arising from the acquisition represents the assembled workforce. None of the goodwill is expected to be
deductible for income tax purposes.
The fair value of the Ordinary Shares issued as part of the consideration was determined on the basis of the volume weighted average
share price for the 5 days prior to completion.
Future payments under the deferred consideration arrangement total £450,000. This is payable in two equal instalments on the first and
second anniversary of completion.
ASB and Aspire contributed £2,445,000 of revenue to the Group’s Statement of Comprehensive Income for the period from 5 March 2020
to 30 April 2020. The profit contributed is not separately identifiable due to the hive-up of its trade and assets being incorporated into
Knights Professional Services Limited from 17 April 2020.
Identifiable assets
Identifiable intangible assets
Property, plant and equipment
Right-of-use assets
Contract assets
Trade and other receivables
Cash and cash equivalents
Liabilities
Trade and other payables
Lease liabilities
Borrowings
Provisions
Deferred tax
Total identifiable assets and liabilities
Goodwill
Total consideration
Satisfied by:
Cash
Equity instruments (1,437,016 Ordinary Shares of Knights Group Holdings plc)
Deferred consideration arrangement
Total consideration transferred
Net cash outflow arising on acquisition:
Cash consideration (net of cash acquired)
Repayment of debt
Net cash outflow arising on acquisition
Carrying
amount
£’000
Fair value
adjustment
£’000
1,068
745
–
2,774
3,185
111
(2,569)
–
(1,005)
(10)
–
4,299
3,608
(60)
3,126
–
(200)
–
468
(3,126)
–
(242)
(795)
2,779
Total
£’000
4,676
685
3,126
2,774
2,985
111
(2,101)
(3,126)
(1,005)
(252)
(795)
7,078
6,050
13,128
6,528
6,093
507
13,128
6,065
1,005
7,070
The goodwill of £6,050,000 arising from the acquisition represents the assembled workforce. None of the goodwill is expected to be
deductible for income tax purposes.
The fair value of the Ordinary Shares issued as part of the consideration was determined on the basis of the volume weighted average
share price for the 5 days prior to completion.
A contingent consideration arrangement was entered into as part of the acquisition. This is contingent on the sellers remaining in employment
by the Group so it has been excluded from the consideration and will be recognised in the Statement of Comprehensive Income on a straight-line
basis. The maximum undiscounted amount of all potential future payments under the contingent consideration arrangement is £5,708,000.
This is payable in 2 instalments on the first and second anniversary of completion.
Future payments under the deferred consideration arrangement are £507,000, of which £125,000 is payable in May 2020, £225,000 is payable
on the first anniversary of the completion date and £127,000 is payable on the second anniversary.
Shulmans contributed £2,910,000 of revenue to the Group’s Statement of Comprehensive Income for the period from 5 March 2020 to 30 April 2020.
The profit contributed is not separately identifiable due to the hive-up of its trade and assets being incorporated into Knights Professional Services
Limited from 24 April 2020.
100
101
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc Notes to the Consolidated Financial Statements continued
For the year ended 30 April 2020
21. Property, plant and equipment
Cost
As at 1 May 2018
Acquisitions of subsidiaries
Additions
Disposals
As at 30 April 2019
IFRS 16 - right-of-use assets
As at 1 May 2019 - after IFRS 16 transition
Acquisitions of subsidiaries
Additions
Disposals
As at 30 April 2020
Depreciation and impairment
As at 1 May 2018
Depreciation charge
Eliminated on disposal
As at 30 April 2019
Depreciation charge
Eliminated on disposal
As at 30 April 2020
Carrying amount
At 30 April 2020
At 30 April 2019
At 1 May 2018
Expenditure
on short
leasehold
property
£’000
Office
equipment
£’000
Furniture
and
fittings
£’000
Motor
vehicles
£’000
Right
of use assets
£’000
1,401
9
603
(7)
2,006
–
2,006
367
1,129
(1)
3,501
169
238
(1)
406
250
–
656
2,845
1,600
1,232
1,192
155
585
–
1,932
–
1,932
586
982
(70)
3,430
643
307
–
950
494
(4)
1,440
1,990
982
549
825
210
26
(12)
1,049
–
1,049
151
12
(217)
995
158
157
(3)
312
114
(158)
268
727
737
667
5
–
–
–
5
–
5
–
–
(5)
–
5
–
–
5
–
(5)
–
–
–
–
–
–
–
–
–
19,407
19,407
4,515
1,822
–
25,744
–
–
–
–
1,995
–
1,995
23,749
–
–
Total
£’000
3,423
374
1,214
(19)
4,992
19,407
24,399
5,619
3,945
(293)
33,670
975
702
(4)
1,673
2,853
(167)
4,359
29,311
3,319
2,448
Depreciation of £86,000 (2019: £nil) is included in non-underlying operating costs.
See note 37 for further details of the right-of-use assets.
22. Contract assets and liabilities
As at 30 April 2020
As at 30 April 2019
Contract assets
Contract
assets
£’000
21,507
11,112
Trade
receivables
£’000
22,450
10,720
Contract
liabilities
£’000
(177)
(120)
Contract assets consist of unbilled revenue in respect of legal and professional services performed to date.
Contract assets in respect of fee-for-service and fixed fee arrangements are billed at appropriate intervals, normally on a monthly basis in arrears,
in line with the performance of the services. Where such matters remain unbilled at the period end the asset is valued on a contract-by-contract
basis at its expected recoverable amount.
The Group undertakes some matters based on contingent fee arrangements. These matters are billed when the claim is successfully settled.
For matters ongoing at the period end, each matter is valued based on its specific circumstances. If the matter has agreed funding arrangements
in place, then it is valued based on the estimated amount recoverable from the funding depending on the stage of completion of the matter.
If the matter has been admitted and performance obligations satisfied, such that it is no longer contingent, these matters are valued based on the
expected recoverable amount. Due to the complex nature of these matters, they can take a considerable time to be finalised therefore performance
obligations may be settled in one period but the matter not billed until a later financial period. The amount of contingent fee work in progress at
30 April 2020 was £4,114,000 (2019: £2,201,000).
If the performance obligations for contingent matters have not been satisfied at the reporting date, these assets are valued on a contract-
by-contract basis taking into account the expected recoverable amount and the likelihood of success. Where the likelihood of success of a
contingent fee arrangement is less than highly probable, the amount recognised in contract assets is further reduced to reflect this uncertainty.
During the year, contract assets of £8,292,000 (2019: £1,877,000) were acquired in business combinations.
An impairment loss of £27,000 has been recognised in relation to contract assets in the year (2019: £57,000). This is based on the expected credit
loss under IFRS 9 of these types of assets. The contract asset loss is estimated at 0.2% (2019: 0.5%) of the balance.
Trade receivables
Trade receivables are recognised when a bill has been issued to the client, as this is the point in time that the consideration is unconditional
because only the passage of time is required before the payment is due. Trade receivables also includes disbursements.
Bills are payable within 30 days unless otherwise agreed with the client.
Contract liabilities
When matters are billed in advance or on the basis of a monthly retainer, this is recognised in contract liabilities and released over time
when the services are performed.
23. Trade and other receivables
Trade receivables
Impairment provision – Trade receivables
Prepayments and other receivables
Impairment provision – Prepayments and other receivables
Trade receivables
30 April 2020
£’000
30 April 2019
£’000
23,003
(553)
4,596
–
27,046
10,960
(240)
3,008
(57)
13,671
The average credit period taken on sales is 42 days as at 30 April 2020 (2019: 38 days). No interest is charged on trade receivables. The Group
uses appropriate methods to recover all balances once overdue. Once the expectation of recovery is deemed remote a debt may be written off.
The Group measures the loss allowance for trade receivables at an amount equal to lifetime expected credit losses (‘ECL’). The Group applies
the simplified approach to providing for expected credit losses prescribed by IFRS 9, which permits the use of the lifetime expected loss provision
for all trade receivables. As the Group’s historical credit loss experience does not show significantly different loss patterns for different client
segments, the provision for loss allowance is based on past due status.
The following table details the risk profile of trade receivables (excluding disbursements) based on the Group’s provision matrix.
30 April 2020
Not
past due
31-60 days
past due
61-90 days
past due
91-120 days
past due
>120 days
past due
Expected credit loss rate
Estimated total gross carrying amount £’000
Lifetime ECL £’000
0.03%
9,868
3
0.02%
4,233
1
1.39%
1,454
20
7.47%
370
28
16.77%
2,449
411
Total
2.52%
18,374
463
In addition to the above on trade receivables a further £90,000 (2019: £39,000) impairment loss has been recognised against disbursement
balances. This is based on 100% impairment against all disbursements with no activity on the matter for over 12 months and 0.2% against
the remainder of the balance based upon the historical credit loss experience of this type of asset.
An impairment loss of £27,000 has been recognised on contract assets in the year (2019: £57,000). This is based on the expected credit loss
under IFRS 9 of these types of assets. The contract asset loss is estimated at 0.2% (2019: 0.5%).
Other receivables
As at 30 April 2020 other receivables includes £187,000 (2019: £513,000) of consideration paid in advance relating to the acquisition of Cummins
Solicitors Limited which is contingent on continued employment over a 2 year period. This is being released to the Statement of Comprehensive
Income over the 2 year period.
24. Share capital
As at 1 May 2018
Changes during the period
Ordinary Shares of £1 each issued in respect of the share-for-share acquisition of Knights 1759 Limited
Subdivision of 100,000 Ordinary Shares of £1 each into 50,000,000 Ordinary Shares of 0.2p each
Ordinary Shares of 0.2p each issued at Initial Public Offering
Ordinary Shares of 0.2p each issued in respect of the Share Incentive Plan (see note 9)
Ordinary Shares of 0.2p each issued as consideration in the purchase of subsidiaries
As at 30 April 2019
Changes during the period
Ordinary Shares of 0.2p each issued at share placing
Ordinary Shares of 0.2p each issued in respect of exercised share options
Ordinary Shares of 0.2p each issued in respect of exercised share options equivalent to dividend entitlement
Ordinary Shares of 0.2p each issued in respect of exercised share warrants
Ordinary Shares of 0.2p each issued as consideration in the purchase of subsidiaries
Ordinary Shares
Number
100,000
–
49,900,000
20,689,656
657,732
1,978,031
73,325,419
4,761,905
41,328
139
706,897
3,240,644
£’000
100
–
–
41
2
4
147
9
1
–
1
6
At 30 April 2020
82,076,332
164
102
103
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc
Notes to the Consolidated Financial Statements continued
For the year ended 30 April 2020
25. Share premium
As at 1 May 2018
Premium arising on issue of equity shares
Expenses of issue of equity shares
As at 30 April 2019
Premium arising on issue of equity shares
Expenses of issue of equity shares
At 30 April 2020
26. Reserves
At 1 May 2018
Profit for the period and total comprehensive income
Credit to equity for equity-settled share-based payments
Dividends (note 18)
Balance at 30 April 2019
IFRS 16 impact (note 37)
As at 1 May 2019 - restated
Profit for the period and total comprehensive income
Credit to equity for equity-settled share-based payments
Dividends (note 18)
Balance at 30 April 2020
£’000
–
34,327
(1,841)
32,486
34,475
(709)
66,252
Retained
earnings
£’000
6,234
4,001
356
(433)
10,158
2,058
12,216
1,820
789
(1,755)
13,070
Merger
reserve
£’000
(3,536)
–
–
–
(3,536)
–
(3,536)
–
–
–
(3,536)
The merger reserve of £3,536,000 arose on the share for share exchange by Knights 1759 Limited and Knights Professional Services Limited.
The reserve is the difference between the nominal value of Knights 1759 Limited share capital and amounts paid to the shareholders as
part of the Group reorganisation in October 2016 and the share capital, share premium value and capital redemption of the shares acquired
in Knights Professional Services Limited.
Retained earnings represents cumulative profits and losses of the Group net of distributions to members.
27. Borrowings
Secured borrowings at amortised cost:
Bank loans
Total borrowings
Amount due for settlement within 12 months
Amount due for settlement after 12 months
30 April 2020
£’000
30 April 2019
£’000
28,650
28,650
–
19,000
19,000
–
28,650
19,000
All of the Group’s borrowings are denominated in Sterling.
The Group has a credit facility of £40,000,000 in total (2019: £27,000,000) compromising term debt and revolving credit facilities. The previous
facility that was due to expire on 25 June 2023 was increased in the year to £40,000,000. The facility remains available until 25 June 2023.
The new facility is a revolving credit facility and is renewed monthly and is due for final repayment on 25 June 2023. The facility is secured by
a fixed and floating charge over the Group’s assets. The facility carries an interest margin above LIBOR of between 1.65% and 2.45% depending
on the leverage level. A commitment fee of one third of the applicable margin is payable on the undrawn amounts.
28. Deferred consideration
Non-current liabilities
Deferred consideration
Current liabilities
Deferred consideration
30 April 2020
£’000
30 April 2019
£’000
127
127
2,723
2,723
1,611
1,611
1,628
1,628
Deferred consideration as at 30 April 2020 relates to the acquisitions of Turner Parkinson LLP, Fraser Brown, ASB Law LLP and Shulmans LLP
and is not contingent.
In addition the Group has contingent consideration accrued and included within trade and other payables relating to acquisitions. This is contingent
based upon continued employment and is being accrued on a monthly basis in the Statement of Comprehensive Income in accordance with the
terms of the agreement. It is expected that employment will continue for the terms of the agreement and, therefore, the contingent consideration
will be payable in full.
29. Deferred tax
The following are the major deferred tax liabilities and (assets) recognised by the Group and movements thereon during the current
and prior reporting period.
As at 1 May 2018
Acquisitions of subsidiaries
Charge/(credit) for the year
As at 30 April 2019
IFRS 16 impact
Charge/(credit) for the prior year
Acquisitions of subsidiaries
Charge/(credit) for the year
As at 30 April 2020
Accelerated
capital
allowances
£’000
Intangible
assets
£’000
Share-based
payments
£’000
IFRS 16
£’000
109
–
92
201
–
(87)
–
282
396
1,275
2,190
(118)
3,347
–
(5)
1,897
308
5,547
–
–
(60)
(60)
–
9
–
(156)
(207)
–
–
–
–
(299)
–
–
(8)
(307)
Total
£’000
1,384
2,190
(86)
3,488
(299)
(83)
1,897
426
5,429
Deferred tax assets and liabilities are offset where the Group has a legally enforceable right to do so. The following is the analysis of the
deferred tax balances after offset for financial reporting purposes:
Deferred tax assets
Deferred tax liabilities
30. Trade and other payables
Trade payables
Other taxation and social security
Other payables
Accruals
30 April 2020
£’000
30 April 2019
£’000
(514)
5,943
5,429
(60)
3,548
3,488
30 April 2020
£’000
30 April 2019
£’000
3,033
6,180
2,817
7,989
1,442
3,511
1,868
5,284
20,019
12,105
Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period
taken for trade purchases is 25 days (2019: 26 days). No interest is charged on the trade payables.
The Directors consider that the carrying amount of trade payables approximates to their fair value.
104
105
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc
Notes to the Consolidated Financial Statements continued
For the year ended 30 April 2020
31. Provisions
As at 30 April 2018
1 May 2019 – Transferred in from accruals
Acquisitions of subsidiaries
Additional provision in the year
Utilisation of provision
As at 30 April 2019
IFRS 16 reallocation
Acquisitions of subsidiaries
Additional provision in the year
Utilisation of provision
As at 30 April 2020
Dilapidation
provision
£’000
Onerous
contract
provision
£’000
Professional
indemnity
provision
£’000
161
–
231
81
–
473
–
652
546
(123)
1,548
–
–
272
202
(39)
435
(435)
–
–
–
–
–
284
–
284
(29)
539
–
264
90
(295)
598
Total
£’000
161
284
503
567
(68)
1,447
(435)
916
636
(418)
2,146
The dilapidations provision relates to the potential rectification of leasehold sites upon expiration of the leases. This has been based
on a surveyor’s valuation of the schedule of works included in the lease, or in absence of a surveyor’s estimate, is based on the Directors’
estimate of potential liabilities.
The onerous contract provision relates to vacant offices where the Group is the lessee. The Group is actively marketing these leases for
reassignment. The provision represents the Directors’ estimate of the future lease payments to be paid by the Group prior to reassignment
of the leases. The onerous contracts provision also includes contracts acquired via acquisition that are non-cancellable. The provision represents
the remaining payments under the terms of the lease. Future lease payments are offset against the provision. This provision has been transferred
to right-of-use assets in accordance with IFRS 16 during the year.
The professional indemnity provision (transferred from accrued expenses on 1 May 2018), relates to a number of disputes in the ordinary course
of business for all claims where costs are likely to be incurred and represents the cost of defending and concluding claims and any excess that
may become payable. The Group carries professional indemnity insurance and no separate disclosure is made of the cost of claims covered
by insurance as to do so could seriously prejudice the position of the Group.
32. Financial instruments
Categories of financial instruments
Financial assets
Amortised cost
Contract assets
Trade and other receivables (excluding prepayments)
Cash and cash equivalents
Financial liabilities
Amortised cost
Borrowings
Deferred consideration
Trade and other payables
Fair value
Trade and other payables
Financial risk management objectives
30 April 2020
£’000
30 April 2019
£’000
21,507
23,425
12,741
28,650
2,850
12,872
11,112
11,706
4,904
19,000
3,239
8,448
967
146
The Group’s finance function monitors and manages the financial risks relating to the operations of the Group. These risks include market
risk (interest rate risk), credit risk, liquidity risk and cash flow interest rate risk.
Market risk
The Group’s activities expose it primarily to the financial risks of changes in interest rates (see below). Market risk exposures are measured
using sensitivity analysis.
There has been no change to the Group’s exposure to market risks or the manner in which these risks are managed and measured.
Interest rate risk management
The Group is exposed to interest rate risk because the Group borrows funds at floating interest rates. The risk is managed by the Group
by keeping the level of borrowings at a manageable level.
Interest rate sensitivity analysis
The sensitivity analysis below has been determined based on the exposure to interest rates for financial instruments at the end of the reporting
period. For floating rate liabilities, the analysis is prepared assuming the amount of the liability outstanding at the end of the reporting period
was outstanding for the whole year.
If interest rates had been 0.5% higher/lower and all other variables were held constant, the Group’s profit for the year ended 30 April 2020
would decrease/increase by £143,000 (2019: decrease/increase by £95,000). This is attributable to the Group’s exposure to interest rates
on its variable rate borrowings.
The Group’s sensitivity to interest rates has increased during the current year mainly due to the increase in the borrowings of the Group.
Credit risk management
Note 23 details the Group’s maximum exposure to credit risk and the measurement bases used to determine expected credit losses.
The risk of bad debts is mitigated by the Group having a policy of performing credit checks or receiving payments on account for new clients
when practical and ensuring that the Group’s exposure to any individual client is tightly controlled, through credit control policies and procedures.
Liquidity risk
Liquidity risk arises from the Group’s management of working capital and the financial charges on its debt instruments and repayments of principal.
There is a risk that the Group will encounter difficulty in meeting its financial obligations as they fall due or not meet its required covenants. The Group
manages this risk and its cash flow requirements through detailed annual and monthly cash flow forecasts. These forecasts are reviewed regularly
to ensure that the Group has sufficient working capital to enable it to meet all of its short-term and long-term cash flow needs.
The tables below analyse the Group’s financial liabilities into relevant maturity groupings based on their contractual maturities. The amounts
disclosed in the table are the contractual undiscounted cash flows.
Contractual maturities of financial liabilities
30 April 2020
Borrowings
Deferred consideration
Trade and other payables
30 April 2019
Borrowings
Deferred consideration
Trade and other payables
The Group has met its covenant tests during the year.
Capital management
< 1 year
£’000
1 - 2 years
£’000
2 - 5 years
£’000
–
2,723
13,839
–
127
–
28,650
–
–
< 1 year
£’000
1 - 2 years
£’000
2 - 5 years
£’000
–
1,628
8,594
–
1,611
–
19,000
–
–
Total
£’000
28,650
2,850
13,839
Total
£’000
19,000
3,239
8,594
The capital structure of the Group consists of borrowings (as disclosed in note 27) and equity of the Group (comprising issued capital, reserves,
and retained earnings as disclosed in the Statement of Changes in Equity).
In managing its capital, the Group’s primary objective is to provide a return for its equity shareholders through capital growth and future dividend
income. The Group seeks to maintain a gearing ratio that balances risk and returns at an acceptable level and also to maintain a sufficient funding
base to enable the Group to meet its working capital and strategic investment needs and objectives.
Gearing ratio
The gearing ratio at the year end is as follows:
Borrowings (note 27)
Cash and cash equivalents
Net debt
Equity
Net debt to equity ratio
Significant accounting policies
30 April 2020
£’000
30 April 2019
£’000
28,650
(12,741)
15,909
75,950
%
21
19,000
(4,904)
14,096
39,255
%
36
Details of the significant accounting policies and methods adopted (including the criteria for recognition, the basis of measurement and the bases
for recognition of income and expenses) for each class of financial asset, financial liability and equity instrument are disclosed in note 2.
33. Capital commitments
As at 30 April 2020 there is a capital commitment of £82,000 (2019: £425,000) in relation to an ongoing office refurbishment.
106
107
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc
Notes to the Consolidated Financial Statements continued
For the year ended 30 April 2020
34. Reconciliation of profit to net cash generated from operations
Profit before taxation
Adjustments for:
Amortisation
Depreciation - property, plant and equipment
Depreciation - Right of use assets (net of £89,000 included in non underlying costs)
Loss on disposal of equipment (net of £97,000 included in non underlying costs)
Contingent consideration not payable
Contingent consideration expense
Non-underlying operating costs
Share based payments
Interest income
Interest expense
Operating cash flows before movements in working capital
Increase in contract assets
Increase in trade and other receivables
(Decrease)/Increase in provisions
Increase in contract liabilities
(Decrease)/Increase in trade and other payables
Cash generated from operations
Year ended
30 April 2020
£’000
Year ended
30 April 2019
£’000
4,058
1,501
858
1,909
8
–
2,996
4,581
861
(399)
1,530
17,903
(2,103)
(1,186)
(183)
57
(697)
13,791
5,241
757
702
–
14
(30)
233
1,314
356
(162)
2,776
11,201
(1,788)
(1,171)
782
18
2,664
11,706
35. Changes in liabilities arising from financing activities
The table below details changes in the Group’s liabilities arising from financing activities, including both cash and non-cash changes.
Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Group’s Consolidated
Statement of Cash Flows as cash flows from financing activities.
As at 1 May 2019
Repayment of borrowings
Proceeds of new borrowings
As at 30 April 2020
Borrowings
£’000
19,000
(35,150)
44,800
28,650
36. Alternative performance measures
This Annual Report contains both statutory measures and alternative performance measures. In management’s view the underlying performance
of the business provides a more meaningful comparison of how the Group’s business is managed and measured on a day-to-day basis.
The Group’s alternative performance measures and key performance indicators are aligned to the Group’s strategy and together are used
to measure the performance of the business.
Alternative performance measures are non-GAAP (Generally Accepted Accounting Practice) measures and provide supplementary information
to assist with the understanding of the Group’s financial results and with the evaluation of operating performance for all the periods presented.
Alternative performance measures, however, are not a measure of financial performance under International Financial Reporting Standards (‘IFRS’)
as adopted by the European Union and should not be considered as a substitute for measures determined in accordance with IFRS. As the Group’s
alternative performance measures are not defined terms under IFRS they may therefore not be comparable with similarly titled measures reported
by other companies.
Reconciliations of alternative performance measures to the most directly comparable measures reported in accordance with IFRS are shown
on the adjacent page.
a) Adjusted EBITDA
Adjusted EBITDA is presented as an alternative performance measure to show the underlying operating performance of the Group excluding
the effects of depreciation, amortisation and non-underlying items.
Operating profit
Depreciation and amortisation charges
Non-underlying costs (note 13)
Adjusted EBITDA
b) Adjusted profit before tax (PBT)
Year ended
30 April 2020
£’000
Year ended
30 April 2019
£’000
5,588
4,276
8,090
17,954
8,017
1,473
1,847
11,337
Adjusted PBT is presented as an alternative performance measure to show the underlying performance of the Group excluding the effects
of amortisation of intangible assets and non-underlying items.
Profit before tax
Amortisation (adjusted for amortisation on computer software)
Non-underlying costs (note 13)
Non-recurring finance costs
Adjusted profit before tax
Year ended
30 April 2020
£’000
Year ended
30 April 2019
£’000
4,058
1,427
8,090
41
13,616
5,241
693
1,847
2,038
9,819
Non-recurring finance costs relate to exit fees and arrangement fees expensed due to the refinancing of the Group during the year and accrued
interest on deferred consideration.
c) Adjusted profit after tax (PAT) and adjusted earnings per share (EPS)
Adjusted PAT and EPS are presented as alternative performance measures to show the underlying performance of the Group excluding the effects
of amortisation of intangible assets, share-based payments and non-underlying items.
Profit after tax
Amortisation (adjusted for amortisation on computer software)
Non-underlying operating costs
Non-recurring finance costs
Tax in respect of the above
Adjusted profit after tax
Adjusted earnings per share
Basic adjusted earnings per share
Diluted adjusted earnings per share
Year ended
30 April 2020
£’000
Year ended
30 April 2019
£’000
1,820
1,427
8,090
41
(672)
10,706
Pence
14.33
14.20
4,001
693
1,847
2,038
(438)
8,141
Pence
11.88
11.83
Tax has been calculated at the corporation tax and deferred tax rate of 19% (2019: 19%).
d) Free cash flow and cash conversion %
Free cash flow measures the Group’s underlying cash generation. Cash conversion % measures the Group’s conversion of its adjusted PAT into
free cash flows. Free cash flow is calculated as the total of net cash from operating activities after adjusting for tax paid and the impact of IFRS 16
(to be comparable with the treatment of leases costs in the prior year). Cash conversion % is calculated by dividing free cash flow by adjusted
profit after tax, which is reconciled to profit after tax above.
Previously free cash flow was calculated as the total of net cash from operating activities, interest paid and net cash flows on capital expenditure
after excluding cash flows in respect of non-underlying costs. However the Group considers that the revised method is a more accurate reflection
of the operating cash flow of the business.
108
109
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc
Notes to the Consolidated Financial Statements continued
For the year ended 30 April 2020
36. Alternative performance measures continued
Property
£'000
Equipment
£'000
Cash generated from operations (note 34)
Tax paid
Total cash outflow for IFRS 16 leases
Free cashflow
Adjusted profit after tax
Cash conversion (%)
Previously reported cash conversion
Year ended
30 April 2020
£’000
Year ended
30 April 2019
£’000
13,791
(2,907)
(2,366)
8,518
10,706
80%
–
11,706
(1,076)
–
10,630
8,141
131%
115%
Operating lease commitments at 30 April 2019
Impact of discounting
Leases not yet commenced at 1 May 2019
Short-term leases recognised as an expense
Long-term leases expiring before 30 April 2020
Impact of rent increase
Other reconciling items (net)
Lease liability opening balance 1 May 2019
24,893
(6,573)
–
(4)
(116)
834
–
19,034
The table below shows lease liabilities maturity analysis – contractual undiscounted cash flows at 30 April 2020:
Total
£'000
26,240
(6,581)
(1,108)
(72)
(153)
834
6
1,347
(8)
(1,108)
(68)
(37)
–
6
132
19,166
37. Lease liabilities - IFRS 16 Leases
The weighted average incremental borrowing rate applied to lease liabilities recognised at 1 May 2019 is 3.60%. Incremental borrowing
rates applied to individual leases ranged between 2.40% and 6.49%.
During transition prepayments of £185,000 were released against the right-of-use asset. Rent free accruals of £1,759,000 and deferred
tax of £299,000 were adjusted against opening reserves.
The table below sets out the impact on the Consolidated Statement of Financial Position as at 30 April 2020 and 1 May 2019:
Right-of-use assets
Property
Equipment
Lease liability
> 1 year
< 1 year
30 April 2020
£’000
1 May 2019
£’000
22,649
1,100
23,749
21,078
2,766
23,844
19,267
140
19,407
17,894
1,272
19,166
The table below shows the impact on the Consolidated Statement of Comprehensive Income for 12 months to 30 April 2020 compared with
reporting under IAS 17:
Profit before tax under IFRS 16
Depreciation on right-of-use assets
Finance costs
Rental costs under IAS 17
Profit before tax under IAS 17
12 months
ended
30 April 2020
£’000
4,058
1,995
812
6,865
(2,265)
4,600
Whilst the cash flows of the Group have not been affected by the adoption of IFRS 16, during the period ended 30 April 2020 cash outflows
from financing activities presented in the Consolidated Statement of Cash Flows increased by £1,576,000 for cash payments of the principal
portion and £790,000 for cash payments of the interest portion of leases recognised within lease liabilities under IFRS 16. Cash generated from
operations reflects the corresponding reduction of £2,366,000 of payments for leases previously classified as operating leases under IAS 17.
Differences between the operating lease commitments disclosed at 30 April 2019 under IAS 17 discounted at the incremental borrowing rate
at 1 May 2019 and lease liabilities recognised at 1 May 2019 shown on the adjacent page.
Less than one year
One to five years
More than five years
Property
£’000
Equipment
£’000
3,424
11,015
15,099
29,538
565
850
–
1,415
Total
£’000
3,989
11,865
15,099
30,953
The table below shows amounts recognised in the Statement of Comprehensive Income for leases exempt from IFRS 16 as at 30 April 2020:
Expenses relating to short-term leases
Expenses relating to leases of low-value assets, excluding short-term leases of low-value assets
The total minimum lease payments at 30 April 2019 under non-cancellable operating lease rentals were:
Less than one year
In the second to fifth year inclusive
After five years
Property
£’000
Equipment
£’000
Year ended
30 April 2020
£’000
143
–
143
18
–
161
–
161
30 April 2019
£’000
2,302
9,408
14,530
26,240
Operating lease payments represent rentals payable by the Group for office properties, motor vehicles and office equipment.
110
111
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc
Notes to the Consolidated Financial Statements continued
For the year ended 30 April 2020
38. Defined benefit pension schemes
The Stonehams Pension Scheme
The Group operates a defined benefit pension arrangement, the Stonehams Pension Scheme (the ‘Scheme’). The Scheme provides benefits
based on salary and length of service on retirement, leaving service, or death. The following disclosures exclude any allowance for any other
pension schemes operated by the Group.
The scheme was acquired as part of the acquisition of ASB Law where contracts were exchanged on 5 March 2020. Therefore the disclosures
below represent the period of ownership from 5 March 2020 to 30 April 2020. The Scheme is closed and provides benefits for 43 legacy employees
(now pensioners and deferred members).
The Scheme is subject to the Statutory Funding Objective under the Pensions Act 2004. A valuation of the Scheme is carried out at least once
every 3 years to determine whether the Statutory Funding Objective is met. As part of the process the Group must agree with the Trustees of the
Scheme the contributions to be paid to address any shortfall against the Statutory Funding Objective.
The most recent comprehensive actuarial valuation of the Scheme was carried out as at 31 December 2018. The results of that valuation were
updated to 30 April 2020 allowing for cash flows in and out of the Scheme and changes to assumptions over the period.
From January 2020 the employers started to make annual contributions of £35,000 per annum towards administration expenses. Administration
expenses from 1 November 2017 to 31 December 2019 have been met directly from the assets of the Scheme. The Group will separately meet
the cost of the PPF levy.
The Scheme typically exposes the Group to actuarial risks such as: investment risk, interest rate risk and longevity risk.
Investment risk
The present value of the defined benefit plan liability is calculated using a discount rate determined by reference
to high-quality corporate bond yields; if the return on plan assets is below this rate, it will create a plan deficit.
Currently assets are invested in very low risk funds, which will reduce volatility. The investment approach is reviewed
every 3 years as part of the valuation process.
Interest risk
There is some hedging in the asset portfolio, but at a low level.
A decrease in the bond interest rate will increase the plan liability but this will be partially offset by an increase
in the return on the plan’s debt investments.
Longevity risk
The present value of the defined benefit plan liability is calculated by reference to the best estimate of the mortality
of plan participants both during and after their employment. An increase in the life expectancy of the plan participants
will increase the plan’s liability.
The average duration of the Schemes obligations is 16 years.
Explanation of amounts in the financial statements
Actuarial assumptions
Principal actuarial assumptions
Discount rate
Retail Prices Index (‘RPI’) Inflation
Consumer Price Index (‘CPI’) Inflation
Pension increase (LPI 5%)
Pension increase (LPI 2.5%)
Post retirement mortality
Commutation
Life expectancy at age 65 of male aged 45
Life expectancy at age 65 of male aged 65
Life expectancy at age 65 of female aged 45
Life expectancy at age 65 of female aged 65
The average duration of the Schemes obligations is 16 years.
30 April 2020
%
1.58
2.85
1.95
2.80
2.03
90%/100% (m/f) S2PA CMI_2017
projections (with standard smoothing
parameter of 7.5) using a long-term
improvement rate of 1.0% pa
80% of members are assumed to take
the maximum tax-free cash possible
using current commutation factors
23.6
22.6
25.2
24.1
The current asset split is as follows:
Equities and growth assets
Bonds, LDI and cash
Fair value of assets
Present value of funded obligations
Surplus in scheme
Deferred tax
Net defined benefit surplus after deferred tax
The fair value of the assets at 30 April 2020 can be analysed as follows:
Low-risk investment funds
Credit Investment funds
Matching funds
Cash
Fair value of assets
Current service costs
Past service costs
Administration costs
Interest on liabilities
Interest on assets
Total charge to the Statement of Comprehensive Income
Remeasurements over the period since acquisition
Loss on assets in excess of interest
Total remeasurements
The change in value of assets
Fair value of assets as at acquisition
Interest on assets
Group contributions
Benefits paid
Administration costs
Loss on assets in excess of interest
Fair value of assets
Actual return on assets
Asset
allocation at
30 April 2020
20%
80%
Value as at
30 April 2020
£’000
3,384
(2,732)
652
–
652
30 April 2020
£’000
692
1,434
998
260
3,384
30 April 2020
£’000
–
–
2
1
(3)
–
30 April 2020
£’000
(145)
(145)
30 April 2020
£’000
3,534
8
–
(11)
(2)
(145)
3,384
(137)
112
113
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc Notes to the Consolidated Financial Statements continued
For the year ended 30 April 2020
38. Defined benefit pension schemes continued
Change in value of liabilities
Value of liabilities as at acquisition
Interest cost
Benefits paid
Value of liabilities
Sensitivity of the value placed on the liabilities
Discount rate
Minus 0.50%
Inflation
Plus 0.50%
Life expectancy
Plus 1.0 years
30 April 2020
£’000
2,737
6
(11)
2,732
Approximate
effect
on liability
£’000
208
161
123
Significant actuarial assumptions for the determination of the defined benefit obligation are discount rate, inflation rate and mortality.
The sensitivity analysis above has been determined based on reasonably possible changes of the respective assumptions occurring
at the end of the reporting period, while holding all other assumptions constant.
The sensitivity analysis presented above may not be representative of the actual change in the defined benefit obligation as it is unlikely
that the changes in assumptions would occur in isolation of one another as some of the assumptions may be correlated.
The With Profits Section of the Cheviot pension
Allocation of liabilities between employers
The With Profits Section was acquired as part of the acquisition of ASB Law where contracts were exchanged on 5 March 2020.
The Trustee has discretion under the contribution rule on how the cost of providing the benefits of the With Profits Section is allocated
between employers. The contribution rule applies until the earlier of the discharge of the employer by the Trustee and the termination
of the With Profits Section. The Trustee’s current policy is not to discharge employers. Employers therefore remain liable under the
contribution rule even if their last member dies or transfers out.
The Trustee has been considering how best to ensure all employers bear an appropriate share of the With Profits Section’s obligations
whilst ensuring fairness between employers and a practical and transparent methodology for the future.
As discussed at the Employers’ Meeting on 5 July 2017, the Trustee has decided to fix the allocation between employers on the basis
of the promised benefits just before the Section was reclassified in 2014 (the valuation as at 31 December 2013). The allocation to each
employer will be expressed as a percentage of the total Scheme liabilities. The intention is to apply this percentage to any funding, buyout
or IFRS deficit in the future to calculate any contribution that may be due or any accounting liability.
The estimated percentage in relation to Knights Professional Services Limited is 0.790%.
This approach enables each employer to calculate the extent of their obligation to the Section on the basis of the funding level at any time.
Cheviot will publish funding updates on the website: quarterly, on the scheme funding basis, which includes an allowance for future investment
returns; and annually, on an estimated buyout basis, which looks at the position should all benefits be secured with an external provider.
Estimated funding position as at 30 April 2020:
As at 30 April 2020
Total assets
Total liabilities excluding expenses
Deficit
Funding level
Scheme
funding basis
£’000
94,400
(97,200)
(2,800)
97%
Allocation to the Group
The estimated share of the Scheme liabilities is 0.790%.
Over the year to 30 April 2020, the Section’s funding position worsened from a small surplus to a small deficit.
Estimated cost of providing benefits
Value of assets
Resulting shortfall
Funding level
The deficit has not been recognised as management consider this to be temporary and not material.
The Trustee continues to monitor the funding position.
The Trustee reserves the right to withdraw, replace or amend the policy for the allocation between employers in the future.
30 April 2020
£’000
(768)
746
(22)
97%
39. Related party transactions
Balances and transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation
and are not disclosed in this note. Transactions between the Group and its other related parties are disclosed below.
KPV Propco Ltd is a Company controlled by Mr DA Beech, a person with significant influence over the Group and a member
of key management personnel.
The Group leases a property from KPV Propco Ltd. During the year rents of £367,000 (2019: £343,000) were charged by KPV Propco Ltd
to the Group.
During the year Knights Professional Services Limited charged KPV Propco Ltd for professional services totalling £98,000 (2019: £nil).
At 30 April 2020, there was an amount of £246,000 (2019: £229,000) owed to KPV Propco Ltd by the Group.
Remuneration of key management personnel
The remuneration of the key management personnel of the Group, is set out below in aggregate for each of the categories specified
in IAS 24 Related Party Disclosures.
Short-term employee benefits and social security costs
Pension costs
Share-based payments
Key management personnel includes Board members and Directors.
Transactions with Directors
Year ended
30 April 2020
£’000
Year ended
30 April 2019
£’000
1,174
23
181
1,378
829
14
106
949
Dividends totalling £787,000 (2019: £202,000) were paid in the year in respect of Ordinary Shares held by the Company’s Directors.
114
115
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc Company Statement of Financial Position
As at 30 April 2020
Company Statement of Changes in Equity
For the period ended 30 April 2020
Assets
Non-current assets
Investments in subsidiaries
Amounts receivable from subsidiaries
Current assets
Trade and other receivables
Total assets
Equity and liabilities
Equity
Share capital
Share premium
Share-based payment reserve
Other reserve
Retained earnings
Equity attributable to owners of the Company
Current liabilities
Trade and other payables
Corporation tax liability
Total liabilities
Total equity and liabilities
Note
30 April 2020
£’000
30 April 2019
£’000
43
44
45
45
46
46
46
1,145
69,118
70,263
356
34,010
34,366
48
14
70,311
34,380
164
66,252
1,145
(100)
2,565
70,026
58
227
285
147
32,486
356
(100)
1,363
34,252
1
127
128
70,311
34,380
Share capital
£’000
Share
premium
£’000
Share-based
payments
£’000
Other reserve
£’000
Retained
earnings
£’000
As at 4 April 2018
Profit for the period and total comprehensive
income
Transactions with owners in their capacity as
owners:
Credit to equity for equity-settled share-based
payments
Issue of shares
Other Reserve (IAS 27:13)
Dividends paid
At 30 April 2019
Profit for the period and total comprehensive
income
Transactions with owners in their capacity as
owners:
Credit to equity for equity-settled share-based
payments
Issue of shares
Dividends paid
Balance at 30 April 2020
–
–
–
147
–
–
147
–
–
17
–
164
–
–
–
32,486
–
–
32,486
–
–
33,766
–
66,252
–
–
356
–
–
–
356
–
789
–
–
1,145
–
–
–
–
(100)
–
(100)
–
–
–
–
(100)
–
1,796
–
–
–
(433)
1,363
2,957
–
–
(1,755)
2,565
Total
£’000
–
1,796
356
32,633
(100)
(433)
34,252
2,957
789
33,783
(1,755)
70,026
Under section 408 of the Companies Act 2006 the company is exempt from the requirement to present its own Statement of Comprehensive Income.
The Company reported a profit for the year ended 30 April 2020 of £2,958,000 (2019: £1,796,000).
The financial statements were approved by the Board and authorised for issue on 21 July 2020 and are signed on its behalf by:
Kate Lewis
Director
Registered No. 11290101
116
117
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc Notes to the Company Financial Statements
40. Accounting policies
The separate financial statements of the Company are presented as required by the Companies Act 2006. The Company meets
the definition of a qualifying entity under FRS 100 ‘Application of Financial Reporting Requirements’ issued by the FRC. Accordingly,
these financial statements were prepared in accordance with Financial Reporting Standard 101 ‘Reduced Disclosure Framework’.
As permitted by FRS 101, the Company has taken advantage of the disclosure exemptions available under that standard in relation
to share-based payments, financial instruments, capital management, presentation of comparative information in respect of certain
assets, presentation of a cash-flow statement, standards not yet effective and certain related party transactions.
Where required, equivalent disclosures are given in the consolidated financial statements.
The financial statements have been prepared on the historical cost basis. The principal accounting policies adopted are the same
as those set out in note 2 to the consolidated financial statements except as noted below.
Investments in subsidiaries
Investments in subsidiaries and associates are stated at cost less, where appropriate, provisions for impairment.
On 18 June 2018, the whole of the share capital of Knights 1759 Limited was acquired by the Company via a share for share exchange
agreement. This was a Group reorganisation satisfying the criteria of IAS 27:13. The investment cost is measured at £nil because the carrying
amount of the equity items shown in the separate financial statements of Knights 1759 Limited was negative at the date of the reorganisation.
Investments in subsidiaries includes capital contributions to subsidiaries as a result of the issue of equity-settled share-based
payments to employees of subsidiaries. The accounting policy for share-based payments is set out in note 2.14 to the consolidated
financial statements.
41. Critical accounting judgements and key sources of estimation uncertainty
In the application of the Company’s accounting policies, which are described in note 40, the Directors are required to make judgements,
estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates
and associated 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 the revision and future periods if the revision affects
both current and future periods.
There are no major accounting judgements or key sources of estimation uncertainty at the end of the reporting period that have a significant
risk of resulting in a material adjustment to the carrying amounts of the Company’s assets and liabilities within the next financial year.
42. Profit for the year
As permitted by s408 of the Companies Act 2006, no separate Statement of Comprehensive Income is presented in respect of the parent Company.
The profit attributable to the Company is disclosed in the footnote to the Company’s Statement of Financial Position.
The auditor’s remuneration for audit and other services is disclosed in note 15 to the consolidated financial statements.
The average monthly number of employees comprised of the Executive Directors and Non-Executive Directors and was 6 (2019: 6). Their aggregate
remuneration borne by the Company was £nil (2019: £nil).
43. Investments in subsidiaries
Cost and net book value
At 4 April 2019
Capital contribution in respect of equity-settled share-based payments
At 30 April 2019
Capital contribution in respect of equity-settled share-based payments
At 30 April 2020
Further information about share-based payment transactions is provided in note 9 to the consolidated financial statements.
£’000
–
356
356
789
1,145
Details of the Company’s subsidiaries at 30 April 2020 are as follows:
Name
Knights 1759 Limited
Place of business and
registered office address
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Principal activity
Holding company
Class
of shares
Ordinary
Proportion
of ownership
interest %
Proportion of
voting power
held %
100%*
100%*
Knights Professional
Services Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Provision of legal and
professional services
Ordinary
100%
100%
Turner Parkinson LLP
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant**
Spearing Waite LLP
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant**
Darbys Solicitors LLP
Midland House West Way, Botley,
Oxford, OX2 0PH
Dormant**
Knights Solicitors LLP
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
Cummins Solicitors Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant**
N/A
N/A
N/A
N/A
99.99%
99.99%
99.99%
99.99%
99.99%
99.99%
100%
100%
Ordinary
100%
100%
BrookStreet des Roches LLP The Brampton, Newcastle-under-
Business Support Services N/A
99.99%
99.99%
Lyme, Staffordshire, ST5 0QW
K&S Secretaries Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
Knights Trustee Company
No 1 Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
Knights Trustee Company
No 2 Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
K&S Directors Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
Turner Parkinson Nominees
Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
T.P.D.D Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
K&S (Nominees) Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
K&S (560) Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
Ordinary
100%
100%
Ordinary
100%
100%
Ordinary
100%
100%
Ordinary
100%
100%
Ordinary
100%
100%
Ordinary
100%
100%
Ordinary
100%
100%
Ordinary
100%
100%***
Charden Enterprises Limited The Brampton, Newcastle-under-
Dormant
Ordinary
100%
100%***
Lyme, Staffordshire, ST5 0QW
Four Below Zero Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
Endzin Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
DDB Consulting Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
Wingelock Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
ASB Aspire LLP
ASB Law LLP
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
Edward Cursham Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
Patrick Wood Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
Gavin White Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
Ordinary
100%
100%***
Ordinary
100%
100%***
Ordinary
100%
100%***
Ordinary
100%
100%***
Ordinary
100%
100%
Ordinary
100%
100%
Ordinary
100%
100%
Ordinary
100%
100%
Ordinary
100%
100%
118
119
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc
Notes to the Company Financial Statements continued
43. Investments in subsidiaries continued
44. Amounts receivables from subsidiaries
Name
Donald Peel Limited
Place of business and
registered office address
Principal activity
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
Christopher Barnes Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
Richard Wollacott
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
Thomas Gray Law Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
John Tansur Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
Wendy Hooley Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
Adrian Slater Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
Laura Mackin Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
Anthony J Ogley Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
Erin Vickers Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
Fiona Boswell Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
Clive Day Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
Edward Capes Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
ERT Law Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
Arthur Chapman Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
Class
of shares
Ordinary
Proportion
of ownership
interest %
Proportion of
voting power
held %
100%
100%
Ordinary
100%
100%
Ordinary
100%
100%
Ordinary
100%
100%
Ordinary
100%
100%
Ordinary
100%
100%
Amounts receivable from subsidiaries
30 April 2020
£’000
20 April 2019
£’000
69,118
34,010
Amounts receivable from subsidiaries are repayable on demand. Interest is charged at a rate of 3.5% per annum and is payable annually
on 30 April each year. Unpaid interest on 30 April each year is added to the principal of the loan.
The balances are considered recoverable from the future cash flows of profitable trading subsidiaries. They are classified as non-current assets
because they are not expected to be realised within 12 months of the reporting period.
The Company measures the loss allowance for intra-Group receivables at lifetime expected credit losses (‘ECL’). The ECL is estimated
using a probability-weighted analysis of all possible outcomes with reference to the debtors’ financial position and forecasts of future
economic conditions. The resultant estimated ECL is not considered material to the financial statements, therefore the Company has
recognised a loss allowance of £nil (2019: £nil) against amounts receivable from subsidiaries.
45. Share capital and share premium account
Ordinary
100%
100%
The movements on these items are disclosed in notes 24 and 25 to the consolidated financial statements.
Ordinary
100%
100%
Ordinary
100%
100%
Ordinary
100%
100%
Ordinary
100%
100%
Ordinary
100%
100%
Ordinary
100%
100%
Ordinary
100%
100%
A Ordinary
100%
100%
46. Reserves
The Share-Based Payment Reserve is a non-distributable reserve representing the total credits to equity in respect of equity-settled
share-based payment charges recognised as capital contributions within investments.
The Other Reserve arose as a result of applying the requirements of IAS 27:13 to the share-for-share exchange acquisition
of Knights 1759 Limited because the total equity of Knights 1759 Limited was less than the nominal value of the shares issued by the Company
as consideration.
Retained Earnings represents cumulative profits and losses of the Company net of distributions to members.
Simon Leighton Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
A Ordinary and
B Ordinary
100%
100%
Bob Agnew Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
Croftons Solicitors LLP
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
Croftons Legal Services
Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
Dakeyne Emms Gilmore
Liberson Limited
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
Helix EGL Limited
Shulmans LLP
Lancaster House, 67 Newhall Street,
Birmingham, B3 1NQ
Dormant
The Brampton, Newcastle-under-
Lyme, Staffordshire, ST5 0QW
Dormant
A Ordinary
100%
100%
N/A
100%
100%
Ordinary
100%
100%
D Ordinary
E Ordinary
G Ordinary
L Ordinary
Ordinary
100%
100%
100%
100%
N/A
99.9%
99.9%
SLS Trust Corporation
C/O Shulmans LLP, 10 Wellington
Dormant
Ordinary
100%
100%
Limited
Place,
Leeds, England, LS1 4AP
* Held directly by Knights Professional Services Limited
** The acquired entities were active during the financial year, but are dormant as at 30 April 2020
*** Legal title held on behalf of nominees
120
121
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc
Glossary of Terms
Financial Performance Measure
Non-recurring finance costs
Free Cash Flow and Cash Conversion %
Other Definitions
This document contains certain financial measures that are not
defined or separately recognised under IFRS. These measures
are used by the Board and other users of the accounts to evaluate
the Group’s underlying trading performance excluding the impact of
any non-recurring items and items that do not reflect the underlying
day-to-day trading of the Group. These measures are not audited and
are not standard measures of financial performance under IFRS. There
are no generally accepted principles governing the calculation of these
measures and the criteria upon which these measures are based can
vary from company to company. Accordingly these measures should
be viewed as supplemental to, not as a substitute for, the financial
measures calculated under IFRS.
Underlying EBITDA
Underlying EBITDA is presented as an alternative performance
measure to show the underlying operating performance of the
Group excluding the effects of depreciation, amortisation, and
non-underlying items.
Year ended
30 April 2020
£’000
Year ended
30 April 2019
£’000
Operating profit
Depreciation and
amortisation charges
Non-underlying costs (note 13)
5,588
4,276
8,090
8,017
1,473
1,847
Underlying EBITDA
17,954
11,337
Underlying Profit Before Tax (PBT)
Underlying PBT is presented as an alternative performance measure
to show the underlying performance of the Group excluding the effects
of amortisation of intangible assets, and non-underlying items.
Profit before tax
Amortisation
Non-underlying costs
Non-underlying finance costs
Effective interest on deferred
consideration
Underlying profit
before tax
Year ended
30 April 2020
£’000
Year ended
30 April 2019
£’000
4,058
1,427
8,090
–
41
13,616
5,241
693
1,847
1,924
114
9,819
Non recurring finance costs relate to the exit fees and release
of arrangement fees arising on the repayment of debt at the
IPO and interest on deferred consideration payable as part
of the consideration on acquisitions.
Exit fees and release of
arrangement fees
Interest on deferred consideration
Non-recurring finance costs
Year ended
30 April 2020
£’000
Year ended
30 April 2019
£’000
–
41
41
1,924
114
2,038
Underlying Profit After Tax (PAT) and Adjusted Earnings
per Share (EPS)
Underlying PAT and adjusted EPS are presented as alternative
performance measures to show the underlying performance of
the Group excluding the effects of amortisation of intangible
assets and non-underlying items.
Free cash flow measures the Group’s underlying cash generation.
Cash conversion % measures the Group’s conversion of its adjusted
PAT into free cash flows. Free cash flow is calculated as the total
of net cash from operating activities, tax paid and cash outflows for
IFRS 16 leases (to ensure comparability with 2019). Cash conversion
% is calculated by dividing free cash flow by adjusted profit after
tax, which is reconciled to profit after tax above.
Colleague/Talent Retention/Employee Turnover
Churn is calculated based on the number of qualified fee earners
who had been employed by the Group for more than one year.
Churn is calculated taking the number of leavers in the above group
over the financial year as a percentage of the average number of
colleagues for the year. Retention is 100% less the churn rate.
Year ended
30 April 2020
£’000
Year ended
30 April 2019
£’000
Fee Earner Concentration
Cash generated from
operations (note 34)
Tax paid
Total cash outflow for
IFRS 16 leases
Free cash flow
Underlying profit after tax
Cash conversion (%)
13,791
(2,907)
(2,366)
8,518
10,706
80%
11,706
(1,076)
–
10,630
8,141
131%
Year ended
30 April 2020
£’000
Year ended
30 April 2019
£’000
Working Capital
Working capital is calculated as:
Profit after tax
Amortisation on acquisition
related intangibles
Non-underlying operating costs
Non-underlying finance costs
Effective interest on
deferred consideration
Tax in respect of the above
Underlying profit after tax
Adjusted earnings per share
Basic adjusted earnings per share
Diluted adjusted earnings per share
1,820
1,427
8,090
–
41
(672)
10,706
Pence
14.33
14.20
4,001
693
1,847
1,924
114
(438)
8,141
Pence
11.88
11.83
Current assets
Contract assets
Trade and other
receivables
Current liabilities
Trade and other
payables
Contract liabilities
Corporation tax liability
Net working capital
30 April 2020
£’000
30 April 2019
£’000
21,507
27,046
48,553
20,019
177
675
20,871
27,682
11,112
13,671
24,783
12,105
120
796
13,021
11,762
This is calculated taking the largest fees allocated to an individual
fee earner as a percentage of the total turnover for the year and
demonstrates the Group’s reliance on the fee earning potential
of an individual fee earner.
Client Concentration
On an individual basis this is calculated as the percentage
of total turnover for the financial year that arises from fees
of the largest client.
For the top 10 client concentration calculation this takes the
fee income from the 10 largest clients for the year as a percentage
of the total turnover for the year.
Client Satisfaction
Net Promoter Score (NPS) measures the loyalty of a client
to a company and can be used to gauge client satisfaction.
NPS scores are measured with a single question survey and
reported with a number from -100 to +100, the higher the score,
the higher the client loyalty/satisfaction.
Colleague Satisfaction
Employee Net Promoter Score (ENPS) measures the loyalty of
employees to a company and how likely they are to recommend
their employer as a place to work, which can also be used to gauge
employee satisfaction. ENPS scores are measured with a single
question survey and reported with a number from -100 to +100,
the higher the score the higher the employee loyalty.
Fee Earners
When referring to the number of fee earners in the Group we include
all individuals working in the Group on a mainly fee earning basis.
This includes professionals (legal and non-legal) of all levels including
paralegals, trainees and legal assistants.
When referring to the number of fee earners in the business this
will refer to the absolute number of individuals working in the Group.
When using the number of fee earners to calculate the average fees
or profit per fee earner or the ratio of fee earners to support staff these
calculations are based on the number of full-time equivalent (FTE)
individuals to reflect that a number of individuals choose to work
on a part-time basis.
Non-Fee Earners/Support Staff
This includes all employees that are not fee earning.
Recurring Revenue
This is calculated based on the amount of revenue in a year that
reoccurs in the following year from the same clients.
122
123
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc
Glossary of Terms continued
Shareholder information
Lock Up
This is calculated as the combined debtor and WIP days
as at a point in time.
Debtor days are calculated on a count back basis using the gross
debtors at the period end and compared with the total fees raised
over prior months.
WIP (work in progress) days are calculated based on the gross
work in progress (excluding that relating to clinical negligence claims)
and calculating how many days billing this relates to based on average
fees (again excluding clinical negligence fees) per month for the
last 6 months.
Total Shareholder Return (TSR)
Total shareholder return is calculated as:
Share price at 30 April 2020
Share price at listing
Dividend paid in period
Gain on shares in period
As a percentage of opening price
£3.575
(£1.450)
£0.024
£0.769
27.2%
Financial Performance Measure Comparable Under IFRS 16
Underlying Profit Before Tax (PBT)
Underlying PBT is calculated before amortisation of acquired intangible
assets; non-underlying costs relating to the placing, acquisitions
and restructuring, contingent consideration payments, non-recurring
finance costs, share based payments related to the IPO and
acquisitions and is provided on an IFRS 16 basis in the prior period.
Underlying PBT
Note
Profit before tax
- as reported
IFRS 16 adjustments
(see finance review)
IFRS 16 adjusted profit
before tax
Amortisation on
acquired intangibles
Non underlying
operating costs
Non underlying
finance costs
Underlying profit
before tax
13
14
Reported
IFRS 16
April 20
£’000
Comparable
under IFRS 16
April 19
£’000
4,058
–
4,058
1,427
8,090
41
13,616
5,241
(392)
4,849
693
1,847
2,038
9,427
Underlying PAT is calculated as above after taking account of the
tax charge and is provided on an IFRS 16 basis in the prior period.
Underlying Profit After Tax (PAT) and Adjusted Earnings
per Share (EPS)
Underlying EPS is calculated from profit after tax by adding back
amortisation of acquired intangible assets, non-underlying costs
relating to the placing, acquisitions and restructuring, contingent
consideration payments, non-recurring finance costs and share-based
payment charges related to the IPO and acquisitions and the tax in
respect of these costs and it is provided on an IFRS 16 basis in the
prior period.
Reported
IFRS 16
April 20
£’000
Comparable
under IFRS 16
April 19
£’000
1,820
–
1,820
1,427
8,090
41
(672)
10,706
2.44
14.33
14.20
4,001
(392)
3,609
693
1,847
2,038
(438)
7,749
5.27
11.31
11.26
Underlying PAT
Profit after tax
- as reported
IFRS 16 adjustments
(see finance review)
IFRS 16 adjusted
profit before tax
Amortisation on
acquired intangibles
Non underlying
operating costs
Non underlying
finance costs
Tax in respect of above
Underlying profit after tax
Basic EPS
Underlying EPS
Diluted EPS
Underlying EBITDA
13
14
16
Underlying EBITDA is calculated as reported operating profit after
adjusting for the impact of the reclassification of leases costs under
IFRS 16 and is provided on an IFRS 16 basis in the prior period.
Underlying EBITDA
Note
Operating profit - as
reported
IFRS 16 adjustments
(see finance review)
IFRS 16 adjusted
operating profit
Depreciation and
amortisation charges
Non-underlying costs
11
13
Reported
IFRS 16
April 20
£’000
Comparable
under IFRS 16
April 19
£’000
5,588
–
5,588
4,276
8,090
8,017
1,603
9,620
1,473
1,847
Underlying EBITDA
17,954
12,940
Cash conversion is calculated as the total of net cash from operations,
tax paid and payments of lease interest and lease finance liabilities
under IFRS 16 for periods from 1 May 2019, divided by the underlying
profit after tax, which is calculated from profit after tax by adding back
amortisation on acquired intangible assets, non-underlying costs
and finance costs, contingent consideration payments, share-based
payment charges related to the IPO and acquisitions and the tax
in respect of these costs.
Underlying EBITDA
Note
Free cash flow
- as reported
Underlying profit after tax
36
Reported
IFRS 16
April 20
£’000
Comparable
under IFRS 16
April 19
£’000
8,518
10,706
80%
10,630
7,749
137%
Bank
Allied Irish Bank (GB)
Vantage Point
Hardman Street
Spinningfields
Manchester
M3 3PL
HSBC UK Bank plc
Building 2
Eturia Office Village
Forge Lane
Festival Park
Stoke-on-Trent
ST1 5RQ
Registrar
Computershare Investor Services
The Pavilions
Bridgwater Road
Bristol
BS13 8AE
Legal
DLA Piper UK LLP
160 Aldersgate Street
London
EC1A 4HT
Directors
DA Beech (appointed 4 April 2018)
KL Lewis (appointed 9 May 2018)
RA King (appointed 1 June 2018)
BS Johal (appointed 1 June 2018)
S Dolton (appointed 1 June 2018)
J Pateman (appointed 14 January 2019)
Secretary
L Bridgwood (appointed 1 June 2018)
Registered office
The Brampton
Newcastle-Under-Lyme
Staffordshire
ST5 0QW
Registered number
11290101
Independent auditor
RSM UK Audit LLP
Chartered Accountants
Festival Way
Stoke-on-Trent
Staffordshire
ST1 5BB
Nomad and Broker
Numis Securities Limited
The London Stock Exchange Building
10 Paternoster Square
London
EC4M 4LT
Financial Public Relations
MHP
6 Agar Street
London
WC2N 4HN
124
125
Strategic ReportCorporate GovernanceFinancial StatementsAnnual Report and Accounts 2020Knights plc i
K
n
g
h
t
s
p
c
A
n
n
u
a
l
l
R
e
p
o
r
t
a
n
d
A
c
c
o
u
n
t
s
2
0
2
0
Registered Office
The Brampton
Newcastle-Under-Lyme
Staffordshire
ST5 0QW
Tel: 0844 371 2562
Annual Report and Accounts
30 April 2020
A diversified platform
for profitable, cash
generative growth