Redcentric plc
Annual Report 2017

Plain-text annual report

REDCENTRIC REPORT & ACCOUNTS 2017 2 Redcentric | Report and Accounts 2017 CONTENTS Chairman’s Statement Operational Review Financial Review Directors’ Profiles Corporate Governance Directors’ Remuneration Report Strategic Report Directors’ Report Statement of Directors’ Responsibilities Independent Auditor's Report Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Statement of Changes in Equity Consolidated Statement of Financial Position Consolidated Cash Flow Statement Notes to the Consolidated Financial Statements Company Balance Sheet Company Statement of Changes in Equity Notes to the Company Financial Statements 4-5 6-8 9-14 16-18 19-22 23-25 26-27 28-30 31 32-33 34 35 36 37 38 39-84 85 86 87-90 3 Redcentric | Report and Accounts 2017CHAIRMAN’S STATEMENT The year has been challenging, following the Company’s disclosure in November concerning the financial misstatements arising from past periods and the subsequent release of interim results in December 2016. Despite these events, our clients and employees have remained loyal and focused, thus ensuring that the business has continued to provide reliable services and report results in line with revised expectations. Jon brings additional financial experience to the Board while Stephen brings a wealth of industry experience. These changes create a strengthened Board which is important for the long term outlook of Redcentric. Furthermore, under Peter Brotherton’s stewardship, the Finance Team has also been significantly reinforced to ensure the challenges of this year cannot happen again. A great deal of work has been carried out in the period. We have made a number of key appointments to ensure the ongoing strengthening and resilience of our financial management team, its processes, structure and all adjacent activities. While we continue to reinforce these activities, the overall operation of the group has largely returned to business as normal. Board and employees I would like to place on record my sincere thanks to all of our employees. Despite the distractions and challenges of the events from the past few months, they have carried on their work with great dedication. This has meant that we have continued to provide our clients with the support they rightly expect. Summary trading results The revenue for the year was £104.6m. Operating loss for the year was £(3.0)m and adjusted EBITDA* was £17.3m, resulting in an adjusted EBITDA margin of 16.5%. Adjusted basic EPS was 4.45p with a statutory EPS loss of (1.60)p. Prior year restatements As a result of the scale of the restatements to the comparative numbers and the qualification of the audit report on the 2016 Income Statement of the Group, we have not sought to comment on comparative trading performance figures. During the second half of the year a number of changes have occurred to the Board. Tony Weaver resigned from the Board as Non-Executive Director on 1 November 2016. Tim Coleman resigned from the Board as Chief Financial Officer on 7 November 2016. On 23 November 2016 the Company announced the appointment of Peter Brotherton ACA as Chief Financial Officer, Company Secretary and a Director of the Board. Peter has over 25 years’ experience across a number of senior roles. Jon Kempster joined the Board as a Non-Executive Director on 10 January 2017 and Stephen Vaughan also joined the Board as a Non-Executive Director post year end on 13 June 2017. 4 Redcentric | Report and Accounts 2017There remains significant opportunity for the Company to continue to establish itself as a market leader. We see no change in our clients’ operational and strategic needs being matched by the delivery of our reliable and innovative services. Therefore the Board is confident that the Group will put this difficult period behind it and progress to improve Shareholder value. Chris Cole Non-Executive Chairman 26 July 2017 Dividend While the Group remains cash generative, the Board has decided that it is not appropriate to pay a dividend in respect of the year ended 31 March 2017. The Board will review this situation on an ongoing basis. Outlook It is appropriate to register our thanks for the support provided to the Group by our banks and advisers. The Board is mindful that this has been an equally difficult period for Shareholders and their ongoing support has been appreciated. We have a strengthened Board and Management Team who are absolutely focused on ensuring Redcentric has a sustainable and successful long term future. Our strong contract base and recurring nature of our business provides a solid platform for ongoing performance and growth. * Adjusted EBITDA is defined as earnings before interest, tax, depreciation, amortisation of acquired intangibles, non-recurring costs and share based payments. 5 Redcentric | Report and Accounts 2017OPERATIONAL REVIEW Overview Since it started life as a new company in April 2013, Redcentric has grown and developed into one of the leading businesses in the UK managed services market, successfully delivering critical services to over 2,000 mid-market customers. We have built a strong platform, delivering a broad range of core services to our customers, enabling them to focus on improving their own businesses. We are taking the necessary actions, following the accounting misstatements, to strengthen the business. While the business has had a turbulent period, we have weathered the storm and can now return to business as usual, focussing on sales growth and high quality customer services. The underlying business is strong, sustainable and well positioned for the future. Redcentric’s proposition Redcentric’s central aim is to provide its customers with a wide range of reliable, secure and innovative core IT services from a well-invested base of owned infrastructure. Redcentric operates highly accredited, state- of-the-art data centres in Harrogate, Reading, London and Cambridge which are connected to our network, and from which services are delivered. These are our own dedicated facilities, held on long leases, and have been fully resourced with well trained and qualified staff as well as the technology to deliver critical services to our customers. 6 We maintain very high levels of accreditation, and undergo rigorous audits from a range of external and government bodies throughout the year. • Security We help protect customers from deliberate malicious attacks, or unintentional security threats from unauthorised devices and a range of other threats. The data centres are connected to our own fully resilient national network, providing coverage and access across the UK. From this strong base of owned managed infrastructure we are able to offer a wide range of IT managed cloud, communications and connectivity services including; • Collaboration Services Through IP telephony, messaging and video conferencing we help organisations enable their staff to communicate more effectively. • Infrastructure As a leading provider of infrastructure services, Redcentric offers a suite of Cloud services, as well as colocation, data management and virtualisation services, all offered on an “As a Service” basis. • Connectivity Services We are a significant service provider with a core backbone network, metro networks and extensive experience in delivering networks for a broad range of organisations. • Applications Services We provide packaged solutions for many sectors as well as application management services from legacy to current architecture. • Mobile We provide a fully managed mobile service with flexibility, reliability and security. Along with our own highly assured and actively managed services, we also offer customers the ability to operate hybrid solutions. These include operating customer premise equipment, through to private or shared cloud solutions in Redcentric’s data centres, through to public cloud. These can all be managed through Redcentric’s assured “single pane of glass” management platform, allowing customers complete flexibility to implement the right solution for their needs, while enabling flexibility for future change. Redcentric’s headquarters are in Harrogate, with additional offices in London, Reading, Theale, Cambridge, Hyde and Hyderabad. The Hyderabad office operates as a fully integrated part of Redcentric, with highly skilled second and third line technical engineers complementing the support teams in the UK as well as providing back office services. The Hyderabad office provides access to one of the world’s largest sources of highly skilled technical staff, and provides flexibility in delivering high quality services to our customers. Redcentric | Report and Accounts 2017Redcentric sees its mission as enabling its customers to focus on enhancing their own businesses whilst relying on a trusted partner to operate their underlying core IT infrastructure platform. Performance The financial performance of the company is covered in the Financial Review. We focus particularly on recurring revenue, which was £90.2m (86.2% of total revenue for the year). Despite the challenges we have faced through the year with regard to our financial misstatements of previous periods, it is important to note that we have continued to be asked to tender for business, have clients renew contracts and win new clients. We continue to generate growth by winning new business from both existing clients and new names. The ratio remains healthy with 65% of our new wins coming from cross sell to existing customers and 35% coming from brand new clients. The sales performance throughout the year was strong, with internal sales targets being achieved and 88 new names added to the client list. Some significant wins include: • Public Healthcare Sector: a £3.4m new business win delivering network services • Private Healthcare Sector: a £2.9m Strategy five-year contract cross-sell to provide Cloud services • Public Sector: a £3.8m two-year contract renewal for Cloud services • Public Sector: a £2.4m two year contract renewal We continue to believe that ownership of our own cloud, communications and connectivity infrastructure allow us to provide our clients with the peace of mind that they need as they continue to look externally for the delivery of core IT services. In addition we have invested heavily in ISO accreditation covering many fields including service management, business continuity and security, ensuring that our high quality team of people deliver a demonstrably exemplary service. Acquisitions Whilst there were no acquisitions this year, City Lifeline Ltd was acquired in January 2016 with the integration now complete and the data centre “on-net”. The Shoreditch location provides ample data centre space. It also provides additional office space allowing for the consolidation of our London locations into a single site. There are multiple different views of the size of the UK IT services market, however they all indicate a very significant market, worth in excess of £100bn spend per annum. Within this market are a wide range of differing sub-sectors, from high-growth new technologies, to declining legacy markets. Redcentric is not exposed to markets in structural decline, and our focus on connectivity, infrastructure and cloud-based solutions means the markets we operate in are growing steadily. Our strategy for future growth is simple; • We will continue to win new customers, sell more to existing customers and renew our existing customer contracts. • We will continue to invest in developing and enhancing our own infrastructure so that we can provide our customers with the very highest levels of security and service. • We will use our scale to explore and invest in new technologies so that our customers can benefit from the high levels of innovation across the whole industry. 7 Redcentric | Report and Accounts 2017While being very aware of the impact from this past year for Redcentric’s shareholders, the Board does believe that the business has a positive long term outlook. Fraser Fisher Chief Executive Officer 26 July 2017 OPERATIONAL REVIEW CONTINUED We have a stable, growing and well-funded business, operating in a growing market, and we are confident that our strategy will deliver shareholder value in the coming years. People Redcentric’s success has always been dependent on the hard work and dedication of its employees in both the UK and India. Staff numbers have increased this year to 541, with around 150 being located in our Hyderabad office. We have invested in additional space in both our Harrogate and Hyderabad offices to support the business. We are also investing in our Shoreditch location to allow the closure of our other London office. Our Save-As-You-Earn share- save plan has been in place since December 2014 and the Company plans to launch a third round later this year to include our staff based in India for the first time. The plan provides employees with a risk-free means of sharing in the success of the Company, and I am delighted that so many have been able to participate. Outlook A huge amount of work has been carried out to ensure the challenges of this year will not happen again. Significant investment in our finance department has materially strengthened the personnel and systems in place. The addition of the new back office system toward the end of the financial year will cement into place a solid scalable back office platform. The board has been strengthened both by the addition of a new Chief Financial Officer and two experienced Non-Executive Directors. The team at Redcentric remain dedicated and loyal which is key within a people business. Client loyalty has also been very positive. This has been demonstrable in both contract renewal and cross sell wins. The Company has also benefitted from 88 new name customer wins throughout the year demonstrating the appeal of the Company’s market offering. The sales team delivered their target last year and the current pipeline remains healthy. Redcentric is a good business with solid market potential underpinned by a robust contract base. 8 Redcentric | Report and Accounts 2017 FINANCIAL REVIEW Summary of results A summary of the Group’s financial performance is shown below. Revenue Loss from operations Basic and Diluted earnings per share Dividend (p) Adjusted financial performance measures Adjusted EBITDA Adjusted EBITDA margin Adjusted profit from operations Adjusted Basic earnings per share Adjusted Diluted earnings per share Other key performance indicators Net debt (including finance leases) Operating cash flows to adjusted EBITDA Accounting misstatements 2017 £000 104,623 (2,995) (1.60p) 0p 17,273 16.5% 8,250 4.45p 4.32p £39.5m 54.7% Net assets and net debt Following an internal review by the Company’s Audit Committee in relation to the interim results for the six months ended 30 September 2016, materially misstated accounting balances in the Group’s balance sheet were discovered. The Board acted promptly and appointed Deloitte and CMS Cameron McKenna Nabarro Olswang LLP to carry out an independent forensic review. The majority of misstatements arose in the group’s main subsidiary, Redcentric Solutions Limited. The forensic review found that both net assets and net debt as at 31 March 2016 had been materially misstated. The misstatements arose due a combination of wilful misstatement and poor application of basic accounting controls and processes. The investigation did not find any evidence of theft. The review found that net assets as at 31 March 2016 had been overstated by £14.9m (subsequently revised to £15.8m as per note 28). A number of accounting policies and practices, specifically those in respect of cost accrual, cost deferment and revenue recognition had been incorrectly applied. Net debt at 31 March 2016 had been understated by £12.5m. The forensic review uncovered misstatements regarding the timing of cash receipts and cash payments. Cash receipts from customers received post year end had been incorrectly recorded as having been received pre year end and cash payments to suppliers pre year end had been incorrectly recorded as being made post year end. 9 Redcentric | Report and Accounts 2017FINANCIAL REVIEW CONTINUED In addition to the accounting errors and misstatements, supplier payments had been very significantly delayed in order to present a better net debt position (cash flows and net debt below). Income statement prior year comparative figures The scale and complexity of the misstatements, along with the length of time over which the misstatement occurred, meant that the forensic review took a significant time to complete and a level of judgement was applied to the allocation of profit reduction over a number of accounting periods. The forensic review focused on the 30 September 2016 and 31 March 2016 balance sheets and additional work was undertaken by the Company to analyse and attribute the accounting misstatements back to 31 March 2015. Whilst the audits of the subsidiary companies had been completed, the statutory accounts for the year ended 31 March 2016 were not filed at the same time as the Redcentric plc group accounts. Given the material misstatements discovered, the Group’s subsidiary accounts had to be re-audited by the predecessor auditor, PwC. This was a very time consuming exercise and was completed when the subsidiary accounts were drawn up again and filed with Companies House on 28 April 2017. Whilst all of the Group’s subsidiaries received unqualified audit reports on the Statements of Financial position, the Statement of Comprehensive income of Redcentric Solutions Limited received a qualified opinion as the company’s former auditors, PwC, were unable to form an opinion within reasonable timescales. The directors took the view that the time and cost of the further investigations necessary to provide sufficient audit evidence would be disproportionate, and this conclusion also applies to the comparative consolidated Statement of Comprehensive Income within these financial statements, leading to a qualified opinion being issued by KPMG. As a result of the scale of the restatements to the comparative numbers and the qualification of the audit report on the 2016 income statement, we have not sought to comment on comparative trading figures. Remedial plan The forensic review identified a number of process and control failings which required prompt rectification action. Significant progress has been made in improving the financial control environment post the forensic review: • The finance team has been significantly strengthened in terms of numbers, experience and capability. • Significantly enhanced financial controls have been applied across the business. • Clear cash cut off policies are rigorously applied. • The replacement of the multiple legacy back office systems is underway and a fully integrated Microsoft platform will be implemented by the start of the next financial year. 10 Redcentric | Report and Accounts 2017Bank refinancing As a result of the accounting misstatements, the Group’s historical financial results had to be restated and this meant that previously reported banking covenant ratios had been breached. The Group received covenant waivers for the historical breaches from its Banking Syndicate (Barclays, NatWest and Lombard) and a revised facilities agreement was signed on 27 April 2017. The revised facilities agreement was broadly in line with the original agreement save with an increased margin. Financial Conduct Authority investigation On 17 March 2017, the Financial Conduct Authority (“FCA”) notified Redcentric that it had commenced an investigation in connection with the Company’s publication of accounting information and other announcements concerning its financial position. This followed the completion of an independent forensic review commissioned by the Board of Redcentric. Redcentric is co-operating fully with the FCA and other relevant authorities concerning this matter. Acquisitions and amortisation of intangibles No acquisitions were undertaken during the year. In relation to the previous year’s acquisitions, with the exception of the City Lifeline Ltd finance function, the Calyx Managed Services Ltd and City Lifeline ltd businesses were fully integrated into the Group’s principal subsidiary Redcentric Solutions Ltd. In the year ended 31 March 2017 the Group recorded an amortisation charge of £6.2m against a £6.0m restated charge in the previous year. The increase in amortisation reflected a full years charge for City Lifeline (2 months in the year ended 31 March 2016). Capital expenditure and depreciation Capital expenditure for the year at £8.6m was broadly consistent with the previous year. The depreciation charge for the year was £7.5m, reflecting the higher levels of capital expenditure in the last two financial years. 11 Redcentric | Report and Accounts 2017FINANCIAL REVIEW CONTINUED Non-recurring items Non-recurring costs amounted to £5.5m (Restated 31 March 2016: £6.7m) and comprise: Non-recurring impairment of trade debtor balances Professional fees associated with the forensic review and Financial Conduct Authority (FCA) investigation Integration and restructuring costs Vacant property provisions Disposal of City Fibre network Settlement of supplier claims 2017 £000 2,933 1,291 658 385 207 5,474 2016 Restated £000 - - 3,028 1,698 - 1,954 6,680 The accounting irregularities experienced at the start of the financial year resulted in inadequate credit management during part of the year, causing a significant build-up of overdue and uncollected debt. This together with a reassessment of the basis for credit risk provisioning has resulted in one-off credit losses of £2.9m being recorded during the year ended 31 March 2017. A non-recurring charge of £1.3m was incurred in respect of professional fees paid to Deloitte and CMS Cameron McKenna Nabarro Olswang LLP relating to the forensic exercise and FCA investigation. Integration and restructuring costs relate primarily to the final operational integration of the City Lifeline and Calyx businesses. During the year, the Birmingham and Hoddesdon offices were vacated and this led to a vacant property charge of £0.4m in the year. During the year the Group disposed of its fibre network to City Fibre Limited and this resulted in an exceptional charge of £0.2m in respect of the loss on disposal and legal fees. The settlement of supplier claims resulted from a software licence audit in respect of prior years. 12 Redcentric | Report and Accounts 2017 Cash flows / Net debt A summary of the cash flows for the year are as follows: Cash flows from operating activities Operating cash flow before non-recurring costs and movements in working capital Working capital movements Non-recurring costs Corporation tax received Net cash inflow from operating activities Cash flows from investing activities Proceeds on disposal of property, plant and equipment Purchase of property, plant and equipment Net cash outflow from investing activities Cash flows from financing activities Dividends paid to shareholders Interest paid Repayment of borrowings Drawdown on revolving credit facility Proceeds of issue of shares less costs of issue Net cash inflow from financing activities Net increase (decrease) in cash and cash equivalents Opening cash and cash equivalents (as restated) Net increase (decrease) in cash and cash equivalents Effect of exchange rates Cash and cash equivalents 2017 £000 17,273 (7,831) (3,159) 71 6,354 5,000 (6,744) (1,744) (4,406) (1,209) (2,435) 10,000 1,731 3,681 8,291 (3,970) 8,291 19 4,340 The cash flow statement is dominated by the £9.6m catch up in creditor balances. The delayed payments included trade creditors and payroll creditors. Post the forensic review, the Group has had a policy of paying its suppliers in accordance with their terms and this explains the £9.6m cash outflow. 13 Redcentric | Report and Accounts 2017FINANCIAL REVIEW CONTINUED Taxation The corporation tax charge for the year reflects the offset of available tax trading losses brought forward. Share based payments The Group recorded a charge for share based payments during the year of £1.1m. Of this amount, £0.5m related to staff schemes and £0.6m to historic options. The staff charge for the year declined largely as a result of options lapsing due to leavers. EPS The statutory basic and diluted earnings per share (“EPS”) in the year was (1.60)p. The Group also calculates an adjusted EPS figure to measure underlying performance, which excludes the effect of amortisation of acquired intangibles, share option charges and non-recurring costs, and applies a normalised tax charge. Adjusted basic EPS was 4.45p with adjusted diluted EPS 4.32p. Dividends During the year Redcentric returned £4.4m to shareholders in the form of dividends. Whilst the Group remains cash generative, the Board has decided that it is not appropriate to pay a dividend in respect of the year ended 31 March 2017. The Board will review this situation on an ongoing basis. Change of Auditor KPMG were appointed as the Group’s auditors on 15 May 2017. Peter Brotherton Chief Financial Officer 26 July 2017 14 Redcentric | Report and Accounts 2017OUR EXPANDED NETWORK OPERATIONS CENTRE HEAD OFFICE, CENTRAL HOUSE, HARROGATE 15 Redcentric | Report and Accounts 2017DIRECTORS’ PROFILES NON-EXECUTIVE DIRECTORS Chris Cole Independent Non-Executive Chairman David Payne Independent Non-Executive Director Stephen Puckett Independent Non-Executive Director Stephen Puckett was appointed as a non-executive Director on 17 November 2014. Stephen has a wealth of senior boardroom experience in a number of listed companies, and was Group Finance Director at Michael Page International plc from 2001 to 2012. Stephen is also non-executive Chairman of Hydrogen Group plc and a non-executive Director of ITE Group plc and Chairman of the Audit Committee, and is a Director of the charity Kingston Carers Network. Stephen is Chairman of the Audit Committee and is a member of the Remuneration and Nominations Committees. Chris Cole was appointed as a non-executive Director and Chairman of Redcentric with effect from 1 September 2014. Chris has a strong track record and experience with quoted companies, having successfully led WSP Group plc as CEO and subsequently non-executive Chairman and Ashtead Group plc as non-executive Chairman. Chris, as a Chartered Engineer, founded and led the development of WSP both organically and acquisitively into a global consultancy with 10,000 people operating in 40 countries. Following WSP’s merger with Genivar, Inc. in August 2012, Chris is the non-executive Chairman of the new engaged company, WSP Global Inc. listed on the Toronto Stock Exchange. In addition to the above Chris is the non-executive Chairman of Applus Services SA and Tracsis plc. David Payne was appointed as a non- executive Director of Redcentric on 19 February 2013. David has a varied background of management and entrepreneurship in the IT, leisure, and property industries. For 20 years after leaving university he worked for Juliana's, a leisure company that floated on the main market of the London Stock Exchange in 1983. David was subsequently recruited by a venture capital fund to become chairman of Virtuality Limited, a company at the forefront of developing virtual reality. He oversaw the successful flotation of this company on the main market of the London Stock Exchange in 1994 and then left to devote more time to the development of a quoted property company. David is Chairman of the Remuneration and Nomination Committees and a member of the Audit Committee, and was the Senior Independent non-executive Director to 24 July 2017. David is also Chairman of Castleton Technology plc. 16 Redcentric | Report and Accounts 2017Jon Kempster Independent Non-Executive Director Stephen Vaughan Non-Executive Director Jon Kempster was appointed as a non-executive Director on 10 January 2017. Jon was until recently the Chief Financial Officer at Utilitywise, an AIM listed energy consultancy, and is currently a Non-Executive Director of JVM Group, a private company selling construction equipment in Russia. Prior to these two roles, Jon was Chief Financial Officer to Wincanton plc, the logistics and distribution group, from 2010 to 2012. From 2006 to 2010 Jon was Chief Financial Officer of Delta plc. Jon is an ACA qualified chartered accountant and will join the Audit, Remuneration and Nominations Committees. Stephen Vaughan was appointed as a non-executive Director on 13 June 2017. Through his career, Stephen has held a number of executive and non-executive roles focused on the technology sector. He currently has two non-executive roles, sitting on the Board of ECSC plc, the AIM-listed cyber security services provider, and Progressive Equity Research, the paid-for equity research house. Until 2015, Stephen was Chief Executive of Phoenix IT plc, the main- market listed IT Infrastructure Services business, and since then has been non-executive director of Mobica, a software development company, and Chairman of NetNames, the internet services and online brand management company. He has previously been Chief Executive at Communisis plc and Synstar plc. Stephen is a member of the Remuneration, Audit and Nomination Committees, and is the Senior Independent non-executive Director as of 24 July 2017. 17 Redcentric | Report and Accounts 2017 DIRECTORS’ PROFILES CONTINUED EXECUTIVE DIRECTORS Fraser Fisher Chief Executive Officer Peter Brotherton Chief Financial Officer Fraser Fisher was appointed a Director of Redcentric on 8 April 2013, and became CEO on 9 November 2015. Fraser is an experienced IT business leader having successfully built and sold profitable businesses in the sector. Fraser was most recently Managing Director of Redstone with responsibility for leading its managed services offering while integrating Maxima Holdings plc. Prior to his appointment at Redstone, Fraser had a number of senior roles, including Managing Director at Maxima and was latterly responsible for developing its offshore support function in Hyderabad. Prior to his appointment at Maxima, Fraser founded and was Managing Director of Centric Networks Limited, a mid-market managed and hosted services provider and was a founding Director of Netforce Group plc, an ISP and managed services provider. Peter Brotherton was appointed as Chief Financial Officer on 28 November 2016. Peter is a senior and experienced Chief Financial Officer with over 25 years' experience across a number of senior finance roles. Peter's two previous roles were as Chief Financial Officer of Gametech and Chief Financial Officer at PKR Group. Prior to those two roles, from 2011 to 2014, Peter was Chief Financial Officer and then Chief Executive of Meucci Solutions NV. Meucci Solutions was an international telecommunications and managed services business. During his time at Meucci Solutions, the business saw strong sales and EBITDA growth while also extensively reviewing its central financial control function. Peter also had senior finance roles at Varla (UK) Limited, Cell Structures Group plc and spent five years at Kingston Communications plc, becoming Director of Finance. Peter trained at KPMG. 18 Redcentric | Report and Accounts 2017CORPORATE GOVERNANCE As an AIM listed company Redcentric plc is not required to comply with the principles and provisions of the UK Corporate Governance Code published by the Financial Reporting Council in September 2014, however the Board of Redcentric plc is committed to the principles of good corporate governance and follows, so far as is practicable and appropriate in view of the Group’s size, stage of development and the nature of the Company the provisions of the UK Corporate Governance Code and complies with the provisions of the QCA Guidelines. The Board of Directors At the financial year end the Board comprised the Non-Executive Chairman, Chris Cole; the Chief Executive, Fraser Fisher; the Chief Financial Officer, Peter Brotherton; and Non-Executive Directors David Payne, Jon Kempster and Stephen Puckett. Post the year end, Stephen Vaughan joined the Board as a non-executive Director. The business and management of the Company and its subsidiaries are the collective responsibility of the Board. At each meeting, the Board considers and reviews the trading performance of the business. The Board has a formal written schedule of matters reserved for its review and approval. These include the approval of the annual budget, major capital expenditure, investment proposals, the interim and annual results, and a review of the overall system of internal control and risk management. There are three standing Board Committees: Audit, Nominations and Remuneration. Each of these Committees acts within defined terms of reference. Additional information is set out later in this report and also in the Directors’ Remuneration Report in respect of the Remuneration Committee. Authority for the execution of the approved policies, business plan and daily running of the business is delegated to the executive Directors. David Payne served as the Senior Independent non-executive Director throughout the year. David was replaced as Senior Independent non-executive Director by Stephen Vaughan on 24 July 2017. All Directors have access to the advice and services of the Company Secretary who is responsible for ensuring that Board procedures and applicable rules and regulations are observed. The Board has a procedure whereby any Director may seek, through the Company Secretary, independent professional advice, at the Company’s expense, in furtherance of his duties. Formal agendas and reports are provided to the Board on a timely basis in advance of Board and Committee meetings and the Chairman ensures that all Directors are properly briefed on issues to be discussed at Board meetings. Directors are able to obtain further advice or seek clarity on issues raised at the meetings from within the Company or from external sources. The Company’s Articles of Association require that a minimum of one third of the Directors must seek re-appointment at the next Annual General Meeting. Given the exceptional year it is the Board’s intention that all Directors will stand for election. Nominations Committee The Nominations Committee consists of David Payne (Chairman), Stephen Puckett, Jon Kempster, Stephen Vaughan and Tony Weaver (until his exit date). For nominations, the Committee meets as and when necessary to consider the appointment of new executive and non-executive Directors. A process is in place for the appointment of new Directors involving, if felt appropriate, the use of external consultants followed by meetings with both the Committee and subsequently with the Board as a whole. This ensures that the selection process is both formal and objective. The Committee has formal terms of reference (available on request from the Company Secretary) and meets at least once a year to review succession planning at both Board and senior management level across the Group. 19 Redcentric | Report and Accounts 2017CORPORATE GOVERNANCE CONTINUED Remuneration Committee The Remuneration Committee consists of David Payne (Chairman), Stephen Puckett, Jon Kempster and Stephen Vaughan. Details of the Committee and its policies are set out in the Directors’ Remuneration Report on pages 23 to 25. The Committee has formal terms of reference (available on request from the Company Secretary). Audit Committee The Audit Committee consists of Stephen Puckett (Chairman), Jon Kempster, David Payne and Stephen Vaughan. The Committee has formal terms of reference (available on request from the Company Secretary). These include the recommendation of, appointment, re-appointment and removal of the external auditors, the review of the scope and results of the external annual audit by the auditors, their cost effectiveness, independence and objectivity. The Committee also reviews the nature and extent of any non-audit services provided by the external auditors. In addition, the Committee reviews the effectiveness of internal controls, considers the need for an internal audit function and considers any major accounting issues and reports on such matters to the Board. The Committee reviews the integrity of the financial statements and formal announcements. A whistle-blowing arrangement exists whereby matters can be confidentially reported to the 20 Committee. The executive Directors are not members of the Committee but attend the meetings by invitation, as necessary, to facilitate its business. The Chief Financial Officer monitors the level and nature of non-audit services and specific assignments are flagged for approval by the Audit Committee as appropriate. The Audit Committee reviews non-audit fees and considers implications for the objectivity and independence of the relationship with the external auditors. The Board is satisfied that the Chairman of the Audit Committee has recent and relevant financial experience necessary to meet the requirements of the Corporate Governance Code. Internal control The Board has overall responsibility for the Group’s system of internal control and for reviewing its effectiveness. The implementation and maintenance of the risk management and internal control systems are the responsibility of the executive Directors and senior management. The internal control system is designed to manage risk rather than eliminate it and can therefore only provide reasonable and not absolute assurance against material misstatement or loss. In accordance with the guidance set out in the Turnbull Guidance on Internal Control, the Group has an on-going process for identifying, evaluating and managing the significant risks faced by it. The Group is committed to maintaining high standards of business conduct and operates under an established internal control framework covering financial, operational and compliance controls. This is achieved through an organisational structure that has clear reporting lines and delegated authorities. The management and monitoring of risk and performance occurs at multiple levels throughout the Group. In addition, the Group maintains written processes to control expenditure, authorisation limits, purchase ordering, sales order intake, project management, inventories and assets. The Board receives monthly financial information which includes key performance and risk indicators and the Chief Executive Officer and the Chief Financial Officer report on significant changes in the business and the external marketplace to the extent they represent significant risk. There is an established budgetary system with an annual budget approved by the Board. The Board reviews the results against budget, forecasts and prior year actual figures together with other business measures on a monthly basis. The principal treasury related risks are documented and approved by the Board. Details of any derivatives and financial instruments are set out in notes 18 and 19 to the financial statements. Redcentric | Report and Accounts 2017Relations with shareholders and investors Copies of the Annual Report and Financial Statements are issued to all shareholders who have requested them and copies are available on the Group’s website www.redcentricplc.com. The Half Year Report is also available on the Group’s website. The Group makes full use of its website to provide information to shareholders and other interested parties. The Company Secretary also deals with a number of written or e-mailed enquiries throughout the year. Shareholders are given the opportunity to raise questions at the Annual General Meeting and the Directors are available both prior to and after the meeting for further discussion with shareholders. During the year, the Chief Executive Officer and the Chief Financial Officer met with institutional investors after the announcement of the preliminary and interim results. Additional meetings were arranged during the year by the Group’s brokers Numis Securities Limited and finnCap Limited. Feedback arising from these meetings was communicated to the Board and the Company Secretary also reports to the Board if there is feedback from other shareholders. Stephen Vaughan, as Senior Independent non-executive Director, is available to shareholders if they wish to raise any matters that contact through the normal channels of non-executive Chairman, Chief Executive Officer, Chief Financial Officer or Company Secretary has failed to resolve or for which such contact is inappropriate. 21 Redcentric | Report and Accounts 2017CORPORATE GOVERNANCE CONTINUED Substantial shareholders As at 31 March 2017 and 30 June 2017 (being the latest practicable date before the publication of the report) the Company had been notified of the following significant interests in its Ordinary, voting share capital: Coltrane Asset Management LP Kestrel Partners LLP Mr John Stanislas Albert Radziwill Schroder Investment Management Slater Investments Mr Richard Griffiths Commerzbank AG Eugenia II Investment Holdings Hargreaves Lansdown Asset Mgt Hargreave Hale 31 March 2017 Number 31 March 2017 % 30 June 2017 Number 26 May 2017 % 21,231,691 17,001,468 14,909,662 13,348,327 8,954,221 8,542,965 5,975,494 4,746,043 3,265,703 3,253,249 14.26 11.42 10.02 8.97 6.02 5.74 4.01 3.19 2.19 2.19 22,231,961 19,662,913 14,909,662 13,348,237 8,905,307 8,648,435 4,855,859 5,540,495 2,939,756 2,527,794 14.93 13.21 10.02 8.97 5.98 5.81 3.26 3.72 1.97 1.70 22 Redcentric | Report and Accounts 2017DIRECTORS’ REMUNERATION REPORT (UNAUDITED UNLESS STATED OTHERWISE) Remuneration Committee Basic salary and benefits Fees The Remuneration Committee comprises David Payne (Chairman), Stephen Puckett, Jon Kempster, Stephen Vaughan and Tony Weaver (until his exit date). The Committee makes recommendations to the Board, within agreed terms of reference, on the remuneration and other benefits, including bonuses and share options, of the executive Directors. In considering the remuneration for the year, the Committee consulted with the executive Directors about its proposals. The Board sets the fees payable to the non-executive Directors. Remuneration policy The Group is committed to maximising shareholder value over time. Each year, the Remuneration Committee reviews the incentive and reward packages for the executive Directors to ensure that they are aligned with the Company’s objectives and are appropriate to attract, retain and motivate management behaviour in support of the creation of shareholder value. Basic salaries are reviewed on a discretionary basis. The benefits provided for each executive Director may include: i. life assurance cover of 4 times salary; ii. private medical insurance for themselves, their spouse and their children; The Board, within the limits stipulated by the Articles of Association and following recommendation by the executive Directors, determines non-executive Directors’ fees. The Chairman receives a fee of £70,000 with the other non-executive Directors receiving a fee of £35,000, with an additional fee of £5,000 for chairing a Board committee. iii. a contribution to a private pension Service contracts plan. Performance related bonus The Remuneration Committee determines the criteria for the award of performance bonuses for the executive Directors in advance of each year. The bonuses are non- pensionable. Non-Executive Directors do not receive a bonus. Share options Executive Directors are entitled to participate in the Company share option schemes. The Remuneration Committee approves the granting of any share options. The Chief Executive Officer has a service contract with a provision for termination notice period of twelve months, with the Chief Financial Officer having a termination notice period of six months. Non-Executive Directors have letters of appointment. Appointments can be terminated with between one and six months’ notice. The remuneration of the Non-Executive Directors takes the form solely of fees which are not pensionable. 23 Redcentric | Report and Accounts 2017DIRECTORS’ REMUNERATION REPORT (CONTINUED) The details of the executive and non-executive Directors’ service contracts are summarised below: Date of contract Notice period (months) Executive Directors Fraser Fisher Peter Brotherton Non-executive Directors David Payne Chris Cole Stephen Puckett Jon Kempster Stephen Vaughan Tony Weaver (resigned November 2016) 112 months in the event of a takeover. The service contracts continue until notice on either side is given. Directors’ remuneration (audited) The remuneration of the Directors in respect of the year was as follows: 18 April 2013 28 November 2016 19 February 2013 1 September 2014 17 November 2014 10 January 2017 13 June 2017 11 February 2013 12 61 6 6 6 6 6 1 Basic salary, allowances and fees Payment for loss of office Bonus Benefits Pension £000 £000 £000 £000 £000 2017 Total £000 2016 Total £000 350 57 170 70 40 40 18 5 750 - 28 - - - - - - - - 30 - - - - - 28 30 1 - - - - - - - 1 18 369 429 3 8 - - - - - 29 88 - 208 310 70 40 40 18 5 838 70 40 40 138 - 1,027 Executive Fraser Fisher Peter Brotherton (Appointed November 2016) Tim Coleman (Resigned November 2016) Non-executive Chris Cole David Payne Stephen Puckett Tony Weaver (a) (Resigned November 2016) Jon Kempster (Appointed January 2017) Total (a) Directors’ emoluments for Tony Weaver were paid to Mathian Ltd, a company controlled by MXC Capital Limited, which is a related party. Further details are provided in note 25. 24 Redcentric | Report and Accounts 2017 Share options (audited) Details of share options in the Company held by the Directors during the year are as follows: Exercise price (p) 70 80 107 112 107 nil 32 Fraser Fisher Tim Coleman Peter Brotherton Tony Weaver (a) (b) (c) (d) (c) (e) (f) Further information regarding the options noted above is set out below. (a) The options were granted under the Company’s EMI scheme. 294,623 of the options are qualifying options, and 466,520 are non-qualifying under the terms of the scheme. For all of the options, the performance conditions have been met, the options have vested and are exercisable. (b) The options were granted under the Company’s EMI scheme, and all of the options are non- qualifying under the terms of the scheme. The earliest vesting date for the options was 15 November 2016 and they are subject to the achievement of performance conditions related to the achievement of a pre-defined level of share price growth. Balance 31 March 2016 761,143 581,968 16,822 1,100,000 16,822 Granted Exercised Forfeited / Expired Transferred - - - - - 485,000 - - - - - - - - (1,100,000) (16,822) - - - - - - - - (846,494) - 161,905 846,494 - Balance 31 March 2017 276,143 581,968 16,822 - - 161,905 - (f) The options were granted under the Company’s EMI scheme as non-qualifying options. These were transferred to MXC Capital Ltd and were subsequently exercised in January 2017. Share price The market price of the Company’s shares on 31 March 2017 was 87p per share. The highest and lowest market prices during the year were 200p and 63p respectively. David Payne Chairman, Remuneration Committee On behalf of the Board 26 July 2017 (c) The options were granted pursuant to the Company’s HMRC approved Save-As-You-Earn Option Plan 2014, under which employees contribute a monthly amount which is saved over three years to buy shares. The options are exercisable from 31 March 2018. There are no performance conditions. Tim Coleman’s options lapsed upon his resignation from the company. (d) The options were granted under an unapproved share option contract, and lapsed when Tim Coleman resigned from the company. (e) The options were granted under the Company’s Long Term Incentive Plan (“LTIP”). The options will vest on 21 June 2019 subject to the achievement of performance conditions related to the achievement of a pre-defined level of share price growth. 25 Redcentric | Report and Accounts 2017 STRATEGIC REPORT Review of the business A detailed review of the business is set out in the Chairman’s Statement on pages 4 to 5 and in the Operational Review on pages 6 to 8. The Financial Review is set out on pages 9 to 14. Included in these reviews are comments on the key performance indicators that are used by the Board on a monthly basis to monitor and assess the performance of the business. These key performance indicators are: the level of revenue, recurring revenue proportion, adjusted EBITDA*, adjusted EBITDA margin, the ratio of net bank debt to adjusted EBITDA and adjusted earnings per share. The consolidated Group income statement for the year is set out on page 34. Operating loss was £3.0m and adjusted EBITDA* of the Group for the year was £17.3m. Principal risks and uncertainties Identifying, evaluating and managing the principal risks and uncertainties facing the Group is an integral part of the way Redcentric does business. There are policies and procedures in place throughout the operations, embedded within our management structure and as part of our normal operating processes. Market and economic conditions are recognised as one of the principal risks in the current trading environment. This risk is mitigated by the monitoring of trading conditions and the constant search for ways to achieve new efficiencies in the businesses without impacting levels of service. Reliance on key personnel and management The success of Redcentric is dependent on the services of key management and operating personnel. The Directors believe that the Group’s future success will depend largely on its ability to retain and attract highly skilled and qualified personnel, and to expand, train and manage its employee base. There can be no guarantee that suitably skilled and qualified individuals will be retained or identified and employed. If the Group fails to retain or recruit the necessary personnel, or if the Group loses the services of any of its key executives, its business could be materially and adversely affected. Competition Redcentric operates in a highly competitive marketplace and while the Directors believe the Group enjoys significant strengths and advantages in competing for business, some of the competitors are much larger with considerable scale that could allow them to offer similar services for lower prices than the Group would be prepared to match, therefore competitors could materially adversely impact the scale of the Group’s revenues and its profitability. The Group monitors competitor’s activity and constantly reviews its own services and prices to ensure a competitive position in the market is maintained. Technology The market for Redcentric’s services is in a state of constant innovation and change. The Group actively participates in a number of industry- wide forums, and devotes significant resource to the development of new services, ensuring new technologies can be incorporated and integrated with the Group’s core services. The nature of the Group’s services means that they are exposed to a range of technological risk, such as viruses, hacking, and an ever-changing spectrum of security risk. The Group maintains constant pro-active vigilance against such risks and maintains membership of some of the highest levels of security accreditation as part of the service it offers its customers. *Adjusted EBITDA is defined as earnings before interest, tax, depreciation, amortisation, non-recurring costs and share-based payments. 26 Redcentric | Report and Accounts 2017• Effective use of our scale and resources to explore and invest in new technologies so that our customers can benefit from the high levels of innovation across the whole industry. The board believes that Redcentric’s position between the very large system integrators and network operators, and the smaller competitors that may lack delivery structure, reputation, reliability and financial strength is a very compelling one. Redcentric has a strong and reliable set of core infrastructure, and has developed a delivery model that provides assurance and certainty for customers. By order of the Board Peter Brotherton Chief Financial Officer 26 July 2017 Infrastructure failure The Directors believe that one of the key differentiators that Redcentric offers is that its services are provided over its own controlled and managed infrastructure, such as its own networks and data centres. Whilst this provides customers with comfort over resilience and reliability, the Group also is exposed to risks of infrastructure failure. A critical element of Redcentric’s operating methodologies and procedures is to mitigate such risks through the careful construction, maintenance and management of its own infrastructure. All networks and data centres have fully resilient fail- over procedures with regular testing of back-up and recovery plans. Strategy The market for IT managed services in the UK is highly fragmented, and is served by a broad spectrum of businesses from global telecommunication companies through hardware and software providers, system integrators and a range of independent managed service providers of varying sizes through to companies providing individual elements of the IT managed services spectrum. The market is growing, driven by the continued move towards off-premise solutions and mobile access to secure services. Redcentric positions itself in the market as being able to combine the benefits of proprietary network and data centres with a flexible and technically skilled workforce able to deliver and support critical services and solutions in a highly secure environment. Redcentric seeks to differentiate itself in three distinct ways: • Innovation – innovation in the design and delivery of services; • Reliability – the right technical skills, organised in the right way, to give predictable high quality results; and • Value – service offerings that are designed to offer value for money to mid-market customers. Through these differentiators, Redcentric aims to attract new customers and to deepen and broaden the relationship with existing customers. The Board’s strategy for growth comprises; • Ongoing investment in expanding and enhancing our own infrastructure so that we can provide our customers with the very highest levels of security and service. 27 Redcentric | Report and Accounts 2017DIRECTORS’ REPORT The Directors present their annual report together with the audited financial statements for the year ended 31 March 2017. Principal activity The principal activity of the Group during the year was the supply of IT managed services. The Company is a holding company. The Strategic Report on pages 26 to 27 contains a review of the business, future developments and the principal risks and uncertainties. Directors The following were Directors of Redcentric plc during the year and at the date of approval of these financial statements: Chris Cole Stephen Puckett David Payne Fraser Fisher Peter Brotherton (appointed 28 November 2016) Jon Kempster (appointed 10 January 2017) Stephen Vaughan (appointed 13 June 2017) Tony Weaver (resigned 1 November 2016) Tim Coleman (resigned 6 November 2016) As at 31 March 2017 the Directors beneficial interests and those of their families in the ordinary share capital of the Company were as follows: Fraser Fisher David Payne 31 March 2017 Number of shares 31 March 2016 Number of shares 106,807 100,626 90,557 100,626 Relevant Directors will retire in accordance with the terms of the articles of the Company and, being eligible, will offer themselves for re-election at the forthcoming Annual General Meeting. Details of the Directors’ contracts, remuneration and share options granted are set out in the Directors’ Remuneration Report on pages 23 to 25. As permitted by the Articles of Association, the Directors have the benefit of an indemnity which is a qualifying third party indemnity provision as defined by Section 234 of the Companies Act 2006. The indemnity was in force throughout the last financial year and is currently in force. The Company also purchased and maintained Directors’ and Officers’ liability insurance throughout the financial year in respect of itself and its Directors. 28 Redcentric | Report and Accounts 2017Staff policy The Group’s employment policies are designed to ensure that they meet the statutory, social and market practices where the Group operates. The Group systematically provides employees with information on matters of concern to them, consulting them or their representatives regularly, so that their views can be taken into account when making decisions that are likely to affect their interests. Employee involvement in the Group is encouraged, as achieving a common awareness on the part of all employees of the financial and economic factors affecting the Group plays a major role in maintaining its relationship with its staff. The Group is committed to employment policies, which follow best practice, based on equal opportunities for all employees, irrespective of sex, race, colour, disability or marital status. The Group gives full and fair consideration to applications for employment for disabled persons, having regard to their particular aptitudes and abilities. Appropriate arrangements are made for the continued employment and training, career development and promotion of disabled persons employed by the Group. If members of staff become disabled the Group continues employment, either in the same or an alternative position, with appropriate retraining being given if necessary. Employees The average number of employees employed during the year was as follows: Directors Senior managers Other employees Total average headcount Share scheme Male Female 5 4 427 436 - 3 102 105 Total 5 7 529 541 The Group believes that having an effective employee share ownership programme helps to align employees’ interests with shareholders, and provides an effective tool in attracting, retaining and motivating staff. In November 2014 the Group launched the HMRC approved Redcentric plc Save-As-You-Earn Option Plan 2014. Under the Plan, employees contribute a monthly amount which is saved over three years to buy shares in the Company at a pre-determined price. Since inception, there have been two awards of options under the plan. On 14 December 2015 the Company granted options over a total of 163,905 ordinary shares to 62 employees. These options are available for exercise from 31 March 2019, with an exercise price of 154p, which is a 20% discount to the average closing price on the three days ending 20 November 2015, the last trading date before the launch of the Plan on 23 November 2015. On 17 December 2014, the Company granted options over a total of 1,134,886 ordinary shares of 0.1p each to 180 employees. The options are available for exercise from 31 March 2018, with an exercise price of 107p. 29 Redcentric | Report and Accounts 2017DIRECTORS’ REPORT CONTINUED The Group intends to grant options under the plan to eligible employees in future years. As at 31 March 2017, the following options had been granted under the plan: Grant date 17 December 2014 14 December 2015 Total Annual General Meeting Exercise price Options granted Options exercised Options cancelled Options remaining 107p 154p 985,824 158,529 1,144,353 - - - 262,785 70,002 332,787 723,039 88,527 811,566 The Annual General Meeting will be held at 11.00am at CMS Cameron McKenna Nabarro Olswang LLP, Cannon Place, 78 Cannon Street, London EC4N 6AF on 4 September 2017. Dividend While the Group remains cash generative, the Board has decided that it is not appropriate to pay a dividend in respect of the year ended 31 March 2017. The Board will review this situation on an ongoing basis. Financial risk management objectives and policies The Company’s financial risk management objectives and policies are described in note 18 to the financial statements. Disclosure of information to auditors The Directors who were members of the Board at the time of approving the Directors’ Report are listed on page 28. Having made enquiries of fellow Directors, each of these Directors confirms that: • To the best of each Director’s knowledge and belief, there is no information relevant to the preparation of their report of which the Group’s auditors are unaware; and • Each Director has taken all the steps a Director might reasonably be expected to have taken to be aware of relevant audit information and to establish that the Group’s auditors are aware of that information. Subsequent events There have been no significant events between the balance sheet date and the date of approval of these accounts. Future developments Future developments and current trading and prospects are set out in the Chairman’s Statement and in the Operational and Financial Reviews. 30 Redcentric | Report and Accounts 2017STATEMENT OF DIRECTORS’ RESPONSIBILITIES The Directors are responsible for preparing the Annual Report, the Directors’ Report and the Group and parent company financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and parent company financial statements for each financial year. As required by the AIM Rules of the London Stock Exchange they are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice), including FRS 101 the Financial Reporting Standard applicable in the UK and Republic of Ireland. 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 parent company and of their profit or loss for that period. In preparing each of the Group and parent company financial statements, the Directors are required to: 1. Select suitable accounting policies and then apply them consistently; 2. Make judgements and estimates that are reasonable and prudent; 3. For the Group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU; 4. For the parent company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and 5. Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. By order of the Board Peter Brotherton Company Secretary 26 July 2017 Central House Beckwith Knowle Harrogate HG3 1UG 31 Redcentric | Report and Accounts 2017INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF REDCENTRIC PLC We have audited the financial statements of Redcentric plc for the year ended 31 March 2017 set out on pages 34 to 38. 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 EU. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice), including FRS 101 Reduced Disclosure Framework. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members, as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditor As explained more fully in the Directors’ Responsibilities Statement set out on page 31, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate Basis for qualified opinion on financial statements During the year ended 31 March 2017 the Audit Committee discovered a number of materially misstated balances in the Group’s accounting records. The Directors commissioned an independent forensic review, which identified a significant reduction in the previously reported net assets as at 31 March 2016 and 31 March 2015. During the preparation of the 31 March 2017 financial statements, the Directors identified additional misstatements in the previously reported Group financial statements. Consequently the Group has recognised multiple prior year adjustments, as further explained in note 28 to the financial statements, thus reducing net assets as at 31 March 2016 and 31 March 2015 by £15,771,000 and £4,413,000 respectively, and reducing the profit for the year ended 31 March 2016 by £9,451,000. Certain key individuals no longer work for the Group and the Directors have assessed that further investigation into the above misstatements would represent a disproportionate cost and effort to the business. As a result, the Directors have not been able to distinguish whether certain of the adjustments, which in aggregate resulted in a £9,451,000 reduction in profit and net assets, related to the year ended 31 March 2016 or to prior periods, and consequently the income statement effect of these adjustments has been recognised wholly within the income statement for the year ended 31 March 2016. We were appointed as auditors subsequent to the 2016 year end and due to the above circumstances we were unable to obtain sufficient appropriate audit evidence in relation to these misstatements. Any adjustments would have a consequential effect on the Group’s profit for the year ended 31 March 2016 and its net assets at 31 March 2015. 32 Redcentric | Report and Accounts 2017Qualified opinion on financial statements In our opinion the parent company financial statements: • give a true and fair view of the state of the parent company’s affairs as at 31 March 2017; • have been properly prepared in accordance with UK Generally Accepted Accounting Practice; and • have been prepared in accordance with the requirements of the Companies Act 2006. In our opinion, except for the possible effect solely on the comparative information for the year ended 31 March 2016 and as at 31 March 2015 of the matters described in the basis for qualified opinion on financial statements paragraph, the group financial statements: • give a true and fair view of the Group’s state of affairs as at 31 March 2017 and of its loss for the year then ended; • have been properly prepared in accordance with IFRSs as adopted by the EU; and • have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matters prescribed by the Companies Act 2006 In our opinion the information given in the Strategic Report and the Directors’ Report for the financial year is consistent with the financial statements. Based solely on the work required to be undertaken in the course of the audit of the financial statements and from reading the Strategic Report and the Directors’ Report: • we have not identified material misstatements in those reports; and • in our opinion, those reports have been prepared in accordance with the Companies Act 2006. Matters on which we are required to report by exception In respect solely of the limitation on our work relating to the comparative Group information for the year ended 31 March 2016 and as at 31 March 2015, described above, we have not obtained all the information and explanations that we considered necessary for the purpose of our audit. We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records had not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements are not in agreement with the accounting records and returns; or • certain disclosures of Directors’ remuneration specified by law are not made. John Pass (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 1 Sovereign Square Sovereign Street Leeds LS1 4DA 27 July 2017 33 Redcentric | Report and Accounts 2017CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH Note 2017 £000 2 104,623 (43,304) 61,319 Restated 2016 £000 102,363 (44,553) 57,810 (64,314) (62,756) (2,995) (4,946) 10 11 5 22 6 8 17,273 (7,507) (6,207) (5,474) (1,080) (2,995) 14,380 (5,294) (6,016) (6,680) (1,336) (4,946) (1,253) (1,195) (4,248) 1,870 (2,378) (6,141) 1,946 (4,195) 9 (1.60)p (2.89)p Revenue Cost of sales Gross profit Operating expenditure Operating Loss Analysed as: Adjusted EBITDA* Depreciation Amortisation of intangibles Non-recurring costs Share-based payments Finance costs Loss on ordinary activities before taxation Tax (charge) /credit on profit on ordinary activities Loss for the year (attributable to owners of the parent) Earnings per share Basic and diluted earnings per share *Earnings before interest, tax, depreciation, amortisation, non-recurring costs and share-based payments. The above consolidated income statement should be read in conjunction with the accompanying notes. 34 Redcentric | Report and Accounts 2017 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Loss for the year Exchange differences arising on re-translation of foreign subsidiary Total comprehensive income 2017 £000 (2,378) 94 (2,284) Restated 2016 £000 (4,195) (7) (4,202) 35 Redcentric | Report and Accounts 2017 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Called up share capital Share premium Capital redemption reserve Retained earnings £000 £000 £000 £000 145 - 145 62,668 (9,454) 41,378 - - (4,413) 62,668 (9,454) 36,965 - - - 1 - - - - - - 999 - - - - - - - - - - - - - 3 - - - - - 1,728 - - - - - - - - 146 63,667 (9,454) 27,328 Total equity £000 94,737 (4,413) 90,324 (4,195) (7) 1,000 (5,806) 1,336 (965) 81,687 (2,378) 94 (4,202) (4,202) (4,195) (7) - (5,806) 1,336 (965) (2,378) 94 (2,284) (2,284) - (4,406) 975 (974) 1,731 (4,406) 975 (974) 149 65,395 (9,454) 20,639 76,729 At 31 March 2015 – previously reported Prior year adjustments At 31 March 2015 – restated Loss for the year (restated) Other comprehensive gain (loss) – before tax Total comprehensive income for the year Transactions with owners: Issue of new shares Dividends to shareholders IFRS2 Charge Deferred tax on SBP At 31 March 2016 Loss for the year Other comprehensive gain (loss) – before tax Total comprehensive income Transactions with owners: Issue of new shares Dividends to shareholders IFRS2 Charge Deferred tax on SBP At 31 March 2017 36 Redcentric | Report and Accounts 2017 Restated 2016 £000 Restated 2015 £000 CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 2017 Assets Non-current assets Property, plant and equipment Intangible assets Total Current assets Inventories Trade and other receivables Corporation tax receivable Cash and short term deposits Total Total assets Equity and liabilities Equity Called up share capital Share premium account Capital redemption reserve Retained earnings Total equity Non-current liabilities Provisions Borrowings Deferred tax liability Total Current liabilities Overdraft Trade and other payables Corporation tax payable Borrowings Provisions Total Total liabilities Note 10 11 12 13 20 21 16 8 13 14 16 21 2017 £000 21,998 88,725 110,723 234 25,839 369 4,340 30,782 141,505 149 65,395 (9,454) 20,639 76,729 1,207 41,092 2,112 44,411 - 17,247 - 2,779 339 20,365 64,776 26,026 94,191 120,217 429 31,038 531 - 31,998 152,215 146 63,667 (9,454) 27,328 81,687 1,940 31,389 3,110 36,439 3,970 27,407 - 2,378 334 34,089 70,528 23,630 80,503 104,133 - 16,474 - 3,295 19,769 123,902 145 62,668 (9,454) 36,965 90,324 489 9,412 31 9,932 - 20,909 1,518 1,033 186 23,646 33,578 123,902 Total equity and liabilities 141,505 152,215 The notes on pages 39 to 84 are an integral part of these financial statements. The consolidated financial statements of Redcentric plc (Registration Number 08397584) on pages 34 to 84 were approved by the Board on 26 July 2017 and are signed on its behalf by: Fraser Fisher, Director Peter Brotherton, Director 37 Redcentric | Report and Accounts 2017 CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 MARCH Cash flows from continuing operating activities Note Loss before taxation Net finance expense Operating loss Depreciation and amortisation Non-recurring items Share based payments Operating cash flow before non-recurring costs and movements in working capital Non-recurring costs and NI on share based payments Operating cash flow before movements in working capital Decrease (increase) in inventories Decrease (increase) in trade and other receivables (Decrease) increase in trade and other payables Cash generated from operations Corporation tax received Net cash inflow from operating activities Cash flows from investing activities Acquisition of subsidiaries net of cash acquired Proceeds on disposal of property, plant and equipment Purchase of property, plant and equipment Net cash outflow from investing activities Cash flows from financing activities Dividends paid to shareholders Interest paid Repayment of borrowings Drawdown on revolving credit facility Proceeds of issue of shares less costs of issue Net cash inflow from financing activities Net increase (decrease) in cash and cash equivalents Opening cash and cash equivalents (as restated) Net increase (decrease) in cash and cash equivalents Effect of exchange rates Cash and cash equivalents 38 2017 £000 (4,248) 1,253 (2,995) 13,714 5,474 1,080 17,273 (3,159) 14,114 196 1,589 (9,616) 6,283 71 6,354 - 5,000 (6,744) (1,744) (4,406) (1,209) (2,435) 10,000 1,731 3,681 8,291 (3,970) 8,291 19 4,340 2016 £000 (6,141) 1,195 (4,946) 11,310 6,680 1,336 14,380 (5,081) 9,299 (429) (11,456) 833 (1,753) (244) (1,997) (13,777) - (8,158) (21,935) (5,806) (1,127) - 22,600 1,000 16,667 (7,265) 3,295 (7,265) - (3,970) Redcentric | Report and Accounts 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED 31 MARCH 2017 1 Accounting policies – Group Redcentric plc is a public limited company incorporated and domiciled in England and Wales, whose shares are publicly traded on the AIM division of the London Stock Exchange. Redcentric plc was incorporated on 11 February 2013, and admitted to AIM on 24 April 2013. The principal activity of the Group is the supply of IT managed services. The principal accounting policies, which have been applied consistently in the preparation of these consolidated financial statements throughout the period and by all subsidiary companies, are set out below: 1.1 Basis of preparation The consolidated financial statements of Redcentric plc have been prepared on the going concern basis and in accordance with EU adopted International Financial Reporting Standards (IFRS), IFRIC interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention. The Directors are required to be satisfied that the Group has adequate resources to continue in business for the foreseeable future. The validity of this assumption depends on the ability of the Group to meet its cash flow forecasts and the continuing support of its bankers by providing adequate overdraft facilities and of its debt holders and shareholders. On 27 April 2017 the Group signed a revised banking facility agreement which runs until 2 April 2020. A high proportion of the Group’s revenue is recurring in nature, which provides good visibility of future cash-flows. However, there can be no absolute certainty that the Group will achieve its cash flow forecasts. The present cash flow forecasts indicate that the Group will be able to operate within its banking facilities for at least 12 months from the date of approval of these financial statements. For these reasons the Directors believe the going concern basis to be appropriate. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 1.25 in the accounting policies. 1.2 Basis of consolidation Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group 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. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. 39 Redcentric | Report and Accounts 2017NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest’s proportionate share of the recognised amounts of acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred. Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated. When necessary, amounts reported by subsidiaries have been adjusted to conform with the Group’s accounting policies. Business combinations under common control Business combinations under common control are accounted for in the consolidated financial statements from the date the Group obtains the ownership interest. Assets and liabilities are recognised upon consolidation at their historic carrying amount in the consolidated financial statements of the ultimate parent entity, Redcentric plc. Any difference between the fair value of the consideration paid and the amounts at which the assets and liabilities are recorded is recognised directly as a common control reserve. 1.3 Intangible assets Goodwill Goodwill arises on the acquisition of subsidiaries and represents the excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired. If the total of consideration transferred, non- controlling interest recognised and previously held interest measured at fair value is less than the fair value of the net asset of the subsidiary, in the case of a bargain purchase, the difference is recognised directly to the income statement. For the purposes of impairment testing, goodwill acquired in a business combination is allocated to each of the CGUs, or groups of CGUs, that is expected to benefit from the synergies of the combination. Each unit or group of units to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. Goodwill is monitored at the operating segment level. Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. The carrying value of the CGU containing the goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs of disposal. Any impairment is recognised immediately as an expense and is not subsequently reversed. 40 Redcentric | Report and Accounts 2017Other intangible assets Other intangible assets are carried at cost less accumulated amortisation and impairment losses (note 1.5). Other intangible assets acquired separately from a business are carried initially at cost. An intangible asset acquired as part of a business combination is recognised outside goodwill if the asset is separable or arises from contractual or other legal rights and its fair value can be measured reliably. Intangible assets with a finite life are amortised on a straight-line basis over their expected useful lives, as follows: Customer contracts and related relationships 5-15 years Trademarks 5 years Impairment and amortisation charges are included within the administrative expenses line in the income statement. 1.4 Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and any impairment in value (note 1.5). The cost includes the original price of the asset and the cost attributable to bringing the asset to its current working condition for its intended use. Depreciation, down to residual value, is calculated on a straight-line basis over the estimated useful life of the asset which is reviewed on an annual basis. Motor vehicles 3 years Leasehold improvements 5 years or over lease term if shorter Network infrastructure, equipment, fixtures and fittings 2-20 years An item of property, plant and equipment is de-recognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the income statement in the period the item is de-recognised. 41 Redcentric | Report and Accounts 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 1.5 Impairment of assets Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. As at the acquisition date any goodwill acquired is allocated to each of the cash generating units expected to benefit from the business combination’s synergies. Impairment is determined by assessing the recoverable amount of the cash generating unit to which the goodwill relates. When the recoverable amount of the cash generating unit is less than the carrying amount, including goodwill, an impairment loss is recognised. Other intangible assets and property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate the carrying values may not be recoverable. In addition, the carrying value of capitalised development expenditure is reviewed for impairment annually. If any such indication exists and where the carrying amounts exceed the estimated recoverable amount, the assets or cash generating units are written down to their recoverable amount. The recoverable amount of intangible assets and property, plant and equipment is the greater of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined by the cash generating unit to which the asset belongs. Fair value less costs to sell is, where known, based on actual sales price net of costs incurred in completing the disposal. Non-financial assets that were impaired in the previous periods are annually reviewed to assess whether the impairment is still relevant. 1.6 Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction from proceeds. 1.7 Leases Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognised as an expense in the income statement on a straight-line basis over the lease term. Assets funded through finance leases are capitalised as property, plant and equipment and depreciated over the shorter of their useful economic life and the lease term. The resulting lease obligations are included in borrowings net of finance charges. Interest costs on finance leases are charged to the income statement. 42 Redcentric | Report and Accounts 20171.8 Current and deferred income tax Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates and laws that are enacted or substantively enacted by the balance sheet date. Deferred income tax is provided for on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, with the following exceptions: • • where the temporary difference arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss; in respect of taxable temporary differences associated with investments in subsidiaries, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future; and • deferred income tax assets are recognised only to the extent that it is probable that taxable profits will be available against which deductible temporary differences carried forward tax credits or tax losses can be utilised. 1.9 Trade and other receivables Trade and other receivables are recognised and carried at the lower of their original value and recoverable amounts. Provision is made where there is evidence that the balances will not be recovered in full. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. Trade and other receivables are initially recognised at fair value and subsequently held at amortised cost. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows. The Group’s trade and other receivables are non-interest bearing. 1.10 Cash and cash equivalents Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less. For the purpose of the consolidated cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. 1.11 Foreign currencies The functional and presentation currency of Redcentric plc is Pounds Sterling (£) and the Group conducts the majority of its business in Sterling. Transactions in foreign currencies are initially recorded in the functional currency by applying the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the balance sheet date. All differences are taken to the income statement, except for differences on monetary assets and liabilities that form part of the Group’s net investment in a foreign operation. These are taken directly to equity until the disposal of the net investment, at which time they are recognised in the profit or loss. 43 Redcentric | Report and Accounts 2017NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 1.12 Trade payables Trade payables are stated at their nominal value, recognised initially at fair value and subsequently valued at amortised cost. 1.13 Accruals and deferred income The liability for costs which have been incurred in an accounting period but for which no invoice has been received are recognised in the period the costs relate to. Income which has been invoiced in advance of its recognition criteria being met is recognised on the balance sheet as deferred income until the recognition criteria are met. 1.14 Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Vacant property The Group currently has a number of vacant properties. Provisions have been recognised to cover the rents, business rates and service charges for the period that each property is expected to be vacant, being up to the lease expiry or break clause if earlier. Provisions are calculated using the contracted rates of rents and service charges on each individual lease arrangement. Dilapidations The dilapidation provisions are built up over the life of the associated lease based on estimates of costs of work required to fulfil the Group’s contractual obligation under the lease agreements to return the property to the same condition as at the commencement of the lease. 1.15 Pensions The Group operates a defined contribution scheme. Pension costs are charged directly to the income statement in the period to which they relate on an accruals basis. The Group has no further payment obligations once contributions have been paid. 1.16 Share-based payment transactions The cost of equity-settled transactions with employees is measured by reference to the fair value of the award at the date at which they are granted and is recognised as an expense over the vesting period, which ends on the date at which the relevant employees become fully entitled to the award. Fair value is determined by an external valuer using an appropriate pricing model for which the assumptions are approved by the Directors. In valuing equity-settled transactions, only vesting conditions linked to the market price of the shares of the Company are considered. 44 Redcentric | Report and Accounts 2017No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied. At each balance sheet date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has expired and management’s best estimate of the achievement or otherwise of non-market conditions, number of equity instruments that will ultimately vest or in the case of an instrument subject to a market condition, be treated as vesting described above. The movement in the cumulative expense since the previous balance sheet date is recognised in the income statement, with a corresponding entry in equity. Where the terms of an equity-settled award are modified or a new award is designated as replacing a cancelled or settled award, the existing charge is recognised immediately. In addition an expense is recognised over the remainder of the new vesting period for the incremental fair value of any modification, based on the difference between the fair value of the original award and the fair value of the modified award, both as measured on the date of the modification. No reduction is recognised if this difference is negative. Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. Any compensation paid up to the fair value of the award at the cancellation or settlement date is deducted from equity, with any excess over fair value being treated as an expense in the income statement. The Group does not operate any cash settled share based payment schemes. 1.17 Financial assets The Group classifies its financial assets as loans and receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments which are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date which are classified as non-current assets. The Group’s loans and receivables comprise ‘trade and other receivables’, ‘cash and cash equivalents’, and other receivables which are expected to be settled in cash. 1.18 Interest-bearing loans and borrowings All loans and borrowings are initially recognised at fair value less directly attributable transaction costs. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses arising on the repurchase, settlement or otherwise cancellation of liabilities are recognised in the finance cost line in the income statement. 1.19 Finance costs Loans are carried at fair value of initial recognition, net of unamortised issue costs of debt. These costs are amortised over the loan term. All other borrowing costs are recognised in the income statement on an accruals basis, using the effective rate method. 45 Redcentric | Report and Accounts 2017NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 1.20 Revenue Revenue is measured at the fair value of the consideration received or receivable, and represents amounts receivable for services and goods supplied, stated net of discounts, returns and value added taxes. The Group recognises revenue when the amount of revenue can be reliably measured; when it is probable that future economic benefits will flow to the entity; and when specific criteria have been met for each of the Group’s activities, as described below. The Group does not generally bundle various services and products. When bundles occur, the revenue is allocated to each segment based on the fair value of each element within the contract. a) Recurring revenue The largest portion of the Group’s revenue relates to a number of managed services, which the Group offers to its customers. All of the revenue in this category is contracted, and includes a full range of managed support, maintenance, subscription and service agreements. Revenue for these types of services is recognised evenly over the period of the agreement as the services are provided. The costs incurred for this revenue stream typically match the revenue pattern. Deferred income is recognised when billing occurs ahead of revenue recognition and the same applies to cost of sales. Accrued income is recognised when the revenue recognition criteria were met but in accordance with the underlying contract the sales invoice has not been issued yet. Deferred income is recognised within trade and other payables and accrued income is recognised within trade and other receivables. b) Service revenue These professional services include mainly installation and consultancy services. Revenue from these services is recognised in accordance with the underlying contracts. Customer acceptance of milestones is often required for the recognition of consultancy and installation revenue. The costs incurred for this revenue stream generally match the revenue pattern, however a significant portion of consultancy costs relate to staff costs, which are recognised as incurred. The Group does not provide any of its professional services under fixed price contracts. Installations are typically completed in a very short period of time and the revenue is recognised upon completion and/or customer acceptance. Consultancy services are generally provided on a time and material basis. c) Product sales This revenue stream relates predominantly to the sale of third party equipment to customers, and almost always takes place in connection with the provision of other services. Revenue from the sale of product is recognised upon delivery to the customer. The costs incurred for this revenue stream match the revenue pattern. 1.21 Other income Finance income Income is recognised on an accrual basis using the effective interest method. 46 Redcentric | Report and Accounts 20171.22 Non-recurring costs It is the policy of the Group to identify certain costs separately on the face of the Income Statement in order that the underlying profitability of the business can be clearly understood. These costs are identified as Non-recurring costs, and comprise; (a) Professional fees incurred in sourcing and completing acquisitions and disposals (b) Professional fees incurred in restructuring and refinancing acquisitions (c) Integration costs which are incurred by the Group when integrating one trading business into another, including rebranding of acquired businesses (d) Redundancy costs, including employment related costs of staff made redundant up to the date of their leaving as a consequence of integration (e) Property costs such as lease termination penalties and vacant property provisions and third party advisor fees (f) Non-cash accounting charges relating to aligning accounting policies of acquired businesses with the Group where traditional fair value accounting methods are not appropriate (g) Other non-recurring costs For further detail refer to note 5. 1.23 Holiday pay accrual It is the Group policy to accrue for holiday pay to the extent of the total amount that would be paid out if all employees of the Group left the business at its reporting date. 1.24 Segmental reporting The Chief Operating Decision Maker (“CODM”) has been identified as the Group Chief Executive and the Chief Financial Officer. The CODM reviews the Group’s internal reporting in order to assess performance and allocate resources. Management has determined the operating segments based on these reports. The Executive Board assess the performance of the operating segments based on adjusted EBITDA. Information provided to the Executive Board is measured in a manner consistent with that in the Financial Statements. 1.25 Critical accounting estimates and assumptions Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. 47 Redcentric | Report and Accounts 2017NOTES TO THE CONSOLIDATED FINANCIAL NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED STATEMENTS CONTINUED The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are: • Impairment of trade debtors The Group tests annually whether trade debtors have suffered any impairment. A provision for impairment is established when there is evidence of a risk on non-payment, taking in to account ageing, known post balance sheet corrections, previous losses experienced and general economic conditions. • Estimated impairment of goodwill and intangible assets The Group tests annually whether goodwill and intangible assets have suffered any impairment, in accordance with the accounting policy stated in note 1.5. The recoverable amount has been determined based on value-in-use calculations. These calculations require the use of estimates (note 11). • Deferred tax The Group has substantial tax losses and unclaimed capital allowances carried forward. A deferred tax asset has been recognised in connection with trading losses carried forward to the extent that they are foreseen as being recoverable based on future profitability of the Group which is based on projections. A 10% fall in the forecast available profits would not result in a reduction in the deferred tax asset recognised. • Initial recognition of intangible assets on acquisition Following an acquisition, the Group undertakes an assessment of the fair values attributable to the assets acquired, including an assessment of any intangible assets acquired. Valuation of such intangible assets includes the use of judgements, which are made based on historical experience. The resultant assets are included as part of the fair value balance sheet of the acquired company, and are tested for impairment as noted above. 1.26 New and amended standards adopted by the Group There are no IFRSs or IFRIC interpretations that are effective for the first time for the financial year that had a material impact on the group. A number of standards and interpretations issued by the IASB are effective for financial statements after this reporting period, including IFRS 9 ‘Financial instruments’ and IFRS 15 ‘Revenue from contracts with customers’, both of which are effective for annual periods beginning on or after 1 January 2018, and IFRS 16 ‘Leases’ which is effective for annual periods beginning on or after 1 January 2019. The Group is in the process of assessing the impact that the application of these standards and interpretations will have on the Group’s financial statements. 1.27 General information and basis of preparation The Group prepares its annual consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretations Committee (IFRIC) interpretations endorsed by the European Union (EU) and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial information contained within this preliminary announcement is unaudited and has been prepared under the historical cost convention. 48 Redcentric | Report and Accounts 2017The financial information included in this preliminary announcement does not include all the disclosures required by IFRS or the Companies Act 2006 and accordingly it does not itself comply with IFRS or the Companies Act 2006. The unaudited consolidated financial information in this report has been prepared in accordance with the accounting policies disclosed in the Group’s 2016 annual report and accounts. The financial information set out in this announcement does not constitute the Company’s statutory accounts within the meaning of Section 434 of the companies Act 2006 for the years ended 31 March 2016 or 31 March 2017. Whilst the financial information for the year ended 31 March 2016 is derived from the statutory accounts for that year, which have been delivered to the Registrar of Companies, a number of adjustments have been made in respect of material misstatements to the numbers presented in the Group’s 2016 annual report. These adjustments to the 31 March 2016 annual report, as set out in note 7, will be reported as prior period restatements within the statutory accounts for the year ended 31 March 2017. Because of uncertainty as to the extent to which these adjustments relate to the year ended 31 March 2016, or to the year ended 31 March 2015, or to earlier periods, the annual report for the year ending 31 March 2017 will include a qualified audit opinion in respect of the comparative income statement and cash flow statement (for the year ended 31 March 2016) and also in relation to the opening balance sheet as at 1 April 2015. The statutory accounts for the year ended 31 March 2017 will be finalised on the basis of the financial information presented by the Directors in this unaudited preliminary announcement and will be delivered to the Registrar of Companies following the Annual General Meeting. The financial information contained within this preliminary announcement was approved by the Board on 29 June 2017 and has been agreed with the Company’s auditors for release. Selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in financial position and performance of the Group since the last annual consolidated financial statements which is available on the Group’s investor website. The preliminary announcement will be published on the Company’s website. The maintenance and integrity of the website is the responsibility of the directors. The work carried out by the auditors does not involve consideration of these matters. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 2 Segment reporting IFRS 8 requires operating segments to be identified on the basis of the internal financial information reported to the Chief Operating Decision Maker (CODM). The Group’s CODM is deemed to be the executive Directors on the Board, who are primarily responsible for the allocation of resources to segments and the assessment of performance of the segments. The CODM assess profit performance principally through adjusted profit measures consistent with those disclosed in the annual report and accounts. 49 Redcentric | Report and Accounts 2017NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Previously the Group has identified the operating segments of the Group as the separate product offerings or markets in which the Group operates, being recurring, product and service revenue. Recurring revenue is derived from the provision of the Group’s services to customers under long-term agreements, including data, connectivity, hosting, cloud and support services. Services revenue is derived from the provision of consultancy or installation services regarding the provision and set-up of a new service. Product revenues are derived from the sale of third party products, which comprises mostly hardware. During the year, the Board has changed the way in which it reviews the results of the business, such that it now believes that the Group comprises a single reporting segment being the provision of managed services to customers. Whilst the Board still reviews revenue streams of the three categories separately, the operating costs and operating asset base used to derive these revenue streams are the same for all three categories and are presented as such in the Group’s internal reporting to the CODM. 3 Expenses by nature Amortisation of acquired intangible assets Depreciation – owned assets Depreciation – assets held under finance lease Share-based payments Operating lease payments 2017 £000 6,207 5,424 2,082 1,080 2,637 2016 £000 6,016 4,061 1,233 1,336 3,307 Employee benefits expense, excluding share based compensation 25,350 27,516 50 Redcentric | Report and Accounts 20174 Auditors’ remuneration Below are the fees payable to the auditors and their associates: Audit services – KPMG Fees payable to Company auditor and its associates for the audit of parent company and consolidated financial statements Fees payable to Company auditor and its associates for other services: The audit of Company’s subsidiaries Tax advisory and compliance services Total Audit services – PwC Fees payable to Company auditor and its associates for the audit of parent company and consolidated financial statements Fees payable to Company auditor and its associates for other services: The audit of Company’s subsidiaries Tax advisory and compliance services Total 2017 £000 110 115 32 257 2017 £000 - - - - - 2016 £000 - - - - 2016 £000 30 - 96 54 180 5 Non recurring costs In accordance with the Group’s policy of separately identifying non-recurring costs, the following charges were recognised in the year: Non-recurring impairment of trade debtor balances Professional fees associated with the forensic review and Financial Conduct Authority (FCA) investigation Integration and restructuring costs Vacant property provisions Disposal of City Fibre network Settlement of supplier claims Total 2017 £000 2,933 1,291 658 385 207 5,474 Restated 2016 £000 - - 3,028 1,698 - 1,954 6,680 51 Redcentric | Report and Accounts 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED The accounting irregularities experienced at the start of the financial year resulted in inadequate credit management during part of the year, causing a significant build-up of overdue and uncollected debt. This together with a reassessment of the basis for credit risk provisioning has resulted in one-off credit losses of £2.9m being recorded during the year ended 31 March 2017. A non-recurring charge of £1.3m was incurred in respect of professional fees paid to Deloitte and CMS Cameron McKenna Nabarro Olswang LLP relating to the forensic exercise and the FCA investigation and Integration & restricting costs relate primarily to the final integration of the City Lifeline and Calyx businesses. The vacant property provision relates solely to the Birmingham and Hoddesdon offices which were vacated during the year. This resulted in a non-recurring charge of £0.4m During the year the Group disposed of its fibre network to City Fibre Limited and this resulted in a non-recurring charge of £0.2m in respect of the loss on disposal and legal fees. Prior year non-recurring costs relate to the acquisition and integration of Calyx and City Lifeline. The settlement of supplier claims resulted from a software licence audit in respect of prior years. 6 Finance costs Interest payable on bank loans and overdrafts Amortisation of loan arrangement fees Total 7 Employee benefits expense Staff costs for the year, including executive Directors, amounted to: Wages and salaries Social security costs Pension costs Share options granted to Directors and employees Total 52 2017 £000 1,185 68 1,253 2017 £000 21,449 2,392 428 1,080 25,350 Restated 2016 £000 1,127 68 1,195 Restated 2016 £000 23,150 2,621 409 1,336 27,516 Redcentric | Report and Accounts 2017 Average monthly number of people (including executive Directors) employed: Operations Selling and distribution Administration Total These numbers as split as follows: UK India Total 2017 £000 427 81 33 541 2017 £000 386 155 541 2016 £000 376 95 50 521 2016 £000 374 147 521 53 Redcentric | Report and Accounts 2017NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED The remuneration of the Directors in respect of the year was as follows: Basic salary, allowances and fees Payment for loss of office Benefits Benefits Pension £000 £000 £000 £000 £000 2017 Total £000 2016 Total £000 Executive Fraser Fisher Peter Brotherton (Appointed November 2016) Tim Coleman (Resigned November 2016) Non-executive Chris Cole David Payne Stephen Puckett Tony Weaver (Resigned November 2016) Jon Kempster (Appointed January 2017) Total 350 57 170 70 40 40 18 5 750 - 28 - - - - - - - - 30 - - - - - 28 30 1 - - - - - - - 1 18 369 429 3 8 - - - - - 29 88 - 208 310 70 40 40 18 5 838 70 40 40 138 - 1,027 (a) Directors’ emoluments for Tony Weaver were paid to Mathian Ltd, a company controlled by MXC Capital Limited, which is a related party. Further details are provided in note 25. 54 Redcentric | Report and Accounts 2017 Share options (audited) Details of share options in the Company held by the Directors during the year are as follows: Exercise price (p) 70 80 107 112 107 nil 32 Fraser Fisher Tim Coleman Peter Brotherton Tony Weaver (a) (b) (c) (d) (c) (e) (f) Balance 31 March 2016 761,143 581,968 16,822 1,100,000 16,822 Granted Exercised Forfeited / Expired Transferred - - - - - (485,000) - - - - - - - - - (1,100,000) (16,822) - - - - - - - - (846,494) - 161,905 846,494 - Balance 31 March 2017 276,143 581,968 16,822 - - 161,905 - Further information regarding the options noted above is set out below. (a) The options were granted under the Company’s EMI scheme. 294,623 of the options are qualifying options, and 466,520 are non-qualifying under the terms of the scheme. For all of the options, the performance conditions have been met, the options have vested and are exercisable. (b) The options were granted under the Company’s EMI scheme, and all of the options are non-qualifying under the terms of the scheme. The earliest vesting date for the options was 15 November 2016 and they are subject to the achievement of performance conditions related to the achievement of a pre-defined level of share price growth. (c) The options were granted pursuant to the Company’s HMRC approved Save-As-You-Earn Option Plan 2014, under which employees contribute a monthly amount which is saved over three years to buy shares. The options are exercisable from 31 March 2018. There are no performance conditions. Tim Coleman’s options lapsed upon his resignation from the company. (d) The options were granted under an unapproved share option contract, and lapsed when Tim Coleman resigned from the company. (e) The options were granted under the Company’s Long Term Incentive Plan (“LTIP”). The options will vest on 21 June 2019 subject to the achievement of performance conditions related to the achievement of a pre-defined level of share price growth. (f) The options were granted under the Company’s EMI scheme as non-qualifying options. These were transferred to MXC Capital Ltd and were subsequently exercised in January 2017. Share price The market price of the Company’s shares on 31 March 2017 was 87p per share. The highest and lowest market prices during the year were 200p and 63p respectively. 55 Redcentric | Report and Accounts 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 8 Tax on profit on ordinary activities (a) Tax on profit on ordinary activities 2017 £000 2016 £000 Current income tax: Current income tax Prior year adjustment Deferred tax: Origination and reversal of timing differences – Deferred tax asset: prior year adjustments – Deferred tax asset: current year 64 38 312 200 Total income tax charge/(credit) reported in the income statement – Deferred tax liability: current year (1,983) (1,870) – Deferred tax liability: prior year adjustments (501) 47 (1,914) 677 752 - (1,508) (1,946) (b) Reconciliation of the total income tax charge/(credit) The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated entities as follows: Profit before taxation Profit multiplied by the UK standard rate of corporation tax of 20% Expenses not deductible for tax purposes Movement in unprovided tax losses Prior year adjustments Effect of tax rate change Impact of overseas tax rates 2017 £000 (4,248) (850) 286 (847) (151) (318) 10 2016 £000 (6,141) (1,228) 65 - (1,237) 454 - Total income tax charge/(credit) reported in the income statement (1,870) (1,946) (c) Deferred tax Deferred Tax Deferred tax liability Deferred tax asset Net deferred tax liability at 31 March 56 2017 £000 (7,267) 5,155 (2,112) 2016 £000 (9,751) 6,641 (3,110) Redcentric | Report and Accounts 2017 d) Deferred tax liability Opening balance Acquisition of subsidiaries Acquired with subsidiaries Recognised in the income statement Prior year adjustment At 31 March 2017 £000 9,751 - - (1,983) (501) 7,267 2016 £000 9,330 1,743 186 (1,508) - 9,751 Deferred tax liabilities arose in respect of the amortisation of intangible assets recognised on acquisitions made. (e) Deferred tax assets India – deferred tax asset Share based payments temporary differences Tax losses Property, plant and equipment temporary differences Other timing differences £000 £000 £000 £000 £000 At 31 March 2016 (restated) Recognised in the income statement Prior year adjustment Recognised in equity At 31 March 2017 27 - - - 27 947 4,943 76 - (974) 49 525 (2,743) - 2,725 724 (800) 2,420 - 2,344 - (1) 11 - 10 Total £000 6,641 (200) (312) (974) 5,155 Deferred tax assets have been recognised where it is the view of the Directors that it is probable that there will be future sustainable taxable profits from which prior tax losses can be offset. This is based on projections of future taxable profits and indicators such as the level of orders that support the Directors’ projections. The Group has an unrecognised deferred tax asset of £1.1m which relates to trading losses. The deferred tax asset has not been recognised due to the uncertainty of its ultimate recoverability. Deferred tax assets have been netted off with deferred tax liabilities on the face of the balance sheet. This is because the Group has a legally enforceable right to set off current tax assets against current tax liabilities and the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority, being the UK’s HMRC. The Group operates as one tax group and settles its tax liabilities on a net basis. This is not expected to change in the foreseeable future. 57 Redcentric | Report and Accounts 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED At Summer Budget 2015, the government announced legislation setting the Corporation Tax main rate (for all profits except ring fence profits) at 19% for the years starting the 1 April 2017, 2018 and 2019 and at 18% for the year starting 1 April 2020. At Budget 2016, the government announced a further reduction to the Corporation Tax main rate (for all profits except ring fence profits) for the year starting 1 April 2020, setting the rate at 17%. The Group has no open tax position at 31 March 2017. 9 Earnings per share Basic earnings per share has been calculated using loss after tax for the year of £2.4m (2016: £4.2m) and a weighted average number of shares of 147,026,140 (2016: 145,223,982). The dilutive effect of share options at 31 March 2017 increased the weighted average number of shares to 151,093,267 (2016: 153,314,134). In addition the Board uses adjusted earnings per share figure, which has been calculated to reflect the underlying performance of the business. This measure is derived as follows: Statutory earnings Tax charge / (credit) Amortisation of acquired intangibles** Share based payments Non-recurring costs Adjusted earnings before tax Notional tax charge at standard rate of 20%/21% Adjusted earnings 2017 £000 (2,378) (1,870) 5,944 1,080 5,474 8,250 (1,650) 6,600 Restated 2016 £000 (4,195) (1,946) 5,553 1,336 6,680 7,428 (1,560) 5,868 Weighted average number of shares in issue Weighted dilutive effect of options and warrants in issue Diluted weighted average number of shares in issue 148,448,225 145,223,982 4,295,881 8,090,152 152,744,106 153,314,134 Statutory diluted and basic earnings per shares (1.60)p (2.89)p Adjusted basic earnings per share Adjusted diluted earnings per share **Amortisation charge per P&L Amortisation of software Customer contracts and related relationships 4.45p 4.32p (6,207) 263 (5,944) 4.04p 3.83p (6,016) 463 (5,553) The Board feels that the adjusted EBITDA and adjusted EPS measures give a better view of the ongoing performance of the business as these measures exclude non-recurring costs. 58 Redcentric | Report and Accounts 2017 10 Property, plant and equipment Cost At 31 March 2015 Additions Acquired with subsidiaries At 31 March 2016 Prior year adjustments At 31 March 2016 – (Restated) Additions Disposals Exchange differences At 31 March 2017 Accumulated depreciation At 31 March 2015 Charge for the year ended 31 March 2016 At 31 March 2016 Prior year adjustments charge Prior year adjustments re-classification At 31 March 2016 – (Restated) Charge for the year ended 31 March 2017 Disposals Exchange differences At 31 March 2017 Net book amount At 31 March 2016 – (Restated) At 31 March 2017 Network infrastructure, equipment, fixtures and fittings Leasehold improvements £000 £000 Motor Vehicles £000 Total £000 31,422 9,029 2,068 42,519 (3,839) 38,680 8,632 (6,409) 45 30,858 8,968 1,928 41,754 (3,839) 37,915 8,484 (6,364) 45 40,080 40,948 (7,870) (5,673) (8,025) (5,825) (13,543) (13,850) 529 665 531 665 (12,349) (12,654) (7,176) 1,207 (42) (7,506) 1,252 (42) 477 61 140 678 - 678 147 - - 825 (108) (152) (260) 2 (258) (293) - - (551) (18,360) (18,950) 420 274 25,566 21,720 26,026 21,998 87 - - 87 - 87 1 (45) - 43 (47) - (47) - - (47) (37) 45 - (39) 40 4 Included in network infrastructure and equipment are assets held under finance leases with a carrying value of £5.2m at 31 March 2017 (2016: £5.7m). Of the £8.6m fixed assets acquired in the year, £2.5m were funded using finance leases (2016 Restated: £4.1m). 59 Redcentric | Report and Accounts 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 11 Intangible Assets Customer contracts and related relationships Trademarks Software & Licenses £000 £000 £000 52,614 9,683 - 62,297 - 3 275 - - 275 - - 2,062 - 1,900 3,962 738 - Goodwill £000 37,691 5,578 - 43,269 - - Total £000 92,973 15,261 1,900 109,803 738 3 Cost At 31 March 2015 (Restated) Acquisition of subsidiaries Additions At 31 March 2016 (Restated) Additions FOREX difference on carrying value At 31 March 2017 43,269 62,300 275 4,700 110,544 Accumulated amortisation and impairment At 31 March 2015 (Restated) Amortisation charge for the year ended 31 March 2016 At 31 March 2016 Impairment Amortisation charge for the year ended 31 March 2017 At 31 March 2017 - - - - (8,219) (120) (1,257) (9,596) (5,493) (13,712) - (5,884) (60) (180) - (60) (463) (1,720) (6,016) (15,612) (263) (6,207) (19,596) (240) (1,983) (21,819) Carrying amount at 31 March 2016 (Restated) Carrying amount at 31 March 2017 43,269 43,269 48,585 42,704 95 35 2,242 2,717 94,191 88,725 Customer contracts have a weighted average remaining amortisation period of 7 years and 11 months (2016: 8 years and 11 months). Intangible assets are reviewed for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Goodwill is tested for impairment at least annually. The recoverable amount of the Recurring CGU was based on a value in use calculation using budgeted cash flow projections for the period to 31 March 2018 and extrapolated for a further four years by growth rates applicable to the unit. A terminal value based on a perpetuity calculation using 2% real growth was then added. Discount rates were then applied to these projections reflecting management’s expected risk profile for the CGU. 60 Redcentric | Report and Accounts 2017 In addition to revenue growth, the key assumptions used in the impairment testing were as follows: • Gross margin percentage of c.60%; • Pre-tax discount rate of 11.0%; and • Terminal growth rate percentage of 2%. The assumption of margins remaining flat after the budget period is based on the assumption that a mix of cost savings in service delivery will be offset by competitive market influences, which is line with management’s experience and historical patterns. A pre-tax discount rate of 11.0% (post-tax 9.3%) was applied to the CGU which reflects management’s risk-adjusted estimate of the weighted average cost of capital. The CGU has a significant element of recurring revenue through maintenance contracts and this reduces the risk inherent in the business. Over the five year period, revenues are projected to grow at an average of 10.1%. These growth rates were determined based on management’s past experience and the detailed analysis of market trends. A reasonably possible adverse movement in any of the above key assumptions made would not give rise to impairment. 12 Trade and other receivables Trade receivables Less: provision for impairment of trade receivables Trade receivables – net Other receivables Prepayments Accrued income Total 2017 £000 22,826 (5,576) 17,250 56 5,378 3,155 25,839 2016 £000 29,808 (7,005) 22,803 14 3,797 4,424 31,038 As at 31 March 2017, trade receivables of £5.6m (Restated 2016: £7.0m) were impaired and fully provided for. The Directors monitor the quality of the receivables not impaired and believe them to be recoverable. The non-impaired receivables are fully performing and relate to independent customers with no history of default. The individually impaired receivables relate to receivables over 365 days, customers in financial difficulty, customer acceptance issues and cancelled contracts. As at 31 March 2017, net trade receivables of £8.3m were past due. In the table below, these comprise the receivables over 30 days, which relate to a number of independent customers for whom there is no recent history of default. Due to the prior year restatements a comparison is not available. 61 Redcentric | Report and Accounts 2017NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED The ageing analysis of trade receivables is as follows: Days outstanding 1–30 days 31–60 days 61–90 days 91–180 days Over 180 days Total 2017 Gross £000 2017 Provision £000 2,950 2,220 704 3,277 4,580 13,731 (266) (532) (169) (988) (3,520) (5,475) 2017 £000 2,684 1,688 535 2,289 1,060 8,256 In addition to the £5.5m provision against overdue debt there is a further £0.1m provided against debt not yet due. The provision is calculated by management on a specific basis based on their best estimate of recoverability taking into account the age and specific circumstances relating to the debtor. The maximum exposure to credit risk at the reporting date is the fair value of each class of receivable mentioned above. The Group does not hold any collateral as security. The carrying amounts of the Group’s trade and other receivables are denominated in pounds. Movements on the Group provision for impairment of trade receivables as at 31 March 2017 are as follows: Balance at the start of the period Utilisation of impairment provision Creation of Impairment provision treated as exceptional costs Creation of impairment provision treated as operating costs* At 31 March Due to the prior year restatements a comparison is not available. 2017 £000 7,005 (5,639) 2,933 1,277 5,576 * The creation and release of a provision for impaired receivables has been included in ‘administrative expenses’ in the income statement. Amounts charged to the allowance account are generally written-off, when there is no expectation of recovering additional cash. The other asset classes within trade and other receivables do not contain impaired assets. 62 Redcentric | Report and Accounts 2017 13 Cash and cash equivalents Cash at bank Restated 2016 £000 2017 £000 4,340 (3,970) The Group’s cash is held at accounts with Barclays Bank PLC, which has a Standard and Poor’s rating of A. 14 Trade and other payables Current Trade payables Other payables Taxation and social security Accruals Deferred income Total 2017 £000 7,483 104 1,591 2,264 5,804 Restated 2016 £000 8,678 1,013 4,292 9,541 3,883 17,246 27,407 15 Commitments and contingencies a) Operating leases Future aggregate minimum annual lease payments under non-cancellable operating leases as at 31 March are as follows: Not later than 1 year After 1 year but not more than 5 years After 5 years Total Land and Plant and Land and Plant and buildings machinery buildings machinery 2017 £000 2,095 3,040 4,586 9,721 2017 £000 169 102 - 271 2016 £000 2,411 7,078 7,733 17,222 2016 £000 197 92 - 289 The Group’s operating leases relate to property, motor vehicles and office equipment, and have remaining terms of between 1 and 24 years. The amount recognised as an expense in the year is £2.6m (2016: £3.3m). None of the above leases are sublet by the Group. There are no contingent rent arrangements and the Group does not have a purchase option with respect to the above leases. The lease terms can only be extended if the terms of the underlying contracts are approved by both the Group and the lessor. (b) Capital commitments The Group had no contracted but not provided for capital commitments at 31 March 2017 (2016: £nil). 63 Redcentric | Report and Accounts 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 16 Borrowings Non-current Bank loan Finance leases Unamortised loan arrangement fee Total non-current Current Finance leases Term Loans Total current 2017 £000 38,000 3,296 (204) 41,092 2,456 323 2,779 Restated 2016 £000 28,308 3,353 (272) 31,389 2,239 139 2,378 At 31 March 2017 the Group was party to £71.0m of bank facilities with a termination date of 1 April 2020. The facilities comprise a Revolving Credit Facility (“RCF”) of £40.0m with a £20.0m accordion, a £5.0m Overdraft Facility and a £6.0m Asset Financing Facility. The RCF has been provided jointly by Barclays Bank PLC and The Royal Bank of Scotland PLC, with Lombard Technology Services Ltd providing the Asset Financing Facility and Barclays Bank PLC the Overdraft Facility. As part of the loan refinancing the Group’s banking syndicate agreed to waive historical covenant breaches. The breaches arose due to the restatement of the 2016 accounts and the very significant decrease of trade payables following the cessation of cash window dressing through delaying payments to suppliers. Fair value of non-current borrowings The carrying amounts and fair value of the non-current borrowings are as follows: Non-current: Bank loan Carrying value Fair value Carrying value Fair value 2017 £000 2017 £000 2016 £000 2016 £000 38,135 34,495 28,674 26,344 Fair values are based on discounted cash flows, using an effective interest rate based on the borrowing rates at 31 March 2017 of 3.4% (2016: 2.15%). 64 Redcentric | Report and Accounts 2017 Finance Leases Not later than 1 year After 1 year but not more than 5 years Total Value 2017 £000 2,456 3,296 5,752 17 Financial instruments by category Present Finance Future Lease Present Finance Future Lease Charges Payments 2017 £000 132 89 221 2017 £000 2,588 3,385 Value 2016 £000 2,237 3,355 5,973 5,592 Charges Payments 2016 £000 154 239 393 2016 £000 2,391 3,594 5,985 The objectives of the Group’s treasury activities are to manage financial risk, secure cost-effective funding where necessary and minimise adverse effects of fluctuations in the financial markets on the value of the Group’s financial assets and liabilities, on reported profitability and on cash flows of the Group. The Group’s principal financial instruments for fundraising are bank borrowings, overdraft facilities and loans. The Group has various other financial instruments such as cash, trade receivables and trade payables that arise directly from its operations. Assets Trade receivables Other receivables and prepayments Other current assets Cash and cash equivalents Total Liabilities Trade payables Other payables and accruals Other current liabilities Borrowings Other non-current liabilities Total Carrying Value Fair Value 2017 £000 2017 £000 17,250 17,250 5,434 3,730 4,340 5,434 3,730 4,340 30,754 30,754 7,483 2,367 7,735 43,871 3,319 64,775 7,483 2,367 7,735 43,871 3,319 64,775 Carrying Value Restated Fair Value Restated 2016 £000 22,803 3,811 5,384 - 31,998 8,678 10,554 8,509 37,737 5,050 70,258 2016 £000 22,803 3,811 5,384 - 31,998 8,678 10,554 8,509 37,737 5,050 70,258 65 Redcentric | Report and Accounts 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 18 Financial risk management The Group’s activities expose it to a variety of financial risks: market risk (including foreign exchange, fair value interest rate risk, cash flow interest rate risk, and price risk), credit risk, and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. Risk management is carried out centrally under policies approved by the Board of Directors. The Board provides principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and investments of excess liquidity. (a) Market risk (i) Foreign exchange risk The Group mainly operates within the UK and foreign exchange risk arises from certain transactions with counterparties denominated in foreign currencies. This is not a significant risk for the Group. (ii) Cash flow risk The Group receives interest on cash and cash equivalents and pays interest on its borrowings. Borrowings at variable rates expose the Group to cash flow interest rate risk. During the year ended 31 March 2017 the Group’s borrowings at variable rate were denominated in Pounds Sterling with interest linked to Sterling interest rates. The Group analyses its interest rate exposure on a dynamic basis. Various scenarios are simulated taking into consideration refinancing, renewal of existing positions, alternative financing and hedging. Based on these scenarios, the Group calculates the impact on profit or loss of a defined interest rate shift and manages its cash flow interest rate risk accordingly. Based on the simulations performed, the impact on post-tax profit and equity of a +/– 1% shift in the interest rate would be not be material. The simulation is done on a quarterly basis to verify that the maximum loss potential is within the limit given by management. (iii) Price risk The Group is not exposed to significant commodity or security price risk. (b) Credit risk Credit risk arises from cash and cash equivalents, as well as credit exposures to customers. Individual risk limits are set based on internal and external ratings in accordance with limits set by the divisions and review by the Board where appropriate. The utilisation of credit limits is regularly monitored with appropriate action taken by management in the event of a breach of credit limit. Post the forensic review and the subsequent re-audit of the 2016 subsidiaries and 2017 Group audit, the Board has adopted a more rigorous and prudent approach to debtor provisioning. (c) Liquidity risk Management monitors rolling forecasts of the Group’s undrawn borrowing facility and cash and cash equivalents based on expected cash flow. The Group’s liquidity management policy involves projecting cash flows and considering the level of liquid assets necessary to meet these. 66 Redcentric | Report and Accounts 2017The table below analyses the Group’s financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. These amounts disclosed in the table are the contracted undiscounted cash flows. Balances within 12 months equal their carrying balances as the impact of discounting is not significant. At 31 March 2017 Borrowings Finance leases Trade and other payables Term loans At 31 March 2016 (Restated) Borrowings Finance leases Trade and other payables Term loans 19 Capital risk management Within 1 year £000 2,456 7,483 323 - 2,239 8,678 139 1-5 years £000 38,000 3,296 28,308 3,353 - Total £000 38,000 5,752 7,483 323 28,308 5,592 8,678 139 The Group’s objectives when managing capital are to safeguard the Group’s future growth and its ability to continue as a going concern in order to provide returns for shareholders and to maintain an optimal capital structure to reduce the cost of capital. The Group operates in the managed services sector which, generally, does not require substantial fixed asset investments. Consequently, the Group is financed predominantly by equity. In order to maintain or adjust the capital structure the Group has previously both issued new shares and borrowed using bank facilities. The Group monitors capital on the basis of the ratio of net bank debt to adjusted EBITDA. Net debt is calculated as total bank borrowings (including ‘current and non-current borrowings’ as shown in the consolidated balance sheet) less cash and cash equivalents, and adjusted EBITDA is defined as earnings before interest, tax, depreciation, amortisation, non-recurring costs and share-based payments. The Group’s strategy is to maintain the ongoing ratio at below 2.5x, although the bank facilities can accommodate a higher ratio. The ratio was comfortably below this level throughout the year, and at 31 March 2017 was 2.2x. The bank facilities referred to in Note 16 contain various covenants relating to EBITDA, interest cover, net debt and cash flow, which the Group monitors on a monthly basis. The Group adopts a risk-averse position with respect to borrowings, and maintains a significant amount of head-room in its bank facilities to ensure that any unexpected situations do not create financial stress. The Group has committed to a progressive dividend policy, and intends to return a proportion of free cash-flow to shareholders each year in the form of dividends, whilst retaining a prudent amount of capital in the business to fund potential future expansion and to provide operational flexibility. The Group also grants share options to Directors and other selected employees. However, these do not have a significant impact on the Group’s capital structure. 67 Redcentric | Report and Accounts 2017NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 20 Called up share capital At 31 March 2015 New shares issued At 31 March 2016 New shares issued At 31 March 2017 Allotted and fully paid Number £’000 144,728,908 1,152,277 145,881,185 2,977,988 148,859,173 145 1 146 3 149 The number of shares authorised is the same as the number of shares issued. Ordinary shareholders have the right to attend, vote and speak at meetings, receive dividends, and receive a return on assets in the case of a winding up. Share issues During the year the following shares were issued: Issued on the exercise of share options Issued on the exercise of warrants Total 2017 2016 Number Number 2,977,988 - 354,251 798,026 2,977,988 1,152,277 As at 31 March 2017 the Company had a total of 350,000 warrants in issue with an exercise price of 36p. The warrants were issued to Barclays Bank PLC on demerger in April 2013 in exchange for warrants previously held in Redstone plc, and can be converted to shares at any time before the sale of the entire share capital of the Company. 68 Redcentric | Report and Accounts 201721 Provisions At 31 March 2015 Charged /(credited) to Income statement: Additional provisions created during the year Used during the year At 31 March 2016 Used during the year At 31 March 2017 Vacant Dilapidations property Total provision provision provision £000 £000 £000 642 33 675 - (49) 593 (320) 273 1,698 (50) 1,681 (408) 1,698 (99) 2,274 (728) 1,273 1,546 The provisions have been discounted to present value using a risk free discount rate. The remaining terms of these property leases range from 1 to 6 years. Current and non-current analysis of provisions: 2017 Vacant 2016 Vacant Dilapidations property Total Dilapidations property Total provision provision provision provision provision provision £000 £000 £000 £000 £000 Current Non-current Total - 273 273 339 934 1,273 339 1,207 1,546 - 593 593 334 1,347 1,681 22 Share-based payment plans Share-based payments During the year the Group recognised an expense for the following share-based payments: Equity-settled share-based charge arising from share options* National Insurance and other charges arising on share options Total * This is an IFRS 2 charge arising from share options issued in terms of a share-based payment plan. 2017 £000 975 105 1,080 £000 334 1,940 2,274 Restated 2016 £000 1,336 - 1,336 69 Redcentric | Report and Accounts 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements in, share options during the year. Options Outstanding at the start of the year Issued in the year Exercised in the year Lapsed in the year Outstanding at the end of the year 2017 Number of options 14,230,452 919,048 (2,977,988) (2,134,095) 10,037,417 2017 WAEP 82.4p 45.7p 58.1p 107.9p 80.5p 2016 Number of options 14,567,621 163,905 (354,251) (146,823) 14,230,452 2016 WAEP 82.3p 154.0p 102.1p 108.7p 82.4p The weighted average fair value of the options granted in the year ended 31 March 2017 was 45.7p (2016: 154.0p) per option. During the year ended 31 March 2017 there were new grants of 919,048 options (2016: 163,905 options) which were issued under the Company’s Long Term Incentive Plan (“LTIP”). The weighted average remaining contractual life for the share options outstanding at 31 March 2017 is 5 years and 9 months (2016: 7 years and 3 months). The range of exercise prices for options outstanding at the end of the year was 0p to 154p. Share options outstanding at the end of the year with approximate remaining average life are as follows: Range of prices Number 31 March 2017 Life at 31 March 2017 Number 31 March 2016 Life at 31 March 2016 419,048 2 years, 3 months - 276,143 7,581,968 500,000 225,000 - 225,000 721,731 88,527 - 6 years, 1 month 6 years, 8 month 1 years, 3 months 6 years, 11 months - 7 years, 8 months 1 years, 6 months 2 years, 6 months - 1,692,988 761143 7,581,968 - 1,500,000 1,100,000 450,000 985,824 158,529 - 7 years, 1 month 7 years, 1 month 7 years, 7 months - 7 years, 11 months 8 years, 5 months 8 years, 8 months 2 years, 6 months 3 years, 6 months 10,037,417 5 years, 9 months 14,230,452 7 years, 3 months 0p 32p 70p 80p 84p 102p 112p 117p 107p 154p 70 Redcentric | Report and Accounts 2017 The following table illustrates the status of the options outstanding at the end of the year: Options Performance conditions satisfied Subject to performance conditions Save-As-You-Earn 2017 Number of options 276,143 8,951,616 809,658 Outstanding at the end of the year 10,037,417 2017 WAEP 70p 78p 112.1p 80.5p 2016 Number of options 2,668,417 10,417,682 1,144,353 14,230,452 2016 WAEP 53.5p 86.4p 113.5p 82.4p The fair value of the equity-settled share options granted is estimated as at the date of grant using a binomial model, taking into account the terms and conditions upon which the options were granted. The following table lists the inputs into the model used for the year ended 31 March 2017 and 31 March 2016. No change has been made to the assumptions used for valuing options granted before 31 March 2014. Apr 2013 Nov 2013 Mar 2014 Aug & Nov 2014 SAYE Dec 2014 SAYE Dec 2015 LTIP Dec 2016 Type 1 special award Dec 2016 Type 2 special award Dec 2016 Option exercise price Dividend yield (%) Vesting period (yrs) Assumed volatility at date of grant (% p.a.) Risk-free discount rate 70p 3.0 1-3 80p 102p 117p 107p 154p 3.0 3.6 3.0 2.9 & 2.7 2.3-3.6 0.3-2.7 2.4 3.0 2.1 3.0 0p 3.4 2.5 84p 3.4 1 84p 3.4 2 50% 50% 50% 37% & 36% 34% 27% 46% 46% 46% 0.5- 1.0% 1.1% 0.8- 1.3% 0.8-1.4% 1.0% 1.0% 0.1% 0.1% 0.2 Expected life of option 6.2 yrs 3.6 yrs 3.6 yrs 2.6-3.7 yrs 3.7 yrs 3.7 yrs 2.5 yrs 2.5 yrs 3 yrs Fair value per option 14.2p – 20.5p 32.6p 40.9p – 46.5p Share price at grant 64.0p 83.5p 113.5p 32.3p - 41.4p 119.5p – 130.5p 48.8p 44.0p 81.6 27.1 29.1 145.5p 188.0p 87.5 87.5 87.5 71 Redcentric | Report and Accounts 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 23 Pensions The Group operates a defined contribution pension scheme for eligible employees. The charge for the year ended 31 March 2017 was £0.4m (2016: £0.4m). At the year-end there was a pensions creditor of £0.1m (2016: £0.1m). 24 Subsidiaries As at 31 March 2017, the Company had the following subsidiary undertakings: Principal activity Country of incorporation % Ordinary share capital owned Held directly by Redcentric plc Redcentric Holdings Limited Redcentric Solutions Limited Held indirectly Holding company England and Wales Managed Services England and Wales Redcentric Solutions Private Limited Support services India Redcentric MS Limited Dormant* England and Wales Redcentric Managed Solutions Limited Dormant* England and Wales Redcentric Communications Limited Dormant* England and Wales Hotchilli Internet Limited Redcentric US Limited Dormant* England and Wales Dormant USA Calyx Managed Services Limited Dormant England and Wales City Lifeline Limited Dormant England and Wales City Lifeline Data Centre Limited Dormant* England and Wales All of the Company’s subsidiaries have been consolidated in the Group financial statements. 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% All of the Group companies have a registered office of Central House, Beckwith Knowle, Harrogate HG3 1UG, except Redcentric Solutions Private Limited which has a registered office of 606-611, 6th Floor, Manjeera Trinity Corporate, JNTU – Hitech City Road, Kukatpally, Hyderabad – 72. * The companies marked with an asterisk are exempt from filing audited accounts under s394A of the Companies Act 2006 as they have been dormant throughout the period. 72 Redcentric | Report and Accounts 2017 25 Related parties The Group has taken exemption not to disclose transactions with entities wholly-owned by the Group. Directors’ emoluments are disclosed in the Remuneration Report. MXC Capital The Group has engaged MXC Advisory LLP to provide corporate finance advice and consultancy. MXC Advisory LLP is owned by MXC Capital Limited (“MXC”), which is an AIM quoted merchant bank specialising in investing in technology companies. MXC is a shareholder in Redcentric plc and has options over the ordinary shares of Redcentric plc (as disclosed below) and therefore its interests are aligned with Redcentric plc’s other shareholders. Tony Weaver, a Director of Redcentric plc, has an interest in MXC. Under the terms of the agreement, a fee representing a maximum of 2.5 per cent. of the enterprise value of successful transactions consulted upon is payable by the Company to MXC. During the year, fees of £97,500 were paid to MXC (2016: £497,124), which included £17,500 (2016: £137,629) for Tony Weaver’s Director’s fees, £80,000 (2016: £59,495) for the provision of corporate finance advice, and £nil (2016: £300,000) for advisory fees in respect of the acquisition of Calyx. As at 31 March 2017 MXC has the following interest in shares and options over ordinary shares in the Company: Quantity Grant date Exercise price Expiry date Ordinary shares Options (a) Options (b) 1,692,988 18 April 2013 7,000,000 15 November 2013 - - 32p 80p - 18 April 2023 15 November 2023 (a) The performance conditions with respect to 564,330 of these options have been met, and the options have fully vested. There is a performance condition in respect of 1,128,658 options linked to the occurrence of a qualifying transaction that will deliver a predefined return to shareholders. 846,494 of the options are held by Tony Weaver as a Trustee under a Declaration of Trust, the beneficiary of which is MXC Capital Ltd. (b) The options have a performance condition which allows the option to be exercised if the average mid-market closing price of the shares for the preceding 10 working days at any point after 15 November 2016 is greater than 112.4p. Other There were no other transactions with related parties in the year to 31 March 2017 other than those disclosed in note 29. The balances outstanding at 31 March 2017 in respect of related parties was £30,000 payable to MXC. 73 Redcentric | Report and Accounts 2017NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 26 Dividends Amounts recognised as distributions to Shareholders in year: Final dividend for year ended 31 March 2016 of 3.0p (2015: 3.0p) per share Interim dividend for year ended 31 March 2017 (2016: 1.5p) per share 2017 £000 4,406 - 4,406 2016 £000 3,618 2,188 5,806 The Company paid a final dividend in respect of the year to 31 March 2016 of 3.0p per ordinary share on 16 September 2016, with a total payment value of £4.4m. 27 Subsequent events On 27 April 2017, the Group refinanced is loan facilities, details of which are summarised in the Financial Review on pages 9 to 14. There have been no other significant events between the balance sheet date and the date of approval of these accounts. 28 Error restatement On 7 November 2016 Redcentric plc (‘the Group’) announced that an internal review by the Group’s audit committee had discovered misstated balances in the Group’s accounting records and consequently a forensic review of the Group’s net assets was undertaken. Furthermore as part of the forensic review, work was undertaken to validate the previously reported net debt position of the Group. The findings of the forensic review identified a reduction in net assets of the Group of £14.9m. This misstatement relates to prior periods and subsequently the prior year comparatives have been restated with net assets at 1 April 2015 reducing by £6.0m and as at 31 March 2016 by £14.5m. Subsequent to this review, the Board have completed a further review of net assets as at 31 March 2016 as part of the finalisation of the 2017 annual report. As a result of this investigation further restatements have been recognised: - Relating to the consolidation of the Group’s Indian subsidiary. - Other items, predominantly in relation to misstatement of and taxation and deferred taxation balances. The cumulative impact of the above adjustments on reported profit for the year ended 31 March 2016 was assessed to be £9.5m. The following disclosure provides further detail of the composition of these adjustments, with reference to the affected primary statement captions where possible. 74 Redcentric | Report and Accounts 2017Impact of forensic review Certain assets of the Group recognised as PPE were identified as relating to inventory. Accordingly these assets were reclassified from PPE to inventory (2016: £497k). Certain amounts relating to accrued income and trade receivables were identified as being irrecoverable. As a result further provisions against receivables balances were recognised and other balances were adjusted against revenue. Overall, this reduced trade and other receivable balances (2016: £1,555k). Certain customer receipts were recognised in advance of the date of the clearing of associated cash receipts. This resulted in an overstatement of cash and cash equivalents and an understatement of net debt (2016: £8,242k). In addition, certain cash payments relating to trade creditors were recorded in the wrong period, resulting in an overstatement of cash and cash equivalents and an understatement of net debt (2016: £4,240k). Certain costs relating to the year ended 31 March 2016 and 31 March 2015 had not been recorded as liabilities at the relevant period end. This resulted in an understatement of trade creditor and accrual balances (2016: £3,193k), along with associated cost of sales and operating expenses balances. The deferred tax effect of the above items is £2,375k, driven by the increase in tax losses. These forensic adjustments are consistent with those that were reflected in the financial statements of Redcentric Solutions Limited at 31 March 2016. India The assets and liabilities of the Group relating to a subsidiary company, Redcentric Solutions Private Ltd, were previously not consolidated into the Group’s financial statements. The impact of this restatement is an increase in net assets of £0.4m as at 31 March 2016 with a corresponding increase in profit after tax as at 31 March 2016 of £0.4m. Other Certain assets of the Group relating to capitalised software were identified to have been recognised as part of property, plant and equipment instead of as an intangible asset. Accordingly management have reclassified these assets from PPE to intangible assets (2016: £2,242k). In addition, certain purchases of property plant and equipment were recorded in the wrong period, resulting in an understatement of assets and trade payables (2016: £41k). A further adjustment to reduce the intangibles balance by £317k has been recorded at 31 March 2016, relating to a reduction in carrying value. 75 Redcentric | Report and Accounts 2017NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Certain items of expenditure were incorrectly capitalised within the inventory caption and an adjustment was required to correct this (2016: £68k). Further amounts relating to accrued income and trade receivables were identified as being irrecoverable. As a result further provisions against receivables balances were recognised in addition to the writing off of certain balances, reducing trade and other receivable balances (2016: £3,604k). Borrowings falling due within one year were reclassified to the current liabilities caption (£523k). A corporation tax receivable was not recorded (2016: £531k), and an increase to the deferred tax liability (2016: £356k) was recognised as a result of these other adjustments being recorded. The forensic review identified certain costs relating to the year ended 31 March 2016 and 31 March 2015 as not having been recorded at the relevant period end. However some of these costs had already been accrued for and therefore needed to be reversed to avoid double counting. This adjustment resulted in a reduction of trade creditor and accrual balances (2016: £2,500k), along with associated cost of sales and operating expenses balances. The accounting misstatements are discussed on pages 9-11 of the financial performance review. The impact of the prior year adjustments on the Group's income, equity and cash flows arising from the restatement exercise are summarised on pages 77-81. 76 Redcentric | Report and Accounts 201728 Error restatement Reconciliation of Consolidated Statement of Income – for the year ended 31 March 2016 Revenue Cost of sales Gross profit Operating expenditure Adjusted EBITDA* Depreciation Amortisation of acquired intangibles Non-recurring costs Share-based payments Operating profit/(loss) Finance costs Profit /(loss) on ordinary activities before taxation Tax charge on profit on ordinary activities As previously reported Error restatement Restated 2016 £000 £000 £000 109,526 (45,050) 64,476 (56,037) 25,844 (5,825) (5,548) (4,591) (1,441) 8,439 (995) 7,444 (2,188) (7,163) 496 (6,667) (6,717) (11,464) 531 (468) (2,089) 105 (13,385) (199) (13,584) 4,134 102,363 (44,554) 57,810 (62,756) 14,380 (5,294) (6,016) (6,680) (1,336) (4,946) (1,194) (6,141) 1,946 Profit /(loss) for the year (attributable to owners of the parent) 5,256 (9,451) (4,195) * Adjusted EBITDA is defined as earnings before interest, tax, depreciation, amortisation of acquired intangibles, non-recurring costs and share based payments. 77 Redcentric | Report and Accounts 2017NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Reconciliation of Consolidated Balance Sheet – as at 31 March 2016 As previously reported Forensic Review India Consolidation Other Restated 2016 £000 £000 £000 £000 £000 Assets Non-current assets Property plant and equipment Intangible assets Current assets Inventories Trade and other receivables Corporation tax receivable Cash and short term deposits Total assets Equity and liabilities Equity Called up share capital Share premium account Capital redemption reserve Reserves Total equity Non-current liabilities Provisions Borrowings Deferred tax liability Current liabilities Overdraft Trade and other payables Borrowings Provisions Total liabilities 28,669 92,285 120,954 - 35,762 8,492 44,254 165,208 146 63,667 (9,454) 43,099 97,458 1,940 31,912 5,139 38,991 - 26,570 1,855 334 28,759 67,750 26,026 94,191 120,217 429 31,038 531 - 31,998 152,215 146 63,667 (9,454) 27,328 81,687 1,940 31,389 3,110 36,439 (497) - (497) 497 (1,555) - (8,492) (9,550) (10,047) 56 21 77 - 435 - - 435 512 - - (2,202) 1,885 (317) (68) (3,604) 531 - (3,141) (3,458) - - - (14,856) (14,856) 399 399 (1,314) (1,314) (2,375) (2,375) 3,991 3,193 - - 7,184 4,809 - (523) 356 (167) - 3,970 (2,500) 27,407 523 - (1,977) (2,144) (3,458) 2,378 334 34,089 70,528 152,215 (10) (10) (21) 144 - - 123 113 512 Total equity and liabilities 165,208 (10,047) 78 Redcentric | Report and Accounts 2017 Reconciliation of Consolidated Balance Sheet – as at 31 March 2015 As previously reported Error restatement Restated 2015 £000 £000 £000 Assets Non-current assets Property plant and equipment Intangible assets Current assets Inventories Trade and other receivables Corporation tax receivable Cash and short term deposits Total assets Equity and liabilities Equity Called up share capital Share premium account Capital redemption reserve Retained Earnings Total equity Non-current liabilities Provisions Borrowings Deferred tax liability Current liabilities Overdraft Trade and other payables Corporation tax payable Borrowings Provisions Total liabilities Total equity and liabilities 23,397 82,572 105,969 - 18,350 - 3,199 21,549 127,518 145 62,668 (9,454) 41,378 94,737 489 9,412 1,631 11,532 - 18,542 1,488 1,033 186 21,249 32,781 127,518 233 (2,069) (1,836) - (1,876) 96 (1,780) (3,616) - - - (4,413) (4,413) - - (1,600) (1,600) - 2,367 30 - - 2,397 2,393 (3,616) 23,630 80,503 104,133 - 16,474 - 3,295 19,769 123,902 145 62,668 (9,454) 36,965 90,324 489 9,412 31 9,932 - 20,909 1,518 1,033 186 23,646 33,578 123,902 79 Redcentric | Report and Accounts 2017NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Reconciliation of Consolidated Cash Flow – for the year ended 31 March 16 As previously reported Error Restatement £000 £000 Restated 2016 £000 Cash flows from operating activities Profit /(Loss) before taxation Net finance expense Operating loss Depreciation and amortisation Non-recurring items Share based payments Operating cash flow before non-recurring costs and movements in working capital Non-recurring costs and NI on share based payments Operating cash flow before movements in working capital Decrease (increase) in inventories Decrease (increase) in trade and other receivables (Decrease) increase in trade and other payables Cash generated from operations Corporation tax received Net cash inflow from operating activities Cash flows from investing activities Acquisition of subsidiaries net of cash acquired Purchase of property, plant and equipment Net cash outflow from investing activities Cash flows from financing activities Dividends paid to shareholders Interest paid Drawdown on revolving credit facility Proceeds of issue of shares less costs of issue Net cash inflow from financing activities Net increase (decrease) in cash and cash equivalents Opening cash and cash equivalents (as restated) Net increase (decrease) in cash and cash equivalents Effect of exchange rates Cash and cash equivalents 80 7,444 995 8,439 11,373 4,591 1,441 25,844 (3,066) 22,778 - (17,412) 10,716 16,082 - 16,082 (19,348) (9,030) (28,378) (5,806) (927) 23,323 1,000 17,590 5,294 3,199 5,294 - 8,492 (13,585) 200 (13,385) (63) 2,089 (105) (11,464) (2,015) (13,479) (429) 5,956 (9,883) (17,835) (244) (6,141) 1,195 (4,946) 11,310 6,680 1,336 14,380 (5,081) 9,299 (429) (11,456) 833 (1,753) (244) (18,079) (1,997) 5,571 872 6,443 - (200) (723) - (923) (12,559) 96 (12,559) (13,777) (8,158) (21,935) (5,806) (1,127) 22,600 1,000 16,667 (7,265) 3,295 (7,265) - (12,462) (3,970) Redcentric | Report and Accounts 2017Reconciliation of Earnings per share – for the year ended 31 March 16 Previously reported 2016 Error restatement Restated 2016 Statutory earnings Tax charge / (credit) Amortisation of acquired intangibles Share based payments Non-recurring costs Adjusted earnings before tax Notional tax charge at standard rate of 21% Adjusted earnings £000 5,256 2,188 5,548 1,441 4,591 19,024 (3,805) 15,029 Weighted average number of shares in issue Weighted dilutive effect of options and warrants in issue Diluted weighted average number of shares in issue 145,223,982 8,090,152 153,314,134 Statutory diluted and basic earnings per shares Adjusted basic earnings per share Adjusted diluted earnings per share 3.62p 10.48p 9.93p £000 £000 (9,451) (4,134) 5 (105) 2089 (11,596) 2,435 (9,161) (4,195) (1,946) 5,553 1,336 6,680 7,428 (1,560) 5,868 145,223,982 8,090,152 153,314,134 (2.89)p 4.04p 3.83p 81 Redcentric | Report and Accounts 2017NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 29 Business combinations – in the year ended 31 March 2016 29.1 Acquisition of Calyx On 10 April 2015, Redcentric completed the acquisition of Calyx Managed Services Ltd (“Calyx”) for an enterprise valuation of £12.0m. Calyx was acquired from MXC Capital following a period of significant restructuring, which included the disposals of the Break Fix and Carrier Services divisions. The remaining business was a focused IT managed services and professional and infrastructure services business. Calyx's portfolio of services and its range of customers are an excellent strategic addition for Redcentric. The acquisition is considered a related party transaction under the AIM Rules for Companies on the basis that MXC is a substantial shareholder in the Company and Tony Weaver, a Director of Redcentric, is a substantial shareholder of MXC. In addition, Redcentric agreed a corporate finance advisory fee of £300,000 to MXC for advisory services in relation to the acquisition under an existing engagement with MXC, which is retained as corporate finance adviser to the Company (further details are in note 26 to the financial statements). The payment of the advisory fee is considered to be a related party transaction under the AIM Rules for Companies. The book value of the Calyx net assets acquired and their fair values are summarised below: Book value £000 - - 1,676 1,475 5,465 (2,476) (790) (1,433) - 3,917 Fair value adjustments Fair value to Group £000 6,673 1,587 (93) (192) - - - - (1,201) 6,774 £000 6,673 1,587 1,583 1,283 5,465 (2,476) (790) (1,433) (1,201) 10,691 10,691 4,834 15,525 Intangible assets Deferred tax asset Trade and other receivables Prepayments Cash and loans Deferred revenue Trade and other payables Accrued costs and tax Deferred tax liability Net assets Fair value of net assets Goodwill Total purchase consideration paid in cash 82 Redcentric | Report and Accounts 2017The fair value adjustments relate to the recognition of newly identified intangible assets, and the writing off of unrecoverable debtors and accrued revenue. The purchase consideration paid included an adjustment to reflect the cash proceeds of £4.9m from the disposal of the Break Fix and Carrier Services divisions and an adjustment of £1.5m to reflect certain lease liabilities. On acquisition the Directors assessed the business acquired to identify any intangible assets. Customer contracts and related relationships met the criteria for recognition as intangible assets as they have a measurable fair value, being the amount for which an asset would be exchanged between knowledgeable and willing parties in an arm’s length transaction. For the customer contracts and related relationships the provisional fair value of the intangible assets was calculated by using the discounted cash flows arising from the existing contract base for the business. The reasonable economic life of the customer relationships was assumed to be ten years, and has been discounted using a rate of 10.6%. The identifiable intangible asset was valued at £6.7m. The goodwill arising on the acquisition is attributable to the expected synergies. From the date of acquisition to 31 March 2016, Calyx achieved revenue of £6.7m and a profit before taxation of £0.6m. As Calyx was acquired close to the start of the year, the revenue and profit before tax if Calyx had been consolidated for the full year would not be materially different. 29.2 Acquisition of City Lifeline On 28 January 2016, Redcentric completed the acquisition of City Lifeline Ltd (“City Lifeline”) for an enterprise valuation of £4.8m from its founders. City Lifeline is an established business, which has been trading for over 20 years. It was originally set up as a disaster recovery and back-up site, and has been developed over the years into an independent data centre offering hosting and colocation services from its well-connected and well-invested location in Tech City, London. The principal rationale behind the acquisition was to acquire a London data centre, enhancing Redcentric’s go-to-market proposition based on the ownership and control of the underlying infrastructure from which services are delivered. 83 Redcentric | Report and Accounts 2017NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED The book value of the City Lifeline net assets acquired and their fair values are summarised below: Intangible assets Property, plant and equipment Trade and other receivables Prepayments Cash and loans Borrowings Trade and other payables Accrued costs and tax Deferred tax liability Net assets Fair value of net assets Goodwill Total purchase consideration paid in cash Book value £000 - 2,068 94 216 1,352 (722) (251) (330) (187) 2,239 Fair value adjustments £000 3,010 - - - - - - (383) (542) 2,085 Fair value to Group £000 3,010 2,068 94 216 1,352 (722) (251) (713) (729) 4,324 4,324 744 5,068 The fair value adjustments relate to the recognition of newly identified intangible assets, a provision for contractual staff bonuses which were crystallised at the point of acquisition, and a provision for corporation tax. On acquisition the Directors assessed the business acquired to identify any intangible assets. Customer contracts and related relationships met the criteria for recognition as intangible assets as they have a measurable fair value, being the amount for which an asset would be exchanged between knowledgeable and willing parties in an arm’s length transaction. For the customer contracts and related relationships the provisional fair value of the intangible assets was calculated by using the discounted cash flows arising from the existing contract base for the business. The reasonable economic life of the customer relationships was assumed to be ten years, and has been discounted at a rate of 10%. The identifiable intangible asset was valued at £3.0m. The goodwill arising on the acquisition is attributable to the additional data centre capacity acquired and expected synergies. From the date of acquisition to 31 March 2016, City Lifeline achieved revenue of £0.6m and a profit before taxation of £0.1m. If City Lifeline had been consolidated for the full year it would have achieved revenue of £3.5m and profit before tax of £0.3m. 84 Redcentric | Report and Accounts 2017COMPANY BALANCE SHEET AS AT 31 MARCH Fixed assets Investments Current liabilities Creditors – amounts falling due within one year Net current liabilities Net assets Capital and reserves Called up share capital Share premium account Share option reserve Retained earnings Total shareholders’ funds Note 2017 £000 2016 £000 2 3 4 101,031 100,056 (11,873) (11,873) (9,198) (9,198) 89,158 90,858 149 65,395 4,969 18,645 89,158 146 63,667 3,994 23,051 90,858 The notes on pages 87 to 90 are an integral part of these financial statements. The financial statements on pages 85 to 90 were approved by the Board on 26 July 2017 and are signed on its behalf by: Fraser Fisher, Director Peter Brotherton, Director 85 Redcentric | Report and Accounts 2017 COMPANY STATEMENT OF CHANGES IN EQUITY Called up share capital Share premium £000 £000 Reserves £000 Total equity £000 At 31 March 2015 145 62,668 31,515 94,328 Transactions with owners: Issue of new shares Dividends to shareholders Capital contribution related to share based payment for subsidiaries 1 - 999 - - (5,806) 1,336 1,000 (5,806) 1,336 At 31 March 2016 146 63,667 27,045 90,858 Transactions with owners: Issue of new shares Dividends to shareholders Share Based Payments (SBP) At 31 March 2017 3 - - 1,728 - - 149 65,395 - (4,406) 975 23,614 1,731 (4,406) 975 89,158 86 Redcentric | Report and Accounts 2017 NOTES TO THE COMPANY FINANCIAL STATEMENTS 1 Accounting policies (FRS 101) Redcentric plc has taken advantage of the exemption provided under Section 408 of the Companies Act 2006 not to disclose the Company profit and loss account. Redcentric plc has taken advantage of the exemption provided under Section 404 of the Companies Act 2006 not to disclose the Company statement of cash-flows. The result of the Company for the year was £nil (2016: £nil). Redcentric plc is a public limited company incorporated and domiciled in England and Wales, whose shares are publicly traded on the AIM division of the London Stock Exchange. Redcentric plc was incorporated on 11 February 2013, and admitted to AIM on 24 April 2013. The principal accounting policies, which have been applied consistently throughout the year in the preparation of the financial statements: (a) Basis of accounting The financial statements have been prepared under the historical cost convention in accordance with the Companies Act 2006 and applicable accounting standards in the United Kingdom. (b) Basis of preparation The financial statements have been prepared on a going concern basis in accordance with FRS 101. The Directors have assessed going concern for the Company, taking into account that it operates as part of the Redcentric plc Group. On 1 April 2015 the Group entered into new banking facilities, which run until 2 April 2020. A high proportion of the Group’s revenue is recurring in nature, which provides good visibility of future cash-flows. The present cash flow forecasts indicate that the Group will be able to operate within the present banking facilities for at least 12 months from the date of approval of these financial statements. For these reasons the Directors believe the going concern basis to be appropriate. (c) Investments in subsidiaries Investments are initially recognised at cost, being the fair value of the consideration given. The carrying value of investments is reviewed for impairment if events or changes in circumstances indicate that the carrying value may not be recoverable. (d) Current tax Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates and laws that are enacted or substantively enacted by the balance sheet date. (e) Foreign currencies The functional and presentation currency of Redcentric plc is Pounds Sterling. Transactions in foreign currencies are initially recorded in the functional currency by applying the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the balance sheet date. All differences are taken to the profit and loss. 87 Redcentric | Report and Accounts 2017NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED (f) Employees and Directors emoluments The Company had no employees during the period. The Directors' emoluments are paid by other Group entities. Their remuneration is disclosed in this annual report. 2 Investments Investments in subsidiaries Capital contribution related to share-based payments for subsidiaries 2017 £000 96,062 4,969 101,031 2016 £000 96,062 3,994 100,056 As part of the forensic review discussed in note 28 to the Group financial statements it was noted that the presentation of the fixed asset investment note in 2016 had classified £2,658,000 as direct investment in subsidiaries as opposed to increases in capital contributions. This classification has been correct in the year ended 31 March 2017 as stated above. At 31 March 2017, the Company had the following subsidiary undertakings: Principal activity Country of incorporation % Ordinary share capital owned Held directly by Redcentric plc Redcentric Holdings Limited Redcentric Solutions Limited Held indirectly Holding company England and Wales Managed Services England and Wales Redcentric Solutions Private Limited Support services India Redcentric MS Limited Dormant* England and Wales Redcentric Managed Solutions Limited Dormant* England and Wales Redcentric Communications Limited Dormant* England and Wales Hotchilli Internet Limited Redcentric US Limited Dormant* England and Wales Dormant USA Calyx Managed Services Limited Dormant England and Wales City Lifeline Limited Dormant England and Wales City Lifeline Data Centre Limited Dormant* England and Wales 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% * The companies marked with an asterisk are exempt from filing audited accounts under s394A of the Companies Act 2006 as they have been dormant throughout the period. All of the Group companies have a registered office of Central House, Beckwith Knowle, Harrogate HG3 1UG, except Redcentric Solutions Private Limited which has a registered office of 606-611, 6th Floor, Manjeera Trinity Corporate, JNTU – Hitech City Road, Kukatpally, Hyderabad – 72. The Company does not have any associate operations. 88 Redcentric | Report and Accounts 2017 3 Creditors – amounts falling due within one year Amounts owed to subsidiaries 4 Called up share capital At 31 March 2015 New shares issued At 31 March 2016 New shares issued At 31 March 2017 2017 £000 11,873 2016 £000 9,198 Allotted and fully paid Number £000 144,728,908 1,152,277 145,881,185 2,977,988 148,859,173 145 1 146 3 149 The number of shares authorised is the same as the number of shares issued. Ordinary shareholders have the right to attend, vote and speak at meetings, receive dividends, and receive a return on assets in the case of a winding up. Share issues During the year the following shares were issued: Issued on the exercise of share options Issued on the exercise of warrants 2017 £000 2,977,988 - 2016 £000 354,251 798,026 2,977,988 1,152,277 As at 31 March 2017 the Company had a total of 350,000 warrants in issue with an exercise price of 36p. The warrants were issued to Barclays Bank PLC on demerger in April 2013 in exchange for warrants previously held in Redstone plc, and can be converted to shares at any time before the sale of the entire share capital of the Company. 5 Auditors’ remuneration The Company audit fee is £110,000 (2016: £24,000). This fee was borne by another Group company. 6 Related parties The Group has taken exemption not to disclose transactions with entities wholly-owned by the Group. Directors' emoluments are disclosed in the Remuneration Report. 89 Redcentric | Report and Accounts 2017NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED MXC Capital Up until 30 November 2016, the Group engaged MXC Advisory LLP to provide corporate finance advice and consultancy. MXC Advisory LLP is owned by MXC Capital Limited (“MXC”), which is an AIM quoted merchant bank specialising in investing in technology companies. MXC was a shareholder in Redcentric plc and still has options over the ordinary shares of Redcentric plc and therefore its interests are aligned with Redcentric plc’s other shareholders. Tony Weaver, is a former Director of Redcentric plc, has an interest in MXC. Under the terms of the agreement, a fee representing a maximum of 2.5 per cent. of the enterprise value of successful transactions consulted upon is payable by the Company to MXC. During the year, fees of £97,500 were paid to MXC (2016: £497,124), which included £17,500 (2016: £137,629) for Tony Weaver’s Director’s fees, £80,000 (2016: £59,495) for the provision of corporate finance advice, and £nil (2016: £300,000) for advisory fees in respect of the acquisition of Calyx. The acquisition of Calyx from MXC on 10 April 2015 for an Enterprise Value of £12.0m was a related party transaction. As at 31 March 2017 MXC has the following interest in shares and options over ordinary shares in the Company: Quantity Grant date Exercise price Expiry date Ordinary shares Options (a) Options (b) 1,692,988 18 April 2013 7,000,000 15 November 2013 - - 32p 80p - 18 April 2023 15 November 2023 (a) The performance conditions with respect to 564,330 of these options have been met, and the options have fully vested. There is a performance condition in respect of 1,128,658 options linked to the occurrence of a qualifying transaction that will deliver a predefined return to shareholders. 846,494 of the options are held by Tony Weaver as a Trustee under a Declaration of Trust, the beneficiary of which is MXC Capital Ltd. (b) The options have a performance condition which allows the option to be exercised if the average mid-market closing price of the shares for the preceding 10 working days at any point after 15 November 2016 is greater than 112.4p. Other There were no other transactions with related parties in the year to 31 March 2017 other than those disclosed in note 29. The balances outstanding at 31 March 2017 in respect of related parties was £30,000 payable to MXC. 90 Redcentric | Report and Accounts 2017ADVISERS COMPANY SECRETARY SOLICITORS CMS Cameron McKenna Nabarro Olswang LLP Cannon Place 78 Cannon Street London EC4N 6AF DAC Beachcroft LLP 100 Fetter Lane London EC4A 1BN AUDITORS KPMG LLP (UK) 1 Sovereign Square Sovereign Street Leeds LS1 4DA PRINCIPAL BANKERS Barclays Bank PLC Churchill Place Canary Wharf London E14 5RB COMPANY NUMBER 08397584 Peter Brotherton REGISTERED OFFICE Central House Beckwith Knowle Harrogate HG3 1UG NOMAD AND JOINT BROKER Numis Securities Limited The London Stock Exchange Building 10 Paternoster Square London EC4M 7LT JOINT BROKER finnCap Ltd 60 New Broad Street London EC2M 1JJ FINANCIAL PR Tulchan Communications LLP 85 Fleet Street London EC4Y 1AE REGISTRARS Capita Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Redcentric | Report and Accounts 2017 91 HARROGATE (HEAD OFFICE) Central House Beckwith Knowle Harrogate HG3 1UG LONDON Lifeline House 80 Clifton Street London EC2A 4HB THEALE 2 Commerce Park Brunel Road Theale Reading RG7 4AB HYDE Unit B SK14 Industrial Park Broadway Hyde SK14 4QF CAMBRIDGE Newton House Cambridge Business Park Cowley Road Cambridge CB4 0WZ INDIA 606-611, 6th Floor Manjeera Trinity Corporate  JNTU – Hitech City Road Kukatpally, Hyderabad – 72 READING 3-5 Worton Drive Reading RG2 0TG 0800 983 2522 sayhello@redcentricplc.com www.redcentricplc.com 

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