Redcentric plc
Annual Report 2018

Plain-text annual report

REDCENTRIC REPORT & ACCOUNTS 2018 Year ended 31 March 2018 Redcentric plc Redcentric at a glance Efficient data centres Eliminating the hassle of upgrading and managing PCs Avoiding the administrative burden of email 100,000 registered IP telephony users We manage over 5,600 virtual desktops for our customers We run around 12,850 mailboxes for customers Our telephony users make over 200 million phone calls each year Our Reading data centre uses only 140W to run the site for every 1,000W consumed by customers. That’s an improvement of 150W over the last 12 months Trusted data storage Powerful computing Connecting customers Keeping pace with our customers’ operations We hold 880 terabytes of records for our customers – an increase of 100Tb over the last 12 months Our customers consume 6,100 virtual machines to run their operations 20,000 managed connections to our network, 13Gbps internet traffic 38 customer configuration changes every day 2 Redcentric Report & Accounts 2018Contents Strategic report Chairman’s statement Business model Chief Executive’s review Chief Financial Officer’s review Risk management Corporate responsibility Governance Directors’ profiles Corporate governance report Directors’ report Statement of Directors’ responsibilities Directors’ remuneration report Independent auditors’ report Financial Statements 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 7-9 10-17 18 19 20-21 22-24 25-27 28 29-34 35-37 38 39 39 40 41 42-68 69 70 71-73 3 Redcentric Report & Accounts 2018Chairman’s statement I am pleased to present Redcentric plc’s results for the year ended 31 March 2018. My report last year was dominated by the accounting misstatements that were discovered in November 2016, and at the time I had every confidence that the Group would put this difficult period behind it. In this year’s statement, I am pleased to say that this confidence was not misplaced, and I am happy to present a more positive report along with details of the considerable progress that has been made during the financial year. The business is now in a much stronger position and importantly, we have maintained our principal customer base. Financial results Revenue declined by 4.4% to £100.0m and adjusted EBITDA increased from £17.3m to £18.1m. The increase in profitability reflects reduced adjusted operating costs. Cash flows were very strong, with £22.6m adjusted cash generated from operations, representing a 125.2% adjusted cash conversion. Adjusted net debt fell from £39.5m to £27.7m, a decrease of £11.8m in the year. The ageing of overdue trade debtors improved materially, with debt greater than three months overdue falling from £7.8m as at 31 March 2017 to £1.5m as at 31 March 2018. Dividend No dividend was paid during the year and the Board has decided not to declare a final dividend in respect of this financial year. The Board will continue to keep its dividend policy under review and will advise further at our interim results. Post the accounting misstatements the Board set the Executives five main challenges: • To rebuild the finance function and transform the financial control environment; • To address the historical billing and collection issues; • To reduce the cost base of the Group; • To look after our customers and staff; and • To grow both revenues and profitability. The finance function has been restructured and rebuilt over the last year embedding a tightly controlled financial environment. This has had a significant positive impact on the business. In response to historical issues, work has been undertaken to improve the billing and cash collection process resulting in an improvement in working capital. The effect of this, along with a solid business performance, is that adjusted net debt has been reduced by £11.8m. Detailed work has gone into rightsizing the Group’s cost base and this is reflected by a reduction in adjusted operating costs. Direct costs have also been tightly controlled and the resulting improved gross margin has helped mitigate the effect of a reduced revenue line. Whilst profitability has improved, revenue has declined a little, and this remains the biggest challenge for the Group. The Management team is focused on growing the business and new appointments at the Operating Board level have been made to strengthen the sales function and drive future growth initiatives. Post the year end the Group was awarded the Yorkshire and Humber Public Services Network (YHPSN) framework contract. This represents the biggest revenue opportunity in the history of Redcentric with revenues reaching a potential £20m per annum once the contract is fully rolled out albeit initially there are mobilisation costs to absorb. 4 Strategic report Redcentric Report & Accounts 2018 Chairman’s statement continued Board changes In June 2017, the Group appointed Stephen Vaughan to the Board as a Non-Executive Director. Stephen brings a wealth of industry experience to the Board. In October 2017, Fraser Fisher resigned from the Board and was replaced by Chris Jagusz. Chris has over twenty-five years of experience in the telecommunications and managed services industry. On 31 March 2018, David Payne resigned from the Board. Post David’s resignation, Stephen Vaughan has taken over David’s positions of Senior Non-Executive and Chair of the Remuneration Committee. Outlook There are a number of structural changes taking place in the industry. As a dynamic organisation Redcentric is adapting to these changes and is positioning itself within the areas of the market that are growing. The actions and investments we have made during the period will support this, as can be evidenced by the recently awarded YHPSN contract, which represents a significant milestone for Redcentric and is expected to deliver attractive returns over the medium term. We continue to be alert to appointments that may arise from the changing landscape of the industry. Accordingly, the Board is confident of the Group’s performance aligning to the recent trading update. Chris Cole Non-Executive Chairman 27 June 2018 5 Strategic reportRedcentric Report & Accounts 2018Business model Redcentric’s customers are typically organisations with hundreds to thousands of connected users who need instant access to business critical information in order to do their jobs. Our services are well suited to organisations which are multi-sited, are information-intensive or require flexibility in the manner and form in which information is generated and consumed. Sectors in which the company is particularly well-represented include retail, health and social care, charities, professional services, legal, and central government departments. Redcentric’s aim is to transform, operate and evolve its customers’ information technology infrastructure – their processing, storage, network and applications to align with their business strategies. We do this using a consultative sales approach to understand our customers’ challenges and opportunities to create a roadmap for their IT infrastructure. This roadmap is then brought to life through our four propositions: Cloud Connectivity Computer processing and storage capacity rented to customers and managed on Redcentric or others’ facilities: Networks to link customers’ sites to Redcentric and others’ data centres, hyper cloud providers and the internet: • Processing and storing data • Private networks dedicated to a customer - In the hyperscale public clouds – Azure and AWS - On systems dedicated to a customer - On systems shared among many customers • Oracle database support • Data backup • Data centre space • Virtual private networks shared among many customers • Internet access • Network security Collaboration Person-to-person communication: • Telephone systems on customers’ premises Information & Communications Technology Provision, installation and support of hardware on customers’ premises to enable service delivery: and in Redcentric data centres • Wi-Fi for customers’ employees, visitors • Video-conferencing – mobile, desktop and rooms and customers • Email • Fixed and mobile telephone calls & lines • Routers and switches to route customers’ data traffic • Firewalls to keep networks secure • Project management and technical consultancy • Break-fix support Our services are delivered from our own sizeable data centres in Harrogate and Reading over a network managed by Redcentric and monitored by teams working around the clock in Hyderabad and Harrogate. Extensive commercial and public sector accreditations demonstrate that we operate to the highest of externally verified standards. 6 Strategic report Redcentric Report & Accounts 2018Chief Executive’s review Overview Managing our customers’ IT infrastructure puts Redcentric at the heart of a dynamic industry full of opportunities, balanced by the challenges that these industry changes create. For the year ended March 2018, these changes were set against a difficult backdrop for the business as a result of the accounting misstatements discovered in November 2016. However, the issues uncovered have all been addressed and the Group is now on a much stronger footing. Several major customers renewed and extended the scope of their contracts, demonstrating confidence in Redcentric’s ability and service levels. However, new customer acquisitions and add-on sales to existing customers were below the level required to create top-line growth. Cost control was a key factor in our financial performance. Targeted recruitment and a limited scale redundancy programme reduced the number of UK employees from 387 in April 2017 to 347 by March 2018. We consolidated two London offices into one and reduced the use of third party data centres in favour of using our own facilities. Cost of sales was managed more effectively with a focus on reducing excess inventory in the network. Our Hyderabad office is a key differentiator for Redcentric, giving us access to a large pool of highly skilled professionals in a low-cost jurisdiction with exceptional infrastructure. In addition, the Redcentric management team has been considerably strengthened with a number of appointments in the finance function, and a new Chief Information Officer appointed to drive business automation. Redcentric’s many strengths – flexibility, completeness of proposition and, customer relationships based on trust – are a sound basis on which the business can capitalise on the positive trends in the industry. We will need to develop our business to address declining demand in some markets and capitalise on the opportunities in others whilst becoming more efficient. We believe we have the platform to achieve this. Performance There is much to be proud of in Redcentric’s operational performance over the past year. Service levels remained high, allowing a high customer retention rate and we continued to attract new customers. All this was achieved during a period of leadership changes in the business and the resolution of historical issues. We have continued to invest to maintain our leading service offerings and important accreditations. We became the first fully certified provider of Health & Social Care Network (HSCN) delivery for the UK Government with two significant security accreditations. We also upgraded our security standard to Cyber Essentials Plus and gained ISO 14001 accreditation for environmental management. All these achievements are a reflection of a dedicated and committed workforce which took on a challenge to deliver outstanding service whilst managing significant change during a period of evolution and strengthening of the company. Nevertheless, the fact remains that the business did not sell enough in the latter half of the year ended March 2017 and throughout this year to generate net revenue growth. There are other sector-wide headwinds which are beginning to act against some of our service offerings as currently configured. It is a tribute to the resilience of the business that much of the resultant revenue decline was mitigated through a combination of careful management of cost of sales and a drive on efficiency. The net result of all this was revenue of £100.0m (2017: £104.6m) and adjusted EBITDA of £18.1m (2017: £17.3m). Challenges in the future There are significant changes taking place in the way customers buy the types of service which Redcentric provides. For the company to grow, we must respond to these market changes, evolve our infrastructure and develop new ways to make profits from our customer relationships. This will require change in many areas of the company. We are fortunate that we have the opportunity to make these changes in the context of our successes in retaining and growing major customer relationships, and our recent wins in a major procurement programme in one of our core markets – health and social care. Our strategy for change starts from areas of the business’s strength, where Redcentric has much to build upon. Most important is our reputation for excellent service and the customer trust and loyalty that stems from it. Consequently, we have a strong customer base, with a high degree of repeat business, good product penetration and sector expertise. We have excellent infrastructure for connecting customers, enabling them to collaborate and manage their data processing and storage. Most prominent of the sector-wide changes is the emergence of hyper cloud providers in our cloud market. Amazon Web Services (AWS) and Microsoft (Azure) offer processing and storage services in a flexible manner with low initial cost of purchase. Separately, much of the public sector is mandated to adopt the Government-sponsored Crown Hosting in preference to commercial data centres like our own. We anticipate that many public-sector entities will transfer some of their requirements to Crown Hosting or hyper cloud providers over time. Our own data centres will increasingly host the customer- specific elements of customers’ hybrid clouds – combining the hyper cloud for less sensitive work with the specialised hosting environments we manage. This trend also places a premium on the breadth and quality of our network. 7 Strategic reportRedcentric Report & Accounts 2018Chief Executive’s review continued The increasing complexity of customer infrastructure is another driver of change for our business. Software-as-a- service is becoming more popular among our customers, though many of them expect to retain some of their own proprietary applications for the foreseeable future. These hybrid software-as-a-service / proprietary software and dedicated / hyper cloud environments are significantly more complex to design, operate, keep secure and enhance. The emergence of software defined networking technology offers customers more flexibility whilst increasing technical complexity. Redcentric must ensure that it is well-equipped to help its customers in this demanding environment, throughout the whole cycle from the design and sales process, to the building of the infrastructure and its subsequent operation. Redcentric – some customer highlights 2018 New business examples Renewal examples Birmingham & Solihull CCG – Redcentric provides telephony, Wi-Fi and network connections to the NHS for hundreds of doctors’ surgeries in seven clinical commissioning groups as part of this contract. We have also provided Sandwell and West Birmingham CCG with patient Wi-Fi for surgeries. Caversham Finance (Brighthouse Stores) – renewal for connectivity to 300 stores, five offices, data centre services and dedicated connections to Microsoft Azure’s cloud service. Addison Lee Group – the leading provider of premium mobility and transportation services, chose Redcentric to create their hybrid cloud computing solutions. Across these platforms, Addison Lee operate their mission-critical passenger, driver and fleet services. Upselling examples Howdens Joinery – contract extension for connectivity and telephony for 650+ depots and seven offices, along with data centre services. Legal Aid Agency – renewal of cloud services. Inchcape – converted customer from traditional telephony to cloud-based unified communications for 4,500 users. Salvation Army – renewal of our contract to provide connectivity and telephone services for 787 sites including churches, community services centres, social services centres and regional offices. Look Ahead – added connectivity to 147 sites, 1,000 unified communications users and data centre services. Singtel Ltd – renewal of data centre services for Singapore’s leading mobile network provider. Virgin Care – added 1,000 users to Redcentric’s computing and virtual desktop services used by clinicians and hospital staff. Vp plc – renewal of services for Vp plc, the equipment rental specialist. 8 Strategic report Redcentric Report & Accounts 2018Chief Executive’s review continued Finally, customers are expecting higher levels of service including faster response times for implementation and the ability to conduct business online (sometimes in a wholly automated manner) all at increasingly competitive prices which is presenting a challenge for the industry as a whole. The way forward We are responding to the opportunities and challenges outlined above with an increased pace of change in the shape of our infrastructure, the mix of our service offerings and the cost efficiency of our operations. Shifts in our physical infrastructure are inevitable given the rise of hyper cloud providers reducing long-term demand for data centres whilst increasing customers’ reliance on our networks and ability to manage complex services. Among our prime near-term opportunities is the Health and Social Care Network (HSCN), of which Redcentric is an accredited provider. HSCN is replacing the aged N3 (the NHS National Network) in a national programme which opens markets previously unavailable to Redcentric and other service providers. As part of this programme, post year-end Redcentric won its largest ever framework agreement, the Yorkshire and Humber Public Services Network, which has the potential to add up to £20m of annual revenue. This is one of many procurements in 2018 in which Redcentric is active and seeing success. We will use the considerable revenue streams from YHPSN and other similar contracts to invest in network and service operations for a hybrid cloud world. We are also creating fresh propositions with Redcentric’s new Cloud Transformation Practice which designs the complex hybrid environments when customers use a mix of private and clouds alongside traditional computing. This is especially relevant to existing customers because of our insight into their current infrastructure. We already manage cloud production environments which can scale rapidly in response to changing demand and we are working with lead customers on hyper cloud proofs of concept. Our very strong relationship with Microsoft as a leading Azure partner gives us access to market and product insight which we can bring to our customers. Meanwhile, customer interest in software- defined networking will be tested this year with market trials, and we are experiencing customers’ increased usage and expectation of our network when they move to the hyper cloud, another source of future growth. The movement of some public-sector customers into Crown Hosting creates project and service opportunities for Redcentric. Customers need help managing these complex and risky transitions, and Redcentric is already developing its track record in this field. In parallel, a focus on selling data centre space to commercial users will help offset some of the customer losses from moves to Crown Hosting. Our sales function is being realigned with Redcentric’s business priorities. This includes new incentives to balance retention and growth of existing clients with the acquisition of new ones. Whilst it will take some months for the benefits to materialise, we are making these changes now to secure our future success. Post period-end a new sales leader was appointed to implement this strategy. In parallel with the development of our services, we are making our operations more efficient as a response to pricing pressure. Redcentric has already implemented the first phase of Microsoft Dynamics as an ERP system which will enable us to automate delivery of many back-office services. Further investment will be required to automate customer interactions, improve speed of response and reduce costs. We have the benefit of a well-established low-cost centre in Hyderabad and are moving work there where possible and appropriate. We can do this whilst maintaining direct UK customer contact. Outlook The IT infrastructure market is undergoing structural changes. The adoption of the hyper cloud, software-defined networking, the public sector shift to Crown Hosting, pricing pressure, digital customer experience, along with the Health and Social Care Network framework all create opportunities and challenges in varying degrees. Redcentric’s focus is to build on our strengths of customer relationships and service platforms to shift the business to high growth markets, turn the challenge of the hyper cloud into opportunity, and mitigate the impact of some public sector customers moving to Crown Hosting. We will continue to invest in automation to bring down costs and accelerate the pace of business, whilst expanding our resource in established low cost locations where feasible, and maintaining a UK-based direct customer experience. We have the benefit of the assets, capabilities and customer insight needed to succeed in a rapidly changing industry – our plan is to make the most of the opportunities this presents us. Chris Jagusz Chief Executive Officer 27 June 2018 9 Strategic reportRedcentric Report & Accounts 2018Chief Financial Officer’s review Financial highlights and overview Statutory financial reporting measures Revenue Operating profit / (loss) Basic earnings per share Adjusted performance measures (APMs) Adjusted net debt Adjusted EBITDA Adjusted EBITDA margin Adjusted cash generated from operations Adjusted cash conversion Adjusted operating profit Adjusted basic earnings per share Year ended 31 March 2018 Year ended 31 March 2017 Variance £100.0m £104.6m £(4.6)m (4.4)% £0.9m 0.34p £(3.0)m (1.60)p £3.9m 1.94p - - £27.7m £18.1m 18.1% £22.6m 125.2% £9.8m 4.35p £39.5m £17.3m 16.5% £9.4m 54.7% £9.0m 4.45p £(11.8)m (29.9)% £0.8m £13.2m £0.8m (0.1)p 4.6% 1.6% 140.4% (70.5)% 8.9% (2.2)% The Directors use the APMs as they are critical to understanding the financial performance of the Group. As they are not defined by IFRS, they may not be directly comparable with other companies who use similar measures. APM Definition Adjusted net debt Adjusted EBITDA Total bank borrowings (including current and non-current borrowings as shown in the consolidated balance sheet) less cash and cash equivalents Earnings before interest, tax, depreciation, amortisation, exceptional costs and share- based payments Adjusted EBITDA margin Adjusted EBITDA to revenue Reconciliation to equivalent IFRS measure of performance Borrowings as outlined in Note 16 A reconciliation of this measure is provided in the consolidated income statement Adjusted EBITDA add exceptional costs and share-based payments Adjusted cash generated from operations Cash generated from operations add exceptional costs Adjusted cash generated from operations less exceptional costs Adjusted cash conversion Adjusted operating profit Adjusted basic earnings per share Adjusted cash generated from operations to adjusted EBITDA Operating profit add amortisation on acquired intangibles, exceptional costs and share based payments Adjusted earnings – profit / loss add amortisation on acquired intangibles, share based payments, exceptional costs, tax charge /credit Cash generated from operations to EBITDA Operating profit as disclosed on the consolidated income statement A reconciliation of this measure is provided in Note 9 Adjusted operating costs Operating costs less depreciation, amortisation and share based payments Operating expenditure as outlined in the consolidated income statement 10 Strategic report Redcentric Report & Accounts 2018Chief Financial Officer’s review continued The results for the year reflect three key themes: • a decline in revenue; • a significant reduction in both direct and operating costs; and • a material reduction in net debt. Revenue Revenue for the year ended 31 March 2018 was £100.0m, a decrease of £4.6m on the previous financial year. Year ended 31 March 2018 Year ended 31 March 2017 Variance £000 £000 £000 % Recurring revenue 87,065 90,219 (3,154) (3.5)% Product sales Services revenue One-off revenue Total revenue 7,180 5,745 12,925 6,278 8,126 14,404 902 (2,381) (1,479) 14.4% (29.3)% (10.3)% 99,990 104,623 (4,633) (4.4)% The key revenue metric of RMR (recurring monthly revenue) was down 3.5% compared to last year and accounted for 87% of total revenue in-line with 2017 at 86%. Gross profit Gross profit Gross margin Year ended 31 March 2018 Year ended 31 March 2017 Variance £000 £000 £000 % 59,994 60,464 (470) (0.8)% 60.0% 57.8% The lower gross profit of £0.5m reflects the decrease in revenue offset by significant direct cost savings as a result of the improved management of third party costs. This led to an improvement in gross margin to 60.0% (2017: 57.8%). 11 Strategic reportRedcentric Report & Accounts 2018Chief Financial Officer’s review continued Adjusted operating costs Year ended 31 March 2018 Year ended 31 March 2017 Variance £000 £000 £000 % Staff costs (excluding share based compensation) 23,292 24,655 Office and data centre costs Network and equipment costs Other sales, general and administration costs Offshore costs 6,942 6,805 3,010 1,860 7,512 5,804 3,576 1,644 (1,363) (570) 1,001 (566) 216 41,909 43,191 (1,282) (5.5)% (7.6)% 17.2% (15.8)% 13.1% (3.0)% Adjusted operating costs excludes depreciation, amortisation, exceptional costs and share based payments. Employees Year-end headcount UK India Total Average headcount UK India Total 31 March 2018 31 March 2017 Variance 347 141 488 387 139 526 (40) 2 (38) 31 March 2018 31 March 2017 Variance 362 139 501 386 155 541 (24) (16) (40) Overall, adjusted operating costs for FY18 were £1.3m (3.0%) lower than FY17. The principle variances were as follows: • Staff costs have reduced as a result of a restructuring exercise undertaken during the year. The restructuring resulted in one-off exceptional costs of £868k. • Office and data centre costs were down by approximately 8% on last year reflecting the closure of the London office and a third-party data centre. • On 30 September 2016, the Company disposed of its fibre network to City Fibre and since then has paid a monthly rental fee for use of certain parts of the network. This accounts for the increase in network and equipment costs in FY18. • Savings have also been made in other sales, general and administration costs, achieved by reducing the number of third party consultants in the business and a tighter control of marketing and corporate costs. 12 Strategic report Redcentric Report & Accounts 2018Chief Financial Officer’s review continued Adjusted Earnings Before Interest, Taxation, Depreciation and Amortisation (EBITDA) Year ended 31 March 2018 Year ended 31 March 2017 Variance £000 £000 £000 % Adjusted EBITDA Adjusted EBITDA margin 18,085 18.1% 17,273 16.5% 812 4.7% Adjusted EBITDA is the key measure that the Company uses to assess the underlying profitability of the business. Adjusted EBITDA excludes exceptional costs and share based payments. Adjusted EBITDA increased by £0.8m or 4.7% to £18.1m reflecting the decrease in gross profit of £0.5m offset by the decrease in operating costs of £1.3m. As a result, Adjusted EBITDA margin improved from 16.5% to 18.1%. Exceptional costs Professional fees associated with the forensic review and Financial Conduct Authority (FCA) investigation Staff restructuring Integration costs Non-recurring impairment of trade debtor balances Sale of metro ring to City Fibre Vacant property provisions Year ended 31 March 2018 Year ended 31 March 2017 Variance £000 £000 £000 % 672 868 132 - - - 1,291 187 471 (619) 681 (339) (47.9)% 364.2% (72.0)% 2,933 (2,933) (100.0)% 207 385 (207) (385) (100.0)% (100.0)% 1,672 5,474 (3,802) (69.5)% Overall, the level of non-recurring items has decreased from £5.5m to £1.7m. The key movements are as follows: • Exceptional impairment of trade debtor balances; - Following the audit of the 31 March 2017 annual results, a further debtor impairment charge was taken in FY17. • Professional fees associated with the forensic review and FCA investigation; - These costs relate to legal and forensic advice received in respect of the ongoing FCA investigation. • Staff restructuring costs; - During the year a restructuring exercise was undertaken which resulted in 18 redundancies. • Integration costs; - The integration costs relate to the integration of the City Lifeline acquisition which was undertaken in January 2016. The integration process is complete, and no further costs will be incurred in this regard. • Disposal of City Fibre network; - On 30 September 2016, the Company disposed of its fibre network to City Fibre Limited. This led to an exceptional charge of £0.2m in respect of the loss on disposal and legal fees. • Vacant property provision; - In FY17, the Birmingham and Hoddesdon offices were vacated, leading to a vacant property charge of £0.4m in the year. 13 Strategic reportRedcentric Report & Accounts 2018Chief Financial Officer’s review continued Net financing costs Interest receivable Other interest receivable Interest payable Interest payable on bank loans and overdrafts Interest payable on finance leases Amortisation of loan arrangement fees Net financing costs Year ended 31 March 2018 £000 Year ended 31 March 2017 £000 (19) (1) 1,241 143 68 1,452 1,433 869 317 68 1,254 1,253 The higher interest payable costs in FY18 reflect the higher margin on the RCF following the restructuring of the Group's senior debt facilities in April 2017. Share-based payments SAYE schemes Director and senior manager schemes MXC options Employers NI Year ended 31 March 2018 Year ended 31 March 2017 Variance £000 £000 £000 % 224 162 148 34 568 188 156 631 105 1,080 36 6 (483) (71) (512) 19.1% 3.8% (76.5)% (67.6)% (47.4)% The MXC shared based expense is in respect of legacy options which by the end of FY18 had been fully expensed. NI is being accrued, where applicable, at a rate of 13.8% on the potential employee gain on share-based incentives granted. During both FY17 and FY18 there was a high turnover of Directors and senior managers and this has reduced the share based charge in both years. 14 Strategic report Redcentric Report & Accounts 2018Chief Financial Officer’s review continued Taxation The tax credit for the year was £1.0m (FY17: credit of £1.9m) which was made up of a corporation tax charge of £1.1 (FY17: charge of £0.1m) and a deferred tax credit of £2.1m (FY17: credit of £2.0m). The corporation tax charge comprises a current year corporation tax charge of £0.3m, a prior year corporation tax charge of £0.7m and an overseas tax charge of £0.1m. The prior year corporation tax charge relates to the resubmission of the FY15 and FY16 tax computations. The Group is made up several historical acquisitions some of which have tax losses brought forward. The streaming of these tax losses had been incorrectly applied in the FY15 and FY16 tax computations and hence the reason for the prior year corporation tax adjustment. As at 31 March 2018, the Group had £18.9m of tax losses carried forward comprising: No tax losses carried forward Losses carried forward: - Stream 1 - Stream 2 - Stream 3 % of profits Losses available 27.01% - 43.65% 954,091 19.64% 9,556,568 9.70% 8,349,967 100.00% 18,860,626 Earnings per share and dividends Basic adjusted earnings per share for FY18 was 4.35p, compared to 4.45p in FY17. Diluted adjusted earnings per share for FY18 was 4.32p compared to 4.32p in FY17. The average share price during the year was 83.55p with the equivalent figure in FY17 of 140.52p. The decrease in average share price accounts for the lower dilution effect of the options outstanding. Dividends No dividends were paid during FY18. In September 2016 a final dividend of £4.4m in respect of the year ended 31 March 2016 was distributed to shareholders. Financial position The summary financial position of the Group is set out below: Non-current assets Net current assets (excl. adjusted net debt) Non-current liabilities (excl. adjusted net debt) Adjusted net debt Net assets Year ended 31 March 2018 Year ended 31 March 2017 £000 £000 102,724 110,723 3,326 (421) (27,707) 77,922 8,856 (3,319) (39,531) 76,729 Net current assets have declined by £5.5m as a result of better working capital management and better conversion of debtors in to cash. This, along with normalised funds generated from operations, accounts for the material decrease in net debt. 15 Strategic reportRedcentric Report & Accounts 2018Chief Financial Officer’s review continued Adjusted net debt and cash flows Revolving credit facility Term loans Cash Finance leases Unamortised loan arrangement fees Adjusted net debt Year ended 31 March 2018 Year ended 31 March 2017 £000 £000 28,000 38,000 - (6,089) 5,932 (136) 27,707 323 (4,340) 5,752 (204) 39,531 During FY18, adjusted net debt fell from £39.5m at 31 March 2017 to £27.7m as at 31 March 2018. The movements in adjusted net debt are analysed below. Adjusted EBITDA Working capital movements Adjusted cash generated from operations Cash conversion Capital expenditure - Cash purchases - Finance lease purchases Corporation tax Interest paid Non-cash movements in adjusted net debt Amortisation of loan arrangement fees Effect of exchange rates Decrease in adjusted net debt pre-exceptional costs Exceptional costs - Exceptional costs - New share issues Net (decrease) / increase in adjusted net debt Adjusted net debt at the beginning of the period Adjusted net debt at the end of the period 16 Year ended 31 March 2018 £000 18,085 4,559 22,644 125.2% (3,982) (2,976) (6,958) 217 (1,246) (68) 44 (24) 14,633 (3,002) 193 (2,809) 11,824 (39,531) (27,707) Strategic report Redcentric Report & Accounts 2018Chief Financial Officer’s review continued Working capital movements Improved control of billing and collections has resulted in the positive working capital movement in FY18. In FY17 the negative working capital movements were largely due to a £10m catch up in payments to trade creditors (in FY16 trade creditors had been significantly stretched and this practice no longer takes place). The resolution of legacy debt issues has also led to a significant improvement in the ageing of trade debtors with a significant reduction in debtors aged > 90 days. As at 31 March 2018, there was £1.5m of debt more than 3 months overdue, a £6.3m improvement on the previous year. Current 1 to 30 days overdue 31 to 60 days overdue 61 to 90 days overdue 91 to 180 days overdue > 180 days overdue Gross trade debtors Trade debtor impairment provision Net trade debtors Year ended 31 March 2018 Year ended 31 March 2017 £000 £000 11,323 1,951 1,417 550 945 593 16,779 (981) 15,798 9,095 2,950 2,220 704 3,277 4,580 22,826 (5,576) 17,250 Trade creditor days were 28 at 31 March 2018 compared to 33 as at 31 March 2017. Financing and covenants 31 March 2018 31 March 2017 Available Drawn Undrawn Available Drawn Undrawn £000 £000 £000 £000 £000 £000 Committed - Revolving credit facility 40,000 28,000 12,000 40,000 38,000 2,000 - Term loans - Finance leases Uncommitted - Bank overdraft - Finance leases - 5,932 45,932 - 5,932 33,932 - - 323 5,752 323 5,752 - - 12,000 46,075 44,075 2,000 2,000 4,603 6,603 - - - 2,000 4,603 6,603 5,000 3,098 8,098 - - - 5,000 3,098 8,098 Total borrowing facilities 52,535 33,932 18,603 54,173 44,075 10,098 In addition to the above facilities, the Group has access to a non-committed £20m accordion facility. The Group’s banking facilities were refinanced in April 2017. Whilst the covenant tests remained the same, the margin increased as a result. Peter Brotherton Chief Financial Officer 27 June 2018 17 Strategic reportRedcentric Report & Accounts 2018Risk management 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 business 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. 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 18 networks and data centres. Whilst this provides customers with comfort over resilience and reliability, the Group is also 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 of: • 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; and • 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. Strategic report Redcentric Report & Accounts 2018Corporate responsibility Employees Charitable activity At Redcentric we actively encourage all employees to raise funds for their chosen charities. All employees are contractually entitled to receive one day of paid leave per year to volunteer or support a charitable organisation. We have a Charity Committee that meets every quarter to discuss suggestions for charitable activity and we work with several charities on a regular basis, including Sue Ryder, Macmillan and Sports Relief. Through a combination of funds raised by employees for their own chosen charities or charitable donations from Redcentric, we contributed over £10,000 to various charities in 2017. By order of the Board Peter Brotherton Company Secretary 27 June 2018 Our colleagues have given much to the company over the year. We are now a more efficient organisation, and this improvement has not been gained at the cost of effectiveness. On the contrary, our customers have told us that they are more satisfied with us on every parameter we survey. I would like to offer my sincere personal thanks to each one of our employees in the UK and India who have contributed to this achievement. Through Redcentric’s apprenticeship programme, we have given four young people the opportunity to develop their careers with us and gain qualifications in networks, data storage, computing and electrotechnical systems. Gender pay report Our first gender pay report showed that the overall difference between men and women’s earnings at Redcentric was 23% (mean) or 19% (median), based on hourly rates of pay at the snapshot date of 5th April 2017. Like most organisations in our industry, the primary reason for our gender pay gap is an imbalance of male and female colleagues at different levels across the organisation. We have fewer female colleagues in more senior positions, which attract higher salaries. We are confident that as we make progress towards achieving greater gender balance across all roles within Redcentric, particularly within our technical, sales management and senior management roles, our gender pay gap will reduce. Equality and diversity Creating a diverse, inclusive and great place for our colleagues to work is top of Redcentric’s people agenda. Redcentric actively supports the principle of equal opportunities in employment and is committed to ensuring that individuals are treated fairly, with respect and are valued. Redcentric opposes all forms of unlawful or unfair discrimination on the grounds of colour, race, religion or belief, nationality, ethnic or national origin, sex, gender reassignment, sexual orientation, marital or civil partner status, age or disability (the "Protected Characteristics"). It is important to Redcentric that no one receives less favourable treatment or be disadvantaged on any of the above grounds. Every possible step will be taken to ensure that individuals are treated equally and fairly and that decisions on recruitment and selection and opportunities for training and promotion are based solely on objective and job-related criteria. 19 Strategic reportRedcentric Report & Accounts 2018Directors’ profiles NON-EXECUTIVE DIRECTORS Chris Cole Stephen Puckett Independent Non-Executive Chairman Independent Non-Executive Director 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 (resigned 31st March 2018) Independent Non-Executive Director 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 also Chairman of Castleton Technology plc. During the year, David served as Chairman of the Remuneration and Nomination Committees and as a member of the Audit Committee to 31 March 2018, and was the Senior Independent Non-Executive Director to 24 July 2017. David retired from the Board of Directors effective 31 March 2018. 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. Stephen is Chairman of the Audit Committee and is a member of the Remuneration and Nomination Committees. Jon Kempster Independent Non-Executive Director Jon Kempster was appointed as a Non-Executive Director on 10 January 2017. Jon is the Chief Financial Officer and member of the Board at Sports Direct. Prior to this role, Jon was 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. Jon has also held Chief Financial Officer positions at Wincanton plc, the logistics and distribution Group, from 2010 to 2012 and from 2006 to 2010 Jon was Chief Financial Officer of Delta plc. Jon is an ACA qualified chartered accountant and a member of the Audit, Remuneration and Nomination Committees. Stephen Vaughan Independent Non-Executive Director 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. Stephen is also currently the Chairman of 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 Chairman of the Remuneration Committee, a member of the Audit and Nomination Committees and is the Senior Independent Non-Executive Director as of 24 July 2017. 20 GovernanceRedcentric Report & Accounts 2018Directors’ profiles continued EXECUTIVE DIRECTORS Chris Jagusz Chief Executive Officer Chris Jagusz was appointed Chief Executive Officer on 20 October 2017. Chris has over twenty-five years of experience in the telecoms and managed services industry, during which time he has built a track record of delivering growth and business transformation. Chris has enjoyed a mix of both executive and consultancy roles through his career. From September 2014 to August 2016, Chris was Chief Executive of Azzurri Communications. During this period, he led the transformation of the business, refocusing on growth markets and driving margin and efficiency improvements prior to its sale. Prior to this role, from July 2012 to September 2014, Chris was Managing Director of SSE Telecoms. During this period, he drove the investment in advanced networks and products which served as the foundation for its growth in commercial markets. Other executive roles in the telecoms and managed services industry include Managing Director at Daisy Group plc (February 2010 – August 2011) and a number of senior management roles at BT (1988 to 2006). Peter Brotherton Chief Financial Officer 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 whilst 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. 21 GovernanceRedcentric Report & Accounts 2018Corporate governance report 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, Chris Jagusz; the Chief Financial Officer, Peter Brotherton; and Non-Executive Directors Jon Kempster, Stephen Vaughan, Stephen Puckett and David Payne (resigned 31 March 2018). 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, Nomination 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. 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. Nomination Committee The Nomination Committee consists of Chris Cole (Chairman), David Payne (to 31 March 2018), Stephen Puckett, Jon Kempster and Stephen Vaughan. 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. Remuneration Committee The Remuneration Committee consists of Stephen Vaughan (Chairman), David Payne (to 31 March 2018), Stephen Puckett and Jon Kempster. Details of the Committee and its policies are set out in the Directors’ Remuneration Report on page 29. The Committee has formal terms of reference (available on request from the Company Secretary). Audit Committee Stephen Vaughan is the Senior Independent Non-Executive Director and served from 24 July 2017 in this position (formerly David Payne). The Audit Committee consists of Stephen Puckett (Chairman), David Payne (to 31 March 2018), Jon Kempster and Stephen Vaughan. 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. 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 22 GovernanceRedcentric Report & Accounts 2018Corporate governance report continued statements and formal announcements. A whistle-blowing arrangement exists whereby matters can be confidentially reported to the Committee. The Executive Directors are not members of the Committee but attend the meetings by invitation, as necessary, to facilitate its business. 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. Relations with shareholders and investors Copies of the Annual Report & Accounts 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. 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. 23 GovernanceRedcentric Report & Accounts 2018Redcentric Report & Accounts 2018 Corporate governance report continued Substantial shareholders As at 31 March 2018 and 25 May 2018 (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 ND Capital Investments Limited Kestrel Partners LLP Mr Richard Griffiths Slater Investments Schroder Investment Management Eugenia II Investment Holdings 31 March 2018 Number 31 March 2018 % 25 May 2018 Number 25 May 2018 % 29,172,303 20,113,885 19,658,511 15,848,285 8,625,877 7,455,274 5,540,495 19.56 13.49 13.18 10.63 5.78 5.00 3.72 28,672,303 20,113,885 19,788,958 16,435,919 8,625,877 7,455,274 5,540,495 19.23 13.49 13.27 11.02 5.78 5.00 3.72 24 GovernanceRedcentric Report & Accounts 2018Directors’ report The Directors present their annual report together with the audited financial statements for the year ended 31 March 2018. 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 4-19 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: Peter Brotherton Chris Jagusz (appointed 20 October 2017) Fraser Fisher (resigned 20 October 2017) Chris Cole Stephen Puckett David Payne (resigned 31 March 2018) Jon Kempster Stephen Vaughan As at 31 March 2018 the Directors' beneficial interests and those of their families in the ordinary share capital of the Company were as follows: Peter Brotherton Chris Jagusz Chris Cole Stephen Vaughan David Payne 31 March 2018 31 March 2017 Number of shares Number of shares 20,000 7,953 20,000 20,000 - - - - 100,626 100,626 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 page 29. 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. 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. 25 GovernanceRedcentric Report & Accounts 2018 Directors’ report continued 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 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 Total 6 4 389 399 - 2 100 102 6 6 489 501 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 three awards of options under the plan. • 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, which is a 20% discount to the average closing price on the three days ending 21 November 2014, the last trading date before the launch of the Plan on 24 November 2014. • 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 30 August 2017, the Company granted options over a total of 1,223,390 ordinary shares to 91 employees. These options are available for exercise from 30 August 2020, with an exercise price of 63p, which is a 20% discount to the average closing price on the three days ending 4 August 2017, the last trading date before the launch of the Plan. As at 31 March 2018, the following options had been granted under the plan: Exercise price Options granted Options exercised Options cancelled Options remaining 107p 154p 63p 1,134,886 163,905 1,223,390 2,522,181 - - - - (840,217) (130,720) 294,669 33,185 (55,712) 1,167,678 (1,026,649) 1,495,532 Grant date 17 December 2014 14 December 2015 30 August 2017 Total 26 GovernanceRedcentric Report & Accounts 2018 Directors’ report continued Annual General Meeting 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, Chief Executive’s review and Chief Financial Officer’s review. By order of the Board Peter Brotherton Company Secretary 27 June 2018 The Annual General Meeting will be held at 10am at CMS Cameron McKenna Nabarro Olswang LLP, Cannon Place, 78 Cannon Street, London EC4N 6AF on 3 September 2018. 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 2018. 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 25. 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. 27 GovernanceRedcentric Report & Accounts 2018Statement of Directors’ responsibilities 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 are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and 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. Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report and a Directors’ Report that complies with that law and those regulations. 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 27 June 2018 The Directors are responsible for preparing the Annual 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 International Financial Reporting Standards as adopted by the European Union (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 Reduced Disclosure Framework. 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: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable, relevant, reliable and prudent; • for the Group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU; • 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; • assess the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and • use the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so. 28 GovernanceRedcentric Report & Accounts 2018Directors’ remuneration report (unaudited unless stated otherwise) Annual statement by the Chairman of the Remuneration Committee The Remuneration Committee comprises David Payne (Chairman to 31 March 2018), Stephen Vaughan (Chairman from 1 April 2018), Stephen Puckett and Jon Kempster. 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. Terms of reference 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. Chief Executive On 10 August 2017, Fraser Fisher notified the Board of his intention to resign as a Director and Chief Executive Officer on 31 December 2017. Following the appointment of Chris Jagusz to the Board on 20 October 2017, Fraser Fisher resigned as a Director on the same date. Basic salary and benefits Basic salaries are reviewed on a discretionary basis. The benefits provided for each Executive Director may include: i. life assurance cover of four times salary; ii. private medical insurance for themselves, their spouse and their children; iii. a contribution to a private pension 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. In addition to the Long-Term Incentive Programme, the Board put in place during the year a special bonus scheme for the two Executive Directors which would pay out, in the event of a change of control, a sum linked to the growth in share price since October 2017, subject to an initial uplift requirement. Share options Executive Directors are entitled to participate in the Company share option schemes. The Remuneration Committee approves the granting of any share options. Fees 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. 29 GovernanceRedcentric Report & Accounts 2018Directors’ remuneration report (unaudited unless stated otherwise) continued Recruitment and promotion policy The Committee proposes an Executive Director’s remuneration package for new appointments in line with the principles outlined in the table below: Element of remuneration Policy Base salary Benefits Pension Annual bonus Base salaries are set by the Committee on appointment and then normally reviewed annually. In setting and reviewing salaries, the Committee considers the responsibilities of the role, progression in the role, individual performance, skills, experience and pay levels within the Group. Benefits as provided to current Executive Directors. Benefits for each Executive Director may include life assurance cover of four times salary and private medical insurance for themselves, their spouse and their children. A contribution to a private pension plan. The Remuneration Committee determines the criteria for the award of performance bonuses. An annual bonus would operate in the same way as current executives and would be pro-rated to reflect the period of employment. Long-term incentives Executive Directors are entitled to participate in the Company share options schemes. The Remuneration Committee approves the granting of any share options. Service contracts The Chief Executive Officer has a service contract with a provision for termination notice period of six months (twelve months in the event of a takeover), with the Chief Financial Officer having a termination notice period of six months (twelve months in the event of a takeover). 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. The details of the Executive and Non-Executive Directors’ service contracts are summarised below: Executive Directors Chris Jagusz (appointed 20 October 2017) Fraser Fisher (resigned 20 October 2017) Peter Brotherton Non-Executive Directors David Payne (resigned 31 March 2018) Chris Cole Stephen Puckett Jon Kempster Stephen Vaughan Date of contract Notice period (months) Length of service at 31 March 2018 20 October 2017 8 April 2013 28 November 2016 19 February 2013 1 September 2014 17 November 2014 10 January 2017 13 June 2017 6* 12 6* 6 6 6 6 6 5 months 1 year 4 months 5 years 1 month 3 years 7 months 3 years 4 months 1 year 2 months 9 months *12 months in the event of a takeover. The service contracts continue until notice on either side is given. 30 GovernanceRedcentric Report & Accounts 2018Directors’ remuneration report (audited) continued The Executive Directors’ salaries for the 2018 financial year are set out in the table below: Executive Directors Chris Jagusz Peter Brotherton Salary 31 March 2018 £000 Salary 31 March 2017 £000 310 200 - 170 Chairman and Non-Executive Directors’ fees 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. Chris Cole David Payne (resigned 31 March 2018) Stephen Puckett Jon Kempster Stephen Vaughan Annual fee 31 March 2018 £000 Annual fee 31 March 2017 £000 70 40 40 35 28 70 40 40 5 - Directors may claim reasonable business expenses within the terms of the Group’s expense policy and be reimbursed on the same basis as all employees. The Group may reimburse business expenses which are in future classified as taxable benefits by HMRC. Total remuneration for the Chief Executive Officer The table below shows the total remuneration figure for the Chief Executive Officer over a five-year performance period. The total remuneration figure includes bonus and benefits. Year 2018 2017 2016 2015 2014 Executive Chris Jagusz Fraser Fisher** Fraser Fisher Fraser Fisher Tony Weaver † Tony Weaver Tony Weaver ** Fraser Fisher was Chief Executive Officer until his resignation on 20 October 2017. Chris Jagusz was appointed Chief Executive Officer at this time. † Tony Weaver was Chief Executive Officer until his resignation on 1 November 2016. Fraser Fisher was appointed Chief Executive Officer at this time. Total single figure £000 154 209 369 266 120 204 204 31 GovernanceRedcentric Report & Accounts 2018Directors’ remuneration report (audited) continued The remuneration of the Directors in respect of the year was as follows: Basic salary, allowances and fees £000 Bonus £000 Payment in lieu of notice Holiday Pension Gain on Option Exercise £000 £000 £000 £000 2018 Total £000 2017 Total £000 Executive Chris Jagusz (appointed 20 October 2017) Peter Brotherton Fraser Fisher (resigned 20 October 2017) Tim Coleman (resigned 6 November 2016) Non-Executive Chris Cole David Payne Stephen Puckett Tony Weaver (resigned 1 November 2016) Stephen Vaughan Jon Kempster Total 154 200 199 - 70 40 40 - 28 35 - 40 - - - - - - - - - - 159 - - 15 - - - - - 4 - - - - - - - - - 10 10 - - - - - - - - - 154 254 59 427 - - - - - - - 70 55 40 - 28 35 - 88 369 208 70 40 40 18 - 5 766 40 174 4 20 59 1,063 838 Details of share options in the Group held by the Directors during the year are as follows (audited): Exercise Price Balance 31 Mar 2017 Granted Forfeited / Expired Exercised Chris Jagusz Peter Brotherton Fraser Fisher (a) (b) (c) (d) (c) (e) (f) (g) nil nil nil 63p nil 70p 80p 107p - 349,800 161,905 - - - 192,481 28,571 161,905 221,052 - - - - - - 421,052 (421,052) 276,143 581,968 16,822 - - - - - (16,822) - - - - - - (276,143) Balance 31 Mar 2018 349,800 161,905 192,481 28,571 382,957 - - - - 581,968 - 874,933 421,052 (437,874) (276,143) 581,968 Further information regarding the options noted above is set out below. (a) The options were granted on 4 December 2017 under the Group's Long-Term Incentive Plan. The options will vest post the release of the Group's results for the year ended 31 March 2020 subject to the achievement of performance conditions related to the growth in earnings per share. (b) The options were granted on 28 December 2016 under the Group's Long-Term Incentive Plan. The options will vest post the release of the Group's results for the year ended 31 March 2019 subject to the achievement of performance conditions related to the growth in earnings per share. 32 GovernanceRedcentric Report & Accounts 2018Directors’ remuneration report (audited) continued (c) The options were granted on 29 June 2017 under the Group's Long-Term Incentive Plan. The options will vest post the release of the Group's results for the year ended 31 March 2020 subject to the achievement of performance conditions related to the growth in earnings per share. Fraser Fisher's options lapsed on him leaving the Company. (d) The options were granted pursuant to the Group's HMRC approved Save-As-You-Earn Option Plan 2017 under which employees contribute a monthly amount which is saved over three years to buy shares. There are no performance conditions. (e) The options were granted on 18 April 2013 under the Group's EMI scheme. The options were exercised on 24 January 2018. (f) The options were granted under the Group'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. (g) The options were granted pursuant to the Group's HMRC approved Save-As-You-Earn Option Plan 2015 under which employees contribute a monthly amount which is saved over three years to buy shares. There are no performance conditions. Fraser Fisher's options lapsed on him leaving the Company. Directors’ interests in shares The interests (both beneficial and family interests) of the Directors in office at the date of this report in the share capital of the Group were as follows: Interests in ordinary shares £0.001 At 31 March 2018 At 31 March 2017 Executive Chris Jagusz Fraser Fisher Peter Brotherton Non-Executive Chris Cole David Payne Stephen Puckett Jon Kempster Stephen Vaughan Total 7,953 - 20,000 20,000 100,626 - - 20,000 168,579 - 106,807 - - 100,626 - - - Interests in share based incentives Options (unvested) 349,800 581,986 382,957 - - - - - 207,433 1,314,743 33 GovernanceRedcentric Report & Accounts 2018Directors’ remuneration report (audited) continued Remuneration policy for Executive Directors compared to other employees The table below shows the movement in the salary, benefits and annual bonus for the Chief Executive Officer between the current and previous financial year compared to that of the total amounts for all employees of the Group for each of these elements of pay. Chief Executive Officer Salary Benefits Annual Bonus Average of all employees Salary Benefits Annual Bonus 2018 £000 342 11 - 37 1 1 2017 £000 350 1 18 38 1 1.3 % change (2.3)% 1000%* - (2.6)% 0% (23)% *In the 2018 financial year the Chief Executive Officer received a car allowance as part of his remuneration package. Relative importance of the spend on pay The table below shows the total pay for all Redcentric’s employees compared to other key financial indicators. Additional information on the number of employees, total revenue and underlying profit has been provided for context. Employee costs Dividends to shareholders Income tax Average number of employees Revenue Adjusted EBITDA 2018 £000 23,860 - 1,004 501 99,990 18,085 2017 £000 25,350 4,406 (1,870) 541 104,623 17,273 % change (5.9)% (100)% - (7.4)% (4.4)% 4.7% Resignation arrangements for Fraser Fisher Fraser Fisher's employment with the Group ended on 31 December 2017 following a handover period to ensure a smooth transition process. Chris Jagusz was appointed as Chief Executive on 16th October 2017 and as a Director on 20th October 2017; on this date Fraser Fisher resigned from the Board. The Committee determined that he will continue to be paid his salary and normal package benefits up to 10th August 2018 in line with his notice period of 12 months. The remuneration arrangements for Chris Jagusz who replaced Fraser Fisher as Chief Executive Officer are in line with the Remuneration Policy. Share price The market price of the Company’s shares on 31 March 2018 was 78p per share. The highest and lowest market prices during the year were 97p and 70p respectively. Stephen Vaughan Chairman, Remuneration Committee On behalf of the Board, 27 June 2018 34 GovernanceRedcentric Report & Accounts 2018Independent auditor’s report to the members of Redcentric plc 1. Our opinion is unmodified We have audited the financial statements of Redcentric Plc (“the Group”) for the year ended 31 March 2018 which comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Financial Position, the Consolidated Cash Flow Statement, the Company Balance Sheet, the Company Statement of Changes in Equity and the related notes, including the accounting policies in note 1. In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 31 March 2018 and of the Group’s profit for the year then ended; • the group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union; • the parent Company financial statements have been properly prepared in accordance with UK accounting standards, including FRS 101 Reduced Disclosure Framework; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are described below. We have fulfilled our ethical responsibilities under, and are independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed entities. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Overview Materiality: £549k (2017: £520k) Group Financial statements as a whole 0.55% of group revenue (2017: 0.50% of group revenue) Coverage: 97% of group profit before tax (2017: 97%) Risks of material misstatement: Management judgement Low risk, high value Recoverability of trade receivables and accrued revenue Carrying value of investments (parent company risk) 2. Key audit matters: our assessment of risks of material misstatement Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In arriving at our audit opinion above, the key audit matters, in decreasing order of audit significance, were as follows. Provision for trade receivables and accrued income £18.6m (2017: £20.4m), Risk vs 2017: down. The risk: subjective estimate The Group has a history of material charges against the recoverability of trade receivables and accrued income. Accordingly, the Group has recognised a provision for irrecoverable items against both trade receivables and accrued income reflecting the value of these balances which the Group anticipates will not be realised. As there is a significant level of judgement involved in estimating the value of this provision there is a risk that the amount of provision recognised may be misstated and we consider this to be a key audit matter. 35 GovernanceRedcentric Report & Accounts 2018Independent auditor’s report to the members of Redcentric plc continued Our audit procedures included: • Historical comparisons: Considering the historical accuracy of provisions over trade receivables and accrued income by comparing prior year provisions to actual utilisation in the year and actual levels of debtor and accrued income recovery; • Our sector experience: Challenging key assumptions behind the provisions against accrued income and trade receivables such as history of trading with clients, based on our knowledge of the Group; • Our sector experience: Assessing whether the level of provision recognised by the Directors in respect of aged and overdue trade receivables and accrued income reflected our knowledge of the Group or probable changes in the business environment; • Tests of details: Agreeing a sample of accrued trade receivables at the year end to post year end cash receipts; and • Assessing transparency: Assessing the adequacy of the Group’s disclosures about the degree of estimation involved in arriving at the provision. Recoverability of parent company investment in subsidiaries £101.6m (2017: £101.0), Risk vs 2017: stable The risk: forecast based valuation The carrying amount of the parent company’s investments in subsidiaries are significant and at risk of irrecoverability due to weakening demand in certain areas of the business. The estimated recoverable amount of these balances is subjective due to the inherent uncertainty in forecasting trading conditions and cash flows used in the budgets for the subsidiary companies. Our audit procedures included: • Benchmarking assumptions: Challenging the assumptions used in the cash flows included in the forecasts based on our knowledge of the Group and the markets in which the subsidiaries operate; • Historical comparisons: Assessing the reasonableness of the forecasts by considering the historical accuracy of the previous forecasts; • Our sector experience: Evaluating the current level of trading, including identifying any indications of a downturn in activity, by examining the post year end management accounts and considering our knowledge of the Group and the market; and • Assessing transparency: Assessing the adequacy of the parent company’s disclosures in respect of the investment in subsidiaries. 3. Our application of materiality and an overview of the scope of our audit The materiality for the Group financial statements as a whole was set at £549k (2017: £520k), determined with reference to a benchmark of Total Revenues of £100.0m (2017: £104.6m), of which it represents 0.55% (2017: 0.50%). The materiality for the Parent company financial statements as a whole was set at £548k (2017: £490k), determined with reference to a benchmark of gross assets of £101.6m (2017: £101.0m), of which it represents 0.54% (2017: 0.48%). We report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £27.0k (2017: £15.6k), in addition to other identified misstatements that warranted reporting on qualitative grounds. Of the Group’s 3 (2017: 5) reporting components, we subjected 2 (2017: 4) to full scope audits for group purposes. All components subject to full scope audit were audited by the Group audit team at the Group’s head office. The other component was subject to a desktop review. The components within the scope of our work accounted for the following percentages of the Group’s results: Audits for group reporting purposes 2 (2017: 4) 100% (2017: 100%) 97% (2017: 97%) 100% (2017: 100%) Total 2 (2017: 4) 100% (2017: 100%) 97% (2017: 97%) 100% (2017: 100%) Number of components Group revenue Group profit before tax Group total assets The Group audit team approved the component materialities, which ranged from £215k to £548k (2017: £145k to £490k), having regard to the mix of size and risk profile of the Group across the components. 36 GovernanceRedcentric Report & Accounts 2018Independent auditor’s report to the members of Redcentric plc continued 4. We have nothing to report on going concern 7. Respective responsibilities We are required to report to you if we have concluded that the use of the going concern basis of accounting is inappropriate or there is an undisclosed material uncertainty that may cast significant doubt over the use of that basis for a period of at least twelve months from the date of approval of the financial statements. We have nothing to report in these respects. 5. We have nothing to report on the other information in the Annual Report The Directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information. Strategic report and Directors’ report Based solely on our work on the other information: Directors’ responsibilities As explained more fully in their statement set out on page 28, the Directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. • we have not identified material misstatements in the Strategic report and the Directors’ report; A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities. • in our opinion the information given in those reports for the financial year is consistent with the financial statements; and • in our opinion those reports have been prepared in accordance with the Companies Act 2006. 6. We have nothing to report on the other matters on which we are required to report by exception Under the Companies Act 2006, we are required to report to you if, in our opinion: • adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent Company financial statements are not in agreement with the accounting records and returns; or • certain disclosures of Directors’ remuneration specified by law are not made; or 8. The purpose of our audit work and to whom we owe our responsibilities 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. John Pass (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 1 Sovereign Square, Sovereign Street, Leeds LS1 4DA • we have not received all the information and explanations 27 June 2018 we require for our audit. We have nothing to report in these respects. 37 GovernanceRedcentric Report & Accounts 2018 Consolidated Income Statement for the year ended 31 March 2018 Revenue Cost of sales* Gross profit Operating expenditure Exceptional costs Operating profit / (loss) Analysed as: Adjusted EBITDA** Depreciation Amortisation of intangibles Exceptional costs Share-based payments Interest payable Interest receivable Loss on ordinary activities before taxation Tax credit on profit on ordinary activities Profit /(loss) for the year (attributable to owners of the parent) Earnings per share Basic earnings per share Diluted basic earnings per share Note 5 10 11 5 22 6 6 8 9 9 2018 £000 99,990 (39,996) 59,994 (57,382) (1,672) 2017 £000 104,623 (44,159) 60,464 (57,985) (5,474) 940 (2,995) 18,085 (7,769) (7,136) (1,672) (568) 940 (1,452) 19 (493) 1,004 511 17,273 (7,507) (6,207) (5,474) (1,080) (2,995) (1,254) 1 (4,248) 1,870 (2,378) 0.34p 0.34p (1.60)p (1.60)p * Certain costs in 2017 have been reclassified between cost of sales and operating expenditure – see Note 28. ** Earnings before interest, tax, depreciation, amortisation, exceptional costs and share-based payments. The above consolidated income statement should be read in conjunction with the accompanying notes. 38 Financial StatementsRedcentric Report & Accounts 2018 Consolidated Statement of Comprehensive Income Profit / (loss) for the year Exchange differences arising on re-translation of foreign subsidiary 2018 £000 511 (45) 2017 £000 (2,378) 94 Total comprehensive income 466 (2,284) Consolidated Statement of Changes in Equity At 31 March 2016 Loss for the year Other comprehensive gain – 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 At 31 March 2017 Profit for the year Other comprehensive 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 2018 - - - 3 - - 149 149 - - - - - - - Called up share capital £000 Share premium £000 Capital redemption reserve £000 146 63,667 (9,454) - - - 1,728 - - - - - - - - Retained earnings £000 27,328 (2,378) 94 (2,284) - (4,406) 975 (974) Total equity £000 81,687 (2,378) 94 (2,284) 1,731 (4,406) 975 (974) 65,395 (9,454) 20,639 76,729 65,395 (9,454) 20,639 76,729 - - - 193 - - - - - - - - - - 511 (45) 466 - - 534 - 511 (45) 466 193 - 534 - 149 65,588 (9,454) 21,639 77,922 39 Financial StatementsRedcentric Report & Accounts 2018Consolidated Statement of Financial Position as at 31 March 2018 Assets Non-current assets Property plant and equipment Intangible assets Current assets Inventories Trade and other receivables Cash and short-term deposits Total assets Current liabilities Creditors: amounts falling due within one year Provision: amounts falling due within one year Non-current liabilities Creditors: amounts falling due after more than one year Provision: amounts falling due after more than one year Deferred tax liability Total liabilities Net assets Equity and liabilities Equity Called up share capital Share premium account Capital redemption reserve Retained earnings Total equity Note 2018 £000 2017 £000 10 11 12 13 14 21 16 21 8 20 20,238 82,486 102,724 666 26,120 6,089 32,875 21,998 88,725 110,723 234 26,222 4,340 30,796 135,599 141,519 26,585 - 30,671 376 45 20,040 339 41,092 1,207 2,112 57,677 64,790 77,922 76,729 149 65,588 (9,454) 21,639 77,922 149 65,395 (9,454) 20,639 76,729 The notes on pages 42 to 68 are an integral part of these financial statements. The consolidated financial statements of Redcentric Plc (Registration Number 08397584) on pages 38 to 68 were approved by the Board on 27 June 2018 and are signed on its behalf by: Chris Jagusz, Director Peter Brotherton, Director 40 Financial StatementsRedcentric Report & Accounts 2018 Consolidated Cash Flow Statement year ended 31 March 2018 Cash flows from operating activities Loss before taxation Net finance expense Operating loss Depreciation and amortisation Exceptional costs Share based payments Operating cash flow before exceptional costs and movements in working capital Exceptional 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 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 Bank fees Repayment of borrowings (Repayment) / drawdown on revolving credit facility Proceeds of issue of shares less costs of issue Net cash (outflow) / inflow from financing activities 2018 £000 2017 £000 (493) 1,433 940 14,905 1,672 568 18,085 (3,002) 15,083 (432) 1,079 3,912 19,642 217 19,859 - (6,778) (6,778) - (1,196) (50) (323) (10,000) 193 (11,376) (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 Net increase in cash and cash equivalents 1,705 8,291 Opening cash and cash equivalents Net increase (decrease) in cash and cash equivalents Effect of exchange rates Cash and cash equivalents 4,340 1,705 44 6,089 (3,970) 8,291 19 4,340 41 Financial StatementsRedcentric Report & Accounts 2018Notes to the Consolidated Financial Statements year ended 31 March 2018 1 Accounting policies – Group 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. 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. 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 debtholders 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. 42 Financial StatementsRedcentric Report & Accounts 2018Notes to the Consolidated Financial Statements year ended 31 March 2018 – continued Accounting policies – Group (continued) 1.3 Intangible assets 1.4 Property, plant and equipment 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 cash- generating units (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. 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 Trademarks Software Licences 5-15 years 5 years 5 years (or over the contract term if shorter) Impairment and amortisation charges are included within the administrative expenses line in the income statement. 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. Office fixtures and fittings 4-5 years Leasehold improvements 5-10 years Vehicles and computer equipment 3-5 years (or over the contract term if shorter) 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. 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 CGUs expected to benefit from the business combination’s synergies. Impairment is determined by assessing the recoverable amount of the CGU to which the goodwill relates. When the recoverable amount of the CGU 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 CGU are written down to their recoverable amount. 43 Financial StatementsRedcentric Report & Accounts 2018Notes to the Consolidated Financial Statements year ended 31 March 2018 – continued Accounting policies – Group (continued) 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. 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; • i n 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. A 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, 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. 44 Financial StatementsRedcentric Report & Accounts 2018Notes to the Consolidated Financial Statements year ended 31 March 2018 – continued Accounting policies – Group (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. 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. 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 as 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. 45 Financial StatementsRedcentric Report & Accounts 2018Notes to the Consolidated Financial Statements year ended 31 March 2018 – continued Accounting policies – Group (continued) 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. 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. 46 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. 1.22 Exceptional 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 exceptional 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 exceptional costs. For further detail refer to note 5. Financial StatementsRedcentric Report & Accounts 2018Notes to the Consolidated Financial Statements year ended 31 March 2018 – continued Accounting policies – Group (continued) 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 Board believes that the Group comprises a single reporting segment, that being the provision of managed services to customers. Whilst the Board still reviews revenue streams of three categories separately (recurring, product and service), 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. The Executive Board assess the performance of the operating segment 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. 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 policy is to establish a provision for impairment of trade debtors when there is evidence of a risk of non-payment. Historically the group has little history of non-payment arising from business failure and, as such, specific provisions are generally not required. A provision is created as a result of timing differences when processing renewals or where there is a risk of non-payment due to disputed debtor balances. Following a year of significant improvement in this area, historical analysis shows that the reduced level of provisioning is adequate to cover these eventualities. Annually the group reviews the appropriateness of the impairment provision by taking into account ageing, known post balance sheet corrections, previous losses experienced and general economic conditions. Management complete an exercise assessing recoverability of overdue balances based on an internal assessment of the recoverability of balances. This allows management to conduct sensitivity analysis of debtor balances and related provisions reflecting alternative potential judgements. In management's view, the sensitivities conducted do not show material different outcomes with regards to the level of provision recognised. • Impairment of accrued income The group assesses on an on-going basis the make-up and recovery of accrued income balances. A provision for impairment is established where there is evidence of a risk of non-payment taking in to account ageing, known post balance sheet corrections, previous losses experienced and general economic conditions. The ageing of accrued income can vary depending on the length of project delivery schedules. Aged balances are reviewed regularly and a provision is established where a risk of non-payment has been identified. 1.26 IFRS 15 Revenue from Contracts with Customers (effective date 1 January 2018) The Group intends to adopt IFRS 15 retrospectively in its consolidated financial statements for the year ending 31 March 2019. IFRS 15 replaces all existing revenue requirements in IFRS and sets out principles for recognising revenue that must be applied using a five step model. Revenue should only be recognised when (or as) control of goods or services is passed to the customer, when distinct ‘performance obligations’ are met, at the amount to which the entity expects to be entitled. The Group has completed its assessment of IFRS 15 and has not identified any material differences between the Group’s current revenue recognition policy and the requirements of IFRS 15. Materially all of the Group’s revenues are derived from a full range of contracted managed services which includes support, maintenance subscription and service agreements, which result in performance obligations being met ‘over time’ rather than at a ‘point in time’. It is therefore appropriate that these managed services revenues continue to be recognised over the period that the services are provided to the customer. 47 Financial StatementsRedcentric Report & Accounts 2018Financial Statements Notes to the Consolidated Financial Statements year ended 31 March 2018 – continued Accounting policies – Group (continued) Revenues enabling the provision of the managed services such as customer premises equipment (CPE), cabling and professional services, are often combined in the customers contracts. Judgement will be required here to determine whether these should be ‘bundled’ together or treated as distinct and accounted for as separate performance obligations. It is not expected that this aggregation will materially change either the period over which revenue is recognised or how the Group’s significant revenue streams (as set out in note 1.20) are classified and reported. The Group’s sale of hardware has a performance obligation that is met at a point in time, being the point in time when hardware is delivered or installed. Revenue recognition for hardware is unchanged under IFRS 15. The performance obligations for the Group’s other material revenue streams, set out in note 1.20, are satisfied over time, either as the service is provided or the project delivered. Revenue recognition would not change for these under IFRS 15. IFRS 15 requires that the incremental costs of obtaining a contract, including sales commissions paid to employees, are recognised in line with the transfer of goods / services to the customers. For those relevant costs that are currently expensed as incurred, recognising these over the period that performance obligations are satisfied would not result in a material change to the financial results for the year. 1.27 IFRS 9 Financial Instruments (effective date 1 January 2018) IFRS 9 Financial Instruments replaces IAS 39 Financial Instruments: Recognition and Measurement and will be adopted by the Group for the year ending 31 March 2019. IFRS 9 covers the requirements for assessing the impairment of financial assets. The Group’s policy, in accordance with IAS 39, is to make specific provisions against high risk trade receivable balances, where balances are in dispute or where doubt exists about the customer’s ability to pay. IFRS 9 requires a consideration of the likelihood of default of trade receivables; firstly by splitting out the high risk balances and continuing to provide for these separately, and then applying a ‘loss rate’ to the remaining balance where it is known from experience that the loss rate is not nil. On the basis that the Group has little or no history of unprovided trade receivable write off it is not expected that the impact will be material. 1.28 IFRS 16 Leases (effective date 1 January 2019) IFRS 16 covers the requirements for the recognition, measurement, presentation and disclosure of leases. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is twelve months or less or the underlying asset has a low value. This is a significant departure from the current standard, IAS 17 Leases, and will result in most of the Group’s operating leases being brought onto the balance sheet (and the associated operating lease charge, currently charged to operating profit, being replaced with a finance cost and depreciation charge). The Group is in the process of assessing the impact of this standard, which will be first applied for the year ending 31 March 2019. Details of the Group’s operating leases, currently accounted for under IAS 17 Leases, can be found in note 15. 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. The Board believes that the Group comprises a single reporting segment, that being the provision of managed services to customers. Whilst the Board still reviews revenue streams of three categories separately (recurring, product and service), 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. 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. Service revenue is derived from the provision of consultancy or installation services regarding the provision and set-up of a new service. 48 Financial StatementsRedcentric Report & Accounts 2018Financial Statements Notes to the Consolidated Financial Statements year ended 31 March 2018 – continued Segment reporting (continued) Revenue for the year ended 31 March 2018 was generated wholly from the UK, and all non-current assets are based in the UK. Recurring revenue Product sales Services revenue One-off revenue Total revenue 3 Expenses by nature Amortisation of acquired intangible assets: owned Amortisation of acquired intangible assets: leased Depreciation – owned assets Depreciation – assets held under finance lease Share-based payments Operating lease payments Year ended 31 March 2018 Year ended 31 March 2017 £000 £000 87,065 90,219 7,180 5,745 12,925 6,278 8,126 14,404 99,990 104,623 2018 £000 7,111 25 5,174 2,595 568 2,837 2017 £000 6,207 - 5,425 2,082 1,080 2,791 Employee benefits expense, excluding share based compensation 23,292 24,270 4 Auditors’ remuneration Below are the fees payable to the auditors and their associates: 2018 £000 2017 £000 Audit services – KPMG Fees payable to Company auditor and its associates for the audit of parent company and consolidated financial statements The audit and interim review of Company’s subsidiaries Fees payable to Company auditor and its associates for other services: Tax advisory and compliance services Total 24 115 12 151 110 115 32 257 49 Financial StatementsRedcentric Report & Accounts 2018Notes to the Consolidated Financial Statements year ended 31 March 2018 – continued 5 Exceptional costs In accordance with the Group’s policy of separately identifying exceptional costs, the following charges were recognised in the year: Professional fees associated with the forensic review and Financial Conduct Authority (FCA) investigation Staff restructuring Integration costs Non-recurring impairment of trade debtor balances Sale of metro ring to City Fibre Vacant property provisions Year ended 31 March 2018 £000 Year ended 31 March 2017 £000 672 868 132 - - - 1,672 1,291 187 471 2,933 207 385 5,474 • Exceptional impairment of trade debtor balances; - Following the audit of the 31 March 2017 annual results, a further debtor impairment charge was taken in FY17. • Professional fees associated with the forensic review and FCA investigation; - These costs relate to legal and forensic advice received in respect of the ongoing FCA investigation. • Staff restructuring costs; - During the year a restructuring exercise was undertaken which resulted in eighteen redundancies. • Integration costs; - The integration costs relate to the integration of the City Lifeline acquisition which was undertaken in January 2016. The integration process is complete, and no further costs will be incurred in this regard. • Disposal of City Fibre network; - On 30 September 2016, the Company disposed of its fibre network to City Fibre Limited. This led to an exceptional charge of £0.2m in respect of the loss on disposal and legal fees. • Vacant property provision; - In FY17, the Birmingham and Hoddesdon offices were vacated, leading to a vacant property charge of £0.4m in the year. 6 Finance costs Year ended 31 March 2018 £000 Year ended 31 March 2017 £000 (19) (1) 1,241 143 68 1,452 1,433 869 317 68 1,254 1,253 Interest receivable Other interest receivable Interest payable Interest payable on bank loans and overdrafts Interest payable on finance leases Amortisation of loan arrangement fees Net financing costs 50 Financial StatementsRedcentric Report & Accounts 2018Notes to the Consolidated Financial Statements year ended 31 March 2018 – continued 7 Employee benefits expense Staff costs for the year, including Executive Directors, amounted to: Wages and salaries Social security costs Share options granted to Directors and employees Pension costs Average monthly number of people (including Executive Directors) employed: Operations Selling and distribution Administration These numbers as split as follows: UK India 2018 £000 20,655 2,240 568 397 23,860 2018 367 81 53 501 2018 362 139 501 2017 £000 21,450 2,392 1,080 428 25,350 2017 427 81 33 541 2017 386 155 541 The remuneration of the Directors in respect of the year was as follows: Basic salary, allowances and fees £000 Bonus £000 Payment in lieu of notice Holiday Pension Gain on Option Exercise £000 £000 £000 £000 2018 Total £000 2017 Total £000 Executive Chris Jagusz (appointed 20 October 2017) Peter Brotherton Fraser Fisher (resigned 20 October 2017) Tim Coleman (resigned 6 November 2016) Non-Executive Chris Cole David Payne (resigned 31 March 2018) Stephen Puckett Tony Weaver (resigned 1 November 2016) Stephen Vaughan Jon Kempster 154 200 199 - 70 40 40 - 28 35 - 40 - - - - - - - - - - 159 - - 15 - - - - - 4 - - - - - - - - - 10 10 - - - - - - - - - 154 254 - 88 59 427 369 - - - - - - - 208 70 55 40 - 28 35 70 40 40 18 - 5 Total 766 40 174 4 20 59 1,063 838 51 Financial StatementsRedcentric Report & Accounts 2018Notes to the Consolidated Financial Statements year ended 31 March 2018 – continued Employee benefits expense (continued) Details of share options in the Company held by the Directors during the year are as follows: Exercise Price Balance 31 Mar 2017 Granted Forfeited / Expired Exercised Chris Jagusz Peter Brotherton Fraser Fisher (a) (b) (c) (d) (c) (e) (f) (g) nil nil nil 63 nil 70 80 107 - 349,800 161,905 - - - 192,481 28,571 161,905 221,052 - - - - - - 421,052 (421,052) 276,143 581,968 16,822 - - - - - (16,822) - - - - - - (276,143) Balance 31 Mar 2018 349,800 161,905 192,481 28,571 382,957 - - - - 581,968 - 874,933 421,052 (437,874) (276,143) 581,968 Further information regarding the options noted above is set out below. (a) The options were granted on 4 December 2017 under the Group's Long-Term Incentive Plan. The options will vest post the release of the Group's results for the year ended 31 March 2020 subject to the achievement of performance conditions related to the growth in earnings per share. (b) The options were granted on 29 December 2016 under the Group's Long-Term Incentive Plan. The options will vest post the release of the Group's results for the year ended 31 March 2019 subject to the achievement of performance conditions related to the growth in earnings per share. (c) The options were granted on 29 June 2017 under the Group's Long-Term Incentive Plan. The options will vest post the release of the Group's results for the year ended 31 March 2020 subject to the achievement of performance conditions related to the growth in earnings per share. Fraser Fisher's options lapsed on him leaving the Company. (d) The options were granted pursuant to the Group's HMRC approved Save-As-You-Earn Option Plan 2017 under which employees contribute a monthly amount which is saved over three years to buy shares. There are no performance conditions. (e) The options were granted on 18 April 2013 under the Group's EMI scheme. The options were exercised on 24 January 2018. (f) The options were granted under the Group'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. (g) The options were granted pursuant to the Group's HMRC approved Save-As-You-Earn Option Plan 2015 under which employees contribute a monthly amount which is saved over three years to buy shares. There are no performance conditions. Fraser Fisher's options lapsed on him leaving the Company. Share price The market price of the Group’s shares on 31 March 2018 was 78p per share. The highest and lowest market prices during the year were 97p and 70p respectively. 52 Financial StatementsRedcentric Report & Accounts 2018Notes to the Consolidated Financial Statements year ended 31 March 2018 – continued 8 Tax on profit on ordinary activities (a) Tax on profit on ordinary activities Current income tax: Current income tax Adjustment in relation to prior year Overseas tax Deferred tax: Origination and reversal of timing differences - Deferred tax asset: adjustment in relation to prior year - Deferred tax liability: prior year adjustments - Deferred tax liability: adjustment in relation to prior year - Deferred tax liability: current year Total income tax (credit) reported in the income statement 2018 £000 2017 £000 331 696 53 (604) (410) - (1,070) (1,004) 64 38 - 312 200 (501) (1,983) (1,870) The tax credit for the year was £1.0m (FY17: credit of £1.9m) which was made up of a corporation tax charge of £1.1 (FY17: charge of £0.1m) and a deferred tax credit of £2.1m (FY17: credit of £2.0m). The corporation tax charge comprises a current year corporation tax charge of £0.3m, a prior year corporation tax charge of £0.7m and an overseas tax charge of £0.1m. The prior year corporation tax charge relates to the resubmission of the FY15 and FY16 tax computations. The Group has made several historical acquisitions some of which have tax losses brought forward. The streaming of these tax losses had been incorrectly applied in the FY15 and FY16 tax computations and hence the reason for the prior year corporation tax adjustment. (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: Loss before taxation Profit multiplied by the UK standard rate of corporation tax of 19% / 20% Expenses not deductible for tax purposes Share scheme deduction under Part 12 CTA 2009 Movement in unprovided tax losses Adjustment in relation to prior year Effect of tax rate change Impact of overseas tax rates Fixed asset timing difference Total income tax (credit) reported in the income statement 2018 £000 (493) (94) 53 (12) (1,000) 92 28 8 (79) (1,004) 2017 £000 (4,248) (850) 286 - (847) (151) (318) 10 - (1,870) 53 Financial StatementsRedcentric Report & Accounts 2018Notes to the Consolidated Financial Statements year ended 31 March 2018 – continued Tax on profit on ordinary activities (continued) (c) Deferred tax Deferred tax liability Deferred tax assets Net deferred tax liability at 31 March (d) Deferred tax liability Opening balance Recognised in the income statement Adjustment in relation to prior year At 31 March 2018 £000 (6,197) 6,152 (45) 2018 £000 7,267 (1,070) - 6,197 Deferred tax liabilities arose in respect of the amortisation of intangible assets recognised on acquisitions made. (e) Deferred tax assets Share based Payments temporary differences India – deferred tax asset Property, plant and equipment temporary differences Other timing differences Tax losses £000 £000 £000 £000 £000 At 31 March 2017 Recognised in the income statement Adjustment in relation to prior year At 31 March 2018 27 (16) - 11 49 8 - 57 2,725 (123) 604 3,206 2,344 523 - 2,867 10 1 - 11 2017 £000 (7,267) 5,155 (2,112) 2017 £000 9,751 (1,983) (501) 7,267 Total £000 5,155 393 604 6,152 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. There would have to be a material change in the Groups’ trading activity for the Directors to reassess the recoverability of the asset. 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. The adjustment in relation to prior year relates to the resubmission of the FY15 and FY16 tax computations. The Group is made up several historical acquisitions some of which have tax losses brought forward. The streaming of these tax losses had been incorrectly applied in the FY15 and FY16 tax computations and hence the reason for the prior year corporation tax adjustment. 54 Financial StatementsRedcentric Report & Accounts 2018Notes to the Consolidated Financial Statements year ended 31 March 2018 – continued 9 Earnings per share Basic earnings per share has been calculated using profit after tax for the year of £0.5m (2017: loss after tax £2.4m) and a weighted average number of shares of 148,890,948 (2017: 148,448,225). The dilutive effect of share options at 31 March 2018 increased the weighted average number of shares to 149,871,478 (2017: 152,744,106). 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 Exceptional costs Adjusted earnings before tax Notional tax charge at standard rate of 19% / 20% Adjusted earnings 2018 £000 511 (1,004) 6,252 568 1,672 7,999 (1,520) 6,479 2017 £000 (2,378) (1,870) 5,944 1,080 5,474 8,250 (1,650) 6,600 Weighted average number of shares in issue Weighted dilutive effect of options and warrants in issue Diluted weighted average number of shares in issue 148,890,948 148,448,225 980,529 4,295,881 149,871,477 152,744,106 Statutory basic earnings per shares Statutory diluted earnings per shares Adjusted basic earnings per share Adjusted diluted earnings per share *Amortisation charge per P&L Amortisation of software Customer contracts and related relationships 0.34p 0.34p 4.35p 4.32p 7,136 (884) 6,252 (1.60)p (1.60)p 4.45p 4.32p 6,207 (263) 5,944 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 exceptional costs. 55 Financial StatementsRedcentric Report & Accounts 2018Notes to the Consolidated Financial Statements year ended 31 March 2018 – continued 10 Property, plant and equipment Cost At 31 March 2017 Additions Disposals Exchange differences At 31 March 2018 Accumulated depreciation At 31 March 2017 Charge for the year ended 31 March 2018 Disposals Exchange differences At 31 March 2018 Net book amount At 31 March 2018 At 31 March 2017 Leasehold improvements* Office fixtures and fittings* Vehicles & computer equipment* £000 £000 £000 14,388 1,168 74 (566) - 244 - (40) 32,120 5,745 (8,028) - 13,896 1,372 29,837 8,674 1,418 (566) - 9,526 4,370 5,714 888 100 - 14 16,116 6,251 (8,028) - 1,002 14,339 370 280 15,498 16,004 20,238 21,998 Total £000 47,676 6,063 (8,594) (40) 45,105 25,678 7,769 (8,594) 14 24,867 * In 2018, the split of the fixed assets between classes has been aligned across the group. The result of this is to bring the published results in line with internal management reporting. None of the assets affected required any change in useful economic life. The total NBV as at 31 March 2017 of £21.998m remains unchanged from prior published accounts. Included in vehicle and computer equipment are assets held under finance leases with a carrying value of £4.9m at 31 March 2018 (2017: £5.2m). Of the £6.1m fixed assets acquired in the year, £3.0m were funded using finance leases (2017: £2.5m). 56 Financial StatementsRedcentric Report & Accounts 2018Notes to the Consolidated Financial Statements year ended 31 March 2018 – continued 11 Intangible assets Cost At 31 March 2016 Additions FOREX difference on carrying value At 31 March 2017 Additions Exchange differences At 31 March 2018 Accumulated amortisation and impairment At 31 March 2016 Amortisation charge for the year ended 31 March 2017 Impairment At 31 March 2017 Amortisation charge for the year ended 31 March 2018 Impairment At 31 March 2018 Customer contracts and related relationships Trademarks Software and licences £000 £000 £000 Goodwill £000 Total £000 43,269 62,297 - - - 3 43,269 62,300 - - - (16) 275 - - 275 - - 3,962 109,803 738 - 738 3 4,700 110,544 913 - 913 (16) 43,269 62,284 275 5,613 111,441 - - - - - - - 13,712 5,884 - 19,596 6,217 - 25,813 42,704 36,471 180 60 - 240 35 - 275 35 - 1,720 15,612 263 - 6,207 - 1,983 21,819 884 - 7,136 - 2,867 28,955 2,717 2,746 88,725 82,486 Carrying amount at 31 March 2017 Carrying amount at 31 March 2018 43,269 43,269 Included in software and licences are intangibles assets held under finance leases with a carrying value of £0.4m at 31 March 2018 (2017: £nil). Of the £0.9m intangible assets acquired in the year, £0.4m were funded using finance leases (2017: £nil). Customer contracts have a weighted average remaining amortisation period of 6 years and 11 months (2017: 7 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 was based on the value in use calculation using forecast cash flow projections to the period of 31 March 2021 and extrapolated for a further two years by growth rates applicable. A terminal value based on a perpetuity calculation using a 2.5% real growth was then added. Discount rates were then applied to these projections reflecting management's expected risk profile. In addition to revenue growth, the key assumptions used in the impairment testing were as follows: • Gross margin percentage of c.58% reducing to c.48%; • Pre-tax discount rate of 9.13% (post tax 7.39%); and • Terminal growth rate percentage of 2.5%. The assumption of margins remaining flat after the three-year management forecast 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. 57 Financial StatementsRedcentric Report & Accounts 2018 Notes to the Consolidated Financial Statements year ended 31 March 2018 – continued Intangible assets (continued) A pre-tax discount rate of 9.13% (post-tax 7.39%) was applied which reflects management’s risk-adjusted estimate of the weighted average cost of capital. There is 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 7.68%. The first three years were derived from management's forecast 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 Corporation tax repayable 2018 £000 16,779 (981) 15,798 265 7,211 2,846 - 26,120 2017 £000 22,826 (5,576) 17,250 71 5,377 3,155 369 26,222 As at 31 March 2018, trade receivables of £1.0m (2017: £5.6m) 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 2018, net trade receivables of £4.5m (2017: £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. The ageing analysis of trade receivables is as follows: Days overdue Current 1 to 30 days overdue 31 to 60 days overdue 61 to 90 days overdue 91 to 180 days overdue > 180 days overdue Gross trade debtors 2018 Gross £000 2018 Provision £000 2018 Net £000 2017 Gross £000 2017 Provision £000 11,323 1,951 1,417 550 945 593 16,779 (67) (90) (40) (18) (481) (285) (981) 11,256 1,861 1,377 532 464 308 9,095 2,950 2,220 704 3,277 4,580 15,798 22,826 (101) (266) (532) (169) (988) (3,520) (5,576) 2017 Net £000 8,994 2,684 1,688 535 2,289 1,060 17,250 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. 58 Financial StatementsRedcentric Report & Accounts 2018Notes to the Consolidated Financial Statements year ended 31 March 2018 – continued Trade and other receivables (continued) Movements on the Group provision for impairment of trade receivables as at 31 March 2018 are as follows: Balance at 31 March 2016 Utilisation of impairment provision Creation of Impairment provision treated as exceptional costs Creation of impairment provision treated as operating costs* At 31 March 2017 Utilisation of impairment provision Creation of impairment provision treated as operating costs* At 31 March 2018 £000 7,005 (5,639) 2,933 1,277 5,576 (5,459) 864 981 * The creation and release of a provision for impaired receivables has been included in ‘operating 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. 13 Cash and cash equivalents Cash at bank 2018 £000 2017 £000 6,089 4,340 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 Provision Deferred income Finance Lease Corporation Tax Term loan 2018 £000 9,005 27 2,490 2,705 - 8,343 3,125 890 - 2017 £000 7,483 39 1,671 2,264 339 5,804 2,456 - 323 26,585 20,379 59 Financial StatementsRedcentric Report & Accounts 2018Notes to the Consolidated Financial Statements year ended 31 March 2018 – continued 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 2018 £000 2,881 11,095 20,942 34,918 2017 £000 2,264 3,142 4,586 9,992 The Group’s operating leases relate to property, motor vehicles and office equipment, and have remaining terms of between 2 and 23 years. The amount recognised as an expense in the year is £2.8m (restated 2017: £2.8m). 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 2018 (2017: £nil). 16 Borrowings Non-current Bank loan Finance leases Unamortised loan arrangement fee Total non-current Current Finance leases Term Loans Total current 2018 £000 2017 £000 28,000 2,807 (136) 30,671 3,125 - 3,125 38,000 3,296 (204) 41,092 2,456 323 2,779 At 31 March 2018, the Group was party to £68.0m of bank facilities with a termination date of 1 April 2020. The facilities comprise a Revolving Credit Facility (“RCF”) of £40.0m (£28.0m utilised at 31 March 2018) with a £20.0m accordion (£nil utilised at 31 March 2018), a £2.0m overdraft facility (£nil utilised at 31 March 2018) 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. 60 Financial StatementsRedcentric Report & Accounts 2018Notes to the Consolidated Financial Statements year ended 31 March 2018 – continued Borrowings (continued) Reconciliation of adjusted net debt: Instrument Cash RCF Term loan Finance lease Total As at 31 March 2017 £000 4,340 (37,796) (323) (5,752) Net cash flow £000 Net non-cash flow As at 31 March 2018 £000 £000 1,705 10,000 323 (180) 44 (68) - - (24) 6,089 (27,864) - (5,932) (27,707) (39,531) 11,848 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 2018 £000 Fair value 2018 £000 Carrying value 2017 £000 Fair value 2017 £000 27,864 26,001 38,135 34,495 Fair values are based on discounted cash flows, using an effective interest rate based on the borrowing rates at 31 March 2018 of 3.4% (2017: 3.4%). Finance leases Present value 2018 Finance charges 2018 Future lease payments 2018 £000 £000 £000 Not later than 1 year After 1 year but not more than 5 years 3,125 2,807 5,932 68 21 89 3,193 2,828 6,021 17 Financial instruments by category Present value 2017 £000 2,456 3,296 5,752 Finance charges 2017 Future lease payments 2017 £000 £000 132 89 221 2,588 3,385 5,973 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. 61 Financial StatementsRedcentric Report & Accounts 2018Notes to the Consolidated Financial Statements year ended 31 March 2018 – continued Financial instruments by category (continued) Carrying value 2018 £000 Fair value 2018 £000 Carrying value 2017 £000 Fair value 2017 £000 15,798 7,476 3,512 6,089 32,875 9,005 2,732 11,254 33,796 890 57,677 15,798 7,476 3,512 6,089 32,875 9,005 2,732 11,254 33,796 890 57,677 17,250 17,250 5,448 3,758 4,340 5,448 3,758 4,340 30,796 30,796 7,483 2,303 7,814 43,871 3,319 64,790 7,483 2,303 7,814 43,871 3,319 64,790 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 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 2018 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. 62 Financial StatementsRedcentric Report & Accounts 2018Notes to the Consolidated Financial Statements year ended 31 March 2018 – continued Financial risk management (continued) (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. (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. 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 2018 Borrowings Finance leases Trade and other payables At 31 March 2017 Borrowings Finance leases Trade and other payables Term loans 19 Capital risk management Within 1 year £000 1-5 years £000 Total £000 - 2,828 9,005 - 2,456 7,483 323 28,000 3,104 - 38,000 3,296 - - 28,000 5,932 9,005 38,000 5,752 7,483 323 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. Adjusted 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, exceptional 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 2018 was 1.5x (2017 – 2.2x). The bank facilities referred to in Note 16 contain various covenants relating to EBITDA, interest cover, adjusted 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. 63 Financial StatementsRedcentric Report & Accounts 2018Notes to the Consolidated Financial Statements year ended 31 March 2018 – continued 20 Called up share capital At 31 March 2016 New shares issued At 31 March 2017 New shares issued At 31 March 2018 Allotted and fully paid Number 145,881,185 2,977,988 148,859,173 276,143 149,135,316 £000 146 3 149 - 149 The number of share 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 2018 Number 2017 Number 276,143 276,143 2,977,988 2,977,988 Shares issue relate to the exercise of 276,143 options at an exercise price of 70p (nominal value 0.1p), creating £193,024 of share premium. 21 Provisions At 31 March 2017 Charged / (credited) to Income statement: Prior Year Adjustment At April 2017 Additional provisions created during the year Utilised during the year At 31 March 2018 Current and non-current analysis of provisions: Dilapidations provision £000 Vacant property provision Total provision £000 £000 273 146 419 50 (93) 376 1,273 1,546 (146) 1,127 - (1,127) - - 1,546 50 (1,220) 376 2018 Dilapidations provision 2018 Vacant property provision 2018 Total provision 2017 Dilapidations provision 2017 Vacant property provision 2017 Total provision £000 £000 £000 £000 £000 £000 - 376 376 - - - - 376 376 - 273 273 339 934 1,273 339 1,207 1,546 Current Non-current Total 64 Financial StatementsRedcentric Report & Accounts 2018 Notes to the Consolidated Financial Statements year ended 31 March 2018 – continued 22 Share-based payment plans 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. 2018 £000 534 34 568 2017 £000 975 105 1,080 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 2018 Number of options 10,037,417 2,752,820 (276,143) (2,590,973) 9,923,121 2018 WAEP 80.5p 28.0p 70.0p 57.1p 72.2p 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 The weighted average fair value of the options granted in the year ended 31 March 2018 was 28.0p (2017: 45.7p) per option. During the year ended 31 March 2018 there were new grants of 2,752,820 options (2017: 919,048 options) which were issued under the Group’s Long-Term Incentive Plan. The weighted average remaining contractual life for the share options outstanding at 31 March 2018 is 5 years and 2 months (2017: 5 years and 9 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 2018 Life at 31 March 2018 Number 31 March 2017 Life at 31 March 2017 0p 63p 70p 80p 84p 102p 117p 107p 154p 845,621 1,167,678 - 9 years, 2 months 2 years, 11 months - 7,581,968 5 years, 3 months - - - 294,669 33,185 9,923,121 - - - 0 years, 6 months 1 year, 6 months 5 years, 2 months 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 months 1 year, 3 months 6 years, 11 months 7 years, 8 months 1 year, 6 months 2 years, 6 months 10,037,417 5 years, 9 months 65 Financial StatementsRedcentric Report & Accounts 2018 Notes to the Consolidated Financial Statements year ended 31 March 2018 – continued Share-based payment plans (continued) 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 Outstanding at the end of the year 2018 Number of options 0 8,427,589 1,495,532 9,923,121 2018 WAEP 0p 69p 74p 72p 2017 Number of options 276,143 8,951,616 809,658 10,037,417 2017 WAEP 70p 78p 112.1p 80.5p 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. SAYE schemes Director and senior manager schemes MXC options Employers NI 2018 £000 224 162 148 34 568 2017 £000 188 156 631 105 1,080 At 31 March 2018, the Group had the following share-based payment arrangements: i. Enterprise Management Incentives (EMI) The Group has legacy position of EMI share options outstanding, issued prior to the formation of the Group. ii. Long-Term Incentive Plan (LTIP) The Group operates a Long-Term Incentive Plan under which the Executive Directors and key management personnel are awarded nil cost options that will vest subject to the achievement of performance conditions relating to the growth in earnings per share. iii. Save As You Earn (SAYE) The Group operates a HMRC approved SAYE scheme which offers its UK-based employees the opportunity to participate in a share purchase plan. To participate in the plan, the employees are required to save an amount of their gross monthly salary, up to a maximum of £500 per month, for a period of 36-months. Under the terms of the plan, at the end of the three-year period the employees are entitled to purchase shares using funds saved at a price 20% below the market price at grant date. Only employees who remain in service and save the required amount of their gross monthly salary for 36 consecutive months will become entitled to purchase the shares. Employees who cease their employment, do not save the required amount of their gross monthly salary in any month before the 36-month period expires, or elect not to exercise their options to purchase shares will be refunded their saved amounts. 66 Financial StatementsRedcentric Report & Accounts 2018Notes to the Consolidated Financial Statements year ended 31 March 2018 – continued Share-based payment plans (continued) iv. MXC Historic options awarded to MXC Capital Limited EMI LTIP SAYE MXC Total Balance at 31 March 2016 4,393,111 - 1,144,353 8,692,988 14,230,452 Issued in the year Forfeited in the year Cancelled in the year Exercised in the year Lapsed in the year - 919,048 (1,250,000) - (1,285,000) (550,000) - - - - - (44,448) (288,339) - - - 919,048 (1,294,448) (288,339) (1,308) (1,692,988) (2,979,296) - - (550,000) Balance at 30 March 2017 1,308,111 919,048 810,258 7,000,000 10,037,417 Issued in the period Forfeited in the period Cancelled in the period Exercised in the year Lapsed in the year - - - (276,143) (450,000) 1,529,430 1,223,390 (1,602,857) - - - - (538,116) - - - - - - - 2,752,820 (1,602,857) (538,116) (276,143) (450,000) Balance at 30 March 2018 581,968 845,621 1,495,532 7,000,000 9,923,121 As at 31 March 2018 the Group 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 Group. 23 Pensions The Group operates a defined contribution pension scheme for eligible employees. The charge for the year ended 31 March 2018 was £0.4m (2017: £0.4m). At the year-end there was a pension’s creditor of £0.1m (2017: £0.1m). 24 Subsidiaries As at 31 March 2018, the Group 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 Redcentric Managed Solutions Limited Redcentric Communications Limited Hotchilli Internet Limited Redcentric US Limited Calyx Managed Services Limited City Lifeline Limited City Lifeline Data Centre Limited** Dormant* Dormant* Dormant* Dormant* Dormant* Dormant* Dormant* Dormant* England and Wales England and Wales England and Wales England and Wales USA England and Wales England and Wales England and Wales 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% All of the Company’s subsidiaries have been consolidated in the Group financial statements. 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. ** Dissolved 11 July 2017. 67 Financial StatementsRedcentric Report & Accounts 2018Notes to the Consolidated Financial Statements year ended 31 March 2018 – continued 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 Up until 30 November 2016, the Group engaged MXC Advisory LLP to provide corporate finance advice and consultancy (fees – 2017: £97,500). 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. As at 31 March 2018 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) 7,000,000 15 November 2013 80p 15 November 2023 (a) 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 2018. 26 Dividends Amounts recognised as distributions to Shareholders in year: Final dividend for year ended 31 March 2017 of nil (2016: 3.0p) per share 2018 £000 2017 £000 - - 4,406 4,406 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 There have been no significant events affecting the Company since the year end. 28 Cost reclassification A cost reclassification was undertaken to align comparative periods with the Directors’ view of appropriate cost allocation. 31 Mar 2017 As previously reported £000 104,623 (43,304) 61,319 (64,314) (2,995) Cost reclassification 31 Mar 2017 As reclassified £000 - (855) (855) 855 - £000 104,623 (44,159) 60,464 (63,459) (2,995) Revenue Cost of sales Gross profit Operating expenditure Operating loss 68 Financial StatementsRedcentric Report & Accounts 2018Company Balance Sheet as at 31 March 2018 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 2018 £000 2017 £000 2 3 4 101,565 101,031 (11,680) (11,680) (11,873) (11,873) 89,885 89,158 149 65,588 5,503 18,645 89,885 149 65,395 4,969 18,645 89,158 The notes on pages 71 to 73 are an integral part of these financial statements. The financial statements on pages 69 to 73 were approved by the Board on 27 June 2018 and are signed on its behalf by: Chris Jagusz, Director Peter Brotherton, Director 69 Financial StatementsRedcentric Report & Accounts 2018 Company Statement of Changes in Equity Called up share capital £000 146 3 - - 149 - - - Share premium £000 Reserves £000 Total equity £000 63,667 27,045 90,858 1,728 - - 65,395 193 - - - (4,406) 975 23,614 - - 534 24,148 1,731 (4,406) 975 89,158 193 - 534 89,885 149 65,588 At 31 March 2016 Transactions with owners: Issue of new shares Dividends to shareholders Share Based Payments (SBP) At 31 March 2017 Transactions with owners: Issue of new shares Dividends to shareholders Share Based Payments (SBP) At 31 March 2018 70 Financial StatementsRedcentric Report & Accounts 2018Notes to the Company Financial Statements 1 Accounting policies (FRS 101) In these financial statements, the company has applied the exemptions available under FRS 101 in respect of the following disclosures: • A Cash Flow Statement and related notes; • Comparative period reconciliations for share capital, tangible fixed assets, intangible assets and investment properties; • Disclosures in respect of transactions with wholly owned subsidiaries; • Disclosures in respect of capital management; • The effects of new but not yet effective IFRSs; • Disclosures in respect of the compensation of Key Management Personnel; and • Disclosures of transactions with a management entity that provides key management personnel services to the company. As the consolidated financial statements of Redcentric plc include the equivalent disclosures, the Company has also taken the exemptions under FRS 101 available in respect of the following disclosures: • IFRS 2 Share Based Payments in respect of group settled share based payments; • Certain disclosures required by IAS 36 Impairment of assets in respect of the impairment of goodwill and indefinite life intangible assets; • Disclosures required by IFRS 5 Non-current Assets Held for Sale and Discontinued Operations in respect of the cash flows of discontinued operations; • Certain disclosures required by IFRS 3 Business Combinations in respect of business combinations undertaken by the Company [in the current and prior periods including the comparative period reconciliation for goodwill; and] • Certain disclosures required by IFRS 13 Fair Value Measurement and the disclosures required by IFRS 7 Financial Instrument Disclosures. The accounting policies set out above have, unless otherwise stated, been applied consistently to all periods presented in these financial statements. 2 Investments Investments in subsidiaries Capital contribution related to share-based payments for subsidiaries 2018 £000 96,062 5,503 101,565 2017 £000 96,062 4,969 101,031 71 Financial StatementsRedcentric Report & Accounts 2018Notes to the Company Financial Statements continued Investments (continued) At 31 March 2018, 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 Redcentric Managed Solutions Limited Redcentric Communications Limited Hotchilli Internet Limited Redcentric US Limited Calyx Managed Services Limited City Lifeline Limited City Lifeline Data Centre Limited** Dormant* Dormant* Dormant* Dormant* Dormant* Dormant* Dormant* Dormant* England and Wales England and Wales England and Wales England and Wales USA England and Wales England and Wales 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. ** Dissolved 11 July 2017. 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. 3 Creditors – amounts falling due within one year 2018 £000 2017 £000 Amounts owed to subsidiaries 11,680 11,873 Amounts due to Group undertakings are unsecured, interest-free and have no fixed payment terms. 4 Called up share capital At 31 March 2016 New shares issued At 31 March 2017 New shares issued At 31 March 2018 Allotted and fully paid Number 145,881,185 2,977,988 148,859,173 276,143 149,135,316 £000 146 3 149 - 149 The number of share 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. 72 Financial StatementsRedcentric Report & Accounts 2018 Notes to the Company Financial Statements continued 4 Called up share capital (continued) Share issues During the year the following shares were issued: Issued on the exercise of share options 2018 Number 276,143 276,143 2017 Number 2,977,988 2,977,988 As at 31 March 2018 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 £24,000 (2017: £110,000). 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. MXC Capital Up until 30 November 2016, the Group engaged MXC Advisory LLP to provide corporate finance advice and consultancy (fees – 2017: £97,500). 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. As at 31 March 2018 MXC has the following interest in shares and options over ordinary shares in the Company: Quantity Grant date Exercise price Expiry date Options (a) 7,000,000 15 November 2013 80p 15 November 2023 (a) 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 112.4p plus 12% p.a. with effect from that date. Other There were no other transactions with related parties in the year to 31 March 2018. 73 Financial StatementsRedcentric Report & Accounts 2018Advisers Company Secretary 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 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 74 Redcentric Report & Accounts 201875 Redcentric Report & Accounts 2018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 CAMBRIDGE Newton House Cambridge Business Park Cowley Road Cambridge CB4 0WZ READING 3-5 Worton Drive Reading RG2 0TG HYDE Unit B, SK14 Industrial Park Broadway Hyde SK14 4QF INDIA 606-611, 6th Floor Manjeera Trinity Corporate  JNTU – Hitech City Road Kukatpally, Hyderabad – 72 0800 983 2522 sayhello@redcentricplc.com www.redcentricplc.com 

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