Redcentric plc Annual Report 2019

Plain-text annual report

R E P O R T & A C C O U N T S R E P O R T & A C C O U N T S 2019 2019 Year ended 31 March 2019 Redcentric plc Redcentric Report & Accounts 2019 O U R VA L U E P R O P O S I T I ON ORGANISATIONAL AGILITY ASSURED AVAILABILITY SMARTER WORKING Helping organisations respond to operational, ﬁ nancial and regulatory pressures Delivering the robust infrastructure and resilient environments that organisations can rely on for productivity, performance and proﬁ t regulatory pressures Enabling and empowering organisations to connect, communicate, collaborate, change and compete through the intelligent leveraging of technology 2 Contents Strategic report Chairman’s statement Chief Executive’s review Financial review Risk management Corporate responsibility Governance Directors’ proﬁ les Corporate governance report Directors’ report Statement of directors’ responsibilities Directors’ remuneration report Auditors’ report to the members of Redcentric plc 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 Redcentric Report & Accounts 2019 4 5-7 8-15 16-17 18 19 20-23 24-26 27 28-33 34-40 41 42 42 43 44 45-73 74 75 76-78 3 Strategic Report Redcentric Report & Accounts 2019 Chairman’s statement I am pleased to present Redcentric’s results for the year ended 31 March 2019. The Chief Executive’s review highlights the progress made in addressing the signiﬁ cant challenges that the business has faced over the last three ﬁ nancial years and the positive steps taken this year to position the company for the future. The cost base has received considerable attention, ensuring that we have mitigated some customer losses. In the second half of the year, the business had particular success in the public sector by winning a number of the Health and Social Care Network (HSCN) tenders. The balance sheet is strong with exemplary cash ﬂ ows for the year resulting in a net debt reduction of £10.1m. Our restructuring and attention to sales growth is our business imperative. Financial results Revenue declined by 6.7% to £93.3m, and adjusted EBITDA decreased from £18.1m to £16.7m. Statutory operating proﬁ t decreased from £0.9m to an operating loss of £0.3m. Net debt fell from £27.7m to £17.6m, a decrease of £10.1m in the year. Finally, we are also pleased to announce that Dean Barber will be joining the Board as Chief Financial Ofﬁ cer and Executive Director on 1 September 2019. My thanks to the Board for their support, and special thanks to our management and employees for their hard work and dedication to progress the Company’s performance. Outlook The recent Board and management changes, operational improvements and ﬁ nancial stability of the Company, all demonstrate that we are well positioned for the future and a return to organic revenue growth. Chris Cole Non-Executive Chairman Operating cash ﬂ ows were particularly strong with an operating cash conversion of 127% reﬂ ecting a signiﬁ cant reduction in debtor days to 38.8 days at 31 March 2019 (48.6 days: 31 March 2018). Dividend At the half year we announced the reinstatement of a progressive dividend policy. An interim dividend of 0.4p was paid in December 2018, reﬂ ecting a dividend cover of 4 times adjusted earnings. In light of the continued excellent cash performance, the Board has re-evaluated this policy in the second half of the year and decided to increase the dividend to reﬂ ect a cover of 2 times adjusted earnings. This will result in a ﬁ nal dividend of 1.0p per share. In addition to this ﬁ nal dividend, the Board will also be seeking approval at the upcoming AGM to buy back up to 5% of the issued share capital of the Company. Board changes and people In November 2018, Redcentric announced the resignation of Chris Jagusz from his directorship and position as Chief Executive Ofﬁ cer. Peter Brotherton, Chief Financial Ofﬁ cer, assumed an interim position as Chief Executive and we are pleased to report that he has now accepted the Board’s invitation to become the permanent Chief Executive. In February 2019, Stephen Puckett resigned from the Board as a Non-Executive Director and Chair of the Audit Committee, and Chris Rigg joined the Board as a Non-Executive Director. Jon Kempster has taken over Stephen’s responsibility as Chair of the Audit Committee. 4 Strategic Report Redcentric Report & Accounts 2019 Chief Executive’s review Overview Delivery function Over the last 12 months we have made signiﬁ cant progress in addressing historical issues and focussing on creating a platform for sustainable growth. During the last three ﬁ nancial years the business has operated in a very competitive market, we have been materially affected by Crown Hosting and the FCA investigation has been ongoing. During the second half of the year we made a signiﬁ cant investment in our delivery function with dedicated project management and engineering teams created to support both the public and private sectors. This investment has increased the headcount in our delivery team by 20% and will initially focus on facilitating and expediting the delivery of the orders secured against the HSCN procurement waves and YHPSN framework in the last six months. Cost efﬁ ciencies In the second half of the year annualised savings of £5m were realised. We have rationalised and re-engineered our core network which has yielded annualised savings of £1.4m. A further £2m of annualised savings have been realised through renegotiation of supplier contracts in relation to direct costs. Additionally, we reorganised and streamlined several business functions resulting in a headcount reduction of 20 and annualised savings of £1.5m. We also closed our Theale ofﬁ ce and transferred the staff to our Reading data centre and ofﬁ ce. This has yielded annualised savings of £130k and as there are 3 years remaining on the lease, an onerous lease exceptional charge of £553k has been made in the FY19 accounts. Public sector Health and Social Care Network (HSCN) During the year, much focus was devoted to the conversion of opportunities in the public sector and in particular those associated with HSCN. HSCN is replacing the legacy N3 network and provides the underlying network arrangements to help integrate and transform health and social care. Over the course of this year, suppliers tendered for, and were appointed to, frameworks across the country and this one-off process is now largely concluded. In the initial stages, our approach to HSCN tendering was poor and this resulted in a very low conversion rate. We learned important lessons from this, and the Company took decisive steps to ensure that the pricing was appropriate to the project, the product list was aligned to customer demand and the overall sales process was substantially improved. Whilst the impact this year of these historical issues has been signiﬁ cant, both in terms of management attention and ﬁ nancial consequence, it is pleasing to report that they have largely worked their way through the business. In parallel, the positive steps that have been taken to address the structure and capability of the sales and delivery functions, coupled with signiﬁ cant cost efﬁ ciencies and improvements to our network and platforms, gives us conﬁ dence for FY20 and beyond. FY19 focus and achievements Sales function Signiﬁ cant progress has been made in the restructuring of the Sales function, with the objective of improving our capabilities and enabling our teams to adopt a consultative sales methodology. We have created dedicated ﬁ eld and desk-based sales teams across both the public and private sectors, focusing on continuing to develop our relationships with our existing customers and new customer acquisition. These teams are supported by our Marketing, Service Delivery, Pre-sales technical and Product Management teams that are part of our revised Sales function. We have made progress in the year to clearly identify our target markets and create propositions that deliver the requisite business outcomes for our customers. Our key growth priorities, established in the second half of the year, will continue into FY20 as we focus on: further developing our relationships with our customers in the public and private sector, maximising the potential of our public sector wins and acquiring new name business in the private sector. To deliver against these priorities we have developed, over the course of the second half of the year, a marketing plan and go to market proposition underpinned by strategic vendors that leverages our provenance in both the public and private sector. These changes have resulted in an enabled, proactive, motivated and capable team that has a clear set of strategic priorities and engagement across the public and private sectors. 5 Strategic Report Redcentric Report & Accounts 2019 Chief Executive’s review continued This action led to a strong performance in the public sector in the second half of the year with high levels of conversion and a more successful end to the tender process. As at the end of June 2019, we have secured contracts with seven HSCN partners totalling £13m as follows: Customer Worcester Health Midlands & Lancashire Bedford, Luton & Milton Keynes East Aggregate Procurement Birmingham & Solihull Sandwell & West Telford & Wrekin Total Average Contract Length Total Contract Value Total Annualised Revenue 5 years 3 years 5 years 3 years 3 years 3 years 3 years £000 1,600 800 5,300 980 2,200 1,300 570 12,750 £000 300 270 1,000 260 680 375 190 3,075 In addition to revenues derived from connectivity services, there exists signiﬁ cant opportunity for cross-selling additional products. We have already been awarded a £1.7m contract for supplying IP telephony services to more than 6,000 users by Worcester Health. When fully rolled out this will equate to £300k additional annualised sales. (N.B. these additional ﬁ gures are not included in the table above.) Yorkshire and Humber Public Sector Network (YHPSN) Framework During the second half of the year we put a number of actions in place to enable us to maximise the opportunity afforded by the YHPSN framework. We have made good progress across the framework and after our initial focus on health partners, we have now broadened our approach to include education and local government. This positive momentum has delivered a total contract value of £4.1m across more than 30 partners in the ﬁ rst quarter. The Public Sector sales team will continue to focus on successful account management and sales and cross-selling opportunities. Their progress this year, in the second half particularly, demonstrates the momentum in this side of our business and we expect to see further progress in FY20. Looking forward, we now have the processes and structures in place to tender for contracts with conﬁ dence. Crown Hosting Due to our past success in public sector hosting we have been more exposed to the ﬁ nancial impact of the establishment of Crown Hosting than most of our competitors. In FY17 public sector hosting revenue amounted to £8.2m. This year’s results reﬂ ect like for like revenue of £4.4m and we anticipate that by the end of FY21 all such business will have been migrated away from Redcentric. Products, Networks and Platforms The Company has continued to invest in its core network and operational platforms, which will underpin some key developments in FY20. These investments reinforce our view that it is our network infrastructure and capabilities that form our most important competitive advantage. The connectivity portfolio is being upgraded to allow 10gb connections to terminate into the network, and we are also working on the overall expansion of the network to give a 100gb core. The need for this is driven by increased usage and demand from customers who require 10gb circuits from day one. Additionally, this will help future-proof the network as customer requirements change. In parallel we are developing a robust software-deﬁ ned wide area network offering for launch in FY20 which is intended to complement our core network technologies. This will afford our customers more ﬂ exibility and control whilst maintaining the high level of service that they have come to expect. Whilst the trend towards the hyper-cloud continues, there is still customer demand for private shared cloud. To support this and to ensure the Company can offer the best service to its customers, we are upgrading its internal Infrastructure as a Service platform. This will increase the efﬁ ciency and stability of the service offered to customers and will also modernise the user experience. We have also developed and launched a range of transition and management services which will help our customers migrate their workloads to both Microsoft Azure and our own platforms. 6 Strategic Report Redcentric Report & Accounts 2019 Strong cash ﬂ ows have been a consistent feature of the business and this, taken with the positive steps achieved throughout the year and the low levels of net debt, gives the Board conﬁ dence in the outlook for Redcentric. It also enables us to announce a revised and more substantial dividend policy with future dividends based on a pay-out of 50% of adjusted earnings. In addition, we will seek shareholder approval at the upcoming AGM for the authority to buy back up to 5% of the issued share capital of the Company. Peter Brotherton Chief Executive Ofﬁ cer 25 June 2019 Chief Executive’s review continued External Updates Brexit Whilst there is ongoing political and economic uncertainty as to the outcome of Brexit, we do not foresee any material impact on the Company as a result. The vast majority of our revenue is generated in the UK from UK based customers and all of our suppliers are UK based also. Any revenue from outside of the UK is immaterial. Financial Conduct Authority (FCA) Unfortunately, the business continues to experience the effect of the FCA investigation. As well as diverting management time, signiﬁ cant costs are still being incurred (£0.6m in FY19 and £2.5m since November 2016), we are constrained in the markets into which we can sell, and strategic options are limited. The FCA investigation is still ongoing and has not yet reached its conclusion. At this time, the FCA has not communicated how it intends to proceed and what, if any, action it might bring against the Company. Until such stage as the FCA’s intention becomes clear, the Directors are not able to judge whether a ﬁ ne will be likely and therefore whether we would need to make a relevant provision in the accounts. We continue to cooperate as fully as we can with the investigation and whilst the overall timing is out of our control, we are seeking to expedite it as soon as practicably possible. Summary and outlook We have had a productive year. The resolution of some of the historical issues has allowed us to increasingly focus our attention on the future. The ongoing investigation by the FCA and the effect of Crown Hosting will remain a challenge into FY20 with an anticipated further reduction in revenue of £2.6m from the latter. We have taken positive steps to address the structure and capability of the sales and delivery functions, coupled with signiﬁ cant cost efﬁ ciencies and improvements to our network and platforms. Our key strategic growth priorities, established in the second half of the year, will continue into FY20 as we focus on: further developing the relationships with our customers in the public and private sector, maximising the potential of the YHPSN and other public sector frameworks and acquiring new business in the private sector. 7 Strategic Report Redcentric Report & Accounts 2019 Financial review Financial highlights and overview Statutory ﬁ nancial reporting measures Revenue Operating proﬁ t / (loss) Basic earnings per share Net debt Adjusted performance measures (APMs) Adjusted EBITDA Adjusted EBITDA margin Adjusted cash generated from operations Adjusted operating cash conversion Adjusted operating proﬁ t Adjusted basic earnings per share Year ended 31 March 2019 Year ended 31 March 2018 Variance £93.3m £(0.3)m (1.32)p £17.6m £100.0m £0.9m 0.34p £(6.7)m £(1.2)m (6.7)% (133.3)% (1.66)p (484.5)% £27.7m £10.1m (36.5)% £16.7m 17.9% £21.3m 127.3% £8.2m 3.89p £18.1m 18.1% £22.6m 125.2% £9.4m 4.35p £(1.4)m (20)bps £(1.3)m 201bps £(1.2)m (0.46)p (7.6)% (5.7)% (12.6)% (10.6)% The Directors use the APMs listed above as they are critical to understanding the ﬁ nancial performance of the Group. Most of the Adjusted measures remove the impact of depreciation, amortisation, share based payments and exceptional costs as these are deemed to not be indicative of the underlying operational performance of the business. As the APMs are not deﬁ ned by IFRS, they may not be directly comparable with other companies who use similar measures. APM Deﬁ nition Reconciliation to equivalent IFRS measure of performance Adjusted EBITDA Earnings before interest, tax, depreciation, amortisation, exceptional costs and share-based payments A reconciliation of this measure is provided in the consolidated income statement Adjusted EBITDA margin Adjusted EBITDA to revenue Adjusted EBITDA less exceptional costs less share-based payments, all as a percentage of revenue Adjusted cash generated from operations Adjusted operating cash conversion Adjusted operating proﬁ t Adjusted basic earnings per share Adjusted operating costs Cash generated from operations add exceptional costs Cash generated from operations less exceptional costs Adjusted cash generated from operations to adjusted EBITDA Cash generated from operations less exceptional costs, divided by EBITDA Operating proﬁ t add amortisation on acquired intangibles, exceptional costs and share based payments Adjusted earnings – proﬁ t /loss add amortisation (acquired intangibles), share based payments, exceptional costs, tax charge/credit Operating costs less depreciation, amortisation and share based payments and exceptional costs Operating proﬁ t as disclosed on the consolidated income statement A reconciliation of this measure is provided in Note 9 Operating expenditure as outlined in the consolidated income statement 8 Strategic Report Redcentric Report & Accounts 2019 Financial review continued Revenue Revenue for the year ended 31 March 2019 was £93.4m, a decrease of £6.7m on the previous ﬁ nancial year. Recurring revenue Product revenue Services revenue Total revenue Year ended 31 March 2019 Year ended 31 March 2018 Variance £000 £000 £000 % 80,544 5,810 6,906 87,065 7,180 5,745 (6,521) (1,369) 1,161 (7.5)% (19.1)% 20.2% 93,260 99,990 (6,730) (6.7)% The key revenue metric of RMR (recurring monthly revenue) was down 7.5% compared to last year and accounted for 86% of total revenue in-line with 2018 at 87%. Gross proﬁ t Gross proﬁ t Gross margin Year ended 31 March 2019 Year ended 31 March 2018 Variance £000 £000 £000 % 56,365 59,994 (3,629) (6.0)% 60.4% 60.0% Gross proﬁ t has decreased year on year due to a reduction in revenue. The overall gross margin has increased slightly due to a signiﬁ cant reduction in direct costs through supplier renegotiations and better management of all third-party costs. Adjusted operating costs Year ended 31 March 2019 Year ended 31 March 2018 Variance £000 £000 £000 % Staff costs (excluding share-based compensation) 20,507 23,292 (2,785) (12.0)% Ofﬁ ce and data centre costs Network and equipment costs Other sales, general and administration costs Offshore costs Total adjusted operating costs 7,049 7,311 2,693 2,091 6,942 6,805 3,010 1,860 107 506 (317) 231 39,651 41,909 (2,258) 1.5% 7.4% (10.5)% 12.4% (5.4)% Adjusted operating costs excludes depreciation, amortisation, and share based payments. 9 Strategic Report Redcentric Report & Accounts 2019 Financial review continued Employees Year-end headcount UK India Total Average headcount UK India Total 31 March 2019 31 March 2018 Variance 310 156 466 347 141 488 (37) 15 (22) 31 March 2019 31 March 2018 Variance 329 150 479 362 139 501 (33) 11 (22) Overall, adjusted operating costs for FY19 were £2.3m (5.4%) lower than FY18 as a result of the following: • Headcount has reduced by 37 heads in the UK driving a favourable variance year on year of £2.8m. These reductions have not had an impact on the operational running of the business. One-off exceptional costs of these reductions totalled £0.8m. • Ofﬁ ce and data centre costs have increased slightly by 1.5% in the year. Large electricity increases in FY19 have been offset by the annualised impact of the closures made in FY18. Additionally, the Company has combined its ofﬁ ce in Theale with the data centre in Reading and has therefore allocated the costs of the Theale ofﬁ ce to a vacant property provision (January 2019 onwards). • Network and equipment costs have increased due to reclassiﬁ cation of items from cost of sales to operating costs as well as additional licensing costs for internal platforms. • 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. • Offshore costs have increased due to movement of roles from the UK to India. This is reﬂ ected in the headcount numbers above. Adjusted EBITDA (and adjusted operating proﬁ t) Adjusted EBITDA Adjusted EBITDA margin Adjusted operating proﬁ t Adjusted operating proﬁ t margin Year ended 31 March 2019 Year ended 31 March 2018 Variance £000 £000 £000 % 16,714 17.9% 8,243 8.8% 18,085 18.1% 9,432 9.4% (1,371) (7.6)% (1,189) (12.6)% Adjusted EBITDA is the key measure that the Group uses to assess the underlying proﬁ tability of the business. Adjusted EBITDA excludes exceptional costs and share based payments. Adjusted EBITDA decreased by £1.4m or 7.6% to £16.7m reﬂ ecting the decrease in gross proﬁ t of £3.6m offset by the decrease in operating costs of £2.3m. Adjusted EBITDA margin decreased slightly from 18.1% to 17.9%. 10 Strategic Report Redcentric Report & Accounts 2019 Financial review continued With the implementation of IFRS 16 for FY20, adjusted operating proﬁ t has been included here as a point of reference. The impact of this standard is expected to make a material impact to EBITDA so the Company is considering moving to operating proﬁ t to assess the underlying performance of the business. Exceptional costs Professional fees associated with the forensic review and Financial Conduct Authority (FCA) investigation Staff restructuring Integration costs Vacant property provisions Year ended 31 March 2019 Year ended 31 March 2018 Variance £000 £000 £000 % 554 804 - 553 1,911 672 868 132 - 1,672 (118) (64) (132) 553 239 (17.6)% (7.4)% (100.0)% 100.0% 14.3% Overall, the level of exceptional items has increased from £1.7m to £1.9m. The key movements are as follows: • Professional fees associated with the forensic review and FCA investigation − these costs relate to legal advice received in respect of the ongoing FCA investigation. Whilst the Company is still incurring these costs, they are steadily reducing. • Staff restructuring costs – as part of the overall cost base review and movement of UK roles to India. This restructuring resulted in 20 redundancies. • Post the integration of City Lifeline, there have been no further costs of this nature. All the group companies are now fully integrated. • Vacant property provision relates to closure of the Theale ofﬁ ce. All staff have been transferred to the data centre in Reading. Net ﬁ nancing costs Interest receivable Other interest receivable Interest payable Interest payable on bank loans and overdrafts Interest payable on ﬁ nance leases Amortisation of loan arrangement fees Year ended 31 March 2019 Year ended 31 March 2018 Variance £000 £000 £000 % (13) (19) 6 (31.6)% 947 93 51 1,091 1,241 143 68 1,452 (294) (50) (17) (361) (23.7)% (35.0)% (25.0)% (24.9)% Net ﬁ nancing costs 1,078 1,433 (355) (24.8)% The reduction in net ﬁ nancing costs in FY19 is primarily due to the reduced balance on the revolving credit facility. 11 Strategic Report Redcentric Report & Accounts 2019 Financial review continued Share-based payments SAYE schemes Director and senior manager schemes MXC options Employers NI Year ended 31 March 2019 Year ended 31 March 2018 Variance £000 £000 £000 % 134 220 - 12 366 224 162 148 34 568 (90) 58 (148) (22) (202) (40.2)% 35.8% (100.0)% (64.7)% (35.6)% NI is being accrued, where applicable, at a rate of 13.8% on the potential employee gain on share-based incentives granted. Taxation The tax charge for the year was £0.6m (FY18: credit of £1.0m) which was made up of a corporation tax charge of £0.8m (FY18: charge of £1.1m) and a deferred tax credit of £0.2m (FY18: credit of £2.1m). The corporation tax charge comprises a current year corporation tax charge of £0.6m, a prior year corporation tax charge of £0.1m and an overseas tax charge of £0.1m. As at 31 March 2019, the Group had £16.4m of tax losses carried forward comprising: No tax losses carried forward Losses carried forward: - Stream 1 - Stream 2 % of proﬁ ts Losses available 70.66% - 19.64% 8,813,109 9.70% 7,535,445 100.00% 16,348,554 The Group is made up several historic acquisitions, some of which had tax losses brought forward. The Group’s taxable proﬁ ts are streamed in proportion to the relative size of the original acquired company as a percentage of Redcentric as a whole. At 31 March 2019 £16m of tax losses were still available to be utilised against 29.34% of future proﬁ ts. Earnings per share and dividends Basic loss per share for FY19 was (1.32)p (FY18: basic earnings per share of 0.34p). Basic adjusted earnings per share for FY19 was 3.9p, compared to 4.3p in FY18. Diluted adjusted earnings per share for FY19 was 3.8p compared to 4.3p in FY18. Dividends A progressive dividend policy was announced at the interim accounts with a 0.4p per share dividend paid out in December 2019. This equated to a total payment of £597k. A ﬁ nal dividend payment of 1.0p per share will be paid on 6 September 2019, subject to approval at the Company's Annual General Meeting. The shares will have an ex-dividend date of 4 July 2019 and a record date of 5 July 2019. No dividends were paid during FY18. 12 Strategic Report Redcentric Report & Accounts 2019 Financial review continued Financial position The summary ﬁ nancial position of the Group is set out below: Non-current assets Net current assets (excl. net debt) Non-current liabilities (excl. net debt) Net debt Net assets Year ended 31 March 2019 Year ended 31 March 2018 £000 £000 94,077 102,724 14 (881) (17,565) 75,645 3,326 (421) (27,707) 77,922 Net current assets have declined by £3.3m as a result of better working capital management and better conversion of debtors into cash. This, along with normalised funds generated from operations, accounts for the material decrease in net debt. Net debt and cash ﬂ ows Revolving credit facility Term loans Cash Finance leases Unamortised loan arrangement fees Net debt Year ended 31 March 2019 Year ended 31 March 2018 £000 £000 19,500 363 (7,206) 4,976 (68) 17,565 28,000 - (6,089) 5,932 (136) 27,707 During FY19, net debt fell from £27.7m at 31 March 2018 to £17.6m as at 31 March 2019. The movements in net debt are analysed on page 14. For the second consecutive year the company has achieved an operating cash conversion greater than 100%. 13 Strategic Report Redcentric Report & Accounts 2019 Year ended 31 March 2019 £000 16,714 4,575 21,289 127% (5,229) (2,506) 1,181 665 (5,889) (1,873) (1,044) (68) (8) (76) 12,407 (1,668) (597) (2,265) 10,142 (27,707) (17,565) Financial review continued Net debt and cash ﬂ ows (continued) Adjusted EBITDA Working capital movements Adjusted cash generated from operations Cash conversion Capital expenditure - Cash purchases - Finance lease purchases - Proceeds from sale and lease back of assets - Proceeds from sale of ﬁ xed asset Corporation tax Interest paid Other 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 - Dividend paid to shareholders Net decrease in adjusted net debt Net debt at the beginning of the period Adjusted net debt at the end of the period 14 Strategic Report Redcentric Report & Accounts 2019 Financial review continued Working capital movements There has been a large focus in FY19 on, not only clearing down legacy debt, but improving processes to ensure a consistently low level of debt over 90 days old. Debt greater than 90 days has reduced by 48% year on year, whilst debt greater than 180 days has reduced by 30%. Trade debtor days have also reduced to 38.8 days (2018: 48.6 days). 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 Credit note provision Net trade debtors Year ended 31 March 2019 Year ended 31 March 2018 £000 £000 9,074 2,628 505 99 390 416 13,112 (1,521) 11,591 11,323 1,951 1,417 550 945 593 16,779 (981) 15,798 Trade creditor days were 28 at 31 March 2019 compared to 28 as at 31 March 2018. Financing Committed 31 March 2019 31 March 2018 Available Drawn Undrawn Available Drawn Undrawn £000 £000 £000 £000 £000 £000 - Revolving credit facility 25,000 19,500 5,500 40,000 28,000 12,000 - Term loans - Finance leases Uncommitted - Bank overdraft - Finance leases 363 4,976 363 4,976 - - 30,339 24,839 5,500 - 5,932 45,932 - 5,932 33,932 - - 12,000 2,000 4,724 6,724 - - - 2,000 4,724 6,724 2,000 4,603 6,603 - - - 2,000 4,603 6,603 Total borrowing facilities 37,063 24,839 12,224 52,535 33,932 18,063 In addition to the above facilities, the Company has access to a non-committed £20m accordion facility. During the year the company cancelled £15m of unutilised facility, reducing the committed level down from £40m to £25m and thereby saving £186k in annualised commitment fees. Post the year end a further £2.5m was cancelled from the facility leaving a committed revolving credit facility of £22.5m. Peter Brotherton Chief Executive Ofﬁ cer 25 June 2019 15 Strategic Report Redcentric Report & Accounts 2019 Infrastructure failure The Directors believe that one of the key differentiators that Redcentric offers is that its services are provided over its own controlled and managed infrastructure, such as its own networks and data centres. Whilst this provides customers with comfort around 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. FCA Investigation The FCA investigation is ongoing and has yet to reach its conclusion. The Company continues to cooperate fully with the FCA with a view to bringing the matter to a conclusion as soon as possible. The Company has taken specialist legal advice in respect of the investigation, given its signiﬁ cance and to ensure that it manages the associated risks as effectively as possible. 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 beneﬁ ts of proprietary network and data centres with a ﬂ exible 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. 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 efﬁ ciencies 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 qualiﬁ ed personnel, and to expand, train and manage its employee base. There can be no guarantee that suitably skilled and qualiﬁ ed individuals will be retained or identiﬁ ed 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 signiﬁ cant 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. Competitors could therefore materially adversely impact the scale of the Group’s revenues and its proﬁ tability. The Group monitors competitors’ 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 signiﬁ cant 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 risks, 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. 16 Strategic Report Redcentric Report & Accounts 2019 Risk management continued Through these differentiators, Redcentric aims to attract new customers and to deepen and broaden its relationships with existing customers. The Board’s strategy for growth comprises of: • ongoing investment in expanding and enhancing Redcentric’s own infrastructure so that it can provide its customers with the very highest levels of security and service; and • effective use of Redcentric’s scale and resources to explore and invest in new technologies so that its customers can beneﬁ t 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 ﬁ nancial 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. 17 Strategic Report Redcentric Report & Accounts 2019 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 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 2018. By order of the Board Harn Jagpal Company Secretary 25 June 2019 Our colleagues have given much to the company over the year. We are now a more efﬁ cient 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 satisﬁ ed 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 two young people the opportunity to develop their careers with us and gain qualiﬁ cations in networks, data storage, computing and electro-technical systems. We have also launched an internal Future Leaders Programme that will provide formal management qualiﬁ cations for a number of employees against an apprenticeship framework. Gender pay report Our gender pay report at the snapshot date of 5th April 2018 showed that the overall difference between men and women’s earnings at Redcentric was 23% (mean) or 11% (median), based on hourly rates of pay at the snapshot date of 5th April 2018. 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 conﬁ dent 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. 18 Governance Redcentric Report & Accounts 2019 Directors’ proﬁ les NON-EXECUTIVE DIRECTORS Chris Cole Independent Non-Executive Chairman 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 a former Non-Executive Chairman at Ashtead Group plc. 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. Chris is Chairman of the Nomination Committee. Jon Kempster Independent Non-Executive Director Jon Kempster was appointed as a Non-Executive Director on 10 January 2017. Jon is the Chief Financial Ofﬁ cer and member of the Board at Sports Direct International plc. Jon was previously the Chief Financial Ofﬁ cer at Utilitywise, Wincanton plc, Low and Bonar plc, Linden Group plc and Fii Group plc. Jon is an ACA qualiﬁ ed chartered accountant, Chairman of the Audit Committee (from 1 February 2019 onwards), and a member of the Remuneration and Nominations 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 Non- Executive Chairman of Progressive Equity Research, the paid- for equity research house and a Non-Executive Director of Amino Technologies plc, the AIM listed technology provider of media and entertainment solutions. 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. Chris Rigg (appointed 1 February 2019) Independent Non-Executive Director Chris Rigg was appointed as a Non-Executive Director on 1 February 2019. Chris currently holds Non-Executive roles with Sportech plc and Ridge Pharma Limited. He was also previously Chief Executive Ofﬁ cer and Chief Financial Ofﬁ cer at Quantum Pharma plc and Chief Executive Ofﬁ cer at Northern Recruitment Group Limited. Chris is a qualiﬁ ed chartered accountant and is a member of the Audit, Remuneration and Nomination Committees. EXECUTIVE DIRECTORS Peter Brotherton Chief Executive Ofﬁ cer (from 22 November 2018), formally Chief Financial Ofﬁ cer Peter Brotherton was appointed as Chief Financial Ofﬁ cer on 28 November 2016 and as Interim Chief Executive Ofﬁ cer on 21 November 2018. Peter is a senior and experienced Chief Financial Ofﬁ cer with over 25 years' experience across a number of senior ﬁ nance roles. Peter's two previous roles were as Chief Financial Ofﬁ cer of Gametech and Chief Financial Ofﬁ cer at PKR Group. Prior to those two roles, from 2011 to 2014, Peter was Chief Financial Ofﬁ cer 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 ﬁ nancial control function. Peter also had senior ﬁ nance roles at Varla (UK) Limited, Cell Structures Group plc and spent ﬁ ve years at Kingston Communications plc, becoming Director of Finance. Peter qualiﬁ ed as an ACA chartered accountant at KPMG. 19 Governance Redcentric Report & Accounts 2019 Formal agendas and reports are provided to the Board on a timely basis in advance of Board and Committee meetings and the Chairman ensures that all Directors are properly briefed on issues to be discussed at Board meetings. Directors are able to obtain further advice or seek clarity on issues raised at the meetings from within the Company or from external sources. The Company has taken external legal advice in respect of the ongoing FCA investigation, being a signiﬁ cant matter. Further details are included in note 5 to the Consolidated Financial Statements. The Executive Directors of the Company are employed on a full-time basis. The Non-Executive Directors are required to devote such time to Company matters as is necessary for the proper performance of their duties and this changes from time to time. In addition to monthly Board meetings, members of the Board are required to attend committee meetings as detailed below, other ad hoc Board meetings, the annual general meeting of the Company, site visits, Board dinners and any other business or general meetings as required. Board members are also required to consider all relevant papers before each meeting and to devote additional time in respect of preparation and ad hoc matters which may arise. The Non-Executive Directors are required to obtain the agreement of the Chairman before accepting additional commitments that might affect the time that they are able to devote to their role as a non-executive director. The Board recognises the importance of evaluating its performance and therefore plans to undertake a board performance review towards the end of 2019. As part of the review, the time required and spent on Company matters by the Board will be assessed. 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. Corporate governance report The Board is responsible for the Group’s corporate governance policies and recognises the important of high standards of corporate governance and integrity. The Board has chosen to adopt the Quoted Companies Alliance (QCA) Code for Small and Mid-sized Quoted Companies 2018. A copy of the Group’s full Corporate Governance Statement is available on the Group’s website at www.redcentricplc.com The Board of Directors At the ﬁ nancial year end the Board comprised the Non-Executive Chairman, Chris Cole; the Chief Executive, Peter Brotherton; and Non-Executive Directors Jon Kempster, Stephen Vaughan, and Chris Rigg. The experience and skills of each of the members of the Board are set out on page 19. The Board has signiﬁ cant and appropriate levels of experience given the nature and size of the Company and each member is responsible for ensuring their continuing professional development to maintain their effective skills and knowledge. The business and management of the Company and its subsidiaries are the collective responsibility of the Board. The Board meets on a monthly basis and at each meeting, 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 deﬁ ned 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. Stephen Vaughan is the Senior Independent Non-Executive Director and served from 24 July 2017 in this position. 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. 20 Governance Redcentric Report & Accounts 2019 Corporate governance report continued The following table details the attendance of the Board members at Board and Committee meetings in FY19: Name Position at 31/3/19 Main Board Audit Committee Remuneration Committee Nomination Committee Total Attended Total Attended Total Attended Total Attended Chris Cole Stephen Vaughan Jon Kempster Chris Rigg 1 Peter Brotherton Stephen Puckett 2 Chris Jagusz 3 Chairman NED NED NED CEO NED NED 16 16 16 2 16 14 9 16 15 16 2 16 11 9 - 2 2 0 - 1 - - 1 2 0 - 1 - - 2 2 0 - 2 - - 2 2 0 - 1 - 2 2 2 0 - 2 - 2 2 2 0 - 0 - 1 Appointed with effect from 1 February 2019 2 Resigned with effect from 1 February 2019 3 Resigned with effect from 21 November 2018 Nomination Committee The Nomination Committee consists of Chris Cole (Chairman), Stephen Vaughan, Jon Kempster and Chris Rigg. The Committee meets at least once a year and at other times during the year as agreed between the members of the Committee or as otherwise requested. 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 once a year reviews the structure, size and composition of the Board (including gender balance), considers succession planning for the Board and other senior Executives and review the Executive and Non-Executive leadership needs of the organisation. Remuneration Committee The Remuneration Committee consists of Stephen Vaughan (Chairman), Jon Kempster and Chris Rigg. Details of the Committee and its policies are set out in the Directors’ Remuneration Report on pages 28-33. The Committee has formal terms of reference (available on request from the Company Secretary). Audit Committee The Audit Committee consists of Jon Kempster (Chairman), Stephen Vaughan and Chris Rigg. During the year, Jon Kempster was appointed as Chairman of the Committee and the Committee adopted new terms of reference. In accordance with these, the Committee will meet at least three times a year at appropriate intervals in the ﬁ nancial reporting and audit cycle, and at other times during the year as agreed between the members of the Committee or as required. 21 Governance Redcentric Report & Accounts 2018 Redcentric Report & Accounts 2019 Corporate governance report continued Audit Committee (continued) The Committee’s terms of reference are available on request from the Company Secretary. They 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 formal announcements and the integrity of the ﬁ nancial statements, including signiﬁ cant estimates and judgements made in connection with the preparation of the statements (further details of which are in note 1.25 to the Consolidated Financial Statements). A whistleblowing arrangement exists whereby matters can be conﬁ dentially 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 Director of Financial Control (covering part of the Chief Financial Ofﬁ cer role pending the start of a new Chief Financial Ofﬁ cer) monitors the level and nature of non-audit services and speciﬁ c assignments are ﬂ agged 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. 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 FRC Guidance on risk management and internal control, related ﬁ nancial and business reporting, the Group has an on-going process for identifying, evaluating and managing the signiﬁ cant risks faced by it. The Group is committed to maintaining high standards of business conduct and operates under an established internal control framework covering ﬁ nancial, 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 ﬁ nancial information which includes key performance and risk indicators and the Chief Executive Ofﬁ cer and the Director of Financial Control (pending start of the new CFO) report on signiﬁ cant changes in the business and the external marketplace to the extent they represent signiﬁ cant 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 ﬁ gures together with other business measures on a monthly basis. The principal treasury related risks are documented and approved by the Board. Details of any derivatives and ﬁ nancial instruments are set out in notes 17-19 to the ﬁ nancial statements. Corporate culture The Board leads by example with respect to promoting a healthy corporate culture and ensuring that ethical values and behaviours are embedded in the business. The processes in place for decision making which are documented in its committee terms of reference, the Company’s share dealing code and the requirement for regular disclosure of interests are all examples of processes which require high standards of behaviour from the Board. Employment policies adopted by the Company, such as its whistleblowing and anti-bribery policies assist in embedding a culture of ethical behaviour and the values set out in its corporate social responsibility statement ( www.redcentricplc. com/about-us/redcentric-and-the-community/corporate- social-responsiblity ) and Modern Slavery Act statement ( www.redcentricplc.com/about-us/redcentric-and-the- community/corporate-social-responsiblity/modern-slavery-act ) also reinforce this culture. Relations with shareholders and investors Copies of the Annual Report and Financial Statements are issued to all shareholders who have requested them, and copies are available on the Group’s website www.redcentricplc.com. The Half Year Report is also available on the Group’s website. The Group makes full use of its website to provide information to shareholders and other interested parties. The Company Secretary also deals with a number of written or e-mailed enquiries throughout the year. Shareholders are given the opportunity to raise questions at the Annual General Meeting and the Directors are available both prior to and after the meeting for further discussion with shareholders. 22 Governance Redcentric Report & Accounts 2019 Corporate governance report continued During the year, the Chief Executive Ofﬁ cer and the Director of Financial Control met with institutional investors after the announcement of the preliminary and interim results. There has also been regular dialogue with shareholders through the Group’s corporate brokers, Numis Securities and ﬁ nnCap Limited, and the Group seeks to stay abreast of shareholder expectations and reactions through its brokers, registrars, investor roadshows, meetings with key investors and its internal investor relations team. 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 Ofﬁ cer, Chief Financial Ofﬁ cer or Company Secretary has failed to resolve or for which such contact is inappropriate. Substantial shareholders As at 31 March 2019 and 31 May 2019 (being the latest practicable date before the publication of the report) the Company had been notiﬁ ed of the following signiﬁ cant interests in its Ordinary, voting share capital: Coltrane Asset Management LP ND Capital Investments Limited Kestrel Partners LLP Mr Richard Grifﬁ ths Slater Investments Harwood Capital Mgt Group Eugenia II Investment Holdings 31 March 2019 Number 31 March 2019 % 25 May 2019 Number 25 May 2019 % 33,768,246 23,274,689 21,207,814 16,017,141 8,728,656 7,500,000 5,540,495 22.64 15.61 14.22 10.74 5.85 5.03 3.72 33,768,246 23,274,689 21,399,362 16,250,941 8,728,656 7,525,000 5,540,495 22.64 15.61 14.35 10.90 5.85 5.05 3.72 23 Governance Redcentric Report & Accounts 2019 Directors’ report The Directors present their annual report together with the audited ﬁ nancial statements for the year ended 31 March 2019. 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 4-18 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 ﬁ nancial statements: Peter Brotherton Chris Cole Jon Kempster Stephen Vaughan Chris Rigg (appointed 1 February 2019) Chris Jagusz (resigned 21 November 2018) Stephen Puckett (resigned 1 February 2019) As at 31 March 2019 the Director's beneﬁ cial interests and those of their families in the ordinary share capital of the Company were as follows: Peter Brotherton Chris Cole Stephen Vaughan 31 March 2019 31 March 2018 Number of shares Number of shares 20,000 20,000 20,000 20,000 20,000 20,000 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 28-33. As permitted by the Articles of Association, the Directors have the beneﬁ t of an indemnity which is a qualifying third-party indemnity provision as deﬁ ned by Section 234 of the Companies Act 2006. The indemnity was in force throughout the last ﬁ nancial year and is currently in force. The Company also purchased and maintained Directors’ and Ofﬁ cers’ liability insurance throughout the ﬁ nancial 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 ﬁ nancial and economic factors affecting the Group plays a major role in maintaining its relationship with its staff. 24 Governance Redcentric Report & Accounts 2019 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 6 370 382 0 2 95 97 6 8 465 479 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 an HMRC approved Redcentric plc Save-As-You-Earn Option Plan where employees contribute a monthly amount which is saved over three years to buy shares in the Company at a pre-determined price. At 31 March 2019, there was one active plan as follows (the two previous schemes have both now come to maturity). 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 2019, the following options had been granted under the plan: Grant date 17 December 2014 14 December 2015 30 August 2017 Total Exercise price Options granted Options exercised Options lapsed / cancelled Options remaining 107p 154p 63p 1,134,886 163,905 1,223,390 2,522,181 - - - - (1,134,886) (163,905) (248,870) (1,547,661) - - 974,520 974,520 25 Governance Redcentric Report & Accounts 2019 Directors’ report continued Annual General Meeting The Annual General Meeting will be held at midday at CMS Cameron McKenna Nabarro Olswang LLP, Cannon Place, 78 Cannon Street, London, EC4N 6AF on 2 September 2019. Dividend The Board re-instated the Company’s dividend policy in FY19 with an interim dividend of 0.4p per share being paid on 21 December 2018, totalling £596k. The ﬁ nal dividend of 1.0p per share will be payable to shareholders on 6 September 2019, subject to approval at the Company's Annual General Meeting, based on a record date of 5 July 2019 and ex-dividend date of 4 July 2019. Financial risk management objectives and policies The Company’s ﬁ nancial risk management objectives and policies are described in note 18 to the ﬁ nancial 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 24. Having made enquiries of fellow Directors, each of these Directors conﬁ rms that: • To the best of each Director’s knowledge and belief, there is no information relevant to the preparation of their report of which the Group’s auditors are unaware; and • Each Director has taken all the steps a Director might reasonably be expected to have taken to be aware of relevant audit information and to establish that the Group’s auditors are aware of that information Subsequent events There have been no signiﬁ cant 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 Financial Review. By order of the Board Harn Jagpal Company Secretary 25 June 2019 26 Governance Redcentric Report & Accounts 2019 Statement of Directors’ responsibilities The directors are responsible for keeping adequate accounting records that are sufﬁ cient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the ﬁ nancial position of the Company and enable them to ensure that its ﬁ nancial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of ﬁ nancial 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 ﬁ nancial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of ﬁ nancial statements may differ from legislation in other jurisdictions. By order of the Board Harn Jagpal Company Secretary 25 June 2019 The directors are responsible for preparing the Annual Report and the Group and Company ﬁ nancial statements in accordance with applicable law and regulations. Company law requires the directors to prepare Group and Company ﬁ nancial statements for each ﬁ nancial year. As required by the AIM Rules of the London Stock Exchange they are required to prepare the Group ﬁ nancial 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 Company ﬁ nancial 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 ﬁ nancial statements unless they are satisﬁ ed that they give a true and fair view of the state of affairs of the Group and Company and of their proﬁ t or loss for that period. In preparing each of the Group and Company ﬁ nancial 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 ﬁ nancial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU; • for the Company ﬁ nancial statements, state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the ﬁ nancial statements; • assess the Group and 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 Company or to cease operations or have no realistic alternative but to do so. 27 Governance Redcentric Report & Accounts 2019 Directors’ remuneration report (audited) Annual statement by the Chairman of the Remuneration Committee The Remuneration Committee comprises Stephen Vaughan (Chairman), Jon Kempster and Chris Rigg. The Committee meets at least twice a year and at other times during the year as agreed between the members of the Committee. 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, while at the same time ensuring they are not rewarded for failure. Terms of reference The Committee makes recommendations to the Board, within agreed Terms of Reference, on the remuneration and other beneﬁ ts, including bonuses and share options, of the Executive Directors. The Terms of Reference includes committee oversight of several other signiﬁ cant remuneration matters beyond those 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 21 November 2018, Chris Jagusz resigned as a director and Chief Executive Ofﬁ ce. Peter Brotherton (formerly Chief Financial Ofﬁ cer) has taken on the role of Chief Executive Ofﬁ cer from 22 November 2019 onwards. Chief Financial Ofﬁ cer The Board are pleased to announce the Dean Barber will be joining the Company as Chief Financial Ofﬁ cer and Executive Director with effect from 1 September 2019. The remuneration package offered to the Chief Financial Ofﬁ cer was reviewed and approved by the Remuneration Committee as part of the recruitment process. Basic salary and beneﬁ ts Basic salaries are reviewed on a discretionary basis. The beneﬁ ts provided for each Executive Director may include: i. life assurance cover of 4 times salary; ii. private medical insurance for themselves, their spouse and their children; 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 two Executive Directors beneﬁ ted from a special bonus scheme which would pay out, in the event of a change of control, a cash sum linked to the growth in share price since October 2017, subject to an initial uplift requirement. Mr Jagusz’s participation in this scheme lapsed upon his leaving the Company. Post the balance sheet date, the Board has amended this scheme to allow for any bonus to be paid in shares, or alternatively with an equivalent monetary value at the change of control price, subject to the discretion of the Remuneration Committee at the time. It is intended to include the newly recruited Chief Financial Ofﬁ cer in this scheme when he joins the Board. Share options Executive Directors are entitled to participate in the Company share option schemes. The Remuneration Committee approves the granting of any share options. 28 Governance Redcentric Report & Accounts 2019 Directors’ remuneration report (audited) continued 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. 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 Beneﬁ ts 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. Beneﬁ ts as provided to current Executive Directors. Beneﬁ ts for each Executive Director may include life assurance cover of 4 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 reﬂ ect 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 Ofﬁ cer and Chief Financial Ofﬁ cer have service contracts with a provision for 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 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 Peter Brotherton Chris Jagusz (resigned 21 November 2018) Non-Executive Directors Chris Cole Stephen Puckett (resigned 1 February 2019) Jon Kempster Stephen Vaughan Chris Rigg *12 months in the event of a takeover. Date of contract Notice period (months) Length of service at 31 March 2019 28 November 2016 2 October 2017 1 September 2014 17 November 2014 10 January 2017 13 June 2017 21 January 2019 6* 6 6 6 6 6 6 2 years 4 months 4 years 7 months 4 years 2 months 2 years 2 months 1 year 9 months 2 months The service contracts continue until notice on either side is given. 29 Governance Redcentric Report & Accounts 2019 Directors’ remuneration report (audited) continued Service contracts (continued) The Executive directors’ salaries as at 31 March 2019 are set out in the table below: Executive Directors Peter Brotherton Chairman and Non-Executive Directors’ fees Salary 31 March 2019 £000 Salary 31 March 2018 £000 300 200 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 £40,000. Chris Cole Jon Kempster Stephen Vaughan Chris Rigg (appointed 1 February 2019) Annual fee 31 March 2019 £000 Annual fee 31 March 2018 £000 70 40 40 40 70 35 28 - 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 classiﬁ ed as taxable beneﬁ ts by HMRC. Total remuneration for the Chief Executive Ofﬁ cer The table below shows the total remuneration ﬁ gure for the Chief Executive Ofﬁ cer over a ﬁ ve-year performance period. The total remuneration ﬁ gure includes bonus and beneﬁ ts. Year 2019 2018 2017 2016 2015 Executive Peter Brotherton Chris Jagusz* Chris Jagusz Fraser Fisher** Fraser Fisher Fraser Fisher Tony Weaver † Tony Weaver Total single ﬁ gure £000 100 207 154 209 369 266 120 204 * Chris Jagusz was Chief Executive Ofﬁ cer until his resignation on 21 November 2019. Peter Brotherton was appointed interim Chief Executive Ofﬁ cer at this time. **Fraser Fisher was Chief Executive Ofﬁ cer until his resignation on 20 October 2017. Chris Jagusz was appointed Chief Executive Ofﬁ cer at this time. † Tony Weaver was Chief Executive Ofﬁ cer until his resignation on 1 November 2016. Fraser Fisher was appointed Chief Executive Ofﬁ cer at this time. 30 Governance Redcentric Report & Accounts 2019 Directors’ remuneration report (audited) continued The remuneration of the Directors in respect of the year was as follows: Payment in lieu of notice Holiday Pension Share based payments* £000 £000 £000 £000 2019 Total £000 2018 Total** £000 Basic salary, allowances and fees £000 236 224 - 70 40 36 7 33 - 646 Executive Peter Brotherton Chris Jagusz (resigned 21-Nov-18) Fraser Fisher (resigned 20-Oct-17) Non-Executive Chris Cole Stephen Vaughan Jon Kempster Chris Rigg (appointed 1-Feb-19) Stephen Puckett (resigned 1-Feb-19) David Payne (resigned 31-Mar-18) Total Bonus £000 40 - - - - - - - - - 155 - - - - - - - 40 155 - 4 - - - - - - - 4 12 131 419 - - - - - - - - - - - - - - - - 12 131 383 - 70 40 36 7 33 - 988 254 154 427 70 28 35 - 40 55 1,063 * Any share-based payments issued to Chris Jagusz in FY19 lapsed upon his departure, therefore the expense was written back and there was net nil impact to the P&L. ** In addition to the 2018 remuneration as above, share-based payments totalling £335k were issued to the Executive Directors. Details of share options in the Company held by the Directors during the year are as follows (audited): Exercise Price (p) Balance 31 March 2018 Granted Forfeited / Expired Exercised (a) (b) (c) (d) (e) nil nil nil 63p nil 349,800 161,905 192,481 28,571 - 382,957 - - - 298,879 298,879 (349,800) - - - - 80p 581,968 - (581,968) - - - - - - Balance 31 March 2019 - 161,905 192,481 28,571 298,879 681,836 - Chris Jagusz Peter Brotherton Fraser Fisher Further information regarding the options noted above is set out below: (a) The options were granted on 29 December 2017 under the Company's Long-Term Incentive Plan ("LTIP"). The options will vest post the release of the Company's results for the year ended 31 March 2019 subject to the achievement of performance conditions related to the growth in earnings per share. (b) The options were granted on 29 June 2017 under the Company's Long-Term Incentive Plan ("LTIP"). The options will vest post the release of the Company'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. 31 Governance Redcentric Report & Accounts 2019 Directors’ remuneration report (audited) continued (c) The options were granted pursuant to the Company's HMRC approved Save-As-You-Earn Option Plan 2017 under which employees contribute a monthly amount the Company's results for the year ended 31 March 2020 subject to the achievement of performance conditions related to the growth in earnings per share. (d) The options were granted on 26 November 2018 under the Company's Long-Term Incentive Plan ("LTIP"). The options will vest post the release of the Company's results for the year ended 31 March 2021 subject to the achievement of performance conditions related to the growth in earnings per share. (e) The options were granted under the Group’s EMI scheme on 15 November 2013. The latest vesting date for the options was 8 February 2019 and have therefore lapsed as performance conditions were not met. Directors’ interests in shares The interests (both beneﬁ cial and family interests) of the directors in ofﬁ ce at the date of this report in the share capital of the Company were as follows: Interests in ordinary shares £0.001 At 31 March 2019 At 31 March 2018 20,000 - 20,000 20,000 - 60,000 20,000 7,953 20,000 20,000 100,626 168,579 Interests in share based incentives Options (unvested) 681,836 - - - - 681,836 Executive Peter Brotherton Chris Jagusz Non-Executive Chris Cole Stephen Vaughan David Payne Total Remuneration policy for Executive Directors compared to other employees The table below shows the movement in the salary, beneﬁ ts and annual bonus for the Chief Executive Ofﬁ cer (CEO) between the current and previous ﬁ nancial year compared to that of the total amounts for all employees of the Group for each of these elements of pay. Chief Executive Ofﬁ cer Salary Beneﬁ ts Annual Bonus Average of all employees Salary Beneﬁ ts Annual Bonus 2019 £000 300 12 40 33 2 1 2018 £000 342 11 - 37 1 1 % change (12.3)% 9.1%* 100.0% (10.8)% 100.0% (0.0)% *In the 2018 ﬁ nancial year the Chief Executive Ofﬁ cer received a car allowance as part of his remuneration package. 32 Governance Redcentric Report & Accounts 2019 Directors’ remuneration report (audited) continued Relative importance of the spend on pay The table below shows the total pay for all Redcentric’s employees compared to other key ﬁ nancial indicators. Additional information on the number of employees, total revenue and underlying proﬁ t has been provided for context. Employee costs Dividends to shareholders Corporation tax Average number of employees Revenue Adjusted EBITDA Share price 2019 £000 20,507 597 604 479 93,260 16,714 2018 £000 23,292 - (1,004) 501 99,990 18,085 % change (12.0)% 100.0% (160.2)% (4.4)% (6.7)% (7.6)% The market price of the Company’s shares on 31 March 2019 was 76p per share. The highest and lowest market prices during the year were 106p and 65p respectively. Stephen Vaughan Chairman, Remuneration Committee On behalf of the Board 25 June 2019 33 Governance Redcentric Report & Accounts 2019 Independent auditor’s report to the members of Redcentric plc 1. Our opinion is unmodiﬁ ed We have audited the ﬁ nancial statements of Redcentric plc ("the Company") for the year ended 30 March 2019 which comprise the Consolidated Income Statement, Consolidated Statement of Comprehensive Income, Consolidated Statement of Changes in Equity, Consolidated Statement of Financial Position, Consolidated Cash Flow Statement, Company Balance Sheet, Company Statement of Changes in Equity, and the related notes, including the accounting policies in note 1. In our opinion: • the ﬁ nancial 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 2019 and of the Group's loss for the year then ended; • the group ﬁ nancial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union; • the parent Company ﬁ nancial statements have been properly prepared in accordance with UK accounting standards, including FRS 101 Reduced Disclosure Framework; and • the ﬁ nancial 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 fulﬁ lled 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 sufﬁ cient and appropriate basis for our opinion. Overview Materiality: group ﬁ nancial statements as a whole £524,000 (2018: £549,000) 0.56% of group revenue (2018: 0.55% of group revenue) 98% (2018: 97%) of total proﬁ ts and losses that made up group loss before tax Key audit matters The impact of uncertainties due to the UK exiting the European Union on our audit Going concern Provision for credit notes Recoverability of parent company investment in subsidiaries vs 2018 ▲ ▲ ▼ Coverage New Recurring risks 34 Governance Redcentric Report & Accounts 2019 Independent auditor’s report to the members of Redcentric plc continued 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 signiﬁ cance in the audit of the ﬁ nancial statements and include the most signiﬁ cant assessed risks of material misstatement (whether or not due to fraud) identiﬁ ed 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. We summarise below the key audit matters in arriving at our audit opinion above. These matters were addressed in the context of our audit of the ﬁ nancial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. The risk Our response The impact of uncertainties due to the UK exiting the European Union on our audit Refer to pages 5-7 – Chief Executive's review We developed a standardised ﬁ rm-wide approach the consideration of the uncertainties arising from Brexit in planning and performing our audits. Unprecedented levels of uncertainty: All audits assess and challenge the reasonableness of estimates, in particular as described in the recoverability of parent company investment in subsidiaries and related disclosures, and the appropriateness of the going concern basis of preparation of the ﬁ nancial statements (see below). All of these depend on assessments of the future economic environment and the Group's future prospects and performance. Brexit is one of the most signiﬁ cant economic events for the UK and at the date of this report its effects are subject to unprecedented levels of uncertainty of outcomes, with the full range of possible effects unknown. Our procedures included: • Our Brexit knowledge: We considered the directors' assessment of Brexit-related sources risk for the Group's business and ﬁ nancial resources, compared with our own understanding of the risks. We considered the directors' plans take action to mitigate the risks. • Sensitivity analysis: When addressing the recoverability of parent company investment in subsidiaries and other areas that depend on forecasts, we compared the directors' analysis our assessment of the full range of reasonably possible scenarios resulting from Brexit uncertainty and, where forecast cash ﬂ ows are required to be discounted, considered adjustments to discount rates for the level of remaining uncertainty. • Assessing transparency: As well as assessing individual disclosures as part of our procedures recoverability of parent company investment subsidiaries we considered all of the Brexit related disclosures together, including those in the strategic report, comparing the overall picture against our understanding of the risks. However, no audit should be expected to predict the unknowable factors or all possible future implications for a Group and this is particularly the case in relation to Brexit. 35 Governance Redcentric Report & Accounts 2019 Independent auditor’s report to the members of Redcentric plc continued The risk Our response Going concern Refer to page 45 – Accounting Policy Disclosure quality The ﬁ nancial statements explain how the Board has formed a judgement that it is appropriate to adopt the going concern basis of preparation for the Group. That judgement is based on an evaluation of the inherent risks to the Group's business model and how those risks might affect the Group's ﬁ nancial resources or ability to continue operations over a period of at least a year from the date of approval of the ﬁ nancial statements. The risks most likely to adversely affect the Group's available ﬁ nancial resources over this period were: • The level of external ﬁ nancing facilities and the ability of the group to renew-these facilities when they fall due for renewal in November 2020. • Meeting management forecasts, including the uncertainty around the impact of Brexit on consumer conﬁ dence. There are also less predictable but realistic second order impacts, such as the impact of Brexit, which could result in a rapid reduction of available ﬁ nancial resources. The risk for our audit was whether or not those risks were such that they amounted to a material uncertainty that may have cast signiﬁ cant doubt about the ability to continue as a going concern. Had they been such, then that fact would have been required to have been disclosed. Our procedures included: • Funding assessment: Assessed the committed level of ﬁ nancing available to the Group for at least the next 12 months through consideration of the facility agreement. We challenged the directors' assumptions by considering our own expectations based on our knowledge of the entity and experience of the industry in which it operates. Additionally considered the re ﬁ nancing risk of the group on cessation of the current ﬁ nancing agreement through inquiry with the relevant banks. • Historical comparison: Considered the Group's historical forecast accuracy, by assessing actual performance against previous forecasts, in particular concerning previous accuracy of forecasting revenue. • Sensitivity analysis: Considered sensitivities over the level of available ﬁ nancial resources indicated by the Group's ﬁ nancial forecast taking account of reasonably possible (but not unrealistic) adverse effects that could arise from these risks individually and collectively. • Evaluating directors' intent: Evaluating the intent of the directors and the achievability of the actions they would take to improve the position should certain risks materialize including looking at the history of similar actions being taken. • Assessing transparency: Assessed the completeness and accuracy of the matters covered in the going concern disclosure by evaluating the reasonableness of risks and uncertainties speciﬁ ed by the disclosure against our ﬁ ndings from our evaluation of management's assessment of going concern. 36 Governance Redcentric Report & Accounts 2019 Independent auditor’s report to the members of Redcentric plc continued The risk Our response Provision for credit notes (£1.5m; 2018: £1.0m) Our procedures included: Refer to page 47 (Accounting policy) and page 61-62 (Financial disclosures) Processing error: The group sells to a large customer base. The group has a history of issuing invoices for the incorrect products or/ and amounts and hence has been issuing material levels of credit notes to correct for these. At the period end, management corrects for the issue of the incorrect invoicing by recording a credit note provision against revenue and trade receivables. The credit note provision is based on the value of credit notes that the Group expects to subsequently issue to correct for the estimated unresolved invoicing issues to date. Management generates the credit note provision by assessing historic level of credit notes raised against the related invoiced amounts, taking into consideration changes in the current period. There is a risk that the credit note provision recorded by management to correct for the inaccurate invoicing may be materially understated, resulting in revenue and trade receivables being misstated. In the prior year, the key audit matter also included provision for impairment of trade receivables. Given the low risk of customer non payment of valid invoices, the key audit matter this year focusses only on the element relating to correction of processing error. Recoverability of parent company investment in subsidiaries (£101.9m; 2018: £101.6m) Refer to page 76 (Financial disclosures). Subjective estimate: The carrying amount of the parent company's investments in subsidiaries are signiﬁ cant and at risk of irrecoverability due to weakening demand in certain areas of the business. This estimated recoverable amount of these balances is subjective due to the inherent uncertainty in forecasting trading conditions and cash ﬂ ows used in the forecasts for the subsidiary companies. The effect of these matters is that, as part of our risk assessment for audit planning purposes, we determined that the value in use of the company's investment had a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the ﬁ nancial statements as a whole. In conducting our ﬁ nal audit work, we reassessed the degree of estimation uncertainty over the carrying amount of investment to be less than that materiality. • Tests of details: Assessing the basis and calculation of the credit note provision against our knowledge of the business and our understanding and evaluation of the invoicing process; • Historical comparisons: Evaluating the historic level of credit notes raised against total revenue to assess the appropriateness of the applied rate of credit notes to total revenues in the year; • Tests of details: Assessing the level of post year end credit notes, to determine the extent to which the provision is utilised post year end and the adequacy of the year end; • Tests of details: Agreeing a sample of trade receivables at the year end to post year end cash receipts; • Tests of details: Agreeing a sample of trade receivables at the year end to conﬁ rmations of balances from customers. Our procedures included: • Benchmarking assumptions: Challenging the assumptions used in the cash ﬂ ows 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 indication of a downturn in activity, by examining the post year end management accounts and considering our knowledge of the Group and the market; • Assessing transparency: Assessing the adequacy of the parent company's disclosures in respect of the investment in subsidiaries. 37 Governance Redcentric Report & Accounts 2019 Independent auditor’s report to the members of Redcentric plc continued 3. Our application of materiality and an overview of the scope of our audit Materiality for the Group ﬁ nancial statements as a whole was set at £524,000 (2018: £549,000), determined with reference to a benchmark of total revenues of £93.3m (2018: £100.0 million) (of which it represents 0.56% (2018: 0.55%)). We consider total revenues to be the most appropriate benchmark as it provides a more stable measure year on year than group loss before tax. We agreed to report to the Audit Committee any corrected or uncorrected identiﬁ ed misstatements exceeding £26,200 (2018: £27,000), in addition to other identiﬁ ed misstatements that warranted reporting on qualitative grounds. Materiality for the parent company ﬁ nancial statements as a whole was set at £523,000 (2018: £548,000), determined with reference to a benchmark of total assets, of which it represents 0.5% (2018: 0.5%). Of the Group's 3 (2018: 3) reporting components, we subjected 2 (2018: 2) to full scope audits tor Group purposes. The components within the scope of our work accounted for the percentages is shown in the table below. For the residual 1 component, we performed analysis at an aggregated Group level to re-examine our assessment that there were no signiﬁ cant risks of material misstatement within these. The work on all 3 (2018: 3) components was performed by the Group team. The component materialities were £422,000 to £523,000 (2018 ranged from £215,000 to £548,000), having regard to the mix of size and risk proﬁ le of the Group across the components. 2019 £000 93,300 524 523 422-523 26.2 2019 % 100% - - 98% - 2% 99% - 1% 2018 £000 100,000 549 549 215-548 26.2 2018 % 100% - - 97% - 3% 100% - - Total revenues Group materiality Whole ﬁ nancial statements materiality Range of materiality at three components Misstatements reported to the audit committee Group revenue Full scope for group audit purposes Speciﬁ ed risk-focused audit procedures Residual components Total losses and proﬁ ts that make up loss before tax Full scope for group audit purposes Speciﬁ c risk-focused audit procedures Residual components Group total assets Full scope for group audit purposes Speciﬁ ed risk-focused audit procedures Residual components 38 Governance Redcentric Report & Accounts 2019 Independent auditor’s report to the members of Redcentric plc continued 4. We have nothing to report on going concern The Directors have prepared the ﬁ nancial statements on the going concern basis as they do not intend to liquidate the Company or the Group or to cease their operations, and as they have concluded that the Company's and the Group's ﬁ nancial position means that this is realistic. They have also concluded that there are no material uncertainties that could have cast signiﬁ cant doubt over their ability to continue as a going concern for at least a year from the date of approval of the ﬁ nancial statements ("the going concern period"). Strategic report and directors' report Based solely on our work on the other information: • we have not identiﬁ ed material misstatements in the Strategic report and the Directors' report; • in our opinion the information given in those reports for the ﬁ nancial year is consistent with the ﬁ nancial statements; and • in our opinion those reports have been prepared in accordance with the Companies Act 2006. Our responsibility is to conclude on the appropriateness of the Directors' conclusions and, had there been a material uncertainty related to going concern, to make reference to that in this audit report. However, as we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the absence of reference to a material uncertainty in this auditor's report is not a guarantee that the Group and the Company will continue in operation. We identiﬁ ed going concern as a key audit matter (see section 2 of this report). Based on the work described in our response to that key audit matter, 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 signiﬁ cant doubt over the use of that basis for a period of at least a year from the date of approval of the ﬁ nancial 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 ﬁ nancial statements. Our opinion on the ﬁ nancial 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 ﬁ nancial statements audit work, the information therein is materially misstated or inconsistent with the ﬁ nancial statements or our audit knowledge. Based solely on that work, we have not identiﬁ ed material misstatements in the other information. 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 ﬁ nancial statements are not in agreement with the accounting records and returns; or • certain disclosures of Directors’ remuneration speciﬁ ed by law are not made; or • we have not received all the information and explanations we require for our audit. We have nothing to report in these respects. 7. Respective responsibilities Directors’ responsibilities As explained more fully in their statement set out on page 27, the Directors are responsible for: the preparation of the ﬁ nancial statements including being satisﬁ ed that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of ﬁ nancial 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. 39 Governance Redcentric Report & Accounts 2019 Independent auditor’s report to the members of Redcentric plc continued Auditor’s responsibilities Our objectives are to obtain reasonable assurance about whether the ﬁ nancial 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 inﬂ uence the economic decisions of users taken on the basis of the ﬁ nancial statements. 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. A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities. John Pass (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 1 Sovereign Square, Sovereign Street, Leeds LS1 4DA 25 June 2019 40 Financial Statements Redcentric Report & Accounts 2019 Consolidated Income Statement for the year ended 31 March 2019 Revenue Cost of sales Gross proﬁ t Operating expenditure Operating (loss) / proﬁ t 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 / (charge) on proﬁ t on ordinary activities Proﬁ t / (loss) for the year (attributable to owners of the parent) Earnings per share Basic earnings per share Diluted basic earnings per share Note 10 11 5 22 6 6 8 9 9 2019 £000 93,260 (36,895) 56,365 2018 £000 99,990 (39,996) 59,994 (56,650) (59,054) (285) 940 16,714 (7,330) (7,392) (1,911) (366) (285) (1,091) 13 (1,363) (604) (1,967) 18,085 (7,769) (7,136) (1,672) (568) 940 (1,452) 19 (493) 1,004 511 (1.32)p (1.32)p 0.34p 0.34p * 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. 41 Financial Statements Redcentric Report & Accounts 2019 Consolidated Statement of Comprehensive Income Proﬁ t / (Loss) for the year Exchange differences arising on re-translation of foreign subsidiary Total comprehensive income Consolidated Statement of Changes in Equity 2019 £000 (1,967) 8 (1,959) 2018 £000 511 (45) 466 Called up share capital £000 Share premium £000 Capital redemption reserve £000 Retained earnings £000 Total equity £000 149 65,395 (9,454) 20,639 76,729 - - - - - - - 149 149 - 149 - - - - - - - - 193 - - - - - - - - - - 511 (45) 466 - - 534 - 511 (45) 466 193 - 534 - 65,588 (9,454) 21,639 77,922 65,588 (9,454) 21,639 77,922 - 65,588 - (9,454) - - - - - - - - - - (74) 21,565 (1,967) 8 (74) 77,848 (1,967) 8 (1,959) (1,959) (597) 353 (597) 353 149 65,588 (9,454) 19,362 75,645 At 31 March 2017 Proﬁ t for the year Other comprehensive loss – before tax Total comprehensive income Transactions with owners: Issue of new shares Dividends to shareholders IFRS 2 Charge Deferred tax on SBP At 31 March 2018 At 1 April 2018 (reported) Adjustment on initial application of IFRS 15 At 1 April 2018 (after IFRS adoption) Proﬁ t for the year Other comprehensive loss – before tax Total comprehensive income Transactions with owners: Dividends to shareholders IFRS 2 Charge At 31 March 2019 The accompanying notes form an integral part of the ﬁ nancial statements. 42 Financial Statements Redcentric Report & Accounts 2019 Consolidated Statement of Financial Position as at 31 March 2019 Assets Non-current assets Property plant and equipment Intangible assets Deferred tax asset Current assets Inventories Trade and other receivables Cash and short-term deposits Total assets Current liabilities Trade creditors and other payables Borrowings Provisions Non-current liabilities Borrowings Provisions 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 2019 £000 2018 £000 10 11 8 12 13 14 16 21 16 21 8 20 18,133 75,802 142 94,077 357 22,103 7,206 29,666 20,238 82,486 - 102,724 666 26,120 6,089 32,875 123,743 135,599 22,297 3,056 149 21,715 881 - 23,460 3,125 - 30,671 376 45 48,098 57,677 75,645 77,922 149 65,588 (9,454) 19,362 75,645 149 65,588 (9,454) 21,639 77,922 The notes on pages 45 to 73 are an integral part of these ﬁ nancial statements. The consolidated ﬁ nancial statements of Redcentric Plc (Registration Number 08397584) on pages 41 to 44 were approved by the Board on 25 June 2019 and are signed on its behalf by: Peter Brotherton, Director 43 Financial Statements Redcentric Report & Accounts 2019 Consolidated Cash Flow Statement for the year ended 31 March 2019 2019 £000 2018 £000 Cash ﬂ ows from operating activities Loss before taxation Net ﬁ nance expense Operating proﬁ t Depreciation and amortisation Exceptional costs Share based payments Operating cash ﬂ ow before exceptional costs and movements in working capital Loss on sale of ﬁ xed asset Exceptional costs and NI on share based payments Operating cash ﬂ ow 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 (paid) / received Net cash inﬂ ow from operating activities Cash ﬂ ows from investing activities Proceeds on disposal of property, plant and equipment Purchase of tangible ﬁ xed assets Purchase of intangible ﬁ xed assets Net cash outﬂ ow from investing activities Cash ﬂ ows from ﬁ nancing activities Dividends paid to shareholders Interest paid Bank fees Repayment of borrowings / ﬁ nance leases (Repayment) of revolving credit facility Proceeds of issue of shares less costs of issue Net cash (outﬂ ow) / inﬂ ow from ﬁ nancing activities Net increase in cash and cash equivalents Opening cash and cash equivalents Net increase (decrease) in cash and cash equivalents Effect of exchange rates Cash and cash equivalents (1,363) 1,078 (285) 14,722 1,911 366 16,714 (42) (1,668) 15,004 309 5,775 (1,467) 19,621 (1,873) 17,748 665 (4,665) (564) (4,564) (597) (1,044) - (1,918) (8,500) - (12,059) 1,125 6,089 1,125 (8) 7,206 (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) 1,705 4,340 1,705 44 6,089 In addition to cash purchases, an additional £1.3m of capital expenditure was funded via ﬁ nance leases creating a non-cash movement. Total gross capital expenditure in year was £6.0m, and total net capex was £5.4m after disposals. The accompanying notes form an integral part of the ﬁ nancial statements. 44 Financial Statements Redcentric Report & Accounts 2019 Notes to the Consolidated Financial Statements year ended 31 March 2019 1 Accounting policies – Group Redcentric plc is a public limited company incorporated and domiciled in England and Wales, whose shares are publicly traded on the AIM division of the London Stock Exchange. Redcentric plc was incorporated on 11 February 2013, and admitted to AIM on 24 April 2013. The principal activity of the Group is the supply of IT managed services. that overall facility headroom and covenant headroom both remain strong. The Group will continue to cancel unutilised tranches of the bank facility underpinned by the continuing strength of forecast cash generation and the Group will undergo a full reﬁ nancing process well in advance of the expiration of the current bank facilities in November 2020. The Directors are not aware of any facts or circumstances that would prevent this reﬁ nancing process from being successful. The principal accounting policies, which have been applied consistently in the preparation of these consolidated ﬁ nancial statements throughout the period and by all subsidiary companies, are set out below: Having undertaken this assessment, the directors consider it appropriate to adopt the going concern basis of accounting when preparing the ﬁ nancial statements. 1.1 Basis of preparation The consolidated ﬁ nancial 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 ﬁ nancial statements have been prepared under the historical cost convention. As at 31 March 2019, the Group had committed revolving credit facilities of £25m (2018: £40m) and an overdraft facility of £2m (2018: £2m), of which £19.5m (2018: £28m) of the revolving credit facility and £nil (2018: £Nil) of the overdraft was drawn. During the year, the continuing strength of operating cash ﬂ ows enabled the Group to cancel £15m of unutilised facility. As at 31 March 2019, these facilities were due to expire on April 2 2020. Subsequent to the year end the Group cancelled a further £2.5m of unutilised facility, leaving the committed revolving facility of £22.5m. On 14 June 2019 these facilities were extended to 30 November 2020, with all terms and covenants remaining the same until this time. The Directors have taken note of the guidance issued by the Financial Reporting Council on the Going Concern Basis of Accounting in determining that this is the appropriate basis of preparation of the ﬁ nancial statements and have considered a number of factors. The Group’s business activities and markets in which it operates are set out in the Strategic Report. The sectors in which the Group is particularly well represented are diverse and a high proportion of the Group’s revenue is recurring in nature, which provides good visibility and resilience of future revenue and cash-ﬂ ows. Taking into account all available information about the future for a period of at least, but not limited to, twelve months from the date of approval of the ﬁ nancial statements, the Directors have reviewed cash forecasts as well as performing reasonable downside sensitivity analysis (which demonstrate The preparation of ﬁ nancial 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 signiﬁ cant to the consolidated ﬁ nancial statements are disclosed in note 1.25 in the accounting policies. 1.2 Basis of consolidation Subsidiaries are all entities (including structured entities) over which the group has control. The group controls an entity when the group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the group. They are deconsolidated from the date that control ceases. 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. Identiﬁ able 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 identiﬁ able 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. 45 Financial Statements Redcentric Report & Accounts 2019 Notes to the Consolidated Financial Statements year ended 31 March 2019 – continued 1.3 Intangible assets Goodwill Goodwill arises on the acquisition of subsidiaries and represents the excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identiﬁ able 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 beneﬁ t 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 ﬁ nite 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) costs meeting the recognition criteria in IAS 38, including commercial feasibility, would be capitalised. 1.4 Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and any impairment in value (note 1.5). The cost includes the original price of the asset and the cost attributable to bringing the asset to its current working condition for its intended use. Depreciation, down to residual value, is calculated on a straight-line basis over the estimated useful life of the asset which is reviewed on an annual basis. Ofﬁ ce ﬁ xtures and ﬁ ttings 4-5 years Leasehold improvements 15 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 beneﬁ ts 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 cash generating units expected to beneﬁ t from the business combination’s synergies. Impairment is determined by assessing the recoverable amount of the cash generating unit to which the goodwill relates. When the recoverable amount of the cash generating unit is less than the carrying amount, including goodwill, an impairment loss is recognised. Other intangible assets and property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate the carrying values may not be recoverable. In addition, the carrying value of capitalised development expenditure is reviewed for impairment annually. If any such indication exists and where the carrying amounts exceed the estimated recoverable amount, the assets or cash generating units are written down to their recoverable amount. Impairment and amortisation charges are included within the administrative expenses line in the income statement. Internally generated intangibles Any internally generated intangibles as a result of research and development are not capitalised as they are not deemed to be material. Any signiﬁ cant internal development 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 ﬂ ows are discounted to their present value using a pre-tax discount rate that reﬂ ects current market assessments of the time value of money and the risks speciﬁ c to the asset. 46 Financial Statements Redcentric Report & Accounts 2019 Notes to the Consolidated Financial Statements year ended 31 March 2019 – continued For an asset that does not generate largely independent cash inﬂ ows, 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-ﬁ nancial 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 classiﬁ ed 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 beneﬁ ts of ownership of the asset are classiﬁ ed 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 ﬁ nance 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 ﬁ nance charges. Interest costs on ﬁ nance 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 assets are recognised only to the extent that it is probable that taxable proﬁ ts will be available against which deductible temporary differences carried forward tax credits or tax losses can be utilised. 1.9 Trade and other receivables IFRS 9 Financial Instruments was issued by the IASB in July 2014 and is effective for the Company for the year ended 31 March 2019. Applying IFRS 9 has resulted in changes to the measurement and disclosure of ﬁ nancial instruments and introduced a new expected loss impairment model. Regarding impairment, the Company has applied the IFRS 9 approach to measuring expected credit losses which uses a lifetime expected loss allowance for all assets held at amortised cost. We have revised the methodologies we use to impair ﬁ nancial assets to reﬂ ect the forward-looking ‘expected credit loss’ model introduced by IFRS 9, in contrast to the backward-looking ‘incurred credit loss’ model used under IAS 39. In order to assess the impact of IFRS 9 the Company reviewed the last 12 months of actual debtor impairment when calculating the impact of the expected credit loss. The Company now recognises a loss allowance for all expected credit losses on initial recognition of trade receivables. Providing for loss allowances on our existing ﬁ nancial assets has not had a material impact on the ﬁ nancial statements. 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. 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 ﬁ nancial reporting purposes, with the following exceptions: 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. • 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 proﬁ t or loss; • in respect of taxable temporary differences associated with investments in subsidiaries, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future; and 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 proﬁ t or loss. 47 Financial Statements Redcentric Report & Accounts 2019 Notes to the Consolidated Financial Statements year ended 31 March 2019 – 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 outﬂ ow of resources embodying economic beneﬁ ts 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 ﬂ ows at a pre-tax rate that reﬂ ects current market assessments of the time value of money and, where appropriate, the risks speciﬁ c 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 fulﬁ l 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 deﬁ ned 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 satisﬁ ed, provided that all other performance conditions are satisﬁ ed. 48 At each balance sheet date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has expired and management’s best estimate of the achievement or otherwise of non-market conditions, number of equity instruments that will ultimately vest or in the case of an instrument subject to a market condition, be treated as vesting described above. The movement in the cumulative expense since the previous balance sheet date is recognised in the income statement, with a corresponding entry in equity. Where the terms of an equity-settled award are modiﬁ ed 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 modiﬁ cation, based on the difference between the fair value of the original award and the fair value of the modiﬁ ed award, both as measured on the date of the modiﬁ cation. 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 classiﬁ es its ﬁ nancial assets as loans and receivables measured at amortised cost. Loans and receivables are non-derivative ﬁ nancial assets with ﬁ xed 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 classiﬁ ed as non-current assets. The Group’s loans and receivables comprise ‘trade and other receivables’, ‘cash and cash equivalents’, and other receivables which are expected to be settled in cash. 1.18 Interest-bearing loans and borrowings All loans and borrowings are initially recognised at fair value less directly attributable transaction costs. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses arising on the repurchase, settlement or otherwise cancellation of liabilities are recognised in the ﬁ nance 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. Financial Statements Redcentric Report & Accounts 2019 Notes to the Consolidated Financial Statements year ended 31 March 2019 – continued All other borrowing costs are recognised in the income statement on an accruals basis, using the effective rate method. 1.20 Revenue IFRS 15 ‘Revenue from contracts with customers’ is effective for periods beginning on or after 1st January 2018. The Company has adopted IFRS 15, ‘Revenue from Contracts with Customers’, for the year ending 31 March 2019. This establishes a comprehensive framework for determining whether, how much and when revenue is recognised. As permitted by the standard, the Company has applied IFRS 15 using the cumulative effect method and therefore the comparative information has not been restated and continues to be reported under IAS 18. The overall impact on reserves as at the transition date is not signiﬁ cant. Further details relating to IFRS 15 are disclosed in note 28. The standard requires revenue earned from contracts to be recognised in line with performance obligations based on a ﬁ ve-step model. On inception of the contract we identify a “performance obligation” for each of the distinct goods or services we have promised to provide to the customer. The following table summarises the performance obligations we have identiﬁ ed for our major revenue lines and provides information on the time of when they are satisﬁ es and the related revenue recognition policy. Revenue line Performance obligation Revenue recognition policy Recurring revenue Provision of managed services to the customer. All of the revenue in this category is contracted. and includes a full range of managed support, maintenance, subscription and service agreements. Performance obligations are identiﬁ ed for each distinct service for which the customer has contracted and are considered to be satisﬁ ed over the time period that these services are delivered. Revenue for these types of services is recognised evenly over the period of the agreement as the services are provided. Product revenue Provision of third-party hardware (e.g phone handsets, routers) and licences to the customer as a one-off, distinct sale. Revenue for product sales are recognised in full in the income statement upon delivery to the customer. Performance obligations are satisﬁ ed at the point in time that control passes to the customer. Revenue for product sales are recognised in full in the income statement upon delivery to the customer. Amongst other factors the company has pricing and fulﬁ lment risk and as such is considered to be principal in these transactions. Services revenue Provision of professional services, consultancy and engineering services in order to setup and install a customer managed service. Services revenue is recognised from the date of installation of a managed service and recognised evenly over the period of the agreement. For distinct separable services revenue is recognised at the point of completion. Installation is typically intrinsically linked to the provision of the managed services (in recurring revenue above) these services do not represent separate performance obligations and are therefore combined with the associated service performance obligation. The Group also provides certain services that are non-complex and distinct from the provision of the underlying managed service contract. The completion of these services is a separate performance obligation. 49 Financial Statements Redcentric Report & Accounts 2019 Notes to the Consolidated Financial Statements year ended 31 March 2019 – 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. At 31 March 2019, the holiday pay accrual was £0.2m. 1.24 Segmental reporting The Chief Operating Decision Maker (“CODM") has been identiﬁ ed as the Group Chief Executive and the Chief Financial Ofﬁ cer. 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. There are no material obligations in respect of returns, refunds or warranties. The Group recognises revenue based on the stand-alone selling price of each performance obligation. Determining the selling price is typically driven by list prices. Payments received in advance are recognised as contract liabilities and amounts billed in arrears are contract assets. Revenue expected to be recognised in future periods for performance obligations that are not complete (or partially complete) as at 31 March 2019 is £139m. Of this, £120m relates to revenue for recurring managed services. Incremental revenues are generated based on usage for calls and data. The entity has a right to consideration from the customer at an amount that corresponds directly with the value to the customer of the entity’s performance completed to date, therefore the entity recognises the revenue to the extent to which it has a right to invoice. 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 proﬁ tability of the business can be clearly understood. These costs are identiﬁ ed as Exceptional costs, and comprise; (a) Professional fees incurred in sourcing and completing acquisitions and disposals including legal expenses (b) Professional fees incurred in restructuring and reﬁ nancing 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. 50 Financial Statements Redcentric Report & Accounts 2019 Notes to the Consolidated Financial Statements year ended 31 March 2019 – continued The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by deﬁ nition, seldom equal the related results. The estimates and assumptions that have a signiﬁ cant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next ﬁ nancial year are: Area Judgement Recoverability of debtors due to billing inaccuracies The group has a large customer base and historically a material number of credit notes have been raised by the group due to issues in the accuracy of invoicing to customers. A credit note provision is estimated at the period end to account for revenue which has been recognised in the year, but for which a credit note will subsequently be raised post year end. The provision has been calculated based on empirical analysis of credit notes issued against revenue recognised over a period of two years with adjustments made based on management’s knowledge of speciﬁ c items in the customer base. Deferred tax Deferred tax assets are recognised only to the extent that it is probable that future taxable proﬁ ts will be available against which the temporary differences can be utilised. Recognition, therefore, involves estimates regarding the prudent forecasting of future taxable proﬁ ts of the business and in applying an appropriate risk adjustment factor. 1.26 IFRS 16 Leases (effective date 1 January 2019) IFRS 16 "Leases" provides guidance on the classiﬁ cation, recognition and measurement of leases to help provide useful information to the users of ﬁ nancial statements. The main aim of this standard is to ensure all leases will be reﬂ ected on the Consolidated Balance Sheet, irrespective of substance over form. The new standard will replace IAS 17 "Leases" and is effective for annual periods beginning on or after 1 January 2019 unless adopted early. IFRS 16 is expected to have a material impact on the amounts recognised in the Group's consolidated ﬁ nancial statements. On adoption of IFRS 16 the Group will recognise within the balance sheet a right of use asset and lease liability for all applicable leases. Within the income statement, rent expense will be replaced by depreciation and interest expense. This will result in a decrease in operating expenses and an increase in ﬁ nance costs. Management have reviewed all possible leases that could be affected by IFRS 16 including property, leased cars, leased network contracts, third party tail circuit contracts, etc. It was deemed that for anything related to the network and tail circuits connecting to it, any one company does not have substantially all of the economic beneﬁ ts resulting from the asset and therefore a ”lease", under the IFRS 16 deﬁ nition, does not exist. Therefore, applicable leases will include all rented ofﬁ ce and data centre space as well as leased company cars. The Company will adopt IFRS 16 on a modiﬁ ed retrospective basis. Upon transition, a lease liability will be recognised based on future lease payments discounted an at appropriate borrowing rate. Additionally, a right-of-use asset will be recognised equivalent to the lease liability. The following practical expedients will also be utilised upon transition: - Low-value leases (under £5,000) will be excluded from IFRS 16 accounting and will continue to be recognised as an operating lease - Contracts expiring within 12 months of the transition date will continue to be recognised as an operating lease for FY20 - Leases of intangible assets such as licences will continue to be accounted for under IAS 38. Based on the work done to date of IFRS 16, it is expected that the resulting lease liability and right-of-use asset to be recognised upon transition will be in the region of £25 million to £35 million. The adoption of this standard is expected to impact alternative performance measures, such as EBITDA, that are used by the Group and the Group’s ongoing review of IFRS 16 indicates that the ﬁ nancial impact will result in an increase in EBITDA of between £3 million and £5 million. Details of the Group’s operating leases, currently accounted for under IAS 17 Leases, can be found in note 15. 51 Financial Statements Redcentric Report & Accounts 2019 Notes to the Consolidated Financial Statements year ended 31 March 2019 – continued 2 Segment reporting IFRS 8 requires operating segments to be identiﬁ ed on the basis of the internal ﬁ nancial 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 proﬁ t performance principally through adjusted proﬁ t 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. Services revenue is derived from the provision of consultancy or installation services regarding the provision and set-up of a new service. Revenue for the year ended 31 March 2019 was generated wholly from the UK, and all non-current assets are based in the UK: Recurring revenue Product revenue Services revenue Total revenue 3 Operating proﬁ t The following costs are considered to be signiﬁ cant items within operating proﬁ t. Amortisation of acquired intangible assets Amortisation of intangible assets: owned Amortisation of intangible assets: leased Depreciation – owned assets Depreciation – assets held under ﬁ nance lease Share-based payments Operating lease payments Employee beneﬁ ts expense, excluding share-based compensation Year ended 31 March 2019 Year ended 31 March 2018 £000 £000 80,544 5,810 6,906 93,260 2019 £000 6,252 1,005 135 5,066 2,264 366 3,424 21,027 87,065 7,180 5,745 99,990 2018 £000 6,252 859 25 5,174 2,595 568 2,837 23,860 52 Financial Statements Redcentric Report & Accounts 2019 Notes to the Consolidated Financial Statements year ended 31 March 2019 – continued 4 Auditors’ remuneration Below are the fees payable to the auditors and their associates: Audit services – KPMG Fees payable to Company auditor and its associates for the audit of parent company and consolidated ﬁ nancial statements The audit and interim review of Company’s subsidiaries Total audit fees Fees payable to Company auditor and its associates for other services: Tax compliance services Tax advisory services Total tax fees Other non-audit services Total 5 Exceptional costs 2019 £000 2018 £000 25 131 156 20 20 40 16 202 24 115 139 15 - 15 - 154 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 Vacant property provisions Total Year ended 31 March 2019 Year ended 31 March 2018 £000 £000 554 804 - 553 1,911 672 868 132 - 1,672 Overall, the level of exceptional items has increased from £1.7m to £1.9m. The key movements are as follows: • Professional fees associated with the forensic review and FCA investigation – these costs relate to legal advice received in respect of the ongoing FCA investigation. Whilst the Company is still incurring these costs, they are steadily reducing. • Staff restructuring costs – as part of the overall cost base review and movement of UK roles to India. This restructuring resulted in 20 redundancies. • Post the integration of City Lifeline, there have been no further costs of this nature. All the group companies are now fully integrated. • Vacant property provision relates to closure of the Theale ofﬁ ce. All staff have been transferred to the data centre in Reading. 53 Financial Statements Redcentric Report & Accounts 2019 Notes to the Consolidated Financial Statements year ended 31 March 2019 – continued 6 Finance costs Year ended 31 March 2019 £000 Year ended 31 March 2018 £000 (13) (19) 947 93 51 1,091 1,078 2019 £000 18,173 1,907 366 581 21,027 2019 310 103 66 479 2019 329 150 479 1,241 143 68 1,452 1,433 2018 £000 20,655 2,240 568 397 23,860 2018 367 81 53 501 2018 362 139 501 Interest receivable Other interest receivable Interest payable Interest payable on bank loans and overdrafts Interest payable on ﬁ nance leases Amortisation of loan arrangement fees Net ﬁ nancing costs 7 Employee beneﬁ ts 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 Total Average monthly number of people (including Executive Directors) employed: Operations Selling and distribution Administration During the year 39 heads transferred from operations to selling and distribution. These numbers as split as follows: UK India 54 Financial Statements Redcentric Report & Accounts 2019 Notes to the Consolidated Financial Statements year ended 31 March 2019 – continued Employee beneﬁ ts expense (continued) The remuneration of the Directors in respect of the year was as follows: Payment in lieu of notice Holiday Pension Share based payments* £000 £000 £000 £000 2019 Total £000 2018 Total** £000 Basic salary, allowances and fees £000 236 224 - 70 40 36 7 33 - 646 Executive Peter Brotherton Chris Jagusz (resigned 21-Nov-18) Fraser Fisher (resigned 20-Oct-17) Non-Executive Chris Cole Stephen Vaughan Jon Kempster Chris Rigg (appointed 1-Feb-19) Stephen Puckett (resigned 1-Feb-19) David Payne (resigned 31-Mar-18) Total Bonus £000 40 - - - - - - - - - 155 - - - - - - - 40 155 - 4 - - - - - - - 4 12 131 419 - - - - - - - - - - - - - - - - 12 131 383 - 70 40 36 7 33 - 988 254 154 427 70 28 35 - 40 55 1,063 * Any share-based payments issued to Chris Jagusz in FY19 lapsed upon his departure, therefore the expense was written back and there was net nil impact to the P&L. ** In addition to the 2018 remuneration as above, share-based payments totalling £335k were issued to the Executive Directors. Details of share options in the Company held by the Directors during the year are as follows: Chris Jagusz Peter Brotherton Fraser Fisher (a) (b) (c) (d) (e) Granted Forfeited / Expired Exercised Exercise Price (p) nil nil nil 63p nil Balance 31 Mar 2018 349,800 161,905 192,481 28,571 - 382,957 - - - - 298,879 298,879 (349,800) - - - - - 80p 581,968 - (581,968) Balance 31 Mar 2019 - 161,905 192,481 28,571 - 681,836 - - - - - - - - Further information regarding the options above is set out below. (a) The options were granted on 29 December 2017 under the Company's Long-Term Incentive Plan ("LTIP"). The options will vest post the release of the Company's results for the year ended 31 March 2019 subject to the achievement of performance conditions related to the growth in earnings per share. 55 Financial Statements Redcentric Report & Accounts 2019 Notes to the Consolidated Financial Statements year ended 31 March 2019 – continued (b) The options were granted on 29 June 2017 under the Company's Long-Term Incentive Plan ("LTIP"). The options will vest post the release of the Company'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. (c) The options were granted pursuant to the Company's HMRC approved Save-As-You-Earn Option Plan 2017 under which employees contribute a monthly amount the Company's results for the year ended 31 March 2020 subject to the achievement of performance conditions related to the growth in earnings per share. (d) The options were granted on 26 November 2018 under the Company's Long-Term Incentive Plan ("LTIP"). The options will vest post the release of the Company's results for the year ended 31 March 2021 subject to the achievement of performance conditions related to the growth in earnings per share. (g) The options were granted pursuant to the Company's HMRC approved Save-As-You-Earn Option Plan 2014 under which employees contribute a monthly amount the Company's results for the year ended 31 March 2018 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. (e) The options were granted under the Group’s EMI scheme on 15 November 2013. The latest vesting date for the options was 8 February 2019 and have therefore lapsed as performance conditions were not met. Share price The market price of the Company’s shares on 31 March 2019 was 76p per share. The highest and lowest market prices during the year were 106p and 65p respectively. Key management personnel Key management personnel are those persons having authority and responsibility for planning, controlling and directing the activities of the entity either directly, or indirectly. As the remuneration of the Executive Directors and Non-Executive Directors are disclosed above, the following table details the compensation of other key management personnel, being senior managers and functional directors that sit on the Operating Board of the Company. Basic salary, allowances and fees Bonus and other beneﬁ ts Share related charges Pension costs 8 Tax on proﬁ t on ordinary activities (a) Tax on proﬁ t 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 /(liability): prior year adjustment Origination and reversal of timing differences – Deferred tax liability: current year Total income tax (credit) reported in the income statement 2019 £000 765 121 85 29 1,000 2018 £000 331 696 53 (1,014) (1,070) (1,004) 2019 £000 602 90 98 568 (754) 604 The tax charge for the year was £0.6m (FY18: credit of £1.0m) which was made up of a corporation tax charge of £0.8m (FY18: charge of £1.1m) and a deferred tax credit of £0.2m (FY18: credit of £2.1m). 56 Financial Statements Redcentric Report & Accounts 2019 Notes to the Consolidated Financial Statements year ended 31 March 2019 – continued Tax on proﬁ t on ordinary activities (continued) The corporation tax charge comprises a current year corporation tax charge of £0.6m, a prior year corporation tax charge of £0.1m and an overseas tax charge of £0.1m. (b) Reconciliation of the total income tax charge/(credit) The tax on the Group’s proﬁ t before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to proﬁ ts of the consolidated entities as follows: Loss before taxation Proﬁ t multiplied by the UK standard rate of corporation tax of 19% 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 (c) Deferred tax Deferred tax liability Deferred tax assets Net deferred tax asset / (liability) at 31 March (d) Deferred tax liability Opening balance Recognised in the income statement At 31 March 2019 £000 (1,363) (259) 94 (10) - 658 87 34 - 604 2018 £000 (493) (94) 53 (12) (1,000) 92 28 8 (79) (1,004) 2019 £000 2018 £000 (5,134) (6,197) 5,276 142 6,152 (45) 2019 £000 6,197 (1,063) 5,134 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 2018 Recognised in income statement Adjustment in relation to prior year At 31 March 2019 11 5 28 44 57 9 (30) 36 3,206 (223) (203) 2,867 (100) (363) 2,780 2,404 11 1 - 12 Total £000 6,152 (308) (568) 5,276 57 Financial Statements Redcentric Report & Accounts 2019 Notes to the Consolidated Financial Statements year ended 31 March 2019 – continued 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 proﬁ ts from which prior tax losses can be offset. This is based on projections of future taxable proﬁ ts 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 reassessment of the level of losses carried forward that are deemed to be recoverable against future proﬁ ts has resulted in a prior year corporation tax adjustment. Additionally, during the year, work was undertaken to review the tax treatment of ﬁ xed assets and ﬁ nance leases resulting in a reassessment to the estimate calculated for deferred tax on ﬁ xed assets. 9 Earnings per share Basic earnings per share has been calculated using loss after tax for the year of £2.0m (2018: proﬁ t after tax £0.5m) and a weighted average number of shares of 149,135,316 (2018: 148,890,948). The dilutive effect of share options at 31 March 2019 increased the weighted average number of shares to 151,410,501 (2018: 149,871,477). In addition, the Board uses adjusted earnings per share ﬁ gure, which has been calculated to reﬂ ect 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% Adjusted earnings Weighted average number of shares in issue Weighted dilutive effect of options and warrants in issue Diluted weighted average number of shares in issue 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 2019 £000 (1,967) 604 6,252 366 1,911 7,166 (1,362) 5,804 2018 £000 511 (1,004) 6,252 568 1,672 7,999 (1,520) 6,479 149,135,316 148,890,948 1,140,709 980,529 150,276,025 149,871,477 (1.32)p (1.32)p 3.89p 3.86p 7,392 (1,140) 6,252 0.34p 0.34p 4.35p 4.32p 7,136 (884) 6,252 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. 58 Financial Statements Redcentric Report & Accounts 2019 Notes to the Consolidated Financial Statements year ended 31 March 2019 – continued 10 Property, plant and equipment Cost At 31 March 2018 Reclassiﬁ cation Additions Disposals Exchange differences At 31 March 2019 Accumulated depreciation At 31 March 2018 Reclassiﬁ cation Charge for the year ended 31 March 2019 Disposals Exchange differences At 31 March 2019 Net book amount At 31 March 2019 At 31 March 2018 Leasehold improvements Ofﬁ ce ﬁ xtures and ﬁ ttings Vehicles & computer equipment £000 £000 £000 13,896 1,372 (274) 112 - - - 159 (37) - 29,837 274 5,723 (1,849) 2 Total £000 45,105 - 5,994 (1,886) 2 13,734 1,494 33,987 49,215 9,526 (272) 869 - - 1,002 - 115 (22) - 14,339 272 6,346 (1,092) 1 24,867 - 7,330 (1,114) 1 10,123 1,095 19,864 31,082 3,611 4,370 399 370 14,123 15,498 18,133 20,238 Included in vehicle and computer equipment are assets held under ﬁ nance leases with a carrying value of £3.7m at 31 March 2019 (2018: £4.9m). Of the £6.0m ﬁ xed assets acquired in the year, £1.3m were funded using ﬁ nance leases (2018: £3.0m). 59 Financial Statements Redcentric Report & Accounts 2019 Notes to the Consolidated Financial Statements year ended 31 March 2019 – continued 11 Intangible assets Cost At 31 March 2017 Additions FOREX difference on carrying value At 31 March 2018 Additions Exchange differences At 31 March 2019 Accumulated amortisation and impairment At 31 March 2017 Amortisation charge for the year ended 31 March 2018 Impairment At 31 March 2018 Amortisation charge for the year ended 31 March 2019 Exchange differences Write-off At 31 March 2019 Customer contracts and related relationships Trademarks Software and licences £000 £000 £000 Goodwill £000 Total £000 43,269 62,300 275 4,700 110,544 - - - (16) - - 913 - 913 (16) 43,269 62,284 275 5,613 111,441 - - - - - - 717 1 717 1 43,269 62,284 275 6,331 112,159 - - - - - - - 19,596 6,217 - 25,813 6,252 - 32,065 36,471 30,219 240 35 - 275 - - 1,983 21,819 884 - 7,136 - 2,867 28,955 1,141 7,393 (1) 10 (1) 10 275 4,017 36,357 - - 2,746 2,314 82,486 75,802 Carrying amount at 31 March 2018 Carrying amount at 31 March 2019 43,269 43,269 Included in software and licences are intangibles assets held under ﬁ nance leases with a carrying value of £0.4m at 31 March 2019 (2018: £0.4m). Of the £0.7m intangible assets acquired in the year, £0.2m were funded using ﬁ nance leases (2018: £0.4m). The Company has assessed that the trading operations of the business only constitute one cash generating unit. Customer contracts have a weighted average remaining amortisation period of 5 years and 11 months (2018: 6 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 ﬂ ow projections to the period of 31 March 2022 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 reﬂ ecting management's expected risk proﬁ le. In addition to revenue growth, the key assumptions used in the impairment testing were as follows: • Gross margin percentage of c.61% reducing to c.54%; • Pre-tax discount rate of 8.7% (post tax 8.7%); and • Terminal growth rate percentage of 2.5%. 60 Financial Statements Redcentric Report & Accounts 2019 Notes to the Consolidated Financial Statements year ended 31 March 2019 – continued Intangible assets (continued) The assumption of margins remaining ﬂ at after the 3 year management forecast period is based on the assumption that a mix of cost savings in service delivery will be offset by competitive market inﬂ uences, which is in line with management’s experience. A pre-tax discount rate of 8.7% (post-tax 8.7%) was applied which reﬂ ects management’s risk-adjusted estimate of the weighted average cost of capital. There is a signiﬁ cant element of recurring revenue through maintenance contracts and this reduces the risk inherent in the business. Over the ﬁ ve-year period, revenues are projected to grow at an average of 5.8%. The ﬁ rst 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: credit note provision Trade receivables – net Other receivables Prepayments Commission contract asset Accrued income Corporation Tax 2019 £000 13,112 (1,521) 11,591 194 6,133 2,040 1,949 196 22,103 2018 £000 16,779 (981) 15,798 265 7,211 - 2,846 - 26,120 As at 31 March 2019, trade receivables of £1.5m (2018: £1.0m) were impaired and fully provided for. The Directors monitor the quality of the receivables not impaired and believe them to be recoverable. The non-impaired receivables are fully performing and relate to independent customers with no history of default. The individually impaired receivables relate to receivables over 365 days, customers in ﬁ nancial difﬁ culty, customer acceptance issues and cancelled contracts. As at 31 March 2019, net trade receivables of £4.5m (2018: £4.5m) 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: The commission contract asset has arisen as part of the adoption of IFRS 15. For the year ending 31 March 2019 the impairment for this contract asset was nil. Year ended 31 March 2019 Year ended 31 March 2018 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 Credit note provision Net trade debtors £’000 9,074 2,628 505 99 390 416 13,112 (1,521) 11,591 £’000 11,323 1,951 1,417 550 945 593 16,779 (981) 15,798 61 Financial Statements Redcentric Report & Accounts 2019 Notes to the Consolidated Financial Statements year ended 31 March 2019 – continued Trade and other receivables (continued) The provision is calculated by management on a speciﬁ c basis based on their best estimate of recoverability taking into account the age and speciﬁ c circumstances relating to the debtor. The maximum exposure to credit risk at the reporting date is the fair value of each class of receivable mentioned above. The Group does not hold any collateral as security. The carrying amounts of the Group’s trade and other receivables are denominated in pounds. Movements on the Group credit note provision against trade receivables as at 31 March 2019 are as follows: At 31 March 2018 Top up of provision in relation to FY18 Utilisation of credit note provision in relation to FY18 Remaining provision relating to FY18 Creation of credit note provision in FY19 Utilisation of credit note provision in relation to FY19 Other provisions created in FY19 Remaining provision relating to FY19 At 31 March 2019 No impairment has been posted to accrued income in the year ended 31 March 2019. 13 Cash and cash equivalents Cash at bank £000 981 574 (1,337) 218 2,513 (1,465) 255 1,303 1,521 2019 £000 2018 £000 7,206 6,089 The Group’s cash is held at accounts with Barclays Bank PLC, which has a Standard and Poor’s rating of A. 14 Trade and other payables Current Trade payables Other payables Taxation and social security Accruals Deferred income Corporation Tax 2019 £000 6,603 275 3,249 3,028 9,142 - 2018 £000 9,005 27 2,490 2,705 8,343 890 22,297 23,460 Of the deferred income balance on £8.3m at 31 March 2019, £7.9m has been recognised as revenue in the FY19 accounts. 62 Financial Statements Redcentric Report & Accounts 2019 Notes to the Consolidated Financial Statements year ended 31 March 2019 – 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 2019 £000 2,982 11,169 18,514 32,665 2018 £000 2,881 11,095 20,942 34,918 The Group’s operating leases relate to property, motor vehicles and ofﬁ ce equipment, and have remaining terms of between 2 and 22 years. The amount recognised as an expense in the year is £2.4m (2018: £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 2019 (2018: £nil). 16 Borrowings Non-current Bank loan Finance leases Term loans Unamortised loan arrangement fee Total non-current Current Finance leases Term Loans Total current 2019 £000 2018 £000 19,500 2,214 69 (68) 28,000 2,807 - (136) 21,715 30,671 2,762 294 3,056 3,125 - 3,125 At 31 March 2019, the Group was party to £53.0m of bank facilities with a termination date of 1 April 2020. The facilities comprise a Revolving Credit Facility (“RCF”) of £25.0m (£19.5m utilised at 31 March 2019) with a £20.0m accordion (£nil utilised at 31 March 2019), a £2.0m Overdraft Facility (£nil utilised at 31 March 2019) 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. Post the year-end the Banks have agreed to extend the current facilities by 8 months to 30 November 2020, with all terms and covenants remaining the same until this time. The Company will undergo a full reﬁ nancing process at the start of FY21. 63 Financial Statements Redcentric Report & Accounts 2019 Notes to the Consolidated Financial Statements year ended 31 March 2019 – continued Borrowings (continued) Reconciliation of net debt: Instrument Cash RCF Term loan Finance lease Total As at 31 March 2018 £000 6,089 (27,864) - (5,932) (27,707) Net cash ﬂ ow £000 1,125 8,500 (66) (885) 8,674 Net non-cash ﬂ ow As at 31 March 2019 £000 £000 (8) (68) (297) (2,291) (2,664) 7,206 (19,432) (363) (4,976) (17,565) 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 2019 £000 Fair value 2019 £000 Carrying value 2018 £000 Fair value 2018 £000 19,432 18,793 27,864 26,001 Fair values are based on discounted cash ﬂ ows, using an effective interest rate based on the borrowing rates at 31 March 2019 of 3.4% (2018: 3.4%). Finance leases Present value 2019 Finance charges 2019 Future lease payments 2019 £000 £000 £000 Not later than 1 year After 1 year but not more than 5 years 2,762 2,214 4,976 61 77 138 2,823 2,291 5,114 17 Financial instruments by category Present value 2018 £000 3,125 2,807 5,932 Finance charges 2018 Future lease payments 2018 £000 £000 68 21 89 3,193 2,828 6,021 The objectives of the Group’s treasury activities are to manage ﬁ nancial risk, secure cost-effective funding where necessary and minimise adverse effects of ﬂ uctuations in the ﬁ nancial markets on the value of the Group’s ﬁ nancial assets and liabilities, on reported proﬁ tability and on cash ﬂ ows of the Group. The Group’s principal ﬁ nancial instruments for fundraising are bank borrowings, overdraft facilities and loans. The Group has various other ﬁ nancial instruments such as cash, trade receivables and trade payables that arise directly from its operations. 64 Financial Statements Redcentric Report & Accounts 2019 Notes to the Consolidated Financial Statements year ended 31 March 2019 – continued Financial instruments by category (continued) Assets Trade receivables Other receivables Cash and cash equivalents Total Liabilities Trade payables Other payables Borrowings Total Carrying value 2019 £000 Fair value 2019 £000 Carrying value 2018 £000 11,591 194 7,206 18,991 6,603 274 24,771 31,648 11,591 194 7,206 18,991 6,603 274 24,771 31,648 15,798 265 6,089 22,152 9,005 27 33,796 42,828 Fair value 2018 £000 15,798 265 6,089 22,152 9,005 27 33,796 42,828 18 Financial risk management The Group’s activities expose it to a variety of ﬁ nancial risks: market risk (including foreign exchange, fair value interest rate risk, cash ﬂ ow interest rate risk, and price risk), credit risk, and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of ﬁ nancial markets and seeks to minimise potential adverse effects on the Group’s ﬁ nancial 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 speciﬁ c areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative ﬁ nancial instruments and non-derivative ﬁ nancial 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 signiﬁ cant risk for the Group. (ii) Cash ﬂ ow 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 ﬂ ow interest rate risk. During the year ended 31 March 2019 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 reﬁ nancing, renewal of existing positions, alternative ﬁ nancing and hedging. Based on these scenarios, the Group calculates the impact on proﬁ t or loss of a deﬁ ned interest rate shift and manages its cash ﬂ ow interest rate risk accordingly. Based on the simulations performed, the impact on post-tax proﬁ t 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 signiﬁ cant commodity or security price risk. 65 Financial Statements Redcentric Report & Accounts 2019 Notes to the Consolidated Financial Statements year ended 31 March 2019 – 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 ﬂ ow. The Group’s liquidity management policy involves projecting cash ﬂ ows and considering the level of liquid assets necessary to meet these. The table below analyses the Group’s ﬁ nancial 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 ﬂ ows. Balances within 12 months equal their carrying balances as the impact of discounting is not signiﬁ cant. At 31 March 2019 Borrowings Finance leases Term loans Trade and other payables At 31 March 2018 Borrowings Finance leases Trade and other payables 19 Capital risk management Within 1 year £000 1-5 years £000 Total £000 - 2,762 294 6,602 - 2,828 8,752 19,500 2,214 69 - 28,000 3,104 - 19,500 4,976 363 6,602 28,000 5,932 8,752 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 ﬁ xed asset investments. Consequently, the Group is ﬁ nanced predominantly by equity. In order to maintain or adjust the capital structure the Group has previously both issued new shares and borrowed using bank facilities. The Group monitors capital on the basis of the ratio of net bank debt to adjusted EBITDA. Net debt is calculated as total bank borrowings (including ‘current and non-current borrowings’ as shown in the consolidated balance sheet) less cash and cash equivalents, and adjusted EBITDA is deﬁ ned 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 2019 was 1.1x (2018 – 1.5x). The bank facilities referred to in Note 16 contain various covenants relating to EBITDA, interest cover, net debt and cash ﬂ ow, which the Group monitors on a monthly basis. The Group adopts a risk-averse position with respect to borrowings and maintains a signiﬁ cant amount of headroom in its bank facilities to ensure that any unexpected situations do not create ﬁ nancial stress. The Group has committed to a progressive dividend policy, and intends to return a proportion of free cash-ﬂ ow 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 ﬂ exibility. The Group also grants share options to Directors and other selected employees. However, these do not have a signiﬁ cant impact on the Group’s capital structure. 66 Financial Statements Redcentric Report & Accounts 2019 Notes to the Consolidated Financial Statements year ended 31 March 2019 – continued 20 Called up share capital At 31 March 2017 New shares issued At 31 March 2018 New shares issued At 31 March 2019 Allotted and fully paid Number 148,859,173 276,143 149,135,316 - 149,135,316 £000 149 - 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 21 Provisions At 31 March 2018 Additional provisions created during the year Utilised during the year At 31 March 2019 Current and non-current analysis of provisions: 2019 Number 2018 Number - - 276,143 276,143 Dilapidations provision Vacant property provision Total provision £000 £000 £000 376 120 - 496 - 538 (4) 534 376 658 (4) 1,030 2019 current £000 - 149 149 2019 Non-current 2019 Total provision £000 496 385 881 £000 496 534 1,030 2018 Current £000 2018 Non-current 2018 Total provision £000 £000 - - - 376 - 376 376 - 376 Dilapidations Vacant Property Total 67 Financial Statements Redcentric Report & Accounts 2019 Notes to the Consolidated Financial Statements year ended 31 March 2019 – continued Contingent liabilities In March 2017 the FCA notiﬁ ed the Company that it had commenced an investigation following the historic overstatement of net assets and proﬁ ts as described in the Company's announcements on 7 November 2016, 13 and 23 December 2016 and following the completion of an independent forensic review commissioned by the Board of Redcentric. The FCA investigation is still ongoing and has not yet reached its conclusion. At this time, the FCA has not communicated how it intends to proceed and what, if any, action it might bring against the Company. Until such stage as the FCA’s intentions becomes clear, the Directors are not able to judge whether a ﬁ ne will be likely and therefore whether we would need to make a relevant provision in the accounts. We continue to cooperate as fully as we can with the investigation and whilst the overall timing is out of our control, we are seeking to expedite it as soon as practicably possible. 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 2019 £000 354 12 366 2018 £000 534 34 568 * This is an IFRS 2 charge arising from share options issued in terms of a share-based payment plan. 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 Cancelled in the year Lapsed / forfeit in the year Outstanding at the end of the year 2019 Number of options 9,923,121 914,209 - (100,483) (8,486,727) 2,250,120 2019 WAEP 72.2 0.1 - 70.4 76.3 27.7 2018 Number of options 10,037,417 2,752,820 (276,143) (2,590,973) 9,923,121 2018 WAEP 80.4 28.0 70.0 57.1 72.2 The weighted average fair value of the options granted in the year ended 31 March 2019 was 0.1p (2018: 28.0p) per option. During the year ended 31 March 2019 there were new grants of 914,209 options (2018: 2,752,820 options) which were issued under the Company’s Long-Term Incentive Plan (“LTIP”). The weighted average remaining contractual life for the share options outstanding at 31 March 2019 is 5 years and 10 months (2018: 5 years and 2 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: Number 31 March 2019 Life at 31 March 2019 Number 31 March 2018 Life at 31 March 2018 1,275,600 949,398 - - 25,122 2,250,120 8 years, 10 months 1 years, 11 months - - 0 years, 6 months 5 years, 10 months 845,621 1,167,678 7,581,968 294,669 33,185 9 years, 2 months 2 years, 11 months 5 years, 3 months 0 years, 6 months 1 years, 6 months 9,923,121 5 years, 2 months Range of prices 0p 63p 80p 107p 154p 68 Financial Statements Redcentric Report & Accounts 2019 Notes to the Consolidated Financial Statements year ended 31 March 2019 – 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 satisﬁ ed Subject to performance conditions Save-As-You-Earn Outstanding at the end of the year 2019 Number of options 0 1,275,600 974,520 2,250,120 2019 WAEP 0p 0p 65p 28p 2018 Number of options 0 8,427,589 1,495,532 9,923,121 2018 WAEP 0p 69p 74p 72p 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 2019 £000 133 221 - 12 366 2018 £000 224 162 148 34 568 At 31 March 2019, the Group had the following share-based payment arrangements: i. Long-Term Incentive Plan (LTIP) The Group operates a Long-Term Incentive Plan (LTIP) 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. ii. 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. 69 Financial Statements Redcentric Report & Accounts 2019 Notes to the Consolidated Financial Statements year ended 31 March 2019 – continued Share-based payment plans (continued) EMI LTIP SAYE MXC Total Balance at 31 March 2017 1,308,111 919,048 810,258 7,000,000 10,037,417 Issued in the year Forfeited in the year Cancelled in the year Exercised in the year Lapsed in the year Balance at 30 March 2018 Issued in the period Forfeited in the period Cancelled in the period Exercised in the year Lapsed in the year 1,529,430 1,223,390 - (538,116) - - - - - (276,143) (450,000) 581,968 - - - - (1,602,857) - - - 845,621 914,209 - - - 1,495,532 7,000,000 9,923,121 - (130,905) (100,483) - - - - - 914,209 (130,905) (100,483) - - - - - - 2,752,820 (1,602,857) (538,116) (276,143) (450,000) (581,968) (484,230) (289,624) (7,000,000) (8,355,822) Balance at 30 March 2019 - 1,275,600 974,520 - 2,250,120 As at 31 March 2019 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. Redcentric Plc was created when Redstone Plc demerged its network-based management services business. 23 Pensions The Group operates a deﬁ ned contribution pension scheme for eligible employees. The charge for the year ended 31 March 2019 was £0.5m (2018: £0.4m). At the year-end there was a pension’s creditor of £0.1m (2018: £0.1m). 24 Subsidiaries As at 31 March 2019, 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 Dormant* 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 ﬁ nancial statements. All of the Group companies have a registered ofﬁ ce of Central House, Beckwith Knowle, Harrogate HG3 1UG, except Redcentric Solutions Private Limited which has a registered ofﬁ ce at 606-611, 6th Floor, Manjeera Trinity Corporate, JNTU – Hitech City Road, Kukatpally, Hyderabad – 72 and Redcentric US Limited which has a registered ofﬁ ce at 874 Walker Road, Suite C, Dover, Kent, USA 19904. * The companies marked with an asterisk are exempt from ﬁ ling audited accounts under s394A of the Companies Act 2006 as they have been dormant throughout the period. ** Dissolved 11/07/2017 70 Financial Statements Redcentric Report & Accounts 2019 Notes to the Consolidated Financial Statements year ended 31 March 2019 – 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. Compensation of key management personnel is disclosed in note 7. There were no other transactions with related parties in the year to 31 March 2019. 26 Dividends Amounts recognised as distributions to Shareholders in year: Interim dividend for year ended 31 March 2019 of 0.4p (2018: nil) per share 2019 £000 597 597 2018 £000 Nil Nil The Company paid an interim dividend in respect of the year to 31 March 2019 of 0.4p per ordinary share, with a total payment value of £0.6m. 27 Subsequent events Post the year-end the Banks have agreed to extend the current facilities by 8 months to 30 November 2020, with all terms and covenants remaining the same until this time. The Company will undergo a full reﬁ nancing process at the start of FY21. 28 IFRS 15 (revenue from contracts with customers) restatement There were two main changes to the Company accounts when prepared under IFRS 15. The ﬁ rst was in relation to recognition of revenue for Customer Premises Equipment (i.e routers) and the second was in relation to commission payments made to members of the Sales department. The Company has chosen to adopt the modiﬁ ed retrospective method of transition which allows for the recognition of the cumulative effect of applying the standard through opening retained earnings. Customer Premises Equipment (CPE) Prior to IFRS 15 adoption, CPE set up and activation revenue was recognised up front upon installation. Under IFRS 15 this has now been amended so that all revenue received in relation to CPE set up and activation is now recognised over the life of the relevant customer contract. The impact of this has been a reduction in reported revenue and an equivalent increase in deferred income. Sales Commission Payments Prior to IFRS 15 adoption, the policy was to recognise the commission expense in the income statement in the period in which it was paid via payroll. Under IFRS 15 sales commission costs are now recognised across the life of the contract to which the commission relates. This restatement has had a positive earnings impact alongside an impact on the statement of ﬁ nancial position to reﬂ ect a contract asset for commission costs to be recognised over the term of the contract. The Company is also now recognising the liability for future commission payments due as a result of commission already earned (for example through multi-year payments). 71 Financial Statements Redcentric Report & Accounts 2019 Notes to the Consolidated Financial Statements year ended 31 March 2019 – continued IFRS 15 (revenue from contracts with customers) restatement (continued) The following tables show, for the year ended 31 March 2019, the impact on the ﬁ nancial statements had IFRS 15 not been adopted. There was no net impact on the key cash ﬂ ow headings i.e net cash ﬂ ow from operating activities, investing activities or ﬁ nancing activities. Income statement for the year ended 31 March 2019 prepared under IFRS 15 and IAS 18 2019 (reported) £000 Adjustments under IFRS 15 2019 (under IAS 18) £000 £000 Revenue Cost of sales Gross proﬁ t Operating expenditure Operating loss Analysed as: Adjusted EBITDA Depreciation Amortisation of intangibles Exceptional costs Share-based payments Interest payable Interest receivable Loss on ordinary activities before taxation 93,260 (36,895) 56,365 (56,650) (285) 16,714 (7,330) (7,392) (1,911) (366) (285) (1,091) 13 (1,363) (207) - (207) (336) (543) (543) - - - - (543) - - 93,053 (36,895) 56,158 (56,986) (828) 16,171 (7,330) (7,392) (1,911) (366) (828) (1,091) 13 (543) (1,906) 72 Financial Statements Redcentric Report & Accounts 2019 Notes to the Consolidated Financial Statements year ended 31 March 2019 – continued Statement of ﬁ nancial position at 31 March 2019 prepared under IFRS 15 and IAS 18 Assets Non-current assets Property plant and equipment Intangible assets Deferred tax asset Current assets Inventories Trade and other receivables Cash and short-term deposits As at 31 March 2019 (reported) Adjustments under IFRS 15 As at 31 March 2019 (under IAS 18) £000 £000 £000 18,133 75,802 142 94,077 357 22,103 7,206 29,666 - - - - - (1,875) - (1,875) 18,133 75,802 142 94,077 357 20,228 7,206 27,791 Total assets 123,743 (1,875) 121,868 Current liabilities Trade creditors and other payables Borrowings Provisions Non-current liabilities Borrowings Provisions Deferred tax liability Total liabilities Net assets Equity and liabilities Equity Called up share capital Share premium account Capital redemption reserve IFRS 15 revaluation reserve Retained earnings Total equity 22,297 3,056 149 21,715 881 - 48,098 75,645 149 65,588 (9,454) (75) 19,437 75,645 (1,407) - - - - - 20,889 3,057 149 21,715 881 - (1,407) 46,691 (468) 75,177 - - - 75 (543) (468) 149 65,588 (9,454) - 18,894 75,177 73 Financial Statements Redcentric Report & Accounts 2019 Company Balance Sheet as at 31 March 2019 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 2019 £000 2018 £000 2 3 4 101,918 101,565 (12,271) (12,271) (11,680) (11,680) 89,647 89,885 149 65,588 5,856 18,054 89,647 149 65,588 5,503 18,645 89,885 The notes on pages 45 to 78 are an integral part of these ﬁ nancial statements. The ﬁ nancial statements on pages 41 to 44 were approved by the Board on 25 June 2019 and are signed on its behalf by: Peter Brotherton, Director 74 Financial Statements Redcentric Report & Accounts 2019 Company Statement of Changes in Equity Called up share capital £000 Share premium £000 Share option reserve £000 Reserves £000 Total equity £000 At 31 March 2017 149 65,395 4,969 18,645 89,158 Transactions with owners: Issue of new shares Share Based Payments (SBP) At 31 March 2018 Transactions with owners: Write off Dividends to shareholders Share Based Payments (SBP) At 31 March 2019 - - 149 - - - 193 - 65,588 - - - 149 65,588 - 534 5,503 - - 353 5,856 - - 193 534 18,645 89,885 6 (597) 6 (597) 353 18,054 89,647 75 Financial Statements Redcentric Report & Accounts 2019 Notes to the Company Financial Statements 1 Accounting policies (FRS 101) The Company has elected to prepare the ﬁ nancial statements under FRS 101. In these ﬁ nancial 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 ﬁ xed 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 ﬁ nancial statements of [ultimate parent undertaking] 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 indeﬁ nite life intangible assets; • Disclosures required by IFRS 5 Non-current Assets Held for Sale and Discontinued Operations in respect of the cash ﬂ ows 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 below have, unless otherwise stated, been applied consistently to all periods presented in these ﬁ nancial statements. 2 Investments Investments in subsidiaries Capital contribution related to share-based payments for subsidiaries 2019 £000 96,062 5,856 101,918 2018 £000 96,062 5,503 101,565 The investment in the underlying subsidiaries has been considered by management to assess possible impairment at the year end. The investment recoverable amount was based on the value in use calculation using forecast cash ﬂ ow projections to the period of 31 March 2022 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 reﬂ ecting management's expected risk proﬁ le. In addition to revenue growth, the key assumptions used in the impairment testing were as follows: • Gross margin percentage of c.61% reducing to c.54%; • Pre-tax discount rate of 8.7% (post tax 8.7%); and • Terminal growth rate percentage of 2.5% 76 Financial Statements Redcentric Report & Accounts 2019 Notes to the Company Financial Statements continued Investments (continued) The assumption of margins remaining ﬂ at after the 3 year management forecast period is based on the assumption that a mix of cost savings in service delivery will be offset by competitive market inﬂ uences, which is in line with management’s experience. A pre-tax discount rate of 8.7% (post-tax 8.7%) was applied which reﬂ ects management’s risk-adjusted estimate of the weighted average cost of capital. There is a signiﬁ cant element of recurring revenue through maintenance contracts and this reduces the risk inherent in the business. Over the ﬁ ve-year period, revenues are projected to grow at an average of 5.8%. The ﬁ rst 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 an impairment of the investment value at the year end. At 31 March 2019, 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 Dormant* 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 ﬁ ling 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 ofﬁ ce of Central House, Beckwith Knowle, Harrogate HG3 1UG, except Redcentric Solutions Private Limited which has a registered ofﬁ ce of 606-611, 6th Floor, Manjeera Trinity Corporate, JNTU – Hitech City Road, Kukatpally, Hyderabad – 72 and Redcentric US Limited which has a registered ofﬁ ce at 874 Walker Road, Suite C, Dover, Kent, USA 19904. The Company does not have any associate operations. 3 Creditors – amounts falling due within one year 2019 £000 2018 £000 Amounts owed to subsidiaries 12,271 11,680 Amounts due to Group undertakings are unsecured, interest-free and have no ﬁ xed payment terms. 77 Financial Statements Redcentric Report & Accounts 2019 Notes to the Company Financial Statements continued 4 Called up share capital At 31 March 2017 New shares issued At 31 March 2018 New shares issued At 31 March 2019 Allotted and fully paid Number 148,859,173 276,143 149,135,316 - 149,135,316 £000 149 - 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 2019 Number - - 2018 Number 276,143 276,143 As at 31 March 2019 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 £25,000 (2018: £24,000). This fee was borne by another Group company. 6 Related parties The Group has taken exemption not to disclose transactions with entities wholly owned by the Group. Directors' emoluments are disclosed in the Remuneration Report. There were no other transactions with related parties in the year to 31 March 2019. 78 Advisers Company Secretary Harn Jagpal Registered Ofﬁ ce 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 ﬁ nnCap Ltd 60 New Broad Street London EC2M 1JJ Financial PR Tulchan Communications LLP 85 Fleet Street London EC4Y 1AE Registrar Link 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 Addleshaw Goddard LLP 3 Sovereign Square Sovereign Street Leeds LS1 4ER 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 Redcentric Report & Accounts 2019 79 HARROGATE (HEAD OFFICE) Central House Beckwith Knowle Harrogate HG3 1UG LONDON Lifeline House 80 Clifton Street London EC2A 4HB 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 CAMBRIDGE Newton House Cambridge Business Park Cowley Road Cambridge CB4 0WZ READING 3-5 Worton Drive Reading RG2 0TG 0800 983 2522 sayhello@redcentricplc.com www.redcentricplc.com

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