Redcentric plc
Annual Report 2023

Plain-text annual report

2023 R E P O R T & AC C O U N T S Year ended 31 March 2023 | Redcentric plc Company Number 08397584 Redcentric is a digital transformation partner providing highly available connectivity, colocation, cloud, communications and cyber security solutions that help public and private sector organisations to succeed. Assured Availability Organisational Agility Smarter Working 2 Contents Strategic Report Highlights Chairman’s Statement Chief Executive Officer’s Review Financial Review Alternative Performance Measures Strategy and Business Model Section 172 Statement Risk Management Corporate Responsibility Sustainability Reporting Governance Introduction to Governance Corporate Governance Board of Directors Audit Committee Report Directors’ Remuneration Report Directors’ Report Statement of Directors’ Responsibilities Financial Statements Independent auditor’s report to the members of Redcentric plc Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated cash flow statement Consolidated statement of changes in equity Notes to the consolidated financial statements Company balance sheet Company statement of changes in equity Notes to the company financial statements Directors and advisers 3 5 7 8 12 20 25 26 30 32 36 54 55 62 64 66 72 76 77 84 85 86 87 88 132 133 134 139 Section titleAnnual Report and Accounts 2023F I N A N C I A L H I G H L I G H T S Total revenue £141.7m +51.8% Recurring revenue £128.5m +54.8% Adjusted EBITDA £24.5m +3.3% Adjusted operating profit £8.6m -45.6% 4 Strategic reportHighlights Financial performance measures Total revenue Recurring revenue 1 Recurring revenue percentage1 Adjusted EBITDA1 Adjusted operating profit 1 Reported operating (loss)/profit Adjusted cash generated from operations1 Reported cash generated from operations Net debt1 Adjusted net debt1 Adjusted basic earnings per share1 Reported basic (loss)/earnings per share Percentage change calculated on absolute values Year ended 31 March 2023 (“FY23”) Year ended 31 March 2022 (“FY22”) £141.7m £128.5m 90.7% £24.5m £8.6m (£8.9m) £23.1m £14.8m (£73.0m) (£35.6m) 2.66p (5.94p) Change 51.8% 54.8% 1.8% 3.3% (45.6%) (235.3%) 19.6% (13.8%) (339.5%) (2,271.8%) £93.3m £83.0m 88.9% £23.7m £15.9m £6.6m £19.3m £17.2m (£16.6m) (£1.5m) 7.68p 4.43p (65.3%) (231.4%) 1 This annual report and accounts contains certain financial measures that are not defined or recognised under IFRS but are presented to provide readers with additional financial information that is evaluated by management and investors in assessing the performance of the Group. This additional information presented is not uniformly defined by all companies and may not be comparable with similarly titled measures and disclosures from other companies. These measures are unaudited and should not be viewed in isolation or as an alternative to those measures that are derived in accordance with IFRS. For an explanation of the alternative performance measures used in this report and reconciliations to their most directly related GAAP measure, please refer to pages 16 & 20 - 24. 5 Annual Report and Accounts 2023Strategic reportStrategic report Annual Report and Accounts 2023 “ We visited quite a few co-locations and chose Redcentric for its ‘can do’ approach and the warm and cheerful welcome.” 666 6 Chairman’s statement I am very pleased to introduce the annual report and accounts (“Report”) for the Redcentric plc (“Redcentric” or “Company”) group of companies (the “Group”) for the financial year ended 31 March 2023 (“FY23”). Overview and financial results Dividend and share buyback These results demonstrate an inflection point for the business, the annualised impact of the FY22 acquisitions together with the Sungard and 4D acquisitions made in FY23 have transformed the business both in terms of capability and scale. Revenues have grown by 52% in the financial year FY23 and on a run rate basis are c.75% higher than the pre- acquisition period of FY21. The acquisitions have enhanced our product offerings with Hyper cloud transformation and Cyber Security professional services being added to our portfolio. The recent data centre acquisitions mean that electricity costs are key to the financial performance of the business, and we continue to invest in energy efficiency measures to reduce consumption whilst also being very active in the energy market. We have limited any commodity price volatility in FY24 by agreeing own-use commodity contracts to fix prices and we have also taken advantage of the relatively favourable energy market by fixing a significant proportion of our FY25 requirements. With both the synergy and energy efficiency programmes completing during the course of FY24, FY25 will be the first full year that reflects the full benefit of the acquisitions. The business has also put a sustained effort into delivering organic growth, with eleven of the last twelve months trading to June 2023 showing positive net new business. It is particularly pleasing to note that this has been delivered through a combination of new customers and delivering against cross selling opportunities as a result of broader product offerings and the enlarged customer base. The focus for FY24 will be to complete the integration of the recently acquired businesses and to continue to grow the business by capitalising on the excellent opportunities provided by the acquisitions. Whilst further acquisitions are not an immediate priority for the company, with £41.5m of its £80m committed bank facility drawn at the date of these accounts, the company has significant firepower should an exceptional opportunity present itself. During the year, the Board declared an interim dividend of 1.2 pence per share (FY22: 1.2 pence per share), with £1.9m paid on 27 January 2023 (FY22: £1.9m). A final dividend of 2.4p per share is recommended by the board of directors of the Company (the “Board”) and will result in a total dividend for FY23 of 3.6p per share (financial year ended 31 March 2022 “FY22”: 3.6p per share). Subject to approval by shareholders at the Company’s annual general meeting (“AGM”), this is expected to be paid on 19 January 2024 to shareholders on the register at the close of business on 8 December 2023 with shares going ex-dividend on 7 December 2023. The last day for Dividend Reinvestment Plan elections is 27 December 2023. Board changes and people On 21 July 2022, Alan Aubrey was appointed as a Non- Executive Director and Chair of the Audit Committee. Alan brings with him considerable market knowledge alongside a breadth and depth of skills and experience. from the Board. Recruitment On 24 July 2023, Helena Feltham, Non-Executive Director, stepped down for her replacement is underway. On behalf of the Board and all at Redcentric I would like to thank Helena for her significant contribution over the last two years and wish her all the very best for the future. Outlook The business is benefitting greatly from the acquisitions of Piksel, 7 Elements, Sungard (Consultancy and Data Centres) and 4D made in the last two financial years with revenues growing at a significant pace. The integration programmes are progressing well and the full effect of these will be seen in FY25, in addition the business has protected itself against increases in electricity commodity prices in FY24 and has taken actions to benefit from a favourable energy market beyond FY24. The factors above together with the organic growth momentum seen over the past twelve months, mean that the Board remains optimistic for the future of the business. Nick Bate Chairman 24 August 2023 7 Annual Report and Accounts 2023Strategic reportChief Executive’s Review Strategic execution FY23 has been a pivotal year for Redcentric, the capability acquisitions of Piksel (Hyper cloud transformation) and 7 Elements (Cyber Security) made in FY22 have been quickly integrated and are providing excellent cross-sell opportunities across the enlarged customer base. To support and accelerate our acquisition strategy further a banking facility was agreed on 26 April 2022, providing us with significant additional funding at very competitive rates. Under this new four bank syndicate £80m of committed funds are available with a further £20m uncommitted accordion facility available if required. With the funds in place at the start of FY23, the business completed three acquisitions in quick succession, and by July 2023 had secured the Sungard consultancy business offering enhanced cyber security capability, and the 4D and Sungard Data centre businesses providing significant scale and a blue-chip customer base. At 31 March 2023, £34.0m of the £80.0m committed facility was net drawn to fund acquisitions. As a result of these five acquisitions, over 600 customers have been added to our existing base and we exit the year with a revenue run rate (being total contracted monthly revenue plus the delivered one-off revenue) of £160m which represents a 75% increase on FY21, the last full year with no impact of acquisitions. Furthermore, our product and solutions offerings have been strengthened in the highest growing areas of the market, giving us one of the most comprehensive IT and telecommunications product and solution offerings in the market. the very material and Notwithstanding immediate revenue growth, a return to profitability will take longer to materialise. The very significant and complex synergy and energy efficiency programmes, the consideration paid for the acquisitions, are planned to complete during the course of FY24 meaning that FY25 will be the first full year that reflects the full benefit of the acquisitions. reflected in Organic growth update We continue to see strong organic growth, with an increase in net new business (new business plus or minus renewal churn less cancellations and excluding inflationary price increases) in nine of the last ten months to the end of March 2023. Net new business when converted into revenue equates to an organic growth rate of approximately 6%, a level that has not been experienced for a number of years and we expect this level of organic growth to continue into FY24. 8 8 improvement in organic growth The the increase in new logos and delivering against the cross- selling opportunities to existing customers as a result of the Group’s broader product offering and enlarged customer base. reflects Integration update The integration programme is progressing well with total synergies of £22.0m now forecast, £5m ahead of the expectations at the time of the H1 FY23 results. £16.2m of the total synergies have already been actioned and reflected in the run rate, with the balance of £5.8m to be actioned throughout the course of FY24 and effective throughout both FY24 and FY25. The sale of the Elland data centre assets anticipated for December 2022 did not complete due to buyer funding issues and as a result this facility will now be retained and developed as a long-term strategic asset. The Harrogate data centre will now be closed instead with customer and core equipment transferred to Elland by the end of FY24. Annualised savings of circa £1.4m are anticipated versus the £0.6m expected for Elland, but these savings will now materialise in FY25 rather than FY24. The bulk of the remaining synergy activity relates to energy conservation measures (new chiller units in Heathrow) and the closure of the Harrogate data centre. Electricity sourcing & consumption FY23 has seen the most volatile electricity pricing for a generation, with commodity prices reaching as high as ten times historical averages. Whilst the government’s energy bill relief scheme, put in place during the year, did help to reduce costs, the scheme did not cover the full electricity consumption and, as a result, FY23 profits were adversely impacted by £1.7m of higher than anticipated electricity costs. The Group operates out of eight of its own data centres and has a large (including management) presence in a third- party data centre. In seven out of nine of these data centres, the Group is responsible for the sourcing of electricity. The electricity purchasing cost differences between the data centres are detailed below: • In the seven data centres where procurement is managed by the Group own-use commodity contracts have been agreed for the whole of FY24 and a large proportion of FY25. The commodity rates achieved are consistent with the Board’s expectations and removes the commodity price risk in these data centres until 1 April 2024. Strategic reportAnnual Report and Accounts 2023Chief Executive’s Review (continued) • The two data centres where the Group has no control on the procurement of electricity have also locked in forward prices but at rates much higher (c.80%) than those achieved by the Group. Whilst we can pass on price increases to the former Redcentric, Piksel and 4D customer bases, the fixed priced Sungard customer contracts mean that for FY24 there will be £0.9m of increased costs which cannot be passed on to customers. One of these two data centres will be closed by the end of FY24. Following the year end we have continued to monitor the forward rates for FY25 and beyond and have taken advantage of further reductions in the energy market by agreeing additional own-use commodity contracts for a large proportion of our electricity requirements for FY25. Following the Sungard DC acquisition, electricity costs have become our largest externally sourced cost item, and in addition to monitoring and reducing price risk we have put considerable effort in to reducing electricity consumption, not only to reduce costs but also significantly reducing our carbon footprint and contributing towards our net zero strategy. The introduction of cold aisle containment together with some basic housekeeping measures has already reduced consumption within the Heathrow and Woking data centres by a very impressive 16%. Whilst this is an excellent start, further measures including the replacement of inefficient water chillers in Heathrow will be progressed in FY24 accelerating the reduction in consumption significantly. We are pleased to announce the following results for FY23: • Revenues of £141.7m (FY22: £93.3m); • Adjusted EBITDA* of £24.5m (FY22: £23.7m); • Adjusted operating profit^ of £8.6m (FY22: £15.9m); • Reported operating loss of £8.9m (FY22: profit of £6.6m); The net debt position is after dividend payments of £5.6m; the acquisitions of Sungard Consulting and DCs, and 4D Data Centres for a combined cash cost of £26.6m (net of cash acquired); exceptional items largely relating to integration and restructuring costs of £8.1m; capital expenditure of £6.8m; and a working capital deficit due to investment in stock of £1.4m. from reflect results the contribution These the five acquisitions completed over the last two financial years including a full year of trading from Piksel and 7 Elements, and a partial year’s contribution from 4D Data Centres and the two Sungard business and asset acquisitions. The results further reflect the following: • Higher than anticipated electricity costs of £1.7m, reflecting the impact of the Government Energy Bill Relief Scheme not being applied to overall consumption, the significant increase in non-commodity charges and rephasing of energy efficiency savings as a result of supplier equipment delays. • Higher than expected software license costs of £0.7m (annualised effect of £1.5m) as a result of the acquired Sungard business not recording platform usage accurately and under reporting license consumption prior to the acquisition. OTHER UPDATES Inflation The business continues to experience widespread inflationary increases across its cost base, primarily wage inflation, electricity costs and software license costs. Furthermore, we have been notified of significant increases in business rates (c.33%) across our data centre portfolio which is anticipated to add c.£0.8m to the FY24 cost base. Although the business can pass on specific increases relating to electricity (with the exception of the Sungard customer base) and license costs periodically, increases relating to general inflation can only be passed on annually. • Net debt as at 31 March 2023 of £73.0m (31 March 2022: Contingent consideration As part of the deal structure for the acquisition of 7 Elements Ltd, contingent consideration of up to £0.45m was included based on the performance of the business in the 13 months to 31 March 2023. As the acquisition has exceeded the targets set, the maximum amount of £0.45m became payable, and was paid on 3 April 2023. net debt of £16.6m); and • Adjusted net debt as at 31 March 2023 of £35.6m (31 March 2022: net debt of £1.5m); *Adjusted EBITDA is EBITDA excluding exceptional items, share-based payments and associated National Insurance. Exceptional items are outlines in note 9. ^Adjusted operating profit is reported operating profit excluding amortisation of intangible assets arising on business combinations, exceptional items and share-based payments. 9 Annual Report and Accounts 2023Strategic reportChief Executive’s Review (continued) Contingent consideration (continued) The final consideration for the Sungard DCs acquisition is based on the conversion of short-term contracts into contracts with a term of 12 months or more from the date of the acquisition. The fair value at the yearend was £2.75m (undiscounted), based on the expectations at that point. The final position has now been fully crystallised resulting in a payment of £0.4m made in July 2023. The lower payment is the result of a revised position of customer contracts at the anniversary date. OUTLOOK Electricity costs remain key to financial performance and we will continue to make significant investments in FY24 to further reduce electricity consumption. This will be achieved by deploying new cooling infrastructure at our flagship data centre in Heathrow. The Company has locked in electricity prices for the majority of FY24 and a large proportion of FY25, and so will not be materially subject to further commodity price volatility in the following two financial years. With both the synergy and energy efficiency programmes completing during the course of FY24, FY25 will be the first full year that reflects the full benefit of the acquisitions. the improved electricity purchasing Considering arrangements, customer and supplier price increases effective from 1 April 2023 and completed cost reductions as a result of the synergy programme, we commence FY24 with annualised revenues and adjusted EBITDA of c.£160.0m and c.£29.0m respectively. Peter Brotherton Chief Executive Officer 24 August 2023 The focus for FY24 will be to complete the integration of the recently acquired businesses and to continue to grow the business by capitalising on the excellent opportunities provided by the broader product offerings and increased customer bases which have resulted from the acquisitions undertaken in FY22 and FY23. 10 10 Strategic reportAnnual Report and Accounts 2023O U R S E R V I C E P O R T F O L I O Cyber security Scanning & remediation Identity & access management solutions Security testing Managed vulnerability scanning Data loss prevention Incident response Cloud data protection Managed perimeter security service Application firewalls Endpoint security management Security monitoring & analytics Information security management as a service Information security policy development Certificate management Security Information Event Management (SIEM) Resilience consulting services Managed firewalls DDoS mitigation Cloud Connectivity Communications SD-WAN Managed WAN Managed LAN Network connectivity options Secure remote access Internet access HSCN connectivity Public cloud connectivity (Azure & AWS) Managed wireless networking Cellular MPLS primary & failover WAN Insight Hosted telephony Unified communications Microsoft Teams Webex Teams Microsoft Teams calling Call recording & Voice AI Call reporting Calls & lines SIP trunks CallConnect GP PCI Comply Keep my place in the queue / ARC Omnichannel contact centre Digital transformation consultancy Modern workplace Colocation Managed public cloud (Azure & AWS) Infrastructure as a service Hybrid cloud Disaster recovery as a service Virtual desktops Full stack managed service OS Level managed service E-commerce (DC2) & SAP Hybris Application modernisation Cloud migration & consultancy Application services experts Backup as a service Database administration Platform as a service AI & machine learning LAN infrastructure On-premises security Telephony infrastructure On-premises Wi-Fi IT consultancy services Implementation services Maintenance & support services Applications & software sales Microsoft operating systems Hardware – switches, routers, servers, PCs & laptops Microsoft licensing & licence optimisation Product and software sales 11 Annual Report and Accounts 2023Strategic reportFinancial Review Financial performance measures Total revenue Recurring revenue 1 Recurring revenue percentage1 Adjusted EBITDA1 Adjusted operating profit 1 Reported operating (loss)/profit Adjusted cash generated from operations1 Reported cash generated from operations Net debt1 Adjusted net debt1 Adjusted basic earnings per share1 Reported basic (loss)/earnings per share Year ended 31 March 2023 (FY23) Year ended 31 March 2022 (FY22) £141.7m £128.5m 90.7% £24.5m £8.6m (£8.9m) £23.1m £14.8m (£73.0m) (£35.6m) 2.66p (5.94p) Change 51.8% 54.8% 1.8% 3.3% (45.6%) (235.3%) 19.6% (13.8%) (339.5%) (2,271.8%) £93.3m £83.0m 88.9% £23.7m £15.9m £6.6m £19.3m £17.2m (£16.6m) (£1.5m) 7.68p 4.43p (65.3%) (231.4%) Percentage changes calculated on absolute values. 1 For an explanation of the alternative performance measures used in this report, please refer to page 20. Overview The results for FY23 have been dominated by the impact of the five acquisitions made since September 2021, and reflect the first full year of conditions from the acquired Piksel and 7 Elements businesses, and a partial year of contributions from the acquired Sungard Consulting, Sungard DC and 4D businesses. The enlarged Group delivered revenue and adjusted EBITDA of £141.7m, and £24.5m respectively, resulting in 51.8% and 3.3% of respective growth. Adjusted net debt has increased to £35.6m reflecting £26.6m of acquisition consideration, in addition to £8.1m of exceptional costs largely relating to the restructuring and integration programmes following the acquisitions. Key considerations in the financial statements include: 1. On 26 April 2022, the Group completed a refinance of its debt facilities that were due to mature on 30 June 2022. The new debt facilities consist of an £80m revolving credit facility (“RCF”), £7m asset financing facility and a £20m uncommitted accordion facility and are provided by a new four bank group consisting of NatWest, Barclays, Bank of Ireland, and Silicon Valley Bank (now under the HSBC group) (the “New Facility”), with the asset financing facility provided by Lombard. The New Facility has an initial maturity date of 26 April 2025 with options to extend by a further one or two years. The borrowing cost of the RCF is determined by the level of the Company leverage and has a borrowing cost of 205 basis points over SONIA at the Company’s yearend leverage levels. An arrangement fee of 75 basis points was payable upfront, in addition to a commitment fee on the undrawn portion of the new RCF, on equivalent terms to the previous facility. The New Facility provides the Group with additional liquidity to be used for working capital purposes and to fund acquisitions. 12 12 Strategic reportAnnual Report and Accounts 2023Financial Review (continued) 2. The acquisition on 7 June 2022 by the Group’s trading subsidiary Redcentric Solutions Limited of the consulting business from Sungard Availability Services (UK) Limited (in administration) for £4.2m consideration paid in cash. The business provides services in respect of business continuity, cloud and infrastructure, cyber resilience, disaster recovery and hybrid cloud transformation services alongside the provision and operation of Cloud related services. This acquisition is considered to be a linked transaction with the DC acquisition as mentioned in note 4 below, and also refer to note 2.1 for further consideration of the accounting treatment. 3. The acquisition on 27 June 2022 by Redcentric Solutions Limited for 100% of the share capital of 4D Data Centres Limited (“4D”) for £10.1m consideration paid in cash. The business provides colocation, cloud and connectivity services to mid- market customers. The primary purpose of the business combination is to scale the Group’s existing revenues in this area with significant synergies expected as the acquisition is integrated into the Group. On 28 February 2023, the trade, assets and liabilities of 4D were hived in to Redcentric Solutions Limited. 4. The acquisition on 6 July 2022 by Redcentric Solutions Limited for certain business and assets relating to three data centres “DCs” from Sungard Availability Services (UK) Limited (in administration) for initial consideration of £10.1m paid in cash and a cash prepayment of £3.4m, with contingent consideration at a maximum potential value of £19.0m depending on customer retention and certain performance criteria in the 12-month period post-acquisition. The key financial highlights are as follows: • Total revenue growth of 51.8% to £141.7m (FY22: £93.3m). • Recurring revenue grew by 54.8% to £128.5m, with recurring revenue representing 90.7% of the total revenue (FY22: £83.0m / 88.9%). • Gross profit has increased by 69.5% to £100.9m. • Adjusted EBITDA of £24.5m is 3.3% ahead of FY22. • Adjusted operating profit decreased by £7.3m to £8.6m (45.6% decrease). • Adjusted net debt as at 31 March 2023 was £35.6m, excluding £36.9m of IFRS16 lease liabilities that were previously classified as operating leases under IAS17 and £0.5m of supplier loans. • Reported operating profit reduced by £15.5m to a loss of £8.9m. LTC New Redcentric data centre facilities at London Technology Centre 13 Annual Report and Accounts 2023Strategic reportFinancial Review (continued) Revenue Revenue for FY23 was generated wholly from the UK and is analysed as follows: Recurring revenue 1 Product revenue Services revenue Total revenue Year ended 31 March 2023 £000 Year ended 31 March 2022 £000 Change £000 Change % 128,461 7,144 6,069 141,674 82,965 6,187 4,176 93,328 45,496 957 1,893 48,346 54.8% 15.5% 45.3% 51.8% 1 For an explanation of the alternative performance measures used in this report, please refer to page 14. Total revenue increased by £48.3m compared to FY22, impacted by: incremental revenue in FY23 generated by the acquisitions of Sungard DCs, 4D and Sungard consultancy, and the first full year of revenue generated from FY22 acquisitions in Piksel and 7 Elements. Revenue is analysed into the following categories: • Recurring revenue has increased 54.8% to £128.5m (FY22: £83.0m) from new contracts with Sungard DCs and 4D. • Non-recurring product revenue has increased £0.9m to £7.1m (FY22: £6.2m) from sales with customers introduced through the current year acquisitions. • Non-recurring services revenue increased to £6.1m (FY22: £4.2m), reflecting increased activity on new projects. Gross profit Gross Profit Gross Margin Year ended 31 March 2023 £000 Year ended 31 March 2022 £000 Change £000 Change % 100,911 71.2% 59,550 63.8% 41,361 N/A 69.5% N/A Gross profit increased by 69.5% (£41.4m) reflecting the Group’s increased revenue and contribution from higher margin 4D and Sungard Consulting acquisitions. 14 Strategic reportAnnual Report and Accounts 2023Financial Review (continued) Adjusted operating costs1 The Group’s adjusted operating costs (operating expenditure excluding depreciation, amortisation, exceptional items, other operating income and share-based payments) are set out in the table below: Year ended 31 March 2023 £000 Year ended 31 March 2022 £000 Change £’000 Change % UK employee costs Office and data centre costs Network and equipment costs Other sales, general and administration costs Offshore costs Total adjusted operating costs 34,482 25,335 11,824 3,364 1,414 76,419 21,369 4,411 7,299 1,553 1,205 35,837 13,113 20,924 4,525 1,811 209 40,582 61.4% 474.3% 62.0% 116.6% 17.3% 113.2% 1 For an explanation of the alternative performance measures used in this report, please refer to page 20. Total adjusted operating costs for FY23 were 113.2% (£40.6m) higher than prior year, reflecting: • employee costs increased £13.1m (61.4%) due to additional employees following the Sungard and 4D acquisitions; • • office and data centre costs increased by £20.9m, primarily due to the impact of increased electricity costs as several electricity supply contract renewals fell due during the UK energy crisis, and the increase in the number of data centres through acquisitions; and network and equipment costs increased by £4.5m, and other sales, general and administration costs are up £1.8m, both due to increased requirements from acquisitions. Employees Year-end headcount UK India Total employees Average headcount UK India Total employees Year ended 31 March 2023 (Number) Year ended 31 March 2022 (Number) Variance (Number) 540 98 638 376 91 467 164 7 171 Year ended 31 March 2023 (Number) Year ended 31 March 2022 (Number) Variance (Number) 491 97 588 386 100 486 105 (3) 102 15 Annual Report and Accounts 2023Strategic reportFinancial Review (continued) Adjusted EBITDA1 Adjusted EBITDA is EBITDA excluding exceptional items (as set out in note 9), share-based payments and associated National Insurance. The same adjustments are also made in determining the adjusted EBITDA margin. Reported operating (loss)/profit Amortisation of intangible assets arising on business combinations Amortisation of other intangible assets Depreciation on tangible assets Depreciation on ROU assets EBITDA Exceptional items: Acquisition fees Integration costs Costs relating to the settlement of an historical supplier dispute Cloud computing costs Share-based payments and associated National Insurance Adjusted EBITDA1 Year ended 31 March 2023 £000 Year ended 31 March 2022 £000 (8,939) 8,183 590 4,636 10,617 15,087 8,149 695 5,965 809 680 1,256 24,492 6,607 6,498 475 2,745 4,578 20,903 1,629 1,181 23,713 1 For an explanation of the alternative performance measures used in this report, please refer to page 20. • Adjusted EBITDA increased by 3.3% to £24.5m, £0.8m higher than prior year. FY23 includes 9 months of contributions from the Sungard and 4D acquisitions, as well as the first full year of Piksel and 7 Elements. Taxation, interest and dividend The tax charge for the year was a credit of £3.2m (FY22: a credit of £1.4m), comprising an income tax charge of £0.1m (FY22: a charge of £0.4m), and a deferred tax credit of £3.3m (FY22: a credit of £1.8m). Net finance costs for the year were £3.5m (FY22: £1.1m), including £1.2m (FY22: £1.0m) of interest payable on leases of which £1.2m (FY22: £0.8m) related to leases previously recognised as operating leases under IAS17. During the year, the Group paid an interim dividend for FY23 of 1.2p per share, totalling £1.9m as detailed in note 14 (FY22: 1.2p per share). A final dividend payment of 2.4p per share is expected to be paid on 19 January 2024, subject to approval at the Company’s AGM, to shareholders on the register at the close of business on 8 December 2023 with shares going ex-dividend on 7 December 2023. The last day for Dividend Reinvestment Plan elections is 27 December 2023. 16 16 Strategic reportAnnual Report and Accounts 2023Financial Review (continued) Net debt During the year, net debt increased from £16.6m to £73.0m as at 31 March 2023, with the movements shown in the tables below: Operating (loss)/profit Depreciation and amortisation Exceptional items Share based payments Adjusted EBITDA1 Working capital movements Transfer from intangible assets to cost of sales Non-cash provision movements Adjusted cash generated from operations Cash conversion Capital expenditure - cash purchases Capital expenditure - finance lease purchases Proceeds from sale of fixed asset - sale and leaseback Net capital expenditure Corporation tax (paid) / received Interest paid Loan arrangement fees/fee amortisation Finance lease/term loan interest Effect of exchange rates Other movements in net debt Normalised net debt movement1 Cash cost of exceptional items Share buyback Non-capitalised finance leases purchases Acquisition of subsidiaries (net of cash acquired) Cash received on disposal of non-core business unit IFRS 16 lease additions IFRS 16 lease additions on acquisition IFRS 16 lease disposals Remeasurement relating to lease modification Dividends Disposal of treasury shares on exercise of share options Cash received on exercise of share options Share issues Increase in net debt Net debt at the beginning of the period Net debt at the end of the period Year ended 31 March 2023 £000 Year ended 31 March 2022 £000 (8,939) 24,026 8,149 1,256 24,492 (1,410) - - 23,082 94.2% (6,374) - 966 (5,408) (670) (1,795) (291) (1,248) (101) (4,105) 13,569 (8,258) - - (26,606) - (28,314) (1,976) - 629 (5,593) 229 - - (69,889) (56,320) (16,645) (72,965) 6,607 14,296 1,629 1,181 23,713 (4,017) 140 (577) 19,259 81.2% (2,765) (438) - (3,203) 246 (51) - (885) 27 (663) 15,393 (2,091) (2,666) (145) (10,422) 5,750 (2,094) - 813 - (5,627) - 12 1 (16,469) (1,076) (15,569) (16,645) 1 For an explanation of the alternative performance measures used in this report, please refer to page 20. Exceptional items are outlines in note 9. 17 Annual Report and Accounts 2023Strategic reportFinancial Review (continued) As at 31 March 2021 Net cash flow Net non- cash flow As at 31 March 2022 Net cash flow Net non- cash flow As at 31 March 2023 £000 £000 £000 £000 £000 £000 £000 Cash RCF Term Loan Lease Liabilities 5,250 (3,473) - (1,491) (19,328) (15,569) - 532 3,701 760 27 - (45) (1,818) (1,836) 1,804 (335) (103) 1,366 - (31,537) (2,094) (33,631) (1,004) (17,445) (16,645) 532 (21,542) (52,882) (24) (1,217) (3,438) (496) (40,204) (72,965) Included in lease liabilities at 31 March 2023 are £36.9m (FY22: £14.1m) of IFRS 16 lease liabilities that were previously classified as operating leases under IAS17 and £0.5m (FY22: £1.0m) of term loans. Other movements reflect acquisition of subsidiaries of £26.6m, capital expenditure of £6.8m and £5.6m on dividends. Trade receivables and payables In the year, focus remained on maintaining a strong ageing profile with a low level of aged debt. At the year-end, 96% of gross trade debt was current or less than 30 days overdue (FY22: 97%). 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 Provisions Net trade debtors Year ended 31 March 2023 £000 Year ended 31 March 2022 £000 18,450 2,212 557 283 194 (240) 21,456 (1,251) 20,205 8,736 1,997 452 80 19 (172) 11,112 (884) 10,228 Trade debtor days were 46 at 31 March 2023 compared to 36 at 31 March 2022. Trade debtor days are calculated as gross trade debtors divided by revenue (incl. VAT) multiplied by 365. Trade payable days were 42 at 31 March 2023 compared to 37 as at 31 March 2022. Trade payable days are calculated as trade payables divided by total purchases (cost of sales and operating expenditure) multiplied by 365. 18 18 Strategic reportAnnual Report and Accounts 2023Financial Review (continued) Financing In the year, focus remained on maintaining a strong ageing profile with a low level of aged debt. At the year-end, 96% of debt was current or less than 30 days overdue (FY22: 97%). 31 March 2023 31 March 2022 Available Drawn Undrawn Available £000 £000 £000 £000 Drawn £000 Undrawn £000 Committed - Revolving credit facility 80,000 34,000 46,000 - Term Loans - Leases - Asset financing facility 496 40,204 7,000 127,700 496 40,204 2,309 77,009 - - 4,691 50,691 5,000 1,004 17,445 7,000 30,449 - 5,000 1,004 17,445 1,100 19,549 - - 5,900 10,900 Uncommitted - Bank overdraft - Accordion facility - 20,000 20,000 - - - - 20,000 20,000 - 20,000 20,000 - - - - 20,000 20,000 Total borrowing facilities 147,700 77,009 70,691 50,449 19,549 30,900 Uncommitted facilities represent facilities available to the Group, but which can be withdrawn by the lender and hence are not within the Group’s control. As at 31 March 2023, the Group was party to £87m of banking facilities, comprising a Revolving Credit Facility of £80m (net £34m utilised at 31 March 2023) and a £7.0m Asset Financing Facility (£2.3m utilised at 31 March 2023). As at 31 March 2023, these facilities are due to expire on 25 April 2025. The borrowing cost of the RCF is determined by the Group’s leverage and has a borrowing cost of 205 basis points over SONIA at the Group’s current leverage levels. A commitment fee is payable on the undrawn portion of the RCF at 82 basis points, being 40% of the borrowing cost. David Senior Chief Financial Officer 24 August 2023 19 Annual Report and Accounts 2023Strategic reportAlternative Performance Measures This Annual Report and Accounts contains certain financial measures that are not defined or recognised under IFRS but are presented to provide readers with additional financial information that is evaluated by management and investors in assessing the performance of the Group. This additional information presented is not uniformly defined by all companies and may not be comparable with similarly titled measures and disclosures by other companies. These measures are unaudited and should not be viewed in isolation or as an alternative to those measures that are derived in accordance with IFRS. Recurring revenue Recurring revenue is the revenue that annually repeats either under contractual arrangement or by predictable customer habit. It highlights how much of the Group’s total revenue is secured and anticipated to repeat in future periods, providing a measure of the financial strength of the business. It is a measure that is well understood by the Group’s investor and analyst community and is used for internal performance reporting. Reported revenue Non-recurring revenue Recurring revenue Year ended 31 March 2023 £000 Year ended 31 March 2022 £000 141,674 (13,213) 128,461 93,328 (10,363) 82,965 Recurring revenue percentage is the percentage of recurring revenue as a proportion of total revenue. Recurring revenue makes up 91% of total revenue in FY23, an increase of 1.8ppts from prior year (89%). Maintenance capital expenditure Maintenance capital expenditure is the capital expenditure that is incurred in support of the Group’s underlying infrastructure rather than in support of specific customer contracts. This metric shows the level of internal investment the Group is making through capital expenditure. As the measure explains and analyses routine capital expenditure, land and buildings (including any associated assets relating to dilapidation provisions) and sale and lease back additions are excluded due to the infrequency of this expenditure occurring. Customer capital expenditure relates to assets utilised by the Group in delivering managed services to our customers. - Property plant and equipment additions – excluding additions on acquisition (note 16) - Intangible additions – excluding additions on acquisition (note 15) - Right of use asset additions – excluding land and buildings and sale and leasebacks (note 17) Reported capital expenditure incurred Customer capital expenditure incurred (notes 15 & 16) Maintenance capital expenditure incurred Year ended 31 March 2023 £000 Year ended 31 March 2022 £000 5,505 869 391 6,765 (3,234) 3,531 2,264 502 460 3,226 (1,076) 2,150 Reported capital expenditure of £6.8m has increased by £3.5m (FY22: £3.2m) driven by additions to PPE for efficiency measures in the data centres. Customer capital expenditure has increased to £3.2m (FY22: £1.1m) to support revenue growth. We will continue to monitor the Group’s capital requirements and invest in the business when appropriate. 20 20 Strategic reportAnnual Report and Accounts 2023Alternative Performance Measures (continued) EBITDA and Adjusted EBITDA Adjusted EBITDA is EBITDA excluding exceptional items (as set out in note 9), share-based payments and associated National Insurance. The same adjustments are also made in determining the adjusted EBITDA margin. Items are only classified as exceptional due to their nature or size. The Board considers that this metric provides a useful measure of assessing trading performance of the Group as it excludes items which impact financial performance such as exceptional costs and the amortisation of acquired intangibles arising from business combinations which varies year on year dependent on the timing and size of any acquisitions. Reported operating (loss)/profit Amortisation of intangible assets arising on business combinations Amortisation of other intangible assets Depreciation on tangible assets Depreciation on ROU assets EBITDA Exceptional items: Acquisition fees Integration costs Costs relating to the settlement of an historical supplier dispute Cloud computing costs Share-based payments and associated National Insurance Adjusted EBITDA Year ended 31 March 2023 £000 Year ended 31 March 2022 £000 (8,939) 8,183 590 4,636 10,617 15,087 8,149 695 5,965 809 680 1,256 24,492 6,607 6,498 475 2,745 4,578 20,903 1,629 1,181 23,713 Adjusted EBITDA increased to £24.5m, £0.8m higher than prior year, with adjusted EBITDA margin of 17.3% (down from 25.4%). Adjusted operating profit Adjusted operating profit is operating profit excluding amortisation on acquired intangibles, exceptional items and share- based payments. The same adjustments are also made in determining the adjusted operating profit margin and in determining adjusted earnings per share (“EPS”). Reported operating (loss)/profit Amortisation of intangible assets arising on business combinations Exceptional items Share-based payments Adjusted operating profit Year ended 31 March 2023 £000 Year ended 31 March 2022 £000 (8,939) 8,183 8,149 1,256 8,649 6,607 6,498 1,629 1,181 15,915 The EPS calculation further adjusts for the tax impact of the operating profit adjustments, presented in note 13. This metric is used within the Group’s dividend policy and is therefore relevant for our shareholders. Share based payments are removed for adjusted operating profit as they are not reflective of trading. 21 Annual Report and Accounts 2023Strategic reportAlternative Performance Measures (continued) Adjusted operating costs Adjusted operating costs are operating costs less depreciation, amortisation, exceptional items, share-based payments and foreign exchange. This metric shows the trading operating expenditure of the Group, excluding non-trading and non- recurring items which impact financial performance. These are controllable operating costs which provide investors with useful information about how the Group is managing its expenditure. Reported operating expenditure Depreciation ROU assets Depreciation of tangible assets Amortisation of intangibles arising on business combinations Amortisation of other intangible assets Exceptional items Other operating income Share-based payments Adjusted operating expenditure Adjusted cash generated from operations Year ended 31 March 2023 £000 Year ended 31 March 2022 £000 109,938 (10,617) (4,636) (8,183) (590) (8,149) (88) (1,256) 76,419 53,046 (4,578) (2,745) (6,498) (475) (1,629) (103) (1,181) 35,837 Adjusted cash generated from operations is reported cash generated from operations plus the cash cost of exceptional items. As the Group has been involved in acquisitions and has had other significant, non-repeatable cash impacting items, this measure allows investors to see the cash generated from operations excluding these items which are one-off by nature therefore will not repeat in future years. Reported cash generated from operations Cash costs of exceptional items Adjusted cash generated from operations Year ended 31 March 2023 £000 Year ended 31 March 2022 £000 14,824 8,258 23,082 17,168 2,091 19,259 22 22 Strategic reportAnnual Report and Accounts 2023Alternative Performance Measures (continued) Adjusted net (debt)/cash Adjusted net cash/debt is reported net debt (borrowings net of cash) less supplier loans and less lease liabilities that would have been classified as operating leases under IAS17 and is a measure reviewed by the Group’s banking syndicate as part of covenant compliance as detailed in note 24. Reported net debt Term loans Lease liabilities that would have been classified as operating leases under IAS 17 Adjusted net (debt)/cash Year ended 31 March 2023 £000 Year ended 31 March 2022 £000 (72,965) 495 36,891 (35,579) (16,645) 1,004 14,096 (1,545) Normalised net debt movement The normalised net debt movement, as summarised in the net debt table on page 11, details the movement in net debt before one-off (exceptional) amounts and is therefore a useful indicator to the potential movement in net debt in FY23. David Senior Chief Financial Officer 24 August 2023 O U R A I M I S T O B E A T R U S T E D PA R T N E R T O A L L O U R C U S T O M E R S 23 Annual Report and Accounts 2023Strategic report“ We were looking for a like-for-like service, but got a lot more for less: fully managed IaaS with Disaster Recovery, cloud backup and support we can rely on. Migration to Redcentric’s IaaS platform was completed in just four weeks. The team were absolutely amazing!” 24 Strategic reportAnnual Report and Accounts 2023Strategy and Business Model 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 Group provides a broad range of managed services across its three core specialist areas of Cloud, Connectivity and Communications, and has formed a divisional structure to ensure each area has dedicated focus with appropriately skilled resource. To complete our product offering, the Group acquired a cyber security business (7 Elements) and is building additional cyber security capabilities into its product portfolio. The Group positions itself in the market as being able to combine the benefits of proprietary network and data centres with a flexible and technically skilled workforce able to deliver and support critical services and solutions in a highly secure environment. The Group seeks to differentiate itself in three distinct ways: • Innovation – innovation in the design and delivery of services; • Reliability – the right technical skills, organised in the right way, to give predictable high-quality results; and • Value – service offerings that are designed to offer value for money to mid-market customers. Through these differentiators, the Group aims to attract new customers and to deepen and broaden its relationships with existing customers. The Board’s strategy for growth comprises: • identify acquisition opportunities for both scale and capability; • • ongoing investment in expanding and enhancing the Group’s own infrastructure so that it can provide its customers with the very highest levels of security and service; and effective use of the Group’s scale and resources to explore and invest in new technologies so that its customers can benefit from the high levels of innovation across the whole industry. The Board believes that the Group’s position between the very large system integrators and network operators and the smaller competitors (that may lack delivery structure, reputation, reliability and financial strength) is a very compelling one. The Group has a strong and reliable set of core infrastructure and has developed a delivery model that provides assurance and certainty for customers. 25 Annual Report and Accounts 2023Strategic reportSection 172 Statement – Our Stakeholders The Board recognises its duty to consider the needs and concerns of the Group’s key stakeholders during its discussions and decision-making. The Board has had regard to the importance of fostering relationships with its stakeholders as set out below and also detailed in the Strategic Report and Corporate Governance Report of this Report. More information on how the Directors have discharged their duties under section 172 of the Companies Act 2006 is also available in the Strategic Report on pages 1 to 27 and Corporate Governance Report on pages 43 to 50. • Colleague support - we have continued to focus on colleague well-being and have run a number of initiatives to ensure our colleagues are kept engaged, supported and connected to the business. We have appointed and trained a group of mental health ambassadors and carried out a number of mental health awareness activities, including holding webinars or topics such as managing stress and positive thinking, office lunchtime walks, complimentary on-site massages by qualified therapists, regular circulation of well-being tips and offering resilience building courses. To assist colleagues with their physical well-being, we have run a number of programmes focusing on health, fitness and diet and also offer support on health costs. Recognising the need to support colleagues’ financial well-being, we have run a mortgage surgery where colleagues have access to qualified mortgage advisers to discuss mortgage needs and issues in confidence. In addition, for the first time, the Group held a number of menopause awareness events, for both female and male colleagues. • • • Electric car scheme – the Group has introduced a new electric car scheme for colleagues, in conjunction with a third-party scheme provider, enabling colleagues to use salary sacrifice and make considerable savings on the purchase of an electric car. Share schemes – the Company has in place an HMRC approved Save-As-You-Earn option plan (“SAYE”) to invested enable colleagues to become personally as shareholders of the Group. The Company invites participation on an annual basis. is included information in the Corporate Further Responsibility section of this Report on pages 23 to 26 and in the Corporate Governance Report on pages 43 to 63. Colleagues • Colleague briefings – monthly colleague briefing sessions are held with the operating board of the Company (“Operating Board”) to enable colleagues to ask questions and raise issues, and for colleagues to be provided with updates on the business. • • • Performance updates – key performance information such as trading updates and financial results are always promptly communicated to colleagues by group wide internal emails and follow up all colleague calls. There are also a number of communications champions across the business who meet monthly to ensure the Company’s commitment to two-way communication with colleagues is met and continually enhance and develop its communications strategy. Engagement survey - We have finalised the action plan following the last colleague survey, ahead of the launch of a further all colleague survey to ensure that the views of the enlarged business and all colleagues that have joined through recent acquisitions are captured. Learning management – we have continued to enhance our online learning management system over the last twelve months, introducing additional learning content. In addition, we have launched a partnership with LinkedIn Learning through which colleagues have exclusive access to tools to support their personal and professional development. • Colleague recognition – we continue to recognise the Company’s core values through our recognition scheme – the Extra Mile Awards and also have weekly recognition of exceptional performance of colleagues. 26 26 Strategic reportAnnual Report and Accounts 2023Section 172 Statement – Our Stakeholders (continued) Customers • Customer surveys - a biannual net promoter score (“NPS”) survey is carried out to gain customer feedback and test customers’ opinions on service experience. There is also a monthly NPS survey programme run by the Company’s service delivery management team to customers directly following a service review – this ensures a high return rate and continuous feedback from our customers continually. The results of the monthly and biannual survey scores are discussed in monthly service improvement meetings with all department heads, in order that any trends and areas of focus can be addressed. • Monthly and quarterly service reviews – regular service reviews are held with customers, led by service delivery managers and account managers, with a focus on service experience and further support customers may require. • Daily social media updates – the Group’s social media presence and activity has continued to increase and improve during the year. At least daily updates are provided through the Company’s corporate social media channels (LinkedIn, Twitter and Facebook) and contain key updates and customer case studies. These are shared by customer facing employees to ensure as wide a reach as possible to keep customers appraised of the Company’s news and offering. • Customer scoring – within the Group’s support systems, the Group reaches out to customers on an ongoing basis to score the support service they have received, with follow up actions taken by the support team based on each customer’s score and requirements. • Customer service management solution – during the year, the Group completed the launch of Phase 2 of its new service management solution for customers, called SMAX, which replaced HP service manager and Phase 1 of which was launched in 2022. SMAX has continued to enable the Group to improve how customers are supported, through its a customer facing portal. All customers acquired from 4D and Sungard have been migrated onto SMAX, to ensure that all customers are supported from the same platform and a consistent approach applied to supporting customers. The SMAX offering continues to be developed with a mobile app version being created for release to customers FY24, ensuring ease of access to the support system. • • Targeted customer marketing and communications – during the year, the Group’s marketing team has continued to enhance its customer communications and the way in which campaigns, product launches and solution migrations are communicated. Targeted and personalised communications are agreed between the Group’s marketing team and customers’ account and service delivery managers, to ensure that the right customers are informed and guided through any changes which may affect them. Solution webinar series and regional roadshows – these have been introduced during FY23 with a focus on the legacy Redcentric customer base, to inform them of the Group’s expanded portfolio and capabilities and to ensure they are fully informed of the services available and contact points. Suppliers • • • • The Board is committed to fostering and developing effective partnerships with the Group’s suppliers, based on forward planning, collaboration and trust. These supplier partnerships are crucial in delivering many of our services and in developing them further. The supplier partnerships help the Group deliver value and quality to its customers and help its partners to develop and grow. The Group has in place an annual programme of regular engagement and communication with all suppliers. There is a particular emphasis on key strategic partners, each of which has an annual review and other regular check-ins which involve all relevant departments across the Company. The Group continues to invest into its supply chain management with the appointment of a new Procurement and Supply Chain Director who is implementing a new vendor management framework to drive both supply chain effectiveness and efficiencies but also enhance the mutual supplier value creation through innovation and collaboration with ‘ecosystem’ partners. The Company has given additional focus to the suppliers taken on following the acquisitions of 4D and Sungard DCs and those whose business has grown as a result of the acquisition, notably carriers and AWS. As part of integration following these acquisitions, the Group has sought to work with suppliers to consolidate contracts with existing suppliers and to engage and build relationships with new suppliers. 27 Annual Report and Accounts 2023Strategic reportSection 172 Statement – Our Stakeholders (continued) Suppliers (continued) • • The Company has also continued to give additional focus to suppliers in the faster growing sectors of our market, such as cloud, security and managed services, driven by customer requirements. Following on from the work in FY22 with the Group’s supplier base in reviewing contractual terms, this work has continued with the enlarged supplier base to ensure all suppliers are governed by consistent terms and conditions of trading, modern slavery processes, anti- bribery compliance and ISO requirements. • Some of the Group’s strategic partnerships are listed below: - Microsoft – Application Development, Application Integration, Cloud Platform, Cloud Productivity, DevOps (all GOLD); Content and Collaboration, Data Platform, Datacentre, Security (all SILVER); - Cisco – GOLD; - Hpe – Silver PRSP (Partner Ready Service Provider); - Citrix – CSPP (Citrix Solutions Provider Programme); - VM Ware; - Fortinet; - British Telecom and - Virgin Media Business. Shareholders • Analysts and investor meetings – the Chief Executive Officer and Chief Financial Officer hold analyst and investor roadshow meetings throughout the year, particularly following the release of the Company’s interim and full year results and feedback from those meetings is shared with the Board. In FY23, a full schedule of roadshows took place with a number of these taking place in person for the first time since the pandemic. • is a key opportunity The Company’s AGM for engagement between the Board and shareholders, particularly private shareholders. In FY23, Redcentric was pleased to once again hold a face-to-face AGM, but shareholders were also again given the opportunity to submit questions for the Board ahead of the AGM in the event they were unable or unwilling to attend in person. 28 28 • Annual Report and Accounts – the Group’s annual report and accounts is made available to all shareholders both online and in hard copy where requested. • Group website – all presentations and announcements and other key shareholder information is available on the investor section of the Group’s website. • information Further Governance Report on pages 43 to 63. included is in the Corporate Environment • • • • • The Company has maintained its ISO 14001:2015 environmental management accreditation, through which it enhances environmental performance, fulfils its compliance obligations, and achieves its environmental objectives. in FY23, the acquisitions completed Following particularly the data centres acquired from Sungard and 4D, the Company has undertaken a number of energy conservation measures in relation to its data centres, including the introduction of cold aisle containment and basic energy-efficient housekeeping measures in Hounslow, water chiller replacement and investment work to prepare for the introduction of solar panels. In addition, work has started to consolidate data centres with the closure of the Harrogate data centre, to reduce the Group’s data centre footprint and consolidate into the more efficient Elland site. The Group’s hybrid working policy, permanently introduced across the Group in FY22, has continued to positively impact environmental performance through reduced office space energy usage and travel. The Group launched its electric car salary sacrifice scheme, open to all colleagues, as part of its commitment to reduce the Group’s carbon footprint. (“ESG”) issues, with In FY23, the Group created a new Sustainability Committee dedicated to environmental, social and governance representation from across the business. The committee, together with assistance from third party experts appointed specifically to assist with the Group’s ESG initiatives, has continued to further build on the initial work undertaken in FY22 is assessing the Group’s position on ESG issues and develop the roadmap and actions for delivering the Group’s ESG strategy. Strategic reportAnnual Report and Accounts 2023Section 172 Statement – Our Stakeholders (continued) Environment (continued) • Redcentric has continued to engage with third-party specialists to support the Group in calculating Scope 3 emissions, developing a net zero strategy, and to produce its first voluntary Task Force for Climate-Related Financial Disclosures (“TCFD”) report, which can be found on page 27 of this Report. This is a significant step in the Group’s commitment to the environment and in support of the Government’s UK-wide target to reach net zero by 2050 and the Group is pleased to have produced the TCFD on a voluntary basis this year, ahead of compulsory reporting for the next financial year. • Further information is included in the Sustainability section of the Report on pages 27-42. Newly refurbished data cabinets offering colo and private cages - London Technology Centre 29 Annual Report and Accounts 2023Strategic reportRisk management The Group takes a holistic and consistent approach to the identification, monitoring and management of risk across our entire business. Risk underpins our company values and enables our strategies to succeed. Our risk framework is mature and embedded with the business, maintaining confidence levels across our leadership team. It provides the capability to seamlessly continue to focus on our customers alongside delivering strategies for product enhancement and business growth. How do we manage our risks? Risks are managed on a tiered hierarchy, with each division of the business owning and managing risk to their direct areas, measured scientifically and consistently throughout. High value risks are cascaded upwards to operating Board level and then beyond that to Group level alongside principal risks. This allows the right level of visibility, ownership, and management in the right places with complete consistency and transparency. All the Group’s employees are encouraged to identify, record, monitor and manage risks at local level, empowered is take ownership whilst management oversight to maintained throughout with continued regular review at all levels. Our principal risks Environmental impact The Board very actively monitor both sides of environmental risk. One side being the Group’s impact on the environment, including social, geographical, direct and indirect emissions and overall sustainability. As our customers seek to reduce their own emissions, demand for our propositions and services change, the Board recognises the importance of our corporate responsibilities to do everything possible to reduce the impact the Group has on the environment. impact functions – The other side of environmental impact being all aspects including to Group of potential environmental disaster – that may impact on our ability to maintain services and keep our customers, our sites and our workforce safe. This is an increasing risk and gains a lot of focus by the Board as the physical impacts of climate change and the actions taken by governments and society to try and limit global warming. The Group is managed to a recognised environment management standard and maintains an annual set of environmental objectives to measure and maximise power efficiency across sites, reduce business travel, reduce use of paper and physical peripheries, reduce waste and proactively 30 30 offset our carbon emissions through carbon reduction planning strategy. Technology and cyber-security The market for the Group’s services is in a state of constant innovation and change, alongside a huge growth in capability through acquisition, increasing the risks level. The nature of the Group’s services means that they are exposed to an ever-increasing risk of cyber-attack. Alongside maintaining constant, pro-active vigilance against such risks, the Group maintains membership of some of the highest levels of security accreditation as part of the service it offers its customers. Over the past year, the Group has grown its security capabilities, both internally and externally facing. This helps to meet the ever-increasing threats placed upon the industry in general and globally. The focus here and current mitigations not only allows the Group to protect itself in the best ways possible, but also offers this capability directly them with their own internal risk. to customers, helping Business continuity The Board believes that one of the key differentiators that the Group 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 a variety of risks to business continuity through infrastructure failure, loss of physical site, logical access failures and impact to its people. A critical element of the Group’s operating methodologies and procedures is to mitigate such risks through the careful construction, maintenance and management of all elements of Business continuity, adhering to industry standard methodology. Operating regular externally audited exercises, maintaining continuity plans across all areas alongside our fully resilient technical landscape with regular testing of back-up and recovery plans. Business growth Acquiring differing businesses with differing technologies, people, competencies and processes creates risk to both customers and services being acquired, and the Group’s existing operating model. With our increasing size through recently executed growth strategies, we strive to ensure acquisitions are handled appropriately from the outset, as demonstrated through activity in FY23. The Group consider this risk split into three main areas with the following mitigations in place: Strategic reportAnnual Report and Accounts 2023Risk management (continued) Business growth (continued) Loss of major contract Failure to successfully manage our large, significant and complex clients could lead to a loss of significant revenue and possible reputational damage. To address this risk, the Group pro-actively maintain Sales Management Plans, hold regular customer meetings by account teams, aligns service delivery to sales in order to support both ours and our customers strategies. The Group also operates a meaningful and accurate customer satisfaction methodology with feedback loop. Competition and market pressures for The Group operates in a highly competitive marketplace and, while the Board believes that the Group enjoys significant strengths and advantages in competing for business, some of its competitors are much larger with considerable scale that could allow them to offer similar services 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 profitability. The Group monitors competitors’ activity and constantly reviews its own services and prices to ensure a competitive position in the market is maintained. Capability and scale acquisitions are both expected to further strengthen the Group’s positioning within the marketplace through competitive pricing (scale) and additional services (capability). • Acquisition target risk – the risk that the Group are unable to identify suitable acquisition targets. This risk is managed by a combination of internal resource dedicated to identifying targets complemented by strong relationships with external advisors. • Acquisition integration risk – the risk that completed acquisitions are not integrated into the underlying business in an efficient or effective way leading to loss of customers and employees from potential the acquired business. The risk is managed by including active participation detailed planning, from to ensure acquisitions are the vendors integrated effectively. • Post-acquisition performance risk – the risk that the acquired business may not perform as well as expected or synergies may not be delivered as planned. This has the potential to adversely impact both cashflow and profits post-acquisition. Due diligence and integration planning help manage this risk including the use of experts throughout the acquisition process. The Group manages our growth risks by regular reviews of the operational structure and resource required to deliver to customers without degrading service. Workforce As a service provider the Group is dependent on the skill and experience of its established workforce. The Group could be adversely impacted if employee levels are not maintained. The Group aims to recruit suitably skilled and experienced employee by offering a challenging and rewarding work remuneration packages environment with appropriate relative to their skills and experience. The Group has offices in multiple locations which helps to access talent pools in various locations across the country. Market and economic conditions Market and economic conditions are recognised as one of the principal risks in the current trading environment. This risk is mitigated by the monitoring of trading conditions and the constant search for ways to achieve new efficiencies in the business without impacting levels of service. The Board considers the Group is relatively protected against significant customer risk due to the Group’s diverse customer base, however loss of a major contract remains a principal risk, as discussed below. At the date of approval of these financial statements the macro-economic conditions remain unpredictable and as such is seen as an increasing risk to the business which the board continue to closely review. 31 Annual Report and Accounts 2023Strategic reportCorporate Responsibility Our Colleagues FY23 is a year in which we have been focused on the onboarding and integration of our new businesses and colleagues. Our colleagues have been relentlessly focused on maintaining our high standards of service and support whilst also ensuring a seamless transition for all our new customers into the Redcentric business in addition to welcoming, supporting and integrating our new colleagues. All our new colleagues have now been fully set up on our people system and propositions and we are really excited about working with them moving forwards and continuing to create one new, combined Redcentric team. In FY23 following the acquisitions we have continued to evolve our operating model to meet the needs of our business and customers. We have created a new operational division to focus on meeting the security needs of existing and new customers, establishing a dedicated security division which we are intending to grow significantly over the coming year. The investment in our structures at the end of FY22 is, as expected, supporting both our solutions and service aspirations. To ensure the highest standards of service for our business we have combined our support and service teams to create one centre of excellence which supports customers across all businesses. Investment in our CTO structures is also paying dividends and we are excited about a number of new initiatives that will shortly be coming to fruition. Whilst the main focus of the HR team has been on boarding and integration, we have also continued to focus on our employment proposition, making further enhancements to our HR system and people policies to further enable our employees to take control of their working experience. We have maintained and are committed to maintain our new hybrid working model which, in addition to our new office locations, has given us access to a much broader geographical talent pool. I would like to express my personal thanks for the commitment and dedication that each and every one of our colleagues has shown over what has been a very busy but exciting year. The progress we have made has been phenomenal and that quite simply is down to the passion, enthusiasm and focus of our colleagues. Listening to our Colleagues In FY20 we launched an ongoing listening programme to ensure we had the opportunity to hear and understand the views of each and every colleague in our business. As a result of this programme, we have already introduced a number of new people programmes and initiatives over the last 2 years and we will continue to evolve these in tandem with feedback from our teams. We are committed to continuing to listen to the views of our colleagues and have recently launched our latest colleague survey, running across all colleagues and business heritages. We will receive the results over the next 4 weeks and will be sharing the feedback with our colleagues from September, ahead of commencing a new programme of activity in response to what our colleagues have told us. A number of the initiatives we have rolled out to existing and new colleagues include: • Our Group-wide vision, mission and values which are fully embedded in our performance and recognition schemes • Our online learning management system with additional content to support our colleague’s development and continued investment in supporting our colleagues in achieving industry recognised accreditations that are critical to our business. • Our online performance and development and recognition systems which form part of Peoplecentric, our HR system, enabling colleagues with easy one-stop access to their objective and development actions, as well as the ability to quickly recognise other colleagues more easily. • Access to hybrid working, giving colleagues additional flexibility to work where they will best achieve their daily activities. • Investment supporting personal and professional development. in the roll out of LinkedIn Learning, • A new externally hosted whistleblowing helpline to give our colleagues enhanced confidence in raising and reporting any areas of concern confidentially. • Continued access to all our internal communications, keeping our teams connected and engaged with monthly all colleague calls and our weekly recognition shout outs. 32 32 Strategic reportAnnual Report and Accounts 2023Corporate Responsibility Our Colleagues (continued) Wellbeing The physical, emotional and financial wellbeing of our colleagues is a key priority for us, especially in response to the current cost of living crisis which is impacting all our colleagues and we are continuing to explore new ways to support our colleagues with this. Physical Wellbeing All colleagues have access to our private medical and permanent health insurance schemes to give peace of mind and security, with the knowledge help is there if required. In addition, we offer a scheme supporting discounts on dental care, physiotherapy and a range of other health discounts for our colleagues. We have run a number of programmes over the last 12 months including focus on men’s health, women’s health, online fitness and eating healthily. Emotional Wellbeing We have continued and will continue to run our time to talk programme which comprises of a number of access routes for mental health support, led by a number of qualified mental health first aiders. We are also aiming to train a number of additional colleagues as Mental Health First Aiders over the coming months. Time to talk gives access to our mental health first aider team, access to our employee assistance scheme and supports a number of mental health initiatives including access to workshops including, personal resilience, managing stress, help for sleep, mindfulness and many more. Financial Wellbeing The cost of living crisis has meant we have focused on ensuring we find new ways to help our colleagues make their money go further. All colleagues continue to have access to our Perks scheme which gives access to a large number of online and high street discounts, we have introduced a new discounted Tastecard scheme for colleagues, with discounts on a large number of food chains, retailers and theme parks and have also commenced a discounted programme of mortgage advice to give colleagues better access to financial advice. We have also introduced a new electric car scheme partnership enabling colleagues to save money on car leases whilst also ensuring we continue to support the environment. We will continue to look for new and innovative ways to support our colleagues over the next 12 months. All our colleagues also have access to our Employee Assistance programme which offers help and support across a number of key areas, including external counselling support. Equality and diversity Creating a diverse, inclusive and great place for our colleagues to work is top of the Group’s people agenda. The Group actively supports the principle of equal opportunities in employment and is committed to ensuring that individuals are treated fairly, with respect and are valued. The Group 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 the Group that no one receives less favourable treatment or is disadvantaged on any of the above grounds. Every possible step is 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. We have also established a new diversity, equality and inclusion forum aimed to ensure we support these principles across the business. Gender Diversity The average number of employees employed during the year was as follows: Executive Directors Ops Board Senior managers Other employees Total average headcount Male Female Total 2 6 25 451 484 0 2 7 95 104 2 8 32 546 588 33 Annual Report and Accounts 2023Strategic reportCorporate Responsibility Our Colleagues (continued) Gender Pay Report Our gender pay report at the snapshot date of 5 April 2022 showed that the overall difference between men and women’s earnings at the Group was 22% (mean), which is a slight decline on the previous year’s report of 21%, mainly as a result of acquisition activity, but which is still an improvement from the 2020 gender pay gap of 24%. Like most organisations in our industry, our gender pay gap is driven by a continued imbalance of male and female colleagues at different levels across the organisation. The majority of females in our business sit within the two lowest pay quartiles of the business which has negatively impacted our gender pay gap. We have continued to focus on initiatives to increase the diversity of our business over the last year and are pleased that this is continuing to have a positive impact and we have appointed a number of females into senior roles across the business over recent months. We are confident that we will make further progress in addressing our gender pay gap, albeit this could likewise be impacted in the future by our more recent acquisitions over the last 12 months. Our commitment is to continue to focus on development and progression for our female colleagues over the next 12 months in line with the actions outlined within our Gender Pay Gap report. Apprenticeship Programmes Over the last 12 months we have also continued investment in apprenticeship programmes across differing areas of our business for both new joiners into our business and existing colleagues. These programmes have focused on building a pipeline of talent into our business to support a number of our functions, including sales, customer services, finance, procurement, project management and engineering and we have 14 apprenticeship programmes currently underway, with an additional number successfully completed within the financial year. Since the end of the pandemic, we are working more closely than ever with local schools, colleges and apprentice providers to increase visibility of these opportunities and to attract local talent to the Group. We also continue to actively support work experience placements and I’m pleased to say we are seeing an increase in interest in these programmes. Apprenticeships and work experience are both areas we are committed to maintaining and growing, given the benefits to both our local communities and our business. We have also launched a new dedicated sales apprentice scheme to develop our future sales talent pipeline with 6 current participants in the sales apprentice scheme, operating in conjunction with Leeds City College and Leeds Rhinos. Share Scheme The Group is a strong believer that having and effective share employee share ownership programme helps to align colleagues’ interests with shareholders, and continues to provide an effective tool in attracting, retaining and motivating employees. In November 2014 the Group launched its SAYE option plan where colleagues contribute a monthly amount which is saved over 3 years to buy shares in the Company at a pre-determined price. The most recent grant was made on the 26 August 2022, with the Company granting options over a total of 562,199 ordinary shares. These options are available for exercise from 31 August 2025, with an exercise price of 96.07p. As at 31 March 2023, the following options were outstanding under the plan: Grant date Exercise price (p) Opening options Options granted Options exercised 21-Aug-2019 02-Sept-2020 27-Aug-2021 23-Dec-2021 26-Aug-2022 Total 63.10p 119.60p 108.33p 99.87p 96.07p 369,393 241,311 168,998 615,029 - n/a 1,394,731 - - - - 562,199 562,199 34 34 Options lapsed/ cancelled (8,479) (97,734) (75,760) (118,156) (87,677) Options remaining - 143,577 93,238 496,873 474,522 (360,914) - - - - (360,914) (387,806) 1,208,210 Strategic reportAnnual Report and Accounts 2023Corporate Responsibility Our Colleagues (continued) Hybrid Working Given the success we experienced deploying home working and communication tools throughout the pandemic we continue to be committed to maintaining a hybrid working model. We strongly believe that there are benefits to both being in the office, collaborating closely with colleagues as well as the ability to ensure focused thinking time whilst working from home. Adopting this model brings real business benefits, expands out talent pool and ensures we keep our colleagues motivated with a flexible approach to their working arrangements, which we know is very important to our colleagues. Charitable Activity Since the return to the office, we have continued and in fact increased the number of both virtual and face to face volunteering challenges and fundraising events. These include maintenance of our Trees for Life partnership where we purchase a tree for every colleague joining the business and our new partnership with Generation, a national charity which supports underprivileged young adults into the workplace. From a charity perspective we have maintained our support and commitment to a number of key charities through colleague fundraising initiatives including: • • Red Nose Day & Children in Need Easter egg appeal • Mission Christmas • Macmillan coffee morning • Children’s Heart Surgery Fund • Charity Walks We continue to support local volunteering activity and fundraising by encouraging all colleagues to use their day’s paid volunteering leave to support causes close to their heart and we have seen a higher than ever uptake in the uptake of volunteering days. We are also continuing to evolve our national corporate social responsibility (“CSR”) strategy to support our key customers in their local areas. Health and safety The Group is committed to maintaining high standards of health and safety. New starters receive health and safety training through our online learning management system during their induction period and refresher training is provided to all colleagues every twelve months. No RIDDOR (Reporting of Injuries, Diseases and Dangerous Occurrences Regulations) accidents were reported during the year. Our new offices and sites have been assessed through the course of the year and we are confident all sites comply with all requirements. 35 Annual Report and Accounts 2023Strategic reportSustainability Reporting Within the Group, we recognise the importance of addressing the potential risks and opportunities presented by climate change. We are committed to being responsible and sustainable in our operations, as an IT company. As part of our efforts to be at the forefront of the IT sector’s net-zero goals, we have voluntarily reported against the Task Force on Climate-Related Financial Disclosure (TCFD) recommendations this financial year. The TCFD framework provides a comprehensive structure, which enables us to identify and address climate-related risks and opportunities that may affect our business. This will position us better to comply with the BEIS Climate-Related Financial Disclosure for FY24. As an IT service provider, we acknowledge our responsibility to the environment. We are currently developing our Net Zero targets and strategy, which will be finalised in H1 FY24 and align with UK government’s 2050 net-zero target. By disclosing our climate-related financial information consistent with the TCFD recommendations, we aim to provide transparency to our stakeholders, on our approach to managing climate-related risks and opportunities. We recognise that addressing climate change is an ongoing process. We are committed to continuously evolving our approach, to ensure that we are adequately addressing the challenges and opportunities presented by climate change. The TCFD Framework Climate change presents noteworthy trials for businesses, compelling them to adopt measures that mitigate risks and adapt to the existing changes. By doing so, companies can cultivate operations that are both sustainable and resilient. The Task Force on Climate-related Financial Disclosures (TCFD) was instituted by the Financial Stability Board (FSB) in 2015 with the purpose of formulating a series of recommendations for companies to divulge climate-related risks and opportunities. The TCFD has gained support from a wide array of organisations, including the G20, the International Monetary Fund (IMF), and the World Bank. An increasing number of companies are now embracing the practice of disclosing climate-related information in accordance with the TCFD framework. This framework is designed to aid companies in comprehending and managing climate- related risks and opportunities. It facilitates investors and other stakeholders in grasping the financial impacts of climate change and represents a significant stride towards tackling this issue. The TCFD framework encompasses 11 recommendations that are categorised into four key themes: Governance, Strategy, Risk Management, and Metrics and Targets. By adhering to these recommendations, the Group can identify, evaluate, and address climate-related risks and opportunities that impact our operations. About us The Group is a digital transformation partner. We deliver highly available cloud, communications, network and cyber security solutions that help public and private sector organisations succeed. Founded in 1997, we have fast and secure datacentres in 11 locations around the UK. Our Vision • A trusted cloud and communications transformation partner, underpinned by strong networking and security services. Our Mission • We deliver agile, available and assured solutions that help organisations succeed. Our Values • Our values support our strategic objectives and sit at the heart of our business and our culture. We work hard to integrate our values into everything we do. Proactive We think and act quickly Inspired We create excitement through innovation Trusted We do what we say we will Collaborative We work together to deliver a common goal Transparent We are open, honest and fair 36 36 Strategic reportAnnual Report and Accounts 2023Sustainability Reporting (continued) Governance The Group remains committed to a rigorous and reliable approach to identifying, monitoring and managing risk across all aspects of our business. Our consistent risk management approach is grounded in our core values and supports our overall business strategies, to ensure their success. The Board of Directors Details of the Board of Directors and their experience can be found at pages 62 and 63. The Board is responsible for the company’s response to climate change. They ensure that appropriate climate management practices are integrated into our future business operations and financial strategy. The Board provides oversight on climate- related risks and opportunities and annually evaluates progress in this area. The Board are supported by our third-party ESG specialists, who provide expertise on climate change to support this process. Chief Executive Officer (CEO), Peter Brotherton, and Chief Finance Officer (CFO), David Senior, oversee sustainability and regularly communicate with our stakeholders, management, and the Board regarding climate change-related issues. The Board recognises its unique role in representing and promoting the interests of all the Group’s stakeholders. They are accountable to shareholders for the company’s performance and activities. At present, there are no ESG criteria linked to the Board’s remuneration package. However, we have decided to address this, and we will ensure ESG targets form part of the executive remuneration package in FY24. Through their commitment to strong governance and oversight, the Group can effectively manage climate-related risks and opportunities. This approach enables the company to promote long-term sustainability while delivering value to our stakeholders. During FY23, we established our Sustainability Committee, which plays a crucial role in ensuring that our climate change and sustainability efforts, align with our overall business strategy. The Committee oversees the integration of climate-related risks and opportunities, into our operations and decision-making processes. The Committee is responsible for reviewing and monitoring our sustainability performance. They provide guidance and recommendations to our leadership team on sustainability matters. The committee hosted three meetings in FY23 (20th January, 22nd February and 21st March 2023). The committee is comprised of 18 senior managers and directors at the Group. They will endeavour to meet on a monthly basis during FY24. A third party ESG specialist delivered a climate risk management workshop, with climate change training in February 2023, to the sustainability committee. As part of our TCFD reporting, the Sustainability Committee provides oversight on our climate-related risks and opportunities. They ensure that these risks and opportunities are adequately disclosed in our annual reports. The Committee identify emerging sustainability trends and best practices, which are integrated into our business operations. Through their work, the Sustainability Committee enables the Group to effectively manage climate-related risks and opportunities, promote sustainable practices throughout our business, and provide transparency to our stakeholders on our sustainability performance. Strategy The Board’s strategy for growth involves identifying acquisition opportunities, investing in the Group’s own infrastructure, and effectively using the Group’s scale and resources to explore and invest in new technologies, to benefit our customers. Climate change poses a risk to this strategy, in all scenarios and timeframes, with the risks outlined in Tables A, B and C. Over time, we have continued to develop and refine our risk management framework, enabling us to maintain confidence levels throughout our leadership team. This framework provides us with the ability to focus on our customers’ needs while delivering on our product enhancement and business growth strategies seamlessly. By effectively managing risks, we can proactively identify and address potential threats to our business operations, including those related to climate change and other environmental factors. This enables us to sustain and grow our business, in a way that is financially responsible and sustainable. Also, by promoting the long-term health and resilience of the wider community. 37 Annual Report and Accounts 2023Strategic reportSustainability Reporting (continued) Climate Scenarios To assess the impact of identified risks on our operations and financial planning, we utilized three climate change scenarios as suggested by TCFD. Our scenarios were developed using various internationally recognized frameworks, which are outlined in our 2023 TCFD report. The three climate change scenarios are outlined in Table 1. Table 1 – A table to show the three scenarios Scenarios Proactive Description • Governments, corporations, and the public collaborate to keep global warming below 2°C, compared to pre-industrial levels and take strict climate change mitigation initiatives. Below 2°C by 2100 • The Paris Agreement’s commitment to achieving Net Zero carbon emissions by 2050 is upheld by various companies. • Governments establish stringent rules and regulations to limit greenhouse gas (GHG) emissions. • Although the physical effects will not be harmful, this consistent and well-planned approach to combating climate change will cost businesses more in the short term, as we transition to a low- carbon economy. Reactive • A delayed reaction to climate change, will force unanticipated implementation of policies, to cut global emissions at short notice. 2-3°C by 2100 • This is where the COP26 agreements and policies fit. • In the short term, business as usual (BAU) continues. • Due to the delayed response, transition risks increase and some physical risks occur in the medium and long term. • Only the most innovative companies will actively decrease their carbon footprint. Governments will rely on technology to cut emissions. Inactive • Limited action is taken to combat climate change. Business as usual continues for the ensuing few decades. Above 3°C by 2100 • Through 2040, rising global emissions will cause temperatures to rise by more than 3°C. • Physical threats will be at their peak impact, as numerous climate tipping points are anticipated to be crossed, according to the IPCC (Intergovernmental Panel on Climate Change). • Governments and organisations will finally act, resulting in the implementation of rushed and fragmented policies. Time Horizons: Climate change effects are likely to extend beyond conventional boundaries. Therefore, we have used three-time frames recommended by TCFD and aligned these with the UK Government’s 2050 Net Zero target, to model the above three scenarios (Table 2). 38 38 Strategic reportAnnual Report and Accounts 2023Sustainability Reporting (continued) Table 2 – A table to show the three-time horizons. Timeframe Short-term 2020-2025 Medium-term 2025-2035 Long-term 2035-2050 Description Within the short term, we may implement strategies that have noticeable effects and lay the groundwork for long-term sustainability. We want to lower risks and position ourselves for sustainable growth, by proactively adjusting to changing environmental conditions and incorporating climate considerations into our daily operations. We would typically experience greater transitional risks and limited physical risks in the short term. Our medium-term analysis includes a crucial time frame for addressing climate change. We foresee significant changes in the regulatory environment, technological improvements, and changing stakeholder expectations during this era. We want to manage transition risks and take advantage of fresh sustainable solutions, by proactively matching our business practises with developing low- carbon prospects. This window of opportunity enables us to fund essential infrastructure, promote innovation, and support the overall decarbonisation drive. We approach climate studies from a long-term perspective in keeping with our dedication to securing a sustainable future. With more time to prepare, we can evaluate any long-term physical risks brought on by climate change and develop elaborate plans to limit the effect on our business. We want to ensure resilience, lower emissions, and support the transition to a low-carbon economy by including climate considerations into our long-term planning. In the long term, we will typically see greater physical risks over transition risks. In February 2023, we discussed the results of the climate scenario analysis with the Sustainability Committee, to assess the potential impact of each climate-related risk and opportunity. Analysing the climate-related risks has shown that climate change poses a risk to our business strategy in all timeframes and scenarios. We provide an overview of the 8 climate-related risks and opportunities in Tables A, B and C. As we are at the start of our TCFD journey, we have not performed financial modelling of the climate-related risks and opportunities. We will endeavour to undergo this analysis next year. London New office space at Redcentric London Data Centre (Shoreditch) 39 Annual Report and Accounts 2023Strategic reportSustainability Reporting (continued) Table A: The Group’s climate-related transitional risks. Area Market Risk Increased cost of energy and raw materials Warming Scenario Time Horizon <2°C 2-3°C Short - Medium (2020- 2035) <2°C 2-3° Medium (2025- 2035) Changing consumer preferences to more sustainable products and services Impact Description Response Within the Group, we maintain strong relationships with key suppliers and regularly review our suppliers. In FY23 and beyond, we will continue to monitor and maintain these relationships with our current suppliers so we will be informed as early as possible if there are any delays or issues with receiving the stock. Energy price variations are not in our direct control. However, we monitor energy prices and always aim to be on the best renewable tariff. We would expect our total CO2 emissions to reduce over time given our commitment to Net Zero (targets and timelines to be agreed during FY24). This risk can be mitigated by generating our own renewable energy (through Solar PV) and reducing our reliance on the National Grid. Increases in costs could impact the Group’s profitability. Over the past few years, the escalation of worldwide events, for example, the pandemic and other geopolitical issues, have caused widespread supply chain disruption in the technology sector. An unpredictable climate could exacerbate the impact of existing supply chain issues, with increased pressure on the sourcing of raw materials and finished goods. Climate change is likely to exacerbate these issues resulting in potentially increased costs, supply disruptions and delayed deliveries. Increased energy costs are already impacting the business and are likely to continue to rise. A reduction in customer spending could have an adverse effect on the Group’s revenue and profitability. With ESG growing in importance, customers may change their consumer preferences to other IT service providers who are doing more for ESG and sustainability. The potential loss of business to more sustainable competitors could be detrimental to revenue. Failure to effectively predict and respond to changes could affect the Group’s sales and financial performance. Expenditures - Increased indirect (operating) costs Impact score: 3/4 Likelihood: 3/4 Revenue - Decreased revenue due to reduced demand for products and services Impact score: 3/4 Likelihood: 1/4 40 40 Strategic reportAnnual Report and Accounts 2023Sustainability Reporting (continued) Area Risk Reputation Increased stakeholder concern for ESG Warming Scenario Time Horizon Impact Description Response <2°C 2-3°C Short – Medium (2020- 2035) Capital and Financing – Decreased access to capital Impact Score: 4/4 Likelihood: 1/4 As the world transitions to a decarbonised economy, our stakeholders are likely to have increased interest and concern for our sustainability credentials. An actual or perceived inability to understand and be seen to be taking action to reduce our overall carbon footprint is likely to negatively impact investor sentiment / ratings. This could potentially limit our access to capital, as the focus on environmental impacts, climate change and net zero targets increases. We have already allocated internal resources through a sustainability programme and have engaged with a third- party specialist, to ensure compliance with current and emerging regulations. We will publish a TCFD Report to communicate our efforts to our stakeholders, including customers, and ensure our ESG strategy develops with guidance from best practices. The Group created a new ESG committee and held meetings in FY23. We appointed a third-party expert, to conduct a thorough ESG assessment of our business, so we can identify areas for us to improve. We have conducted our first TCFD disclosure in FY23, to understand the climate-related risks and opportunities associated with our business. A S T R AT E G I C PA R T N E R A N D A S A F E PA I R O F H A N D S 41 Annual Report and Accounts 2023Strategic reportSustainability Reporting (continued) Table B: The Group’s material climate-related physical risks. The full risk register can be found in our 2023 TCFD report. Impact Description Response Area Acute Risk Increased severity of flooding Warming Scenario Time Horizon 2-3°C >3°C Medium - Long (2025- 2050) Expenditures – Increased direct and indirect costs Impact: 3/4 Likelihood: 2/4 After conducting climate scenario analysis on all our sites, we have ascertained that 8 of the eleven sites are exposed to a risk of flooding. This risk is expected to amplify in frequency and severity because of climate change. This vulnerability has the potential for direct damage to property, plant, equipment, and transportation networks, thereby increasing our costs. Additionally, there exists the possibility of delivery delays and further disruptions to our operational activities. These expenses may escalate, as the global premiums for property insurance are projected to surge by 29% by 2040, due to the impact of climate change. While extreme weather conditions have the potential to increase production costs or induce disruptions within our supply chain, it is improbable that they would irrevocably impede our long-term operational capability. Nevertheless, these disruptions may lead to heightened costs and potential price increases. We recognise that increased flooding could result in disruptions to our business. We have conducted climate scenario analysis on all our eleven sites. We found that flooding was a direct risk for eight of the sites in the medium and long term. Some sites have mitigation measures in place to deal with flooding events or are situated on elevated ground thereby reducing the overall impact. We will continue to conduct this assessment on an annual basis and expand the analysis to include our supply chain. We have conducted specific flood risk assessments on the most at-risk sites, and we ensure that we are comprehensively covered by insurance. In the longer term, the Group will have to ensure that drainage systems at our sites are well- maintained and serviced. The frequency and intensity of heatwaves are expected to rise in the UK with climate change. In 2022, the heatwaves in the UK lead to 40-degree temperatures and disruption to multiple transport links. This leads to increased demand for cooling and energy (Air-conditioning, fans, water) at the Group’s sites. Our data centres were impacted by the 2022 heatwaves, especially our sites in Shoreditch, West Byfleet, Woking and Crawley. At our Shoreditch data centre, we had to cool the temperature down when temperatures rose well above 30 degrees during the 2022 summer heat waves. Increased severity of heatwaves and extreme heat 2-3°C >3°C Medium - Long (2025- 2050) Expenditures – Increased direct and indirect costs Impact: 3/4 Likelihood: 3/4 42 42 Strategic reportAnnual Report and Accounts 2023Sustainability Reporting (continued) Area Acute Risk Increased severity of heatwaves and extreme heat Warming Scenario Time Horizon 2-3°C >3°C Medium - Long (2025- 2050) Impact Description Response Expenditures – Increased direct and indirect costs Power outages become more common due to a reduction in power production and an increase in energy demand. Impact score: 3/4 Likelihood: 3/4 The data centres must be cooled to operate under their capacity, which is optimal. Cooling will likely increase as climate change will be associated with hotter summers and heatwaves in the UK. We will in the coming years equip our data centres to deal with the increasing heatwaves over the medium and long term. This may over time require capex investment and lead to an increase in operating cost associated with air conditioning over the summer months. Supply routes may be disrupted as railways buckle and roads melt. Regular comfort breaks may be needed to ensure employees do not suffer from heat-related illness, which reduces productivity. Rising mean temperatures will lead to a higher demand for cooling. Energy costs will rise as sites will require additional cooling, to maintain optimum temperatures for staff and operations. Staff wellbeing may be impacted if adequate cooling is not maintained. Employees may require more frequent breaks to avoid health risks associated with higher temperatures. Productivity may be impacted across the Company. Power outages due to increased demand and pressure on the grid can lead to operation disruption. Chronic Rising mean temperatures >3°C Long Term (2035- 2050) Expenditures – Increased direct and indirect costs Impact score: 3/4 Likelihood: 3/4 43 Annual Report and Accounts 2023Strategic reportSustainability Reporting (continued) Table C: The Group’s climate-related opportunities. The full register can be found in our 2023 TCFD report. Area Opportunity Warming Scenario Time Horizon Description Energy Resources Linking energy performance change in data centres to external weather conditions to track performance. <2°C Medium 2-3°C (2025- 2035) As the climate changes, so will the technology to monitor the changes more accurately in weather patterns. The costs of operating our data centres are intrinsically linked to the weather. We must keep the servers within a certain temperature range, to ensure they are operating at maximum efficiency. Use of lower emission sources of energy. <2°C 2-3°C Short - Medium (2022- 2035) Investment in resource efficiency will lower energy intensity and should lead to cheaper and more consistent operating costs, enhancing operating efficiency. This will be accomplished by decreasing energy use across the Group. The power needed for our data centres, heating, ventilation, air conditioning, and lighting are the main energy users on the sites. Response We can track this performance and improve monitoring of the effects the weather will have on our data centres. By accurately planning and tracking the performance of our data centres, we will be able to ensure our sites are operating at their optimum capacity. It will allow us to mitigate any other acute physical risks from climate change, such as flooding and heatwaves. Within the Group we are committed to decarbonising our operations as we embark on a journey to net-zero. We understand we will be required to invest in lower emissions technology across our operations, as more innovative solutions come to market over time. Increased energy efficiency technology will decrease our energy consumption and the energy costs for our business. The payback associated with lower-emission sources of energy will mitigate the upfront cost of technology investment. Exploring other options such as installing Solar PV could further reduce this cost over time. Also, this would reduce our reliance on the National grid and help mitigate any carbon tax. 44 44 Strategic reportAnnual Report and Accounts 2023Sustainability Reporting (continued) Risk Management Assess To understand how the impact of climate change could affect the risks and opportunities to the business over time, we facilitated a climate risk management workshop in February 2023, with our ESG partners (Inspired PLC). We discussed the impact of each risk and opportunity on the business across three scenarios (<2°C, 2-3°C and >3°C) and three timeframes (short (2020-2025), medium (2025-2035) and long-term (2035- 2050)), enabling us to understand where the impact would be greatest on the Group’s business operations. Appraise Once we assessed the impact of each risk and opportunity, we assigned a range of risk management options. During the climate risk management workshops, we assessed the effectiveness of each current risk mitigation action, for each climate-related risk and opportunity. The climate-related risks were given a score for impact and likelihood, between 1 and 4, which is consistent with our risk-management framework, 1 being low and 4 being high. Post-workshop we developed a climate risk management framework that will feed into our business’s existing risk management process, to ensure that our operations remain resilient to climate change. Each risk was ranked from 1 – 8, using the existing risk management framework rankings. The combination of these rankings provided the overall risk level (Table 3). As we are at the start of our TCFD journey, we have not performed financial modelling of the climate-related risks. We will endeavour to undergo this analysis next year. Address To reduce the impact that climate change will have on our business, we have introduced mitigation actions, to reduce the climate-related risks (Table 3). On an annual basis, the Sustainability Committee will re-evaluate the risks and opportunities presented by climate change and review our mitigation actions to understand their effectiveness. It will remain the Sustainability Committee’s responsibility to review and update the climate risk register, to ensure that the opportunities and risks associated with climate change are accurately assessed, acknowledged and monitored. We follow a tiered hierarchy for risk management, where each functional unit of the business manages and owns risks in their respective areas scientifically and consistently. Risks with significant value are escalated upwards to the Operating Board level and beyond to the Group level, alongside principal risks. This approach ensures the appropriate level of visibility, ownership, and management, with complete consistency and transparency. In recent years, UK businesses have experienced some challenging external forces, such as the repercussions of the pandemic, escalating inflation, and a cost-of-living crisis. These factors have heightened numerous key risks that we have experienced. Nonetheless, our capacity to promptly respond and adapt to these shifting circumstances has set a precedent for effectively tackling unforeseen disruptions within our organisation. The advent of climate change is poised to exacerbate these challenges, thereby necessitating ongoing monitoring and proactive measures to mitigate risks. To fortify our preparedness for such occurrences, the Group has implemented a resilient and well-defined framework for risk management. Over the past couple of years, we have increasingly integrated the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) into our risk management approach, aligning ourselves with emerging climate- related risks. We have developed a four-step framework for managing climate risks, which guides the identification, rating, and monitoring of business risks. Working with a third-party ESG consultancy, we have established a stand-alone climate risk management framework, as part of our TCFD programme. This enables us to identify and evaluate climate-related risks and opportunities. This framework has been integrated into our broader business risk management processes, which ensures that we maintain a comprehensive and systematic approach to climate risk management. Identify During FY23, we engaged with third-party ESG specialists, to help identify and assess the appropriate climate-related risks and opportunities that may impact our business. The climate scenario analysis identified 14 climate-related risks and two opportunities. In the previous financial year, we identified climate change as a principal risk for the first time, under our broader principal risk of environmental impact. 45 Annual Report and Accounts 2023Strategic reportSustainability Reporting (continued) Transitional Risk Mitigation We realise how important it is to take climate-related risks and opportunities into account when making strategic decisions. These risks are managed by our Sustainability Committee. They provide the Board with regular status reports. It is vital that we identify and manage these risks, whilst embracing opportunities, to realise our strategic goals. Our main goal is to demonstrate to our stakeholders the effectiveness of our strong risk management process. We can guarantee openness and comprehension throughout the Group. We also work to improve our mitigation strategies, by coordinating them with our main goals and objectives. Table 3: A table to show the actions to mitigate the transition risks. Area Climate-related Risk Mitigating Actions Policy & Legal Increased reporting requirements due to climate change Mandates on and regulation of existing products and services Carbon Pricing Mechanisms in the value chain • To guarantee that we can react effectively and rapidly to new climate change laws, we continuously monitor regulatory changes. • We have worked with a third-party ESG services advisor that keeps us updated on any new or proposed regulations from the perspective of climate change. • We will put into practice an action plan for scope 3 emissions and value chain participation as part of our Net Zero strategy. To lower the expense of offsetting, we want to reduce emissions as much as possible. • Although we will monitor progress of carbon taxes, we don’t expect it to suddenly affect our industry. Market Changing consumer preferences and increased sensitivity to ESG • We must make sure that changes to our ESG strategy and the work we are doing across our Group to operate more sustainably are made available to the public for the benefit of our stakeholders and customers. • We will monitor customers’ feedback in relation to sustainability and how our sustainable products are performing. Increased costs of raw materials • To ensure that we can cut our energy expenditures as much as possible, we must keep up with energy-saving measures. • To ensure a diverse supply chain, we must maintain solid relationships with all our suppliers and frequently review our suppliers. Reputation Increased stakeholder concern damaging our reputation • To demonstrate our progress with climate change risks, opportunities and mitigation, we will continue to publish an annual TCFD report. • We are aware that ESG and sustainability are crucial to the long-term success of our company and vital to our stakeholders. • The sustainability committee will continue to oversee and refine our sustainability plan, with regular updates sent to the Board. Technology Substitute existing products to lower emissions alternates • Substituting our data centre equipment with lower-emissions alternatives will be associated with a substantial cost to the Group in all scenarios and timeframes. • We are taking steps to increase our data centres’ efficiency by 40%. We will continue to invest in and explore the possibility of improving the energy efficiency in our facilities. Costs to transition to lower emissions technology • To reach our climate objectives, we might need to set aside money for capital expenses so that we can spend it on lower-emission technology. • We must make sure we thoroughly plan for these charges each financial year because these may be associated with significant costs to the business. 46 46 Strategic reportAnnual Report and Accounts 2023Sustainability Reporting (continued) Physical risk mitigation The COVID-19 pandemic has shown the operational disruptions that can ensue from unforeseen and abrupt events. We take pride in our response to the pandemic, as it serves as validation of the efficacy of our current resilience strategy. Drawing from this experience, we are now factoring in the physical risks associated with climate change. The six risks we have identified could cause significant business disruption in the worst-case scenario. Therefore, we will continue to assess these risks on an annual basis, promptly reporting any alterations that may transpire. As we expand our TCFD process to encompass our supply chain, we anticipate that the impact of these risks will change. Table 4 outlines the mitigation actions for the three acute physical risks and three chronic physical risks. Acute physical risks encompass sudden occurrences that elicit short-term consequences, such as floods, storms, and heatwaves. Chronic physical risks denote a more gradual impact, such as sea level rise and extreme heat. Our dedication lies in diminishing our exposure to physical risks and safeguarding the resilience of our business. Table 4: A table to show the actions to mitigate the physical risks. Area Acute Climate-related Risk Mitigating Actions Increased severity of flooding • As our staff have the ability to work from home, the impact of floods is minimal at our office locations. However, this is not the case at our data centres. • To reduce the physical effects of floods at these sites, adequate upkeep of drainage networks will be conducted along with continuous robust flood risk assessments. • All sites considered at risk will receive the proper insurance coverage. Increases severity of forest fires • This risk is more significant to our global supply chain, than to our UK operations. We will conduct a climate scenario analysis next year of our supply chain, to evaluate this risk. • The risk of forest fires presents a small risk to our Woking site. We will monitor fires when they develop in the surrounding areas. To date, wildfires have not posed an issue. However, with climate change we may have to increase our surveillance and develop a continuity plan in the event of a wildfire. Increased heatwaves and extreme heat • Our offices have air conditioning, and we will ensure that they will be fully equipped to manage heatwaves. Staff can work from home in periods of intense heat. Chronic Rising mean temperatures • The cooling of our data centres poses a risk for the Group. In the summer of 2022, some of our sites did not have adequate cooling, for example, Shoreditch. We are currently working on improving the cooling systems at these sites and will continue to evaluate each site’s performance annually. • Regular breaks and hydration will be provided, to ensure the health and well-being of staff on extremely hot days. Sea level rise • In the coming years, we plan to extend our climate scenario analysis to include key suppliers for a better understanding of this risk’s implications. Water stress • We already monitor water use at all our data centres. Two of our sites use water as their primary cooling system. Our West Byfleet and Crawley sites rely on water to cool them down, so we may have to invest in changing this cooling methodology, if access to water poses a threat in the future. • Our TCFD process next year will include a climate scenario analysis of our key suppliers and supply routes, to assess this risk in our supply chain. 47 Annual Report and Accounts 2023Strategic reportSustainability Reporting (continued) Metrics & Targets During this financial year, we initiated our voluntary TCFD reporting and incorporated our sustainability strategy, as a crucial aspect of our business’s growth. To help us advance on our sustainability journey, we appointed a third-party ESG specialist, to assist us in enhancing and evaluating our environmental performance and data collection procedures. Under their and the ESG Committee’s guidance, we calculated our complete carbon balance sheet for the first time, which will serve as a starting point for our Net Zero target and transition plan that we plan to finalise in H1 FY24. We have chosen to evaluate our sustainability performance, strategy, and our resilience against climate-related risks and opportunities through various metrics, including carbon emissions. These metrics are outlined below in Tables 5 and 6 and will assist us in measuring our progress and informing our sustainability-related decision-making processes. Metrics used to measure and manage our climate risks and opportunities The Group’s climate risk register contains the metrics the company will use to measure and monitor climate-related risks and opportunities. As a company that is at the start of its TCFD journey, we aim to collate this data within the next two years and report annually thereafter on the progress of each climate risk against the identified metrics. Table 5: A table to show the metrics used to measure and monitor the transition risks. Transition climate risks Metrics Increase in regulation due to climate change, enhanced emissions reporting obligations. • Annual cost (£) of internal resources used to monitor climate legislation and compliance. Carbon pricing mechanisms. • An internal carbon price will be calculated within the next two years. Mandates on and regulation of existing products and services. Increased cost of energy and raw materials. Changing consumer preferences to more sustainable products and services. • Percentage cost of adhering to new regulation on our products and services. • Annual cost increase (£) linked to energy. • Annually evaluating customer sentiment for sustainability among our products and services. Increased stakeholder concern for ESG. • Annually evaluating sustainability criteria on capital. Substitute existing products and services to lower emissions alternates. Costs to transition to lower emissions technology. • Percentage of revenue investment in improving energy efficiency in our data centres. • Cost (£) of reducing our Scope 1 and 2 emissions. • Cost (£) of reducing our Scope 3 emissions, such as our EV salary sacrifice scheme. 48 48 Strategic reportAnnual Report and Accounts 2023Sustainability Reporting (continued) Table 6: A table to show the metrics used to measure and monitor the physical risks. Transition climate risks Metrics Increased severity of flooding. • Value (£) of key site assets located within flood risk zones. Increased severity of heatwaves and extreme heat. • Annual flood insurance premiums for sites. • Annual maintenance costs due to damage from floods and storms. • Energy use (KWh) and associated costs (£) from periods of extreme heat. Increased frequency of wildfires. • Metrics will be calculated in the next two years, when we consider our value chain. Sea level rise. • Value (£) of key sites located near coastal areas. Rising mean temperatures. • Energy use (KWh) and associated costs (£) from periods of extreme heat. High water stress. • Water use (m3) at the Group’s sites and data centres. Carbon emissions from our own operations (Scope 1 and 2) for FY23 As part of our commitment to sustainability, we are focused on reducing the carbon emissions associated with our business operations. We recognise that measuring our carbon footprint is the first step towards achieving this goal. We have calculated our Scope 1 and 2 GHG emissions, in accordance with Streamlined Energy and Carbon Reporting (SECR) regulations. For FY23, our Scope 1 emissions amounted to 191.40 CO2e, representing an 278.16% increase from FY22. Within the Group, we purchase renewable electricity for all our facilities. Therefore, our Scope 2 emissions are considered zero under a market-based approach. However, under a location-based approach, our emissions for FY23 were 10,055.40 CO2e, representing a 150.35% increase from the previous year. These increases are due to the pandemic ending and our normal operations beginning again. The current energy consumption for FY23 is now typical for our services. Although a third-party calculates our company’s data to estimate emissions, no formal assurance is provided. Table 7: The Group’s total energy consumption (kWh) Utility and Scope Scope 1 Total Gaseous and other fuels (Scope 1) Scope 2 Total Grid-Supplied Electricity (Scope 2) Scope 3 Total Transportation (Scope 3) Total 2022/23 Consumption (kWh) 2021/22 Consumption (kWh) 970,890 970,890 51,998,139 51,998,139 380,785 380,785 53,349,814 90,796 90,796 18,916,332 18,916,332 218,058 218,058 19,225,186 49 Annual Report and Accounts 2023Strategic reportSustainability Reporting (continued) Table 8: The Group’s SECR-compliant scope 1 and 2 carbon emissions Utility and Scope 2022/23 Emissions (tCO2e) 2021/22 Emissions (tCO2e) Location-based Location-based Scope 1 Total Gaseous and other fuels (Scope 1) Scope 2 Total Grid-Supplied Electricity (Scope 2) Scope 3 Total Transportation (Scope 3) Total Table 9: The Group’s UK Location-based emissions intensity metric All Scopes tCO2e per m2 Energy efficiency measures taken during FY23 191.40 191.40 10,055.40 10,055.40 88.94 88.94 10,335.74 2022/23 0.34 23.27 23.27 4,016.50 4,016.50 50.86 50.86 4,090.63 % change -25.34% We are committed to year-on-year improvements in our operational energy efficiency. A register of energy efficiency measures has been compiled, with a view to implementing these measures in the next five years. Cooling System Efficiency Improvements • A continued programme of works has been undertaken on furthering the improvement of the cooling efficiency of the Harrogate data centre. This has included: • AHU temperature sensor recalibration; • Air-flow management improvement through the removal of redundant cabling, and tile vent resetting; • Increase of temperature set points within central AHUs; • Installation of additional cold aisle containment cabinets, increasing the amount of cold aisle containment to 90%. Working Pattern Alterations • Following the pandemic, the way in which the business operated changed, and this has continued through the present reporting year. This includes the continuation of a hybrid working model, reducing the energy consumption of office spaces due to lower occupation, and use of MS Teams for meetings throughout the business, mitigating emissions from travel. 50 50 Strategic reportAnnual Report and Accounts 2023Sustainability Reporting (continued) Our first carbon balance sheet (including our Scope 3 emissions) In 2022, we utilised the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standards, to calculate our complete Scope 3 emissions for FY22, which will serve as the baseline for achieving Net Zero. We undertook a thorough data collection process, to determine our FY22 Scope 3 emissions. As we have the internal process developed for calculating our Scope 3 emissions, in the next financial year, we will align this with our annual accounts reporting, so that we are always reporting on the current financial year. This procedure emphasised the importance of the emissions related to our supply chain and logistics activities, as they represent a significant (%) portion of our overall emissions. The calculation of our FY22 Scope 1, 2 and 3 GHG emissions revealed our energy consumption from electricity (Scope 2) and fuels (Scope 1) accounted for 19% of our total footprint, using the location-based method. However, our Scope 3 emissions represent a significant proportion of our GHG emissions (81%). Therefore, we have decided to disclose these in our annual report (Table 10). The most significant emissions sources are from the goods and services (including capital goods) that the Group purchases. These Scope 3 categories accounted for 64% of the Group’s total carbon footprint, using the location-based approach. Emissions associated with the use of sold products and fuel-related activities are notable contributors to Scope 3 emissions, accounting for 9% and 7% respectively. In total, 9 out of the 15 Scope 3 categories were applicable to the Group. The Board is committed to fostering and developing effective partnerships with the Group’s suppliers, based on forward planning, collaboration and trust. These supplier partnerships are pivotal in delivering many of our services and will play a crucial role in meeting our climate targets. The supplier partnerships help the Group, to deliver value and quality to its customers and help its partners to develop and grow. The Group has an annual programme of regular engagement and communication with all suppliers. New rack space at Redcentric London Data Centre Refurbished London office space 51 Annual Report and Accounts 2023Strategic reportSustainability Reporting (continued) Table 10: the Group’s carbon balance sheet for FY23. Emissions Scope & Scope 3 Category tCO2e (location-based) % (location-based) Scope 1 Natural Gas Transportation (excluding grey fleet) Other Fuels Scope 2 Scope 3 1. Purchased Goods & Services 2. Capital Goods 3. Fuel-related Emissions 4. Upstream Transportation and Distribution 5. Waste Generated in Operations 6. Business Travel 7. Employee Commuting 8. Upstream Leased Assets 9. Downstream Transportation and Distribution 10. Processing of Sold Products 11. Use of Sold Products 12. End-of-life Treatment of Sold Products 13. Downstream Leased Assets 14. Franchises 15. Investments Total All Scopes 23 0 0 23 4,017 17,751 88.94 13,960 1,512 64 2 69 75 N/A N/A N/A 2,069 0.3 N/A N/A N/A 21,791 0.1% 0% 0% 0.1% 18% 81% 50.86 64% 7% 0.3% 0.01% 0.3% 0.3% N/A N/A N/A 9% 0.001% N/A N/A N/A 100% An update on our net zero commitment We are currently developing a comprehensive strategy report and transition plan that will delineate an assortment of decarbonisation measures and pathways aimed at attaining our objective of Net Zero. Our primary focus includes curtailing electricity consumption, enhancing procurement processes, optimizing the utilization of our sites and buildings, and actively engaging with our staff. As an IT services provider, our multiple datacentres necessitate a substantial amount of grid-based electricity. Presently, we procure renewable energy to power all our sites. However, to reach our Net Zero goals, it becomes imperative to reduce our reliance on the national grid and begin generating renewable energy at our facilities. This can be achieved through various initiatives, such as the installation of solar panels. Our Net Zero plan will establish pathways in alignment with our short-term and long-term targets, guaranteeing the existence of an action plan that bolsters our decarbonisation objectives and adheres to the guidelines of the Science Based Targets Initiative (SBTi). 52 52 Strategic reportAnnual Report and Accounts 2023Sustainability Reporting (continued) Decarbonising our operations and reducing our Scope 1 and 2 emissions will be paramount for our Net Zero strategy. When we finalise our Net Zero transition plan in FY24, we will set an interim target for reducing our Scope 1 and 2 emissions. We aim to conclude the development of our comprehensive Net Zero transition plan within the initial half of FY24, thereby cementing our commitment to a sustainable future. The Strategic Report on pages 4 to 53 is signed on behalf of the Board by Peter Brotherton Chief Executive Officer 24 August 2023 York New office space at Redcentric York City centre location adjacent to York Rail Station 53 Annual Report and Accounts 2023Strategic reportIntroduction to Governance The Board recognises the importance of high standards of corporate governance and integrity. It is committed to effective corporate governance as the basis for delivering long-term value growth and for meeting shareholder expectations for proper oversight and leadership of the business. I am responsible, as Chairman of the Board, for corporate governance within the Group and the Board is committed to maintaining a strong governance and ethical structure that supports and sustains its decision making. We believe that having good corporate governance is fundamental to pursue success for the Group and its stakeholders. As such, the Company has adopted the Quoted Companies Alliance Code for Small & Mid-sized Quoted Companies 2018 (the “Code”) as its benchmark for governance matters. At the date of this Report we believe that we are fully in compliance with the Code, and were also fully compliant for the comparative period. This section of the Report sets out how the Group has applied and complies with the principles of the QCA Code. We will continue to review and update our approach and will update our Corporate Governance statement in the AIM Rule 26 section of the Group’s website. Nick Bate Chairman 24 August 2023 New Redcentric data centre facilities at Elland Data Centre New rack space 54 54 Annual Report and Accounts 2023GovernanceCorporate Governance Governance Principle Principle 1 Establish a strategy and business model which promotes long- term value for shareholders Application The Group’s business model and strategy is discussed within the Chief Executive’s Review on pages 8 to 10. Details of the key risks and challenges facing the Group and the high-level management of such are outlined on pages 30 to 31. The Group continues to operate a tiered hierarchy for risk management, with functional management of direct risks and consistent measures across all functions, and escalation of significant value risks, along with principal corporate risks, to the Group’s corporate risk register. The corporate risk register is shared and refined with the Audit Committee and Board at key intervals in the year. Principle 2 Seek to understand and meet shareholder needs and expectation The Group continues to be committed to engaging with its shareholders to ensure that the strategy and business model and key events of the Company are clearly shared and understood. The Board believes that the disclosures of this Report provide information necessary for shareholders to assess the Group’s performance, business model and strategy. Hard copies of the Report are issued to all shareholders that have requested them and copies are also available on the Group’s website. The Group’s half year report is also available on the Group’s website and the Group makes full use of the website to provide information to the shareholders and other interested parties. The Company uses regulatory announcement through RNS to ensure that important news is shared with all shareholder and potential shareholders in a clear and uniform way and often issues announcements beyond those it is obliged to make. The Executive Directors are also in regular contact with the Company’s shareholders and brief the Board on feedback and any shareholder issues. In FY23, investor briefings and roadshows were held at regular intervals, including following announcement of the preliminary and interim results, and other ad-hoc one-to-one meetings with key investors and potential investors were also held through the year to discuss the Group’s strategy and shareholder expectations, amongst other things. There is also regular dialogue with shareholders through the Company’s corporate broker, finnCap Limited (“finnCap”), who keep the Board abreast of shareholder expectations and reactions and assist in setting up meetings with potential investors. Any reports from analysts that refer to the Company or cover the sector are circulated to the Board to support their understanding of the views of the investment community. finnCap, as broker, provides feedback directly to the Board from shareholder meetings and events such as the investor days. An update on key shareholding changes and any relevant investor sentiment is also provided in each Board report and Board meeting. There is a dedicated investor relations contact email address by which shareholders or investors may contact the Company (investorrelations@redcentricplc.com) and the Company Secretary also deals with a number of written queries throughout the year along with the Company’s registrar, Link Group. The Chair and other Non-Executive Directors will always make themselves available to shareholders. The AGM is a key opportunity for this, with shareholders being given the opportunity to raise questions during the AGM and the Board being available both prior to and after the meeting for further discussion with shareholders. We were pleased to once again be able to welcome shareholders in person to our AGM last year, particularly following the constraints faced in recent years and look forward to welcoming shareholders again this year. Once again, to ensure that shareholders who are unable or would rather not attend the AGM have the ability to ask questions of the Board, the Board shall accept any questions relating to the business being dealt with at the AGM which are submitted by shareholders in advance to the Company. Any such questions should be sent to investorrelations@redcentricplc.com so as to be received by no later than 5 p.m. on Friday 22 September 2023 and the Company will publish questions and responses on the Group’s website in advance of the AGM. The voting record at the Company’s general meetings is monitored and we are pleased that all resolutions were passed by shareholders at the 2022 AGM. 55 Annual Report and Accounts 2023GovernanceCorporate Governance (continued) Governance Principle Principle 3 Take into account wider stakeholder and social responsibilities and their implications for long-term success Application The Board recognises that the long-term success of the business relies on a number of key stakeholders, as described on pages 26 to 29 and pages 32 to 35, including colleagues and customers and that engagement with these key stakeholders is fundamental to helping the Board make the best business decisions. COLLEAGUES The dedication and skill of colleagues is fundamental to the Group’s operation and success and, as such, we are committed to colleague engagement and listening to and acting on feedback from colleagues. This year, with the addition of new colleagues through the acquisitions of 4D and Sungard DCs, this has been especially important. The Group has worked hard in FY23 to onboard and integrate new colleagues to give them the best welcome. The Group has also continued to work on its employment proposition during the year with further enhancements to HR systems and people policies to enable employees to take greater control of their working experience. The hybrid working model implemented in FY22 and additional locations continues to provide access to a broader geographical talent pool. This year has seen the Group’s vision, mission and values be fully embedded into the Group’s performance and recognition schemes and additional content on the Group’s online learning management systems, together with a partnership with LinkedIn Learning, has provided colleagues with significant opportunities for personal and professional development. The physical, emotional and financial well-being of colleagues has been a key priority for the Group, particularly in the context of the current cost of living crisis and a number of initiatives have been implemented to assist colleagues in this regard – including healthcare discounts and schemes, webinars and sessions for colleagues on health, fitness and diet; increased profile of Mental Health First Aiders and access to a programme of events on resilience, stress management and mindfulness; and the introduction of a discounted programme of access to mortgage advice and introduction of a new discounted “Tastecard” scheme for colleagues. Investment has continued in the Group’s apprenticeship programme with fourteen apprentices currently in the Group and a number of apprenticeships completed in FY23. A dedicated sale apprentice scheme was also launched in FY23, in conjunction with Leeds City College and Leeds Rhinos Rugby Club, with six participants in the scheme. Recognising the Group’s social responsibility, FY23 has seen an increase in volunteering and fundraising activity and an increase in colleagues using their day’s paid volunteering leave. As detailed on page 34, the Group also has in place a SAYE option plan to enable colleagues to become personally invested as shareholders of the Company. In FY23, the Company granted options over a total of 562,199 ordinary shares under this scheme. CUSTOMERS The Group’s extensive customer services, which are detailed on the Group’s website at https://www.redcentricplc.com/services/, are core to the Group’s customer proposition and the Group is in regular dialogue with its existing and potential customers in order that it may understand and respond to their ongoing and future requirements. The Group also keeps abreast of customer needs and communicates it’s proposition to customers through regular customer surveys, monthly and quarterly service reviews and through its social media channels. In FY23 the Group continued its work to make its communications with customers more meaningful and targeted and the launch of phase 2 of its customer service management solution marked a key step in enhancing customers’ experiences with the Group. The Board also considers its shareholders, suppliers and the environment to be key stakeholders and details of how the Group fosters relationships with these stakeholders and considers their needs are set out in the Section 172 statement on page 26 of this Report. 56 56 Annual Report and Accounts 2023GovernanceCorporate Governance (continued) Governance Principle Principle 4 Embed effective risk management, considering both opportunities and threats, throughout the organisation Application As set out in the Audit Committee Report on page 64, the Board is committed to ensuring that risk management forms part of the way the Group works and is embedded in the business, coordinated by the Chief Financial Officer, and with reporting on mitigating actions as well as the risks. In FY23, having identified climate change as a principal risk for the first time in FY22, there has been an increase in focus on emerging climate change related risks with the TCFD recommendations being integrated into the Group’s risk management framework. These risks are managed by the Group’s newly formed Sustainability Committee, which provides quarterly reports to the Board. 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 Operating Board. However, the internal control system is designed to manage rather than eliminate risk and can therefore only provide reasonable and not absolute assurance against material misstatement or loss. The Board considers that the internal controls in place are appropriate for the size, complexity and risk profile of the Group. Ongoing enhancements continue to be made to D365, the Group’s ERP system, overseen by the Group’s Chief Technology Officer, which are expected to strengthen the control environment, particularly following acquisitions completed in FY23. The Board acknowledge that there is a requirement for continuous improvement to the control environment particularly following acquisitions made in the year and as such, improvement plans continue to be developed and implemented, with short and longer term plans to address risks and control weaknesses. The principal elements of the Group’s internal control system cover financial, operational and compliance controls and include: 1. close management of the day-to-day activities of the Group by the Executive Directors; 2. an established budgetary system with the preparation and approval of an annual budget by the Board and regular monitoring and review of performance against budget, forecasts and prior year; 3. detailed monthly reporting to the Board, both at Group and at divisional level (including financial information, performance against budget and key performance and risk indicators) whereby the Executive Directors report on significant changes to the business and external marketplace to the extent they represent significant risk; 4. an organisational structure that has clear reporting lines and delegated authorities, particularly with the new divisional structure that was put in place at the start of FY23; 5. management and monitoring of risk and performance at multiple levels throughout the Group; and 6. continually improving finance, legal and assurance and compliance functions that maintain processes and systems to enhance the control environment, including the control of expenditure, authorisation limits, purchase ordering, sales order intake, contract review and approval. The Group also works hard to maintain a number of ISO accreditations it has achieved over a number of years, detailed at https://www.redcentricplc.com/about-us/accreditations-frameworks/, and has a number of policies and procedures in place in order to fulfil the requirements of and maintain these accreditations. 57 Annual Report and Accounts 2023GovernanceCorporate Governance (continued) Governance Principle Principle 5 Maintain the board as a well- functioning, balanced team led by the chair Application The composition of the Board is detailed on page 62. The Board delegates specific responsibilities to the Board committees. The composition of the committees and how they discharge their responsibilities can be found on page 62. Part of the role of the Board’s Nomination Committee, chaired by Nick Bate, is to keep the composition of the Board under review as the Group’s business evolves. Following Jon Kempster’s resignation, Alan Aubrey joined the Board as a Non-Executive Director and Chair of the Company’s Audit Committee. Alan brought with him considerable market knowledge and breadth and depth of skills and experience. Following the end of FY23, Helena Feltham stepped down from the Board and as Chair of the Remuneration Committee. Given Helena’s departure, Alan Aubrey was also appointed as interim Chair of the Company’s Remuneration Committee and Nick Bate was appointed as a temporary member of the Audit Committee, pending appointment of a new Non-Executive Director and Chair of the Remuneration Committee. The process for recruitment of a new Non-Executive Director has commenced, led by Nick Bate, and further details will be issued in due course. The Board is mindful of the benefits of having diversity on the Board and will seek to address this with this appointment. The Board is satisfied that it has an appropriate balance between independence and knowledge of the Group to enable it to discharge its duties and responsibilities effectively. All Directors are encouraged and expected to use their independent judgement and to challenge matters where required, both strategic and operational. The Executive Directors of the Company are employed on a full-time basis. Non-Executive Directors are required to devote such time to the Group’s affairs as necessary to discharge their duties and this may change from time to time. In addition to scheduled Board meetings, members are required to attend other ad hoc Board meetings, committee meetings, the AGM 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. Non-Executive Directors are required to obtain the agreement of the Chairman before accepting additional commitments that may affect the time that they are able to devote to their role as a Non-Executive Director. Further details of external appointments of the Board are included in their biographies on page 62. Details of the number of regular scheduled meetings of the Board and committees, together with the attendance record for each Board member, are set out on page 61. The Board recently concluded an assessment of its performance, and more detail is provided below against Principle 7. 58 58 Annual Report and Accounts 2023GovernanceCorporate Governance (continued) Governance Principle Principle 6 Ensure that between them the directors have the necessary up-to- date experience, skills and capabilities Principle 7 Evaluate board performance based on clear and relevant objectives, seeking continuous improvement Application Directors’ details and biographies are on page 62. The Board considers that, other than the gap left by Helena Feltham’s departure and the Remuneration Chair vacancy, it has sufficient skills and experience to enable it to execute its duties and responsibilities effectively given the nature and size of the Group. As mentioned above, the appointment of Alan Aubrey further enhances its capabilities and complements the skills and experience of the current Directors. Directors are responsible for ensuring their continuing professional development to maintain their effective skills and knowledge. As part of the Board performance assessment recently concluded, details of which are set out below, each Board member provided information on their individual skills and experience in areas relevant to the Group. This exercise indicated a high level of capability in most areas but highlighted some skill sets which could form part of the specification for any future Board appointments, some of which should be fulfilled and enhanced by the appointment of a new Non-Executive Director and Remuneration Committee Chair. The Board receives monthly reports on the Group’s operational and financial performance as mentioned above, and formal agendas and reports are also circulated to the Board in advance of meetings. The Board has access to the advice and services of the Company Secretary, who is responsible for ensuring that Board procedures are followed, and applicable rules and regulations are adhered to. Directors are able to obtain further advice or seek clarity on issues raised in reports or at meetings from within the Group or from external sources. The Board also has a procedure whereby any director may seek, through the Company Secretary, independent professional advice in furtherance of their duties, if necessary, at the Group’s expense. Jon Kempster and, following his resignation, Alan Aubrey, was the Company’s Senior Independent Director during FY23 and provided a sounding board for the Chairman and also served as an intermediary for the other directors where required. External advisers or consultants have been engaged by the Board in respect of its remuneration policies, in relation to implementation of the Company’s corporate and acquisition strategy and in relation to the appointment of both Alan Aubrey to the Board and commencement of recruitment of a new Remuneration Committee Chair, all being significant matters. On appointment to the Board, new directors receive a tailored induction pack and introductions to relevant personnel within the Group. The Board recently carried out its annual evaluation. Following its first externally facilitated evaluation in a number of years in FY22, the FY23 assessment was internally facilitated and comprised the following elements: - a questionnaire completed by every Board member covering Board and Committee structure, processes, agendas and priorities. Each Board member’s assessment of their individual performance and feedback on each other was also sought. The questionnaire was based on ones designed by external consultants with considerable experience of Board reviews, but tailored to meet the specific circumstances of the Group; - completion of a skills matrix by each Board member, as referred to under Principle 6 above, to identify areas of expertise on the Board and additional areas that the Board could consider in relation to future appointments; - Review by the Board of the consolidated outputs of the questionnaire and skills matrix, facilitated by the Company Secretary and Chairman. In addition to the appointment of a new a new Non-Executive Director and Chair of the Remuneration Committee, the process identified a number of other actions which the Board believes will assist in improving Board performance and these will be implemented during the year, including: - timings of Board reports prior to meetings; - ongoing review of Board composition; - ongoing review and update of the Company’s investor relations and communications policy; - review of the Group’s ESG strategy and priorities; - ongoing review of succession planning. 59 Annual Report and Accounts 2023GovernanceCorporate Governance (continued) Governance Principle Principle 8 Promote a corporate culture that is based on ethical values and behaviours Application The Board aims to lead 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 ongoing disclosure of interests, are all examples of processes which require high standards of behaviour from the Board. Employment policies adopted by the Group assist in embedding a culture of ethical behaviour and the values set out in its corporate social responsibility statement. Ongoing training on the Group’s compliance and anti-bribery policy and the Group’s Modern Slavery Act policy launched in FY22 continue to reinforce the culture of ethical values and behaviours. The Group is pleased that in FY23 there has been an increase in charitable activity across the Group, with a number of volunteering challenges and fundraising events. This activity includes maintenance of the Trees For Life partnership, a partnership with Generation (which supports underprivileged young adults into the workplace), the Mission Christmas volunteering campaign, Easter Egg appeal and charity walks. Several local and national charities have been supported through the year by colleague fundraising, including Macmillan Cancer Support, The Children’s Heart Surgery Fund, Red Nose Day and Children in Need. All colleagues are granted a day’s paid volunteering and the Group encourages colleagues to use this day to take part in local volunteering activity. We are delighted that FY23 has seen a higher than ever take up of volunteering days. Further details of the Group’s charitable activity is set out on page 35. Principle 9 Maintain governance structures and processes that are fit for purpose and support good decision-making by the board The business and management of the Group are the collective responsibility of the Board. The Board meets at least nine times a year at various Company locations in accordance with its scheduled meeting calendar and this schedule is supplemented with additional meetings as and when required and monthly Board reports circulated in respect of the previous month. The annual calendar includes presentations from all members of the Operating Board through the course of the year. The attendance by each Board member at meetings held in the year is shown in the table below. At each scheduled meeting, the Board considers and reviews the trading performance of the Group for the previous month together with additional topics based on the annual Board calendar. The Board and its Committees receive appropriate and timely information prior to each meeting in accordance with a reporting timetable agreed with the Board and Operating Board. A formal agenda is agreed with the Chair for each meeting and papers are distributed several days ahead of meetings taking place. The Board has a formal written schedule of matters reserved for its review and approval including approval of the annual budget, major capital expenditure and interim and annual results. All specific actions arising are documented following each Board and Committee meeting, followed up by the Executive Directors and Company Secretary and then reviewed at the next meeting. BOARD COMMITTEES The Board is supported by the Audit, Nomination and Remuneration Committees. A report on the composition, responsibilities and key activities of the Audit Committee are set out in the Audit Committee Report and in the Directors’ Remuneration Report for the Remuneration Committee. The Nomination Committee consists of Nick Bate (Chair), Alan Aubrey (having replaced Jon Kempster during the year) and Helena Feltham. The Committee meets at least once a year and further as required, particularly as and when necessary to identify and nominate for approval by the Board, candidates for Board appointments. The Committee engages external consultants when appropriate to assist in the search for and selection of new Board members. During the year, the Nomination Committee was involved in the appointment of Alan Aubrey as Non-Executive Director and Chair of the Audit Committee and has also been involved in recruitment of a new Remuneration Committee Chair to replace Helena Feltham, who stepped down following the year end. The Committee has terms of reference in place which have been formally approved by the Board and once a year it reviews the structure, size and composition (including diversity) of the Board, considers succession planning and reviews the leadership needs of the organisation. 60 60 Annual Report and Accounts 2023GovernanceCorporate Governance (continued) Governance Principle Principle 9 cont Maintain governance structures and processes that are fit for purpose and support good decision-making by the board Principle 10 Communicate how the company is governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders Application OPERATING BOARD Authority for execution of approved policies, business plan and daily running of the business is delegated to the Executive Directors together with the Operating Board, which manages and monitors operational performance across the business and ensures effective decision-making. The Operating Board meets on a weekly basis and provides written reports to the Executive Directors on a monthly basis shortly before each Board meeting to ensure that the Board has the most up to date information possible. The Board communicates with its shareholders in a range of ways including through the Annual Report and Accounts, interim and full-year results announcements, further trading updates where required and appropriate, the AGM, investor roadshows and one-to-one meetings with major existing shareholders or potential new shareholders. The Group’s website (www.redcentricplc. com), particularly the investor section of the site, also provides a range of corporate information for shareholders, investors and the public, including all Company announcements and presentations. Group performance information is communicated to colleagues, within the limitations imposed by the Company’s public company disclosure obligations, in a number of ways, including regular colleague- wide email communications from the Executive Directors and Operating Board, monthly colleague briefing sessions and following year end, the Company launched its latest colleague survey. Further details of how the Company maintains a dialogue with customers and suppliers, both being key stakeholders, are set out in the section 172 statement at pages 26 to 29 of this Report. The following table details the attendance of the Board members at regular scheduled Board and Committee meetings held during FY23 which they were eligible to attend. Name Position (at 31 March 2023) Main Board Audit Commitee Remuneration Commitee Nomination Commitee Total Attended Total Attended Total Attended Total Attended Nick Bate - Jon Kempster (Resigned 21 July 2022) Alan Aubrey (Appointed 21 July 2022) Helena Feltham (Resigned 24 July 2023) NED NED NED Peter Brotherton CEO David Senior CFO 9 3 6 9 9 9 9 3 6 9 9 9 - 1 3 4 - - 2 1 1 2 - - 2 0 1 2 - - 1 0 1 1 - - 1 0 1 1 - - - 1 3 4 - - 61 Annual Report and Accounts 2023GovernanceCorporate Governance (continued) Non-Executive Directors Helena Feltham Independent Non-Executive Director Appointment date: 7 July 2021 Resignation date: 24 July 2023 Committee membership: Chair of the Remuneration Committee and a member of the Audit and Nomination Committees Experience and external appointments: Helena previously held executive roles at B&Q plc and was People Director at Jack Wills, Woolworths South Africa and Marks and Spencer. She also spent time in executive search with Odgers Berndtson, covering senior appointments across both public and private sectors. She has served as a non- executive director and interim chair at Ted Baker plc, as a non-executive director in the NHS, as an independent director of the Assembly of Wales and as a Justice of the Peace. Helena currently holds non-executive roles with Hostmore plc, Dogwoof, a film and distribution company and The Retail Trust. Nick Bate Independent Non-Executive Chair of the Board Appointment date: 17 November 2021 Committee membership: Chair of the Nomination Committee, member of the Remuneration Committee and interim member of the Audit Committee Experience and external appointments: Nick is an experienced chairman and non-executive director of a portfolio of companies across the data, communications, software and financial services sectors, and most recently sat on the board of directors for Nasstar plc for over 6 years. Nick has a proven track record in delivering successful growth through the application of his financial, commercial and operational skills and strong experience in corporate M&A transactions. Nick is a chartered management accountant. Alan Aubrey Independent Non-Executive Director (and Senior Independent Director Appointment date: 21 July 2022 Committee membership: Chair of the Audit Committee, interim Chair of the Remuneration Committee and a member of the Nomination Committee Experience and external appointments: Alan is an experienced executive and non-executive director, having been CEO of IP Group plc from 2006 to 2021 and having served as non-executive chair of Ceres Power Holdings plc and Proactis Holdings plc and non-executive director of Avacta Group plc. Alan currently serves as non-executive chair of DeepMatter Group plc and OxCCU Limited, and on the board of Trellix Limited and Rio AI Limited. Alan has also formerly served on the boards of several large private companies, including Oxford Nanopore and Oxford Sciences Innovation plc, and served as a non-executive director and chair of the audit committee of the Department of Business, Innovation, University and Skills (‘DIUS’, now the Department of Business, Energy and Industrial Strategy, ‘BEIS’) of the UK government. 62 62 Annual Report and Accounts 2023GovernanceCorporate Governance (continued) Executive Directors David Senior Chief Financial Officer Appointment date: 3 April 2020 Experience and external appointments: David served in the role of Finance Director of the Group since 2017, prior to his appointment as Chief Financial Officer. David is a chartered certified accountant with 20 years of experience in finance, in several senior positions with Wolseley plc. including Peter Brotherton Chief Executive Officer Appointment date: 28 November 2016. Peter served as Chief Financial Officer of the Company from 28 November 2016 to 21 November 2018 and then as Interim Chief Executive Officer from 22 November 2018 to 28 May 2019, when he was appointed as Chief Executive Officer. Experience and external appointments: Peter has over 25 years’ experience across a number of senior finance roles. Peter’s two previous roles were as Chief Financial Officer of Gametech and Chief Financial Officer at PKR Group. Prior to those two roles, from 2011 to 2014, Peter was Chief Financial Officer and then Chief Executive of Meucci Solutions NV. Meucci Solutions was an international telecommunications and managed services business. During his time at Meucci Solutions, the business saw strong sales and EBITDA growth whilst also extensively reviewing its central financial control function. Peter also had senior finance roles at Varla (UK) Limited, Cell Structures Group plc and spent five years at Kingston Communications plc, becoming Director of Finance. Peter qualified as an ACA chartered accountant at KPMG. Peter holds no external appointments. A N E X PA N D E D D ATA C E N T R E E S TAT E P R O V I D I N G A S S U R E D H O S T I N G S E R V I C E S 63 Annual Report and Accounts 2023Governance Audit Committee Report The Audit Committee Report which describes the work of the Committee in the last year. • reviewing the nature and extent of any non-audit services provided by the external Auditor. Governance The Committee reports on all such matters to the Board. During the year the Audit Committee consisted of Jon Kempster (who was Chair of the Committee until his resignation on 21 July 2022), Alan Aubrey (who replaced Jon Kempster as Chair of the Committee on 21 July 2022), and Non-Executive Director, Helena Feltham. Following the year end, on 18 July 2023, Nick Bate was appointed as an interim member of the Committee, given Helena’s resignation from the Board on 24 July 2023. The Committee meets at least three times a year at appropriate intervals in the financial reporting and audit cycle, and at other times during the year as agreed between the members of the Committee or as required. The Executive Directors are not members of the Committee but attend Committee meetings by invitation, as necessary, to facilitate its business. The Committee also meets the external auditor at least once a year without management present, to discuss their remit and any issues arising from the previous audit. Internal control and risk management The Audit Committee supports the Board in reviewing the risk management methodology and the effectiveness of internal control. The Audit Committee acknowledges that there is a requirement for continuous improvement to the control environment particularly following acquisitions completed by the Group in the year and as such, as part of integration of acquired businesses, there are ongoing plans to address risk and control weaknesses. The Group continues to operate a tiered hierarchy for risk management, with functional management of direct risks and consistent measures across all functions, and escalation of significant value risks, along with principal corporate risks, to the Group’s corporate risk register. The corporate risk register is shared and refined with the Audit Committee and Board at key intervals in the year, coordinated by the Chief Financial Officer and with reporting on mitigating actions for each risk. During the year, the Committee met four times. Attendance details for the regular scheduled meetings are provided on page 61. Key responsibilites The Committee’s terms of reference are available on the Investor section of the Group’s website. In accordance with the terms, the Committee’s responsibilities include: • monitoring the integrity of the financial statements of the Group, including all formal announcements relating to financial performance; • • • • • reviewing and reporting to the Board on significant financial reporting issues and judgements contained in any announcements of financial performance; reviewing the effectiveness of internal financial controls and internal control and risk management systems and the need for an internal audit function; reviewing the adequacy of arrangements for the raising of concerns about possible wrongdoing, procedures for detecting fraud and systems and controls for the prevention of bribery the recommendation of, appointment, re-appointment, and removal of the external Auditor; reviewing the scope and results of the external annual audit by the Auditor, their effectiveness, independence and objectivity; In FY23, having identified climate change as a principal risk for the first time in FY22, there has been an increase in focus on emerging climate change related risks with the TCFD recommendations being integrated into the Group’s risk management framework. These risks are managed by the Group’s newly formed Sustainability Committee, which provides quarterly reports to the Board. External audit The Audit Committee approved the appointment and remuneration of the external auditor, the Chief Financial Officer monitors the level and nature of non-audit services, and specific assignments are flagged for approval by the Audit Committee as appropriate. The Audit Committee reviews non- audit fees and considers implications for the objectivity and independence of the relationship with the external Auditor. The Committee maintains regular dialogue with the external auditor on ways to improve the efficiency and effectiveness of the external audit process. The responsibilities of the Board and external auditor in connection with the Group’s financial statements are set out in the Statement of Directors’ Responsibilities and Auditor’s Report respectively and details of the services provided by and fees payable to the auditor are included in note 8 to the Consolidated Financial Statements. KPMG LLP were appointed as the Group’s Auditor on 15 May 2017. This is the second year that Christopher Vaulks has been the engagement leader. 64 64 Annual Report and Accounts 2023GovernanceAudit Committee Report (continued) Financial reporting Significant reporting issues and judgements The Committee reviewed the full year results including the annual report and accounts, the preliminary results announcement and the report from the external auditor. In reviewing the statements and determining whether they were fair, balanced and understandable, the committee considered the work and recommendations of management as well as the report from the external auditor. The Committee considered the appropriateness of accounting policies, critical accounting judgements and sources of estimation uncertainty. To do this, the Committee reviewed the information provided by management and the views from the external auditors on the accounting treatments and judgements in the FY23 financial statements. In preparing the FY23 financial statements, there is judgement relating to the accounting treatment of two of the business combinations, and other judgments involving estimation, that could have a material effect on the amounts recognised in these financial statements. These judgements and estimations are detailed below. The significant judgement made in preparing these financial statements relates to the accounting treatment for the Sungard data centres and Sungard consulting business acquisitions as a single transaction. Estimates have been made for the fair value of the consideration transferred for the Sungard and 4D acquisitions, and for the fair value of intangibles assets and property, plant and equipment acquired on the same business combinations completed in the year. Further information is included in note 2. Going concern The Committee have reviewed the reports and financial models from management on the going concern assumptions when considering the FY23 results and the long-term viability of the Group. Internal financial projections and the results of stress testing the financial models were taken into account, with management applying severe but plausible downside scenarios. The Committee concluded that these financial statements are appropriate to be prepared on a going concern basis, and are satisfied with the detail and transparency of the basis of preparation disclosure and the judgement involved in determining that there is no material uncertainty. Alan Aubrey Chair of the Audit Committee 24 August 2023 NEW CYBER SECURITY DIVISION PROTECTING EVERY PART OF OUR CUSTOMERS ORGANISATION 65 Annual Report and Accounts 2023GovernanceDirectors’ Remuneration Report – Annual Statement Introduction On behalf of the Board, I am pleased to present the Directors’ Remuneration Report for the year ended 31 March 2023. As the Company is listed on the Alternative Investment Market (“AIM”), we are required to comply with AIM Rule 19 in respect of remuneration disclosures. However, we also provide additional disclosures to those required by AIM Rule 19 on a voluntary basis, in line with AIM best practice, to enable shareholders to better understand and consider our remuneration arrangements. This report is divided into three sections, these being: • • • This Annual Statement, which summarises the Committee and its work. The Remuneration Policy Report, which summarises the Company’s Remuneration Policy; and The Annual Report on Remuneration, which discloses how the Remuneration Policy was implemented in FY23 in detail and how the Policy will operate for FY24. As a Committee, we recognise the need to foster good relations with our shareholders and encourage open dialogue. The Chair of the Remuneration Committee is available for discussion with institutional investors concerning the Company’s approach to remuneration at any time. We trust you will find this Report to be informative and look forward to receiving your support at our forthcoming AGM. Alan Aubrey Interim Chair of the Remuneration Committee 24 August 2023 Annual Statement Committee members During the year the Remuneration Committee was chaired by Helena Feltham as independent Non-Executive Director and also consisted of Alan Aubrey (who replaced Jon Kempster on the Committee during the year under review) and Nick Bate. Following the year end, on 18 July 2023, Alan Aubrey was appointed interim chair of the Remuneration Committee given Helena’s resignation from the Board on 24 July 2023. The Committee meets at least twice a year and at other times during the year as agreed between the members of the Committee. The attendance record for the meetings held in the year is included on page 50. Committee responsibilities The Group is committed to maximising shareholder value over time. Each year the Remuneration Committee reviews the incentive and reward packages for the Chairman, Executive Directors and senior executives to ensure that they are aligned with the Group’s strategic objectives and financial performance, and are appropriate to attract, retain and motivate management behaviour in support of the Company’s culture and beliefs and the creation of shareholder value. The Committee has formal terms of reference which can be found in the investor section of the Group’s website. The Board (excluding the Non-Executive Directors) sets the annual base fees payable to the Non-Executive Directors and they do not receive any additional benefits, nor are they eligible to participate in any pension or incentive arrangements. Advisors to the Committee FIT Remuneration Consultants LLP was appointed to provide independent advice to the Remuneration Committee as and when required in respect of remuneration quantum and structure and developments in governance and best practice more generally. FIT is a member and signatory of the Remuneration Consultants Group and voluntarily operates under the Code of Conduct in relation to executive remuneration consulting in the UK, details of which can be found at www.remunerationconsultantsgroup.com. 66 66 Annual Report and Accounts 2023GovernanceDirectors’ Remuneration Report – Annual Statement (continued) Directors’ Remuneration Policy This section sets out the Directors’ Remuneration Policy (“Policy”). In order to deliver the Group’s strategy, the primary objectives of our Policy are: • • • to operate a transparent, simple and effective remuneration structure which encourages the delivery of Group targets in accordance with our business plan and strategy; to attract, motivate and retain the best people of the highest calibre by providing competitive and appropriate short- and long-term variable pay which is dependent upon challenging performance conditions; and to promote the Company’s culture and beliefs and promote the long-term success of the Group and ensure that our policy is aligned with the interests of, and feedback from, our shareholders. Summary of Directors’ Remuneration Policy Component Purpose and link to strategy Operation Maximum Performance Base salary To provide a competitive base salary to attract, motivate and retain directors with the experience and capabilities to achieve the strategic aims. Benefits To provide market-competitive benefits package. Pension To provide an appropriate level of retirement benefit. Annual bonus LTIP To reward performance against annual targets which support the strategic direction of Group. To drive and reward the achievement of longer- term objectives and align management with shareholders. Normally reviewed annually after considering pay levels at comparably sized listed companies and sector peers, the performance, role and responsibility of each Director, market conditions and the Company’s performance and the level of pay across the Group as a whole. Life assurance cover of 4 times salary, private medical insurance for themselves, their spouse and their children. Workforce aligned pension which may be paid as a pension and/or cash allowance if annual or lifetime limits are met. Cash bonus of up to 50% based on financial and strategic targets and a share bonus of up to 50% also based on financial and strategic targets, paid in the event of exceptional performance against targets. Conditional shares and/or nil cost or nominal cost share options. Vesting is normally subject to the achievement of challenging performance conditions, normally over a period of three years. Dividend equivalents may be awarded to the extent awards vest. Awards may be subject to malus/clawback provisions at the discretion of the Committee. All-employee share awards To align management with employees and shareholders. Awards will be consistent with prevailing HMRC tax favoured all-employee share plans. Non- Executive Directors The Committee determines the Chairman’s fee. Fees for the Non-Executive Directors are agreed by the Chairman and Chief Executive. Fees are reviewed annually taking into account the level of responsibility, relevant experience. Fees may include a basic fee and additional fees for further responsibilities. Fees are normally paid in cash. Travel and other reasonable expenses incurred in the course of performing their duties may be reimbursed. n/a n/a n/a n/a Currently 5% of salary 100% of salary 200% of salary n/a Sliding scale financial and strategic targets Performance metrics will be linked to financial and/or share price and/ or strategic performance n/a Prevailing HMRC limits n/a n/a 67 Annual Report and Accounts 2023GovernanceDirectors’ Remuneration Report – Annual Statement Service contracts The details of the Executive and Non-Executive Directors’ service contracts and appointment letters are summarised below: Executive Directors Peter Brotherton David Senior Nick Bate Helena Feltham Alan Aubrey Date of appointment 28 November 2016 3 April 2020 17 November 2021 7 July 2021 21 July 2022 Contractual notice period (months) Length of service contract at 31 March 2023 6 6 3 3 3 6 years 4 months 2 years 11 months 1 year 4 months 1 year 8 months 8 months The service contracts and letters of appointment continue in force until notice in writing is given by either the Company or the director. Implementation of the Remuneration Policy for the year ended 31 March 2023 • Salary for the CEO increased to £372,750 from 01 October 2022. Salary for the CFO remained at £200,000 (last increased on 1 October 2021); • Executive Directors received a workforce aligned pension at 5% of salary; • • Executive Directors received a cash bonus of up to 50%, and although Group EBITDA and Group Net Debt targets were missed, as a result of exceeding the Revenue target and good performance against the strategic targets, bonuses of 15% of salary for the CEO and 12% of salary for the CFO were awarded in cash for the year ended 31 March 2023; and Long Term Incentive Plan (“LTIP”) awards were granted to the CEO and CFO in October 2022 over shares with a value equal to 200% of salary with the first 100% of salary based on absolute Total Shareholder Return (“TSR”) between 5% and 10% p.a. and the additional 100% of salary based on stretch absolute TSR targets of 10% to 15% p.a. Implementation of the Remuneration Policy for the year ending 31 March 2024 • The CEO will receive a revised salary of £383,993 and the CFO will receive a revised salary of £220,000, both with effect from 01 July 2023; • Pension provision will continue at 5% of salary in line with the workforce provision; • Annual cash bonus potential will continue to be capped at 50% of salary for FY24. 80% of the bonus will be payable against financial targets and 20% will be based on strategic targets. A share bonus of up to 50% of salary will be payable in the event of exceptional performance against financial and strategic targets; and • 2023 LTIP awards will be granted to Executive Directors in line with the annual grant policy over shares with a value equal to 200% of salary with the first 100% of salary based on absolute Total Shareholder Return (“TSR”) between 5% and 10% p.a. and the additional 100% of salary based on stretch absolute TSR targets of 10% to 15% p.a. Details of the awards will be set out in the RNS issued immediately following the grant date. 68 68 Annual Report and Accounts 2023GovernanceDirectors’ Remuneration Report – Annual Statement (continued) Executive Director’s share awards in the Company Details of share options in the Company held by the Directors during the year are as follows: Peter Brotherton David Senior (a) (b) (c) (d) (e) (a) (b) (c) (e) (f) 0.1 0.1 0.1 99.9 0.1 0.1 0.1 0.1 0.1 96.1 Exercise price (p) Balance, 31 March 2022 Granted Exercised Balance, 31 March 2023 - 242,915 554,326 18,023 621,250 379,267 242,915 554,326 18,023 - - - - - 621,250 (379,267) - - - - 1,194,531 621,250 (379,267) 1,436,514 100,000 129,555 312,296 - - - - - 333,334 18,736 (100,000) - - - - - 129,555 312,296 333,334 18,736 541,851 352,070 (100,000) 793,921 (a) The options were granted on 28 June 2019 under the Company’s LTIP. The options vested post the release of the Group’s results for the year ended 31 March 2022 following the achievement of performance conditions related to the growth in share price and were exercised by the CEO and CFO on 14 September 2022. (b) The options were granted on 8 December 2020 under the Company’s LTIP. The options will vest post the release of the Group’s results for the year ended 31 March 2023 subject to the achievement of performance conditions related to the growth in share price. (c) The options were granted on 18 November 2021 under the Company’s LTIP. The options will vest three years from grant subject to absolute Total Shareholder Return (TSR) Targets. For awards up to 100% of salary, 25% will vest for TSR of 5% p.a. increasing pro-rata to 100% vesting for TSR of 10% p.a. For awards between 100% and 200% of salary, 0% will vest for TSR of 10% p.a. increasing pro-rata to 100% vesting for TSR of 15% p.a. (d) The options were granted on 23 December 2021 under the SAYE option plan under which employees contribute a monthly amount which is saved over three years to buy shares. The options are exercisable from 1 February 2025. There are no performance conditions. (e) The options were granted on 12 October 2022 under the Company’s LTIP. The options will vest three years from grant subject to absolute Total Shareholder Return (TSR) Targets. For awards up to 100% of salary, 25% will vest for TSR of 5% p.a. increasing pro-rata to 100% vesting for TSR of 10% p.a. For awards between 100% and 200% of salary, 0% will vest for TSR of 10% p.a. increasing pro-rata to 100% vesting for TSR of 15% p.a. (f) The options were granted on 26th August 2022 under the SAYE option plan under which employees contribute a monthly amount which is saved over 3 years to buy shares. The options are exercisable from 01 October 2025. There are no performance conditions. 69 Annual Report and Accounts 2023GovernanceDirectors’ Remuneration Report – Annual Statement (continued) Annual Report on Remuneration Single total figure of remuneration for Directors The remuneration of the Directors in respect of FY23, with prior year comparatives, was as follows: Year Base Salary / Fees Annual Bonus1 Pension Share- based payments £000 £000 £000 £000 Executive Peter Brotherton David Senior Non-Executive Directors Nick Bate Helena Feltham Alan Aubrey (appointed 21 July 2022) Former Directors Jon Kempster (resigned 21 July 2022) Ian Johnson (resigned 17 November 2021) Stephen Vaughan (resigned 28 April 2021) Total FY23 FY22 FY23 FY22 FY23 FY22 FY23 FY22 FY23 FY22 FY23 FY22 FY23 FY22 FY23 FY22 FY23 FY22 368 328 200 180 85 31 50 37 38 - 25 49 - 54 - 11 766 690 Total £000 831 863 339 293 85 31 50 37 38 - 25 49 - 54 - 11 54 - 24 - - - - - - - - - - - - - 16 15 11 8 - - - - - - - - - - - - 393 2 520 3 104 4 105 5 - - - - - - - - - - - - 78 - 27 23 497 625 1,368 1,338 1. The annual bonus plan for FY23 was based on sliding scale Revenue (15%), EBITDA (50%), Group Net Debt (15%) and Strategic targets (20%). Although the threshold Group EBITDA and Group Net Debt targets were missed, as a result of exceeding the Revenue target and good performance against the strategic targets, bonuses of 15% of salary for the CEO and 12% of salary for the CFO were awarded for the year ended 31 March 2023. As the awards are below the 50% of salary deferral threshold, the bonus awards were paid in cash. 2. On 14 September 2022, Peter Brotherton exercised options over 379,267 ordinary shares of 0.1p each at a price of 103.5 pence per Ordinary Share resulting in a pre-tax gain of £392,541. 3. On 23 November 2021 Peter Brotherton exercised options over 298,879 ordinary shares of 0.1p each at a price of £1.24 resulting in a pre-tax gain of £370,493. The share-based payments charge for the year includes £149,996 in relation to an allotment of shares to Peter Brotherton. The allotment was made for over achievement against bonus targets in the financial year ended 31 March 2021 and the allotted shares cannot be sold for a period of 2 years from issue. 4. On 14 September 2022, David Senior exercised options over 100,000 ordinary shares of 0.1p each at a price of 103.5 pence per Ordinary Share resulting in a pre-tax gain of £103,500. 70 70 Annual Report and Accounts 2023GovernanceDirectors’ Remuneration Report – Annual Statement (continued) 5. On 23 November 2021 David Senior exercised options over 20,000 ordinary shares of 0.1p each at a price of £1.24 resulting in a pre-tax gain of £24,792. The share-based payments charge for the year includes £79,950 in relation to an allotment of shares to David Senior. The allotment was made for over achievement against bonus targets in the financial year ended 31 March 2021 and the allotted shares cannot be sold for a period of 2 years from issue. Directors’ interests in shares The interests (both beneficial and family interests) of the directors in office at the date of this report in the share capital of the Company were as follows: Executive Peter Brotherton David Senior Non-Executive Nick Bate Helena Feltham Alan Aubrey Interests in ordinary shares at 31 March 2023 Interests in ordinary shares at 31 March 2022 Interests in share- based incentive options at 31 March 2023 Interests in share- based incentive options at 31 March 2022 437,136 106,550 40,000 - 40,650 438,571 56,550 1,436,514 793,921 1,194,531 541,851 - - - - - - - - - Relative importance of spend on pay The table below shows the Group’s expenditure on shareholder distributions (including dividends) and total employee pay expenditure. Additional information on the number of employees, total revenue and underlying profit has been provided for context. Employee expenditure Distributions to shareholders Average number of employees Revenue Adjusted EBITDA Share price Year ended 31 March 2023 Year ended 31 March 2022 £000 34,479 5,593 588 141,674 24,492 £000 22,851 5,627 486 93,328 23,713 Change % 50.9% (0.6%) 21.0% 51.8% 3.3% The market price of the Company’s shares on 31 March 2023 was 135.00p per share. The highest and lowest market prices during the FY23 were 143.50p and 99.99p respectively. Alan Aubrey Interim Chair of the Remuneration Committee 24 August 2023 71 Annual Report and Accounts 2023Governance Directors’ Report The Directors presents their annual report together with the audited financial statements for FY23. 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 1-27 contains a review of the business, future developments and the principal risks and uncertainties. Dividends A final dividend payment of 2.4p per share is expected to be paid on 19 January 2024, subject to approval at the Company’s AGM, to shareholders on the register at the close of business on 8 December 2023 with shares going ex-dividend on 7 December 2023. The last day for Dividend Reinvestment Plan elections is 27 December 2023. Substantial shareholders As at 31 March 2023 and 31 July 2023 (being the latest practicable date before the publication of this report) the Company had been notified of the following significant interests in 3% or more in its ordinary shares: 31 March 2023 Number 31 March 2023 % 31 July 2023 Number 31 July 2023 % Kestrel Investment Partners Lombard Odier Asset Management ND Capital Investments Ltd Slater Investments Harwood Capital Chelverton Asset Management 29,148,518 25,391,824 24,840,868 18,550,768 17,084,000 7,626,122 18.65% 16.25% 15.90% 11.87% 10.93% 4.88% 30,834,974 25,727,201 24,840,868 18,550,768 17,081,500 5,870,000 As of 31 July 2023, the Company’s issued share capital is 156,263,260 ordinary shares. 19.73% 16.46% 15.90% 11.87% 10.93% 3.76% Directors and their interests The following were Directors of Redcentric plc during the year and at the date of approval of these financial statements: • Nick Bate • Alan Aubrey (appointed 21 July 2022) • Helena Feltham (resigned 24 July 2023) • Peter Brotherton • David Senior • Jon Kempster (resigned 21 July 2022) Details of Directors’ remuneration, service agreements and interests in the share capital of the Company are provided in the Directors’ Remuneration Report on pages 55 to 57. Details of the Directors’ contracts, remuneration and share options granted are also set out in the Annual report on remuneration, on page 58 and 59. All Directors will retire in accordance with the terms of the Articles of Association of the Company and, being eligible, will offer themselves for re-election at the forthcoming AGM. 72 72 Annual Report and Accounts 2023GovernanceDirectors’ Report (continued) Directors’ indemnities and liability insurance As permitted by the Articles of Association, the Directors have the benefit of an indemnity which is a qualifying third- party indemnity provision as defined by Section 234 of the Companies Act 2006. The indemnity was in force throughout the last financial year and is currently in force. The Company also purchased and maintained Directors’ and Officers’ liability insurance throughout the financial year in respect of itself and its Directors. Employees 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 colleagues with information on matters of concern to them (including through Group-wide announcements and all employee calls), consulting them or their representatives regularly (including through colleague forums, roadshows, the Company’s newsletter and the colleague survey), so that their views can be considered when making decisions that are likely to affect their interests. Colleague involvement in the Group’s performance is encouraged (including through employee share schemes such as the Save As You Earn Scheme), as achieving a common awareness on the part of all colleagues of the financial and economic factors affecting the Group plays a major role in maintaining its relationship with its employee. The Group is committed to employment policies, which follow best practice, based on equal opportunities for all colleagues, 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. For further information on our colleagues see pages 23 to 26 of our Corporate Responsibility statement. Going concern The Group’s activities and an outline of the developments taking place in relation to its services and marketplace are considered in the strategic report on pages 1 to 27. A commentary on the revenue, trading results and cash flows is provided in the financial review on pages 7 to 13. Note 3 to the financial statements sets out the Group’s financial risks. The Group is forecast to be profitable and is cash generative with high and continuing levels of recurring revenue and high levels of cash conversion expected for the foreseeable future. 73 The consolidated financial statements have been prepared and approved by the directors in accordance with applicable law and UK-adopted international accounting standards. The financial statements are prepared on a going concern basis which the Directors believe to be appropriate for the following reasons. The Group meets its day to day working capital requirements from operational cash flows, a revolving credit facility, an asset financing facility and leasing arrangements (see note 24). The Directors have prepared cash flow forecasts for a period of at least 12 months from the date of approval of these financial statements (the “going concern assessment period”) which indicate that, taking account of reasonably possible downsides on the operations and its financial resources, the Group and the Company will have sufficient funds to meet their liabilities as they fall due for that period, and will comply with debt covenants over that period. The Group is required to comply with financial debt covenants for adjusted leverage (net debt to adjusted EBITDA), cashflow cover (adjusted cashflow to debt service, where adjusted cashflow is defined as adjusted EBITDA less tax paid, dividend payments, IFRS16 lease repayments and cash capital expenditure) and provisions relating to guarantor coverage such that guarantors must exceed a prescribed threshold of the Group’s gross assets, revenue and adjusted EBITDA. The guarantors are Redcentric plc and Redcentric Solutions Limited. Covenants are tested quarterly each year. Following the acquisitions made in the year, the Group has invested heavily in integration and efficiency programmes which are expected to deliver significant benefits to the business from FY25 onward. In anticipation of the effect of those investments on continued covenant compliance, in March 2023 the Directors agreed an amendment to the borrowings facility agreement with the banking syndicate to apply less stringent debt covenant requirements for the quarters ended March and June 2023 and quarters ending September and December 2023 (see note 24 for details). There were no other material changes to the terms and conditions of the borrowings because of this amendment. The Directors’ forecasts in respect of the going concern assessment period have been built from the detailed Board approved budget for the year ending 31 March 2024 and forecasts for the year ending 31 March 2025, and the going concern assessment takes account of the updated debt covenant requirements agreed in the amended agreement. The forecasts include a number of assumptions in relation to order intake, renewal and churn rates, EBITDA margin improvements, capital expenditure requirements to service our customers and the full year impact of the further acquisitions made in FY23 and associated synergies and efficiencies. Revenue assumptions reflect pre-covid levels achieved, which Annual Report and Accounts 2023GovernanceDirectors’ Report (continued) Going concern (continued) have been adjusted for the enlarged customer base and additional products following the acquisitions made in FY23. Both the base case and sensitised forecasts (detailed below) include significant utilisation of the Group’s asset financing facility. Whilst the Group’s trading and cash flow forecasts have been prepared using current trading assumptions, the operating environment continues to present several challenges which could negatively impact the actual performance achieved. These risks include, but are not limited to, achieving forecast levels of order intake, the impact on customer confidence as a result of general economic conditions, inflationary pressures driving continued interest rate increases and the achievability of actions the Directors consider they would take, and which are entirely within their control, should further risks materialise. Whilst cost inflation is an important consideration for the Group, the Directors have already taken positive action to mitigate this issue in respect of the Group’s single largest external cost item, electricity. The Group has entered into contracts with energy brokers and has agreed own-use commodity prices for a significant proportion of its expected FY24 and FY25 electricity volumes, which significantly reduces its exposure to price volatility. The Group can flex contracted volumes to match expected usage volumes giving 30 days’ notice. In making their going concern assessment considering these risks, the Directors have also modelled a severe but plausible downside scenario when preparing the forecasts. The severe but plausible downside scenario assumes significant economic downturn over FY24 and into FY25, impacting forecast new order intake and customer cancellations for recurring revenue, reduced non-recurring revenue levels, a reduction of synergies compared to forecast levels, and inflationary pressures driving continued interest rate rises. All of these downside scenarios have been combined into the Board’s severe but plausible assessment. Under this severe but plausible downside scenario, recurring monthly new order intake is forecast to reduce by 30% and non-recurring product and services revenues reduce by 20%. These reductions have been modelled against the base case budget and incorporate both potential supply chain issues and customer timing preferences which could impact the phasing of non-recurring revenues, and reduced investment from our customer base more generally. Increased customer cancellation rates on recurring monthly revenues have also been considered in addition to expected benefits from electricity volume efficiencies forecast in the Group’s data centres being reduced by 50%. Finally, in considering an increased cost to the Group of its variable rate revolving credit facility debt, UK interest rates are modelled to continue to increase by 0.5% per quarter, to a maximum of 7%. In isolation, each individual downside factor is plausible, however in order to demonstrate the severity of circumstances that would result in the Group coming close to being unable to comply with debt covenants, the above scenarios have been modelled simultaneously in the severe but plausible downside scenario. The Directors note the uncertainties surrounding the timing and extent of non-recurring revenues from quarter to quarter, and the timing and extent of capital expenditure, with increased utilisation of the Group’s asset financing facility modelled under both the base case budget and the severe but plausible downside scenario. As a result, the Directors continue to closely monitor quarterly liquidity together with debt covenant compliance forecasts. Under the severe but plausible downside scenario outlined above, there is limited covenant headroom available throughout the going concern assessment period. As a result, the Directors expect that the final dividend for FY23, which is to be considered for approval at the AGM on 28 September 2023, will be paid in the final quarter of the financial year FY24. The cashflow forecasts prepared and as described above, include a final FY23 dividend payment in January 2024 and the Directors will continue to monitor quarterly liquidity and debt covenant compliance and the timing of subsequent dividend payments. While the Directors consider that the downside scenario modelled represents a severe stress, additional mitigating actions remain available that have not been modelled including the rephasing of non-essential capital expenditure, and the rephasing or reduction of certain non-essential costs. Under the severe but plausible downside scenario modelled, the forecasts demonstrate that the Group is expected to maintain sufficient liquidity and will continue to comply with its debt covenants throughout the going concern assessment period, though covenant headroom is limited throughout and the increased utilisation level of the Group’s asset financing facility is required to ensure continued compliance with debt covenants. The Directors therefore remain confident that the Group and parent Company have adequate resources to continue to meet their liabilities as and when they fall due within a period of at least 12 months from the date of approval of these financial statements, and have therefore prepared the financial statements on a going concern basis. 74 74 Annual Report and Accounts 2023GovernanceDirectors’ Report (continued) Purchase of own shares Corporate governance The authority to make purchases of the Company’s shares on its behalf was given by resolution of the shareholders at the Company’s 2019 and 2020 AGM, and in September 2019 the Company announced that it had approved a share buyback programme of the Company’s ordinary shares for an aggregate purchase price of up to £2million (the “Programme”). The Company announced shortly after the end of FY20 that the Programme would be temporarily halted until such time as the outlook around COVID-19 became more certain and in November 2020, in the announcement of its audited results for the six months to 30 September 2020, the Company announced that it would reinstate the Programme. During FY22 the Company recommenced the Programme and obtained approval from the Board to increase the aggregate consideration payable under the Programme to £5 million in total, resulting in a 2,160,500 shares repurchased and a closing balance of 2,170,203 at the end of FY22. No further purchases were made in FY23, though several share options exercised during the year were settled using treasury shares meaning the number of shares held in treasury at 31 March 2023 was 728,722. Annual General Meeting The 2023 AGM will be held at the offices of finnCap plc at 1 Bartholomew Close, London EC1A 7BL at 13:30 on 28 September 2023. The notice convening the AGM and what shareholders should do to register their intention to attend and/or vote by proxy are contained in a separate circular to shareholders and on the Group’s website at https://www.redcentricplc.com/investors/shareholder- documents/. The Group’s statement on corporate governance can be found in the Corporate Governance section of this Report and forms part of this Directors’ Report and is incorporated by reference. The Group’s financial risk management objectives and policies are described in note 3 to the financial statements. Disclosure of information to the auditor The Directors of the Company at the date of approval of these financial statements confirm, as far as they are aware, that there is no relevant audit information of which the auditor is unaware. The Directors have individually confirmed that they have taken all reasonable steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that it has been communicated to the auditor. Subsequent events There have been no significant events between the balance sheet date and the date of approval of these accounts. Please refer to note 34 for the specific recognition of subsequent events that may have an impact to the readers of these accounts. By order of the Board Nick Heron Company Secretary 24 August 2023 75 Annual Report and Accounts 2023Governance Statement of Directors’ Responsibilities The Directors are responsible for preparing this Report and the Group and Company financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and parent company financial statements for each financial year. Under the AIM Rules of the London Stock Exchange they are required to prepare the Group financial statements in accordance with UK-adopted international accounting standards and applicable law and they have elected to prepare the parent Company financial statements in accordance with UK accounting standards and applicable law, including FRS 101 Reduced Disclosure Framework. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent company and of the Group’s profit or loss for that period. In preparing each of the Group and parent company financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the directors are also responsible for preparing a Strategic Report and a Directors’ Report that complies with that law and those regulations. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. • make judgements and estimates that are reasonable, relevant, reliable and prudent; By order of the Board • • • • for the Group financial statements, state whether they have been prepared in accordance with UK-adopted international accounting standards; Nick Heron Company Secretary 24 August 2023 for the parent company financial statements, state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; assess the Group and parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and use the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so. 76 Annual Report and Accounts 2023Financial statementsIndependent auditor’s report to the members of Redcentric plc 1. Our opinion is unmodified We have audited the financial statements of Redcentric plc (“the Company”) for the year ended 31 March 2023 which comprise the Consolidated Statement of Comprehensive Income, Consolidated Statement of Financial Position, Consolidated Cash Flow Statement, Consolidated Statement of Changes in Equity, Company Balance Sheet, Company Statement of Changes in Equity and the related notes, including the accounting policies in note 1 to both the consolidated financial statements and Company financial statements. In our opinion: — the financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 31 March 2023 and of the Group’s loss for the year then ended; — the Group financial statements have been properly prepared in accordance with UK-adopted international accounting standards; — the parent Company financial statements have been properly prepared in accordance with UK accounting standards, including FRS 101 Reduced Disclosure Framework; and — the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are described below. We have fulfilled our ethical responsibilities under, and are independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed other entities of public interest. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. 77 Overview Materiality: Group financial statements as a whole Coverage £1,100,000 (2022: £755,000) 0.8% (2022: 0.8%) of Group Revenue 96% (2022: 94%) of total profits and losses that make up Group (loss)/profit before tax Key audit matters vs 2022 ▲ ◄► ◄► ▲ New risks Going concern Recurring risks Revenue recognition Event driven Recoverability of parent Company’s investment in subsidiaries New: Valuation of intangible assets acquired in the Sungard and 4D Data Centres acquisitions and valuation of certain property, plant and equipment acquired as part of the Sungard business combination Annual Report and Accounts 2023Financial statements2. Key audit matters: our assessment of risks of material misstatement Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In arriving at our audit opinion above, the key audit matters, in decreasing order of audit significance, were as follows: Going concern (Group and parent Company) See Note 1.1 to the Group financial statements Refer to pages 73-74 (Directors’ Report) and page 65 (Audit Committee Report) The risk Disclosure quality The financial statements explain how the Board has formed a judgement that it is appropriate to adopt the going concern basis of preparation for the Group and parent Company. That judgement is based on an evaluation of the inherent risks to the Group’s and Company’s business model and how those risks might affect the Group’s and Company’s financial resources or ability to continue operations over a period of at least a year from the date of approval of the financial statements. The risks most likely to adversely affect the Group’s and Company’s available financial resources and/or metrics relevant to debt covenants over this period were: • The timing and extent of cash outflows relating to dividends and capital expenditure and their resulting impacts on the Group’s debt covenant compliance; • A reduction in non-recurring revenues as a result of supply chain issues or loss of customer confidence and uncertainties over the timing and extent of non-recurring revenues from quarter to quarter; • • The inability to achieve the growth and new order intake targets in the Group’s base case forecasts; The failure to achieve forecast energy efficiencies; • Adverse impacts from inflationary pressures, such as interest rates; and • The inability to utilise the Group’s asset financing facility to fund certain items of capital expenditure. There are also less predictable but realistic second order impacts, such as the erosion of customer confidence resulting in increased cancellation rates for recurring revenues, which could result in a rapid reduction of available financial 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 significant 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 response We considered whether these risks could plausibly affect the liquidity or covenant compliance in the going concern period by assessing the directors’ sensitivities over the level of available financial resources and covenant thresholds indicated by the Group’s financial forecasts taking account of severe, but plausible, adverse effects that could arise from these risks individually and collectively. Our procedures also included: — Funding assessment: we read the revolving credit facility (RCF) agreement and amendment letter to understand the terms, including covenant requirements. We reperformed the key financial covenants calculations for 30 September 2023, 31 December 2023, 30 March 2024 and 30 June 2024 assessing compliance at these dates. We considered the adjustments made in the adjusted cashflow and adjusted EBITDA for the covenant calculations, considering the appropriateness compared to the loan agreements and historical accepted practice with the lenders. — Historical comparisons: we assessed the ability of the Group to accurately forecast by comparing historical results to forecasts for key metrics. We assessed the most recent years’ performance against budgets, and challenged the assumptions over the going concern period based on historical performance. — Test of detail: we critically assessed the cash flow forecasts by considering the appropriateness of key assumptions used in preparing those projections, with a focus on revenue growth, cost inflation and energy efficiency assumptions and the timing and extent of cashflows, including capital expenditure and dividend payments. We evaluated these via enquiries with the Chief Executive Officer, Chief Financial Officer, and inspected the forecasts and associated papers. — Our sector experience: we assessed the projections and assumptions by reference to our knowledge of the business and general market conditions including the potential risk of management bias. — Sensitivity analysis: we critically challenged the downside sensitivities assessing whether these represented severe but plausible scenarios based on our knowledge of the business and considering the most recent trading results. We also challenged the mitigating actions, to identify whether these were reasonable, achievable and within the control of the Group. — Evaluating directors’ intent: we evaluated the achievability of the actions the directors have modelled in the base case and severe but plausible downside scenario, including the increased utilisation of the Group’s asset financing facility and the timing of dividend payments, taking into account the extent to which the directors can control the timing and outcome of these. We obtained written representations from the directors with regards to the adequacy of the going concern disclosure, and the timing and evaluation of capital expenditure and dividend payments. — Assessing transparency: we assessed whether the matters included in the going concern disclosure give a full and accurate description of the directors’ assessment, including the judgements made, identified risks and mitigating actions. 78 Annual Report and Accounts 2023Financial statementsValuation of intangible assets acquired in the Sungard and 4D Data Centres acquisitions and valuation of certain property, plant and equipment acquired as part of the Sungard business combination (Valuation of intangible assets acquired (including goodwill): £23.5 million) (Valuation of certain property, plant and equipment acquired as part of total property, plant and equipment acquired in the Sungard business combination: £9.6 million) Refer to page 65 (Audit Committee Report), page 92 (accounting policy), page 97 critical accounting judgements, key sources of estimation uncertainty and other areas of estimation) and pages 124-126 (financial disclosures) The risk Our response Subjective estimate and valuation During the year the Group acquired certain business and assets relating to three data centres, and a consulting business, from Sungard Availability Services (UK) Limited (in administration) (‘Sungard’). The Group also completed the acquisition of 4D Data Centres Limited (‘4D’). The Group has performed fair value assessments of the identified acquired intangible assets arising from these business combinations. The assessment of the fair value of intangible assets acquired in each business combination involves estimation uncertainty, including forecasting future performance on a market participant basis. As at the date of the acquisitions, there was a high degree of subjectivity in assessing certain assumptions applied by the Group in the discounted cash flow models used to calculate the acquisition date fair value of these assets, including discount rates, EBIT growth and customer attrition rates. The Group has also performed fair value assessments of the acquired tangible assets, including the property, plant and equipment acquired in the acquisitions of the data centres from Sungard. As at the date of the acquisition, there was a high degree of subjectivity in assessing certain assumptions applied by the Group in establishing the depreciated replacement cost and resulting fair values for the property, plant and equipment acquired, including replacement costs, useful economic lives and utilisation levels. The effect of these matters is that, as part of our risk assessment, we determined that the valuation of intangible assets acquired in the Sungard and 4D Data Centres acquisitions and the valuation of certain property, plant and equipment acquired in the Sungard business combination has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole. We performed the tests below rather than seeking to rely on any of the Group’s controls because the nature of the balance is such that we would expect to obtain audit evidence primarily through the detailed procedures described. Our procedures included: — Test of detail: we inspected the purchase agreements, board minutes and market announcements and assessed whether firstly, the purchase price allocation accounting reflected these documents, as well as comparing the intangible and tangible assets identified by management to our understanding of the rationale for the purchase based on our inspection of these documents. — Assessment of experts: we assessed the competence, capabilities and objectivity of the external valuation experts engaged by the Group to assist in valuing the intangible assets and property, plant and equipment acquired by performing independent research on the qualifications and experience of management’s expert, and evaluating the engagement terms. — Our valuation expertise: we involved our own valuation specialists to assist us in assessing the appropriateness of the valuation methodologies applied for the intangible assets acquired in the Sungard and 4D acquisitions and the valuation of property, plant and equipment acquired with the Hounslow data centre from Sungard. Our specialists assisted in challenging the key assumptions used such as discount rate, growth and customer attrition rates for intangible assets, and replacement costs, useful economic lives and utilisation levels for property, plant and equipment. — Benchmarking assumptions: we challenged the discount rate, EBIT growth rate and useful economic lives by comparing to internally and externally derived data. — Physical inspection: we performed a site visit to the largest data centre of the Sungard acquisition which comprised the majority of the fair value of acquired property, plant and equipment and we observed the existence of the major asset categories included in the property, plant and equipment valuation. — Assessing transparency: we considered the adequacy of the Group’s disclosures in respect of the valuation of the identified intangible assets and property, plant and equipment acquired, including the extent of estimation uncertainty and key assumptions applied in the valuation methodologies. 79 Annual Report and Accounts 2023Financial statementsThe risk Our response Revenue recognition Revenue recognition cut-off (£141.7 million; 2022: £93.3 million) Refer to pages 89-91 (accounting policy) and page 99 (financial disclosures) We identified potential incentives and pressures on the Directors relating to investor expectations, compliance with debt covenants and the achievement of bonus targets which increase the risk of fraudulent revenue recognition. Results for any given financial reporting period are expected to be affected by the revenue recognition policies in place, particularly for the Group’s recurring revenue stream which represents 90.6% of total revenues, and the accurate accrual and deferral of related amounts at the year-end. There is a risk that amounts recorded in recurring revenue could be subject to manipulation, particularly through the inappropriate accrual and deferral of revenue amounts at the year end. This is particularly the case for the Group’s recurring revenue stream, where there are manual aspects of the revenue recognition process, particularly relating to the accrual and deferral of revenue amounts, which provide an opportunity for manipulation. There is a resulting risk that revenue transactions around the year end could be fraudulently recorded, such that revenue is not recognised in line with relevant accounting standards, and in particular that accrued and deferred income recorded at the year end do not exist or are incomplete.  We performed the detailed tests below rather than seeking to rely on any of the Group's controls because our knowledge of the design of these controls indicated that we would not be able to obtain the required evidence to support reliance on controls. Our procedures included: — Tests of detail:    for a sample of revenue transactions recognised one month either side of the balance sheet date, we assessed whether revenue was recognised in the appropriate period by comparing to supporting documentation such as invoices, contracts and customer correspondence; for a sample of credit notes raised in the two months after the balance sheet date, we assessed whether the credit note related to revenue recognised in the year and if this was indicative of inappropriate revenue recognition through inquiry and inspection of source documentation; for a sample of customer balances, we assessed the appropriateness of deferred and accrued income at the year-end through inspection of contracts, invoices, customer correspondence and recalculations;  we assessed the year-end bank reconciliations, and obtained bank confirmations to obtain audit evidence over the Group’s cash balance and to assess the appropriateness of any significant reconciling items as such items may be indicative of inappropriate revenue recognition; and for unexpected revenue journal postings (where the opposite side of the journal was posted to an account which would not be expected based on our understanding of business processes and transaction flows), we assessed the nature of the posting and obtained supporting documentation where available. — Assessing transparency: we considered the adequacy of the Group’s disclosures in respect of revenue recognition policies and the timing of revenue recognition. Recoverability of parent Company’s investment in subsidiaries (£105.1 million; 2022: £104.1 million) Low risk, high value The carrying amount of the parent Company’s investments in subsidiaries represents 100% (2022: 100%) of the Company’s total assets. Refer to page 134 (accounting policy) and pages 136-137 (financial disclosures) Their recoverability is not at a high risk of significant misstatement or subject to significant judgement. However, due to their materiality in the context of the parent Company financial statements, this is considered to be the area that had the greatest effect on our overall parent Company audit. We performed the tests below rather than seeking to rely on any of the Company’s controls because the nature of the balance is such that we would expect to obtain audit evidence primarily through the detailed procedures described. Our procedures included: — Test of detail: we compared the carrying amount of investments with an estimate of value in use based on forecast future cashflows, assessing the sensitivity of the resulting headroom to reasonably possible changes in assumptions. — Comparing valuations: We compared the carrying amount of the Parent Company’s investments to the Group’s market capitalisation. 80 Annual Report and Accounts 2023Financial statements3. Our application of materiality and an overview of the scope of our audit Total revenue £141.7m (2022: £93.3m) Group materiality £1,100,000 (2022: £755,000) Materiality for the Group financial statements as a whole was set at £1,100,000 (2022: £755,000), determined with reference to a benchmark of total revenue of £141.7 million (2022: £93.3 million), of which it represents 0.8% (2022: 0.8%). We consider total revenue to be the most appropriate benchmark as it provides a more stable measure year on year than group profit before tax, and is reflective of the size and complexity of the Group. Materiality for the parent Company financial statements as a whole was set at £522,000 (2022: £514,000), determined with reference to a benchmark of parent Company total assets, of which it represents 0.5% (2022: 0.5%). In line with our audit methodology, our procedures on individual account balances and disclosures were performed to a lower threshold, performance materiality, so as to reduce to an acceptable level the risk that individually immaterial misstatements in individual account balances add up to a material amount across the financial statements as a whole. Performance materiality was set at 65% (2022: 65%) of materiality for the financial statements as a whole, which equates to £715,000 (2022: £490,000) for the Group and £339,000 (2022: £334,000) for the parent Company. We applied this percentage in our determination of performance materiality based on the level of identified misstatements and control deficiencies during the prior period. We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £55,000 (2022: £37,750), in addition to other identified misstatements that warranted reporting on qualitative grounds. Of the Group’s 6 (2022: 6) reporting components, we subjected 1 (2022: 1) to full scope audits for group purposes and 1 (2022: 0) to specified risk-focused audit procedures. The latter was not financially significant enough to require a full scope audit for group purposes, but did present specific individual risks that needed to be addressed. The components within the scope of our work accounted for the percentages illustrated opposite. For the residual 4 (2022: 5) components, we performed analysis at an aggregated group level to re-examine our assessment that there were no significant risks of material misstatement within these. The work on the 2 (2022: 1) components, and the audit of the parent Company, was performed by the Group team. Component materialities ranged from £388,000 to £800,000 (2022: £612,000), having regard to the mix of size and risk profile of the Group across the components. The scope of the audit work performed was predominately substantive as we placed limited reliance upon the Group's internal control over financial reporting. £1.1m Whole financial statements materiality (2022: £0.75m) £0.715m Whole financial statements performance materiality (2022: £0.49m) £0.8m Range of materiality at 2 components £0.39m-£0.8m (2022: at 1 component £0.61m) £55,000 Misstatements reported to the audit committee (2022: £37,750) Total revenue Group materiality Group revenue Total profits and losses that make up group (loss)/profit before tax 9 96% (2022: 94%) 94 87 3 99% (2022: 95%) 95 96 Group total assets 100% (2022: 99%) 99 100 Key: Full scope for group audit purposes 2023 Specified risk-focused audit procedures 2023 Full scope for group audit purposes 2022 Residual components 81 Annual Report and Accounts 2023Financial statements4. Going concern The directors have prepared the financial statements on the going concern basis as they do not intend to liquidate the Group or the Company or to cease their operations, and as they have concluded that the Group’s and the Company’s financial position means that this is realistic. They have also concluded that there are no material uncertainties that could have cast significant doubt over their ability to continue as a going concern for at least a year from the date of approval of the financial statements (“the going concern period”). An explanation of how we evaluated management’s assessment of going concern is set out in the related key audit matter in section 2 of this report. Our conclusions based on this work: — we consider that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate; — we have not identified, and concur with the directors’ assessment that there is not, a material uncertainty related to events or conditions that, individually or collectively, may cast significant doubt on the Group’s or Company's ability to continue as a going concern for the going concern period; and — we found the going concern disclosure in note 1.1 to be acceptable. 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 above conclusions are not a guarantee that the Group or the Company will continue in operation. 5. Fraud and breaches of laws and regulations – ability to detect Identifying and responding to risks of material misstatement due to fraud To identify risks of material misstatement due to fraud (“fraud risks”) we assessed events or conditions that could indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud. Our risk assessment procedures included: — Enquiring of directors and the Audit Committee, and inspection of policy documentation as to the Group’s high-level policies and procedures to prevent and detect fraud, as well as whether they have knowledge of any actual, suspected or alleged fraud; — Reading Board, Audit Committee, and Remuneration Committee minutes; — Considering remuneration incentive schemes and performance targets for management; and — Using analytical procedures to identify any unusual or unexpected relationships. We communicated identified fraud risks throughout the audit team and remained alert to any indications of fraud throughout the audit. As required by auditing standards, and taking into account possible pressures to meet profit targets in a given year, we perform procedures to address the risk of management override of controls and the risk of fraudulent revenue recognition, in particular the risk that Group management may be in a position to make inappropriate accounting entries; and the risk that revenue is overstated or understated through recording revenues in the wrong period. We did not identify any additional fraud risks. Further detail in respect of the revenue recognition cut-off risk is set out in the key audit matter disclosures in section 2 of this report. We performed procedures including: — Identifying journal entries and other adjustments to test based on certain risk criteria, and comparing the identified entries to supporting documentation. This included those journals with unexpected account pairings or posted to seldom used accounts; 82 — Assessing if any bias is present in significant management judgements in relation to the accounting for the Sungard business combinations as a single transaction; — Assessing significant accounting estimates for bias; — Evaluating the business purpose of significant unusual transactions; and — Performing procedures over revenue recognition as disclosed in section 2 of this report. Identifying and responding to risks of material misstatement related to compliance with laws and regulations We identified areas of laws and regulations that could reasonably be expected to have a material effect on the financial statements from our general commercial and sector experience and through discussion with the directors and other management (as required by auditing standards), and from inspection of the Group’s legal correspondence and discussed with the directors and other management the policies and procedures regarding compliance with laws and regulations. We communicated identified laws and regulations throughout our team and remained alert to any indications of non- compliance throughout the audit. The potential effect of these laws and regulations on the financial statements varies considerably. Firstly, the Group is subject to laws and regulations that directly affect the financial statements including financial reporting legislation (including related companies legislation), distributable profits legislation and taxation legislation and we assessed the extent of compliance with these laws and regulations as part of our procedures on the related financial statement items. Secondly, the Group is subject to many other laws and regulations where the consequences of non-compliance could have a material effect on amounts or disclosures in the financial statements, for instance through the imposition of fines or litigation. We identified the following areas as those most likely to have such an effect: health and safety, anti-bribery and corruption, employment law, data protection regulations, environmental protection legislation and contract legislation. Auditing standards limit the required audit procedures to identify non-compliance with these laws and regulations to enquiry of the directors and other management and inspection of legal correspondence, if any. Therefore if a breach of operational regulations is not disclosed to us or evident from relevant correspondence, an audit will not detect that breach. We discussed with the audit committee matters related to actual or suspected breaches of laws or regulations, for which disclosure is not necessary, and considered any implications for our audit. Context of the ability of the audit to detect fraud or breaches of law or regulation Owing to the inherent limitations of an audit, there is an unavoidable risk that we may not have detected some material misstatements in the financial statements, even though we have properly planned and performed our audit in accordance with auditing standards. For example, the further removed non- compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely the inherently limited procedures required by auditing standards would identify it. In addition, as with any audit, there remained a higher risk of non-detection of fraud, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. Our audit procedures are designed to detect material misstatement. We are not responsible for preventing non-compliance or fraud and cannot be expected to detect non- compliance with all laws and regulations. Annual Report and Accounts 2023Financial statements6. We have nothing to report on the other information in the Auditor’s responsibilities Annual Report The directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information. Strategic report and directors’ report Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities. 9. The purpose of our audit work and to whom we owe our Based solely on our work on the other information: responsibilities — we have not identified material misstatements in the strategic report and the directors’ report; — in our opinion the information given in those reports for the financial year is consistent with the financial statements; and — in our opinion those reports have been prepared in accordance with the Companies Act 2006. 7. We have nothing to report on the other matters on which we are required to report by exception 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. Christopher Vaulks (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants Quayside House 110 Quayside Newcastle upon Tyne Tyne and Wear NE1 3DX 24 August 2023 Under the Companies Act 2006, we are required to report to you if, in our opinion: — adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us; or — the parent Company financial statements are not in agreement with the accounting records and returns; or — certain disclosures of directors’ remuneration specified by law are not made; or — we have not received all the information and explanations we require for our audit. We have nothing to report in these respects. 8. Respective responsibilities Directors’ responsibilities As explained more fully in their statement set out on page 76, the directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and, parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so. 83 Annual Report and Accounts 2023Financial statementsConsolidated statement of comprehensive income for the year ended 31 March 2023 Year ended 31 March 2023 £000 Year ended 31 March 2022 £000 Note Revenue Cost of sales Gross Profit Operating costs Other operating income Adjusted EBITDA1 Depreciation of property, plant and equipment Amortisation of intangibles Depreciation of right of use assets Exceptional items Share-based payments Operating (loss)/profit Finance income Finance costs (Loss)/profit before taxation Income tax credit (Loss)/profit for the period attributable to owners of the parent Other comprehensive income Items that may be reclassified subsequently to profit or loss: Currency translation differences Deferred tax movement on share options Total comprehensive (loss)/profit for the period Earnings per share Basic (loss)/earnings per share Diluted (loss)/earnings per share 6 7 16 15 17 9 28 10 12 13 13 141,674 (40,763) 100,911 (109,938) 88 24,492 (4,636) (8,773) (10,617) (8,149) (1,256) 93,328 (33,778) 59,550 (53,046) 103 23,713 (2,745) (6,973) (4,578) (1,629) (1,181) (8,939) 6,607 - (3,530) (12,469) 3,219 (9,250) (97) 47 (9,300) (5.94p) (5.94p) - (1,071) 5,536 1,404 6,940 (26) 58 6,972 4.43p 4.36p The notes on pages 88 to 131 are an integral part of these consolidated financial statements. 1 For an explanation and reconciliation of the alternative performance measures used in this report, please refer to page 20. 84 Annual Report and Accounts 2023Financial statementsConsolidated statement of financial position as at 31 March 2023 Note 31 March 2023 £000 31 March 2022 £000 Non-Current Assets Intangible assets Property, plant and equipment Right-of-use assets Deferred tax asset Current Assets Inventories Trade and other receivables Corporation tax receivable Cash and cash equivalents Total Assets Current Liabilities Trade and other payables Corporation tax payable Bank and term loans Lease liabilities Provisions Contingent consideration Non-Current Liabilities Bank and term loans Lease liabilities Provisions Total Liabilities Net Assets Equity Called up share capital Share premium account Common control reserve Own shares held in treasury Retained earnings Total Equity 15 16 17 18 19 20 22 24 24 26 23 24 24 26 27 27 27 83,217 17,131 46,282 1,076 147,706 3,716 39,254 48 1,366 44,384 192,090 (43,578) - (475) (10,804) (1,841) (2,990) (59,688) (33,651) (29,400) (11,160) (74,211) (133,899) 58,191 157 73,267 (9,454) (898) (4,881) 58,191 67,726 5,372 17,038 3,999 94,135 1,393 22,123 - 1,804 25,320 119,455 (24,053) (800) (508) (4,086) - (422) (29,869) (496) (13,359) (3,883) (17,738) (47,607) 71,848 157 73,267 (9,454) (2,673) 10,551 71,848 The notes on pages 88 to 131 are an integral part of these consolidated financial statements. The financial statements of Redcentric Plc (Registration Number 08397584) on pages 84 to 87, and the notes to these financial statements on pages 88 to 131 were approved by the Board on 24 August 2023 and are signed on its behalf by: David Senior Chief Financial Officer 85 Annual Report and Accounts 2023Financial statementsConsolidated cash flow statement for the year ended 31 March 2023 (Loss)/profit before taxation Finance costs Operating (loss)/profit Adjustment for non-cash items Depreciation and amortisation Exceptional items Share-based payments Operating cash flow before exceptional items and movements in working capital Transfer from intangible assets to cost of sales Non-cash provision movements Cash costs of exceptional items Operating cash flow before changes in working capital Changes in working capital Increase in inventories (Increase)/decrease in trade and other receivables Increase/(decrease) in trade and other payables Cash generated from operations Tax (paid)/received Net cash generated from operating activities Cash flows from investing activities Purchase of property, plant and equipment Disposal of non-core contracts Acquisition of subsidiaries (net of cash acquired) Purchase of intangible fixed assets Net cash used in investing activities Cash flows from financing activities Dividends paid Share buyback Disposal of treasury shares on exercise of share options Cash received on exercise of share options Sale and leaseback of fixed assets Interest paid Interest paid on leases Repayment of leases Repayment of term loans Drawdown of borrowings Repayment of borrowings Payment of loan arrangement fees Issue of shares Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of period Effect of exchange rates Cash and cash equivalents at end of the period Note 10 15,16,17 9 28 9 14 27 24 24 24 24 Year ended 31 March 2023 £000 Year ended 31 March 2022 £000 (12,469) 3,530 (8,939) 24,026 8,149 1,256 24,492 - - (8,258) 16,234 (2,324) (15,463) 16,377 14,824 (670) 14,154 5,536 1,071 6,607 14,296 1,629 1,181 23,713 140 (577) (2,091) 21,185 (185) 559 (4,391) 17,168 246 17,414 (5,505) - (2,264) 5,750 (26,606) (10,422) (869) (32,980) (5,593) - 229 - 966 (1,771) (1,218) (6,901) (508) 55,500 (21,500) (713) - (501) (7,437) (5,627) (2,666) - 12 - (97) (839) (3,745) (487) 4,500 (4,500) - 1 18,491 (13,448) (335) 1,804 (103) 1,366 (3,471) 5,250 25 1,804 The notes on pages 88 to 131 are an integral part of these consolidated financial statements. 86 Annual Report and Accounts 2023Financial statementsConsolidated statement of changes in equity for the year ended 31 March 2023 Share capital Share premium Common control reserve Own shares held in treasury Retained earnings £000 £000 £000 £000 £000 1 April 2021 Profit for the period Transactions with owners Share-based payments Share buyback Issue of new shares Dividends paid Share option exercises Other comprehensive income Deferred tax movement on share options Currency translation differences At 31 March 2022 Loss for the period Transactions with owners Share-based payments Share buyback Issue of new shares Dividends paid (note 14) Share option exercises Deferred tax relating to prior periods Other comprehensive income Deferred tax movement on share options Currency translation differences 156 73,267 (9,454) (32) - - - 1 - - - - - - - - - - - - - - - - - - - - - - (2,666) - - 25 - - Total equity £000 72,090 6,940 1,067 (2,666) 1 8,153 6,940 1,067 - - (5,627) (5,627) (14) 11 58 (26) 58 (26) 157 73,267 (9,454) (2,673) 10,551 71,848 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1,775 - - - (9,250) (9,250) 1,044 1,044 - - (5,593) (1,546) (37) 47 (97) - - (5,593) 229 (37) 47 (97) At 31 March 2023 157 73,267 (9,454) (898) (4,881) 58,191 The notes on pages 88 to 131 are an integral part of these consolidated financial statements. 87 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 Summary of significant accounting policies Redcentric plc is a public limited company incorporated and domiciled in England and Wales, whose shares are publicly traded on the AIM division of the London Stock Exchange. Redcentric plc was incorporated on 11 February 2013 and admitted to AIM on 24 April 2013. The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been applied consistently in the current and prior period. These financial statements are presented in pound sterling, being the currency of the primary economic environment in which the Group operates. The financial statements are prepared on the historical cost basis except that contingent consideration is measured at fair value. 1.1 Basis of preparation The financial statements are prepared on a going concern basis which the Directors believe to be appropriate for the following reasons. The Group meets its day to day working capital requirements from operational cash flows, a revolving credit facility, an asset financing facility and leasing arrangements (see note 24). The Directors have prepared cash flow forecasts for a period of at least 12 months from the date of approval of these financial statements (the “going concern assessment period”) which indicate that, taking account of reasonably possible downsides on the operations and its financial resources, the Group and the Company will have sufficient funds to meet their liabilities as they fall due for that period, and will comply with debt covenants over that period. The Group is required to comply with financial debt covenants for adjusted leverage (net debt to adjusted EBITDA), cashflow cover (adjusted cashflow to debt service, where adjusted cashflow is defined as adjusted EBITDA less tax paid, dividend payments, IFRS16 lease repayments and cash capital expenditure) and provisions relating to guarantor coverage such that guarantors must exceed a prescribed threshold of the Group’s gross assets, revenue and adjusted EBITDA. The guarantors are Redcentric plc and Redcentric Solutions Limited. Covenants are tested quarterly each year. Following the acquisitions made in the year, the Group has invested heavily in integration and efficiency programmes which are expected to deliver significant benefits to the business from FY25 onward. In anticipation of the effect of those investments on continued covenant compliance, in March 2023 the Directors agreed an amendment to the borrowings facility agreement with the banking syndicate to apply less stringent debt covenant requirements for the quarters ended March and June 2023 and quarters ending September and December 2023 (see note 24 for details). There were no other material changes to the terms and conditions of the borrowings because of this amendment. The Directors’ forecasts in respect of the going concern assessment period have been built from the detailed Board approved budget for the year ending 31 March 2024 and forecasts for the year ending 31 March 2025, and the going concern assessment takes account of the updated debt covenant requirements agreed in the amended agreement. The forecasts include a number of assumptions in relation to order intake, renewal and churn rates, EBITDA margin improvements, capital expenditure requirements to service our customers and the full year impact of the further acquisitions made in FY23 and associated synergies and efficiencies. Revenue assumptions reflect pre-covid levels achieved, which have been adjusted for the enlarged customer base and additional products following the acquisitions made in FY23. Both the base case and sensitised forecasts (detailed below) include significant utilisation of the Group’s asset financing facility. Whilst the Group’s trading and cash flow forecasts have been prepared using current trading assumptions, the operating environment continues to present several challenges which could negatively impact the actual performance achieved. These risks include, but are not limited to, achieving forecast levels of order intake, the impact on customer confidence as a result of general economic conditions, inflationary pressures driving continued interest rate increases and the achievability of actions the Directors consider they would take, and which are entirely within their control, should further risks materialise. Whilst cost inflation is an important consideration for the Group, the Directors have already taken positive action to mitigate this issue in respect of the Group’s single largest external cost item, electricity. The Group has entered into contracts with energy brokers and has agreed own-use commodity prices for a significant proportion of its expected FY24 and FY25 electricity volumes, which significantly reduces its exposure to price volatility. The Group can flex contracted volumes to match expected usage volumes giving 30 days’ notice. In making their going concern assessment considering these risks, the Directors have also modelled a severe but plausible downside scenario when preparing the forecasts. The severe but plausible downside scenario assumes significant economic downturn over FY24 and into FY25, impacting forecast new order intake and customer cancellations for recurring revenue, reduced non-recurring revenue levels, a reduction of synergies compared to forecast levels, and inflationary pressures driving continued interest rate rises. All of these downside scenarios have been combined into the Board’s severe but plausible assessment. 88 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 1.1 Basis of preparation (continued) Under this severe but plausible downside scenario, recurring monthly new order intake is forecast to reduce by 30% and non-recurring product and services revenues reduce by 20%. These reductions have been modelled against the base case budget and incorporate both potential supply chain issues and customer timing preferences which could impact the phasing of non-recurring revenues, and reduced investment from our customer base more generally. Increased customer cancellation rates on recurring monthly revenues have also been considered in addition to expected benefits from electricity volume efficiencies forecast in the Group’s data centres being reduced by 50%. Finally, in considering an increased cost to the Group of its variable rate revolving credit facility debt, UK interest rates are modelled to continue to increase by 0.5% per quarter, to a maximum of 7%. In isolation, each individual downside factor is plausible, however in order to demonstrate the severity of circumstances that would result in the Group coming close to being unable to comply with debt covenants, the above scenarios have been modelled simultaneously in the severe but plausible downside scenario. The Directors note the uncertainties surrounding the timing and extent of non-recurring revenues from quarter to quarter, and the timing and extent of capital expenditure, with increased utilisation of the Group’s asset financing facility modelled under both the base case budget and the severe but plausible downside scenario. As a result, the Directors continue to closely monitor quarterly liquidity together with debt covenant compliance forecasts. Under the severe but plausible downside scenario outlined above, there is limited covenant headroom available throughout the going concern assessment period. As a result, the Directors expect that the final dividend for FY23, which is to be considered for approval at the AGM on 28 September 2023, will be paid in the final quarter of the financial year FY24. The cashflow forecasts prepared and as described above, include a final FY23 dividend payment in January 2024 and the Directors will continue to monitor quarterly liquidity and debt covenant compliance and the timing of subsequent dividend payments. While the Directors consider that the downside scenario modelled represents a severe stress, additional mitigating actions remain available that have not been modelled including the rephasing of non-essential capital expenditure, and the rephasing or reduction of certain non-essential costs. Under the severe but plausible downside scenario modelled, the forecasts demonstrate that the Group is expected to maintain sufficient liquidity and will continue to comply with its debt covenants throughout the going concern assessment period, though covenant headroom is limited throughout and the increased utilisation level of the Group’s asset financing facility is required to ensure continued compliance with debt covenants. The Directors therefore remain confident that the Group and parent Company have adequate resources to continue to meet their liabilities as and when they fall due within a period of at least 12 months from the date of approval of these financial statements, and have therefore prepared the financial statements on a going concern basis. 1.2 Changes In accounting policy and disclosure Adopted IFRS not yet applied There are no new standards, amendments to existing standards or interpretations that are not yet effective that are expected to have a material impact on the Group. Such developments are routinely reviewed by the Group and its financial reporting systems are adapted as appropriate. 1.3 Basis of consolidation The Group financial statements consolidate those of the Company and of its subsidiary undertakings drawn up to 31 March 2023. Subsidiaries are all 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. Intra-group transactions, balances and unrealised gains and losses on transactions between group companies are eliminated on consolidation. 1.4 Segmental reporting IFRS 8 requires operating segments to be identified based on internal financial information reported to the chief operating decision-maker for decision-making purposes. The Group considers that this role is performed by the main Board. The Board believes that the Group continues to comprise a single reporting segment, being the provision of managed services to customers. 1.5 Revenue recognition IFRS 15 ‘Revenue from contracts with customers’ requires “performance obligations” to be identified at the inception of the contract for each of the distinct goods or services that have been promised to the customer. The following table summarises the performance obligations we have identified for our major revenue lines and provides information on the time of when they are satisfied and the related revenue recognition policy. The Group does not consider that there are any significant judgements made in concluding when a customer obtains control of a promised good or service. 89 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 1.5 Revenue recognition (continued) 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, license subscription, and service agreements. Performance obligations are identified for each distinct service for which the customer has contracted and are considered to be satisfied over the time period that these services are delivered. Product Revenue Provision of third-party hardware (e.g., phone handsets, routers) to the customer as a one-off, distinct sale. Performance obligations are satisfied at the point in time that control passes to the customer. Services Revenue Provision of professional services, consultancy, and engineering services in order to setup and install a customer managed service. Installation is typically intrinsically linked to the provision of the managed services (in recurring revenue above), so 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 (e.g., hardware sales). The completion of these services is a separate performance obligation. Revenue for these types of services is recognised evenly over the period of the agreement as the services are provided. Revenues for product sales are recognised in full in the income statement upon delivery to the customer. Amongst other factors the Group has pricing and fulfilment risk and as such is considered to be principal in these transactions. 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 of the performance obligation (e.g. upon delivery to the customer). 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 of the revenue recognition point are recognised as deferred income within trade and other payables and amounts billed in arrears are accrued income within trade and other receivables. Revenue expected to be recognised in future periods for performance obligations that are not complete (or partially complete) as at 31 March 2023 is £219m. Of this, £215m relates to revenue for recurring managed services. In comparison, revenue expected to be recognised in future periods for performance obligations that were not complete (or partially complete) as at 31 March 2022 was £117m. Of this, £108m related to revenue for recurring managed services. 30 days standard payment terms are offered to customers. The Group pays commission to its sales teams for new contracts and renewals with the associated cost recognised over the life of the contract in accordance with IFRS15. Commission payments paid in advance are recognised as a contract assets in trade and other receivables. 90 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 1.5 Revenue recognition (continued) Incremental revenues are generated based on usage for calls and data. Some managed service contracts contain an element of usage-based charges, and customers may request additional services or changes in scope, both resulting in additional charges. Usage-based charges are typically billed in arrears, in the period subsequent to which the usage takes place, and revenue is therefore, accrued in the month which usage takes place. For changes in scope or additional services, a new distinct contract is entered into, with revenue recognised as above. 1.6 Exceptional items Exceptional items are items of income and expense which are material and, due to their nature or size, are presented separately on the face of the income statement in order to provide an understanding of the Group’s financial performance. Exceptional items are excluded from the Group’s alternative performance measures (APMs), as defined on page 20, and are disclosed in detail in note 9. Amounts included in exceptional items may also represent true ups presented as exceptional in prior periods. Where the terms of an equity-settled award are modified or a new award is designated as replacing a cancelled or settled award, the existing charge is recognised immediately. In addition, an expense is recognised over the remainder of the new vesting period for the incremental fair value of any modification, based on the difference between the fair value of the original award and the fair value of the modified award, both as measured on the date of the modification. No reduction is recognised if this difference is negative. Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. Any compensation paid up to the fair value of the award at the cancellation or settlement date is deducted from equity, with any excess over fair value being treated as an expense in the income statement. The costs of equity-settled transactions with employees are settled by Redcentric Solutions Limited on behalf of the parent Company and added to the cost of the investment in the parent Company. The Group does not operate any cash settled share-based payment schemes. 1.7 Share-based payments 1.8 Taxation The cost of equity-settled transactions with employees is measured by reference to the fair value of the award at the date at which they are granted and is recognised as an expense over the vesting period, which ends on the date at which the relevant employees become fully entitled to the award. Fair value is determined by an external valuer using an appropriate pricing model for which the assumptions are approved by the Directors. In valuing equity-settled transactions, only vesting conditions linked to the market price of the shares of the Company are considered. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied. At each balance sheet date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has expired and management’s best estimate of the achievement or otherwise of non-market conditions, number of equity instruments that will ultimately vest or in the case of an instrument subject to a market condition, be treated as vesting 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. The taxation expense charged in the Group statement of comprehensive income represents the sum of the current tax expense and the deferred tax expense. The current tax payable is based on the taxable profit for the year. Taxable profit differs from accounting profit as reported in the Group statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group liability for current tax is measured using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit and is accounted for using the balance sheet liability method. Deferred tax is provided for on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, with the following exceptions: • where the temporary difference arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination that at the 91 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 1.8 Taxation (continued) time of the transaction affects neither accounting nor taxable profit or loss; • • in respect of taxable temporary differences associated with investments in subsidiaries, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future; and deferred income tax assets are recognised only to the extent that it is probable that taxable profits will be available against which deductible temporary differences carried forward tax credits or tax losses can be utilised. 1.9 Foreign currencies The functional and presentation currency of Redcentric plc is Pound Sterling (£) and the Group conducts the majority of its business in Sterling. Transactions in foreign currencies are initially recorded in the functional currency by applying the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the balance sheet date. All differences are taken to the income statement, except for differences on monetary assets and liabilities that form part of the Group’s net investment in a foreign operation. These are taken directly to equity until the disposal of the net investment, at which time they are recognised in the profit or loss. 1.10 Pensions The Group operates a defined contribution scheme. Pension costs are charged directly to the income statement in the period to which they relate on an accrual’s basis. The Group has no further payment obligations once contributions have been paid. 1.11 Business combinations Business combinations are accounted for by applying the acquisition method at the accounting date, which is the date on which control is transferred to the Group. 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. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred, 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. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair value 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 acquiree’s net assets. The excess of the consideration transferred and the amount of any non-controlling interest in the acquiree over the fair value of the separable identifiable net assets acquired and liabilities incurred or assumed at the acquisition date is recorded as purchased goodwill. Provision is made for any impairment. Accounting policies previously applied by acquired subsidiaries are changed as necessary to comply with accounting policies adopted by the Group. Where an acquisition involves a potential payment of contingent consideration the cost is estimated based on its acquisition date fair value and is included as part of the consideration transferred in a business combination. To estimate the fair value an assessment is made as to the amount of additional consideration that is likely to be paid with reference to the associated criteria. Where a change is made to the fair value of contingent consideration within the initial measurement period as a result of new or additional information that existed at the acquisition date the change is accounted for as a retrospective adjustment to goodwill. Any change as a result of events that occurred after the acquisition date then the adjustment is accounted for as a charge or credit to profit or loss. Measurement period adjustments are adjustments that arise from additional information obtained during the ‘measurement period’ (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date. Costs related to acquisitions, other than those associated with the issue of debt or equity securities, are expensed as incurred. 1.12 Subsidiaries Subsidiaries are entities controlled by the Group. The Financial Statements of subsidiaries are included in the consolidated financial statements from the date that control is established to the date control ceases. Control is achieved where the acquiring Company has the power to govern the financial and operating policies of an investee entity therefore obtaining benefits from its activities. Intercompany transactions and outstanding balances are eliminated on consolidation. 92 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 1.13 Intangible assets a) Goodwill Goodwill arises on the acquisition of subsidiaries and represents the excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition- date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired. If the total of consideration transferred, non-controlling interest recognised and previously held interest measured at fair value is less than the fair value of the net asset of the subsidiary, in the case of a bargain purchase, the difference is recognised directly to the income statement. For the purposes of impairment testing, goodwill acquired in a business combination is allocated to each of the cash- generating units (CGUs), or groups of CGUs, that is expected to benefit from the synergies of the combination. Each unit or group of units to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. Goodwill 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. Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. As at the acquisition date any goodwill acquired is allocated to each of the cash generating units expected to benefit from the business combination’s synergies. 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. Impairment Intangible assets with a finite life are amortised on a straight- line basis over their expected useful lives, as follows: Customer contracts and related relationships 5 – 15 years Trademarks 5 years Software licences 5 years (or over the contract term if shorter) ERP systems 6 years Impairment and amortisation charges are included within operating expenditure in the income statement. c) Internally generated intangibles Expenditure on software development is capitalised as an intangible asset only if it meets the recognition criteria set out in IAS 38 Intangible Assets, requiring it to be probable that the expenditure will generate future economic benefits and can be measured reliably. To meet these criteria, it is necessary to be able to demonstrate, among other things, the technical feasibility of completing the intangible asset so that it will be available for use or sale. Development expenditure directed towards incremental improvements in existing products, remedial work and other maintenance activity does not qualify for recognition as an intangible asset. 1.14 Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and any impairment in value. 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. b) Other intangible assets Office Fixtures and fittings 5 years Other intangible assets are carried at cost less accumulated amortisation and impairment losses. 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. Leasehold improvements Vehicles and Computer Equipment 15 years (or over the lease term if shorter) 3 – 5 years (or over the contract term if shorter) 93 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 1.14 Property, plant and equipment (continued) 1.16 Inventories and Cost of Sales For property, plant and equipment funded through leases, where there is reasonable certainty that the Group obtains ownership by the end of the lease term, depreciation is provided on a straight-line basis over the useful life, otherwise it’s provided over the shorter of the useful life and the lease term. An item of property, plant and equipment is de-recognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the income statement in the period the item is de-recognised. In reviewing the value of property, plant and equipment, consideration for any impacts of climate related risks to fair values or the useful economic lives of assets is deemed not material. 1.15 Impairment of property, plant and equipment, right of use assets and intangible assets excluding goodwill Other intangible assets, property, plant and equipment and right of use assets are reviewed for impairment whenever events arise or changes in circumstances indicate the carrying values may not be recoverable. If any such indication exists and where the carrying amounts exceed the estimated recoverable amount, the assets or cash generating units are written down to their recoverable amount. The recoverable amount of intangible assets, property, plant and equipment and right of use assets is the greater of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined by the cash generating unit to which the asset belongs. Fair value less costs to sell is, where known, based on actual sales price net of costs incurred in completing the disposal. Non-financial assets that were impaired in the previous periods are annually reviewed to assess whether the impairment is still relevant. 94 Inventories are stated at the lower of cost and net realisable value. Cost corresponds to purchase cost determined by the first is made, where necessary, for slow-moving, obsolete and defective inventories. (FIFO) method. Provision in first out 1.17 Leases IFRS 16 has introduced a single on-balance sheet accounting model for lessees. When entering into a new contract, the Group assesses whether it is, or contains, a lease. A lease conveys a right to control the use of an identified asset for a period of time in exchange for consideration. The Group recognises a right of use asset and a lease liability at the lease commencement date. The right of use asset is initially measured at cost, and subsequently at cost less any accumulated depreciation and impairment losses, adjusted for certain remeasurements of the lease liability. Depreciation is provided on a straight-line basis over the life of the lease, or the useful economic life if that is shorter. Cost of the right-of-use asset consists of the initial lease liability plus any lease payments made to the lessor before the commencement date (less any lease incentives received), plus the initial estimate of restoration costs and any initial direct costs incurred by the lessee. Obligations to restore the underlying asset to the condition required by the terms and conditions of the lease are recognised and measured under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, and a corresponding asset included in the related right-of-use asset. Dilapidation provisions are discounted to present value at the yearend and subsequent unwinding of the discounting is recorded in the income statement. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date and discounted using the interest rate implicit in the lease or, more typically, the Group’s incremental borrowing rate (when the implicit rate cannot be readily determined). The lease liability is subsequently increased by the interest cost on the lease liability and decreased by lease payments made. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, or changes in the Group’s assessment of whether a purchase, extension or termination option is reasonably certain to be exercised. Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 1.17 Leases (continued) Cash and cash equivalents The Group adopts recognition exemptions for short-term (less than 12 months) on property and low value on a lease by lease basis. The Group classifies payments of lease liabilities (principal and interest portions) as part of financing activities. Payments of short-term, low value and variable lease components are classified within operating activities. Cash and cash equivalents on the balance sheet comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less. b) Financial liabilities Trade payables 1.18 Financial instruments a) Financial assets Trade payables are stated at their nominal value, recognised initially at fair value and subsequently valued at amortised cost. The Group classifies its financial assets as loans and receivables measured at amortised cost. Provisions Loans and receivables are non-derivative financial assets with fixed or determinable payments which are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date which are classified as non-current assets. The Group’s loans and receivables comprise ‘trade and other receivables’, ‘cash and cash equivalents’, and ‘other receivables’ which are expected to be settled in cash. Trade receivables Trade receivables are amounts due from customers for goods sold and services provided in the ordinary course of business. Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. In recognising any provision for impairment, the Group applies the IFRS 9 approach to measuring expected credit losses which uses a lifetime expected loss allowance for all assets held at amortised cost. The Group recognises a loss allowance for all expected credit losses on initial recognition using an allowance matrix to measure the expected credit losses of trade receivables from individual and corporate customers. Loss rates are calculated using a ‘roll rate’ method based on the probability of a receivable progressing through successive stages of delinquency to write-off. Given the similar characteristics of the product and service types, geographic region and type of customer relationship, all customers in each ageing bracket have had the same rate applied. The Group’s trade and other receivables are non-interest bearing. Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Interest-bearing loans and borrowings All loans and borrowings are initially recognised at fair value less directly attributable transaction costs. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses arising on the repurchase, settlement or otherwise cancellation of liabilities are recognised in the finance cost line in the income statement. Loans are carried at fair value of initial recognition, net of unamortised issue costs of debt. These costs are amortised over the loan term. 1.19 Dividends Dividends payable to equity shareholders are included in the financial statements within ‘other creditors’ when a final dividend is approved by shareholders in a general meeting. Interim dividends to equity shareholders approved by the board during the financial year are not included in the financial statements until paid. 95 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 1.20 Research and Development costs Expenditure on research activities is recognised in the Income Statement as an expense as incurred. Expenditure on development activities is capitalised as “development costs” if the product or process is technically and commercially feasible, if the Group has the technical ability and sufficient resources to complete development, if future economic benefits are probable and if the Group can measure reliably the expenditure attributable to the intangible asset during its development. Development activities involve a plan or design for the production of new or substantially improved products or processes. 1.21 Allocation of costs Cost of sales are those costs which are directly attributable to the business in order to generate revenue, which includes costs of hardware and software sold to customers, freight and delivery, reseller commissions and set-up costs. Operating costs are all other expenses relating to the underlying business, which includes staff costs, legal and professional fees, office costs, marketing and advertising. 2 Critical accounting judgements, key sources of estimation uncertainty and other areas of estimation In the application of the Group’s accounting policies, which are described in note 1, the Board are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities, without clear direction from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision only affects that period, or in the period of the revision and future periods if the revision affects both current and future periods. Judgements The Group have identified the following item as a critical accounting judgement which would have a significant impact to the amounts recognised in the financial statements for the year ended 31 March 2023. 2.1 Accounting for multiple arrangements as a single transaction During the year, the Group’s trading subsidiary Redcentric Solutions Limited acquired the consulting business and certain business and assets relating to three data centres (“DCs”) from Sungard Availability Services (UK) Limited (in administration). The acquisition of the consulting business was legally completed on 7 June 2022 and the DCs on 6 July 2022. These are legally separate transactions with their own purchase agreements however, the Group have considered if they form a single transaction to achieve an overall commercial effect. The transactions happened within a short time frame and were entered into in contemplation of each other. The commercial rationale for the consulting transaction was inherently linked to facilitating the subsequent DCs transaction and the acquisition of the consulting business was not economically justified on its own but is economically justified when considered together with the DCs transaction. In review of the above, the Group have determined that these two arrangements should be accounted for as a single transaction. Please refer to note 32 for business combinations. Estimates 2.2 Fair value of consideration transferred, including contingent consideration The fair value measurement of the consideration transferred for business combinations in the year, which includes elements of contingent consideration, involves estimation uncertainty regarding the amount to be recognised in the financial statements due to the uncertain future events which management are required to assess at the acquisition date and at subsequent reporting dates in order to determine the fair value at those points. In assessing these future events, management consider the probability and likelihood of specific events and results occurring, which impact the fair value of the contingent consideration. Management have considered the fair value assessment at the acquisition date and at the reporting date. The range of possible outcomes of contingent consideration when the payment crystallises on the 12-month anniversary of the acquisition are between £0.0m and £2.8m as at the year end. The amounts of consideration for the year ended 31 March 2023 are included in note 32, and contingent consideration at note 23. 96 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 2.3 Fair values of acquired intangible assets and property, plant and equipment on business combinations IFRS 3 ‘Business combinations’ requires assets and liabilities acquired from business combinations to be measured initially at fair value and then subsequently revalued to fair value at each period end. In establishing the fair values of assets and liabilities acquired in business combinations, estimation is used in a number of areas. To assist in this work, the Group has engaged external valuation experts to assess the fair value. Management have then reviewed the work and assessed the results in forming their view on the fair value estimation included in the business combinations for the year ended 31 March 2023. The fair values have been established in accordance with IFRS 13. Establishing the fair values of each asset type has been outlined below: Customer relationship intangibles The fair values of the customer relationship intangible involves estimation uncertainty at the acquisition date as they are sensitive to the forecast future cashflows generated from these assets and the discount rate in establishing the present value. The inputs into the forecast also include EBIT margin and customer attrition rates, which affect the future cashflows generated. Sungard Data Centres: If short-term customer revenue attrition rates were to increase by 10%, the estimated fair value would decrease by £0.2m. If the discount rate used in arriving at the estimated fair value of customer relationship intangibles increased by 2%, this would result in a reduction in the acquisition date fair value of these assets of £0.6m. If the EBIT margin applied to the derive the forecast future cashflows before discounting were to increase by 10%, this would result in an increase to the acquisition date fair value of these assets by £1.3m. 4D Data Centres: If the customer revenue attrition rates were to increase by 3%, the estimated fair value would decrease by £0.7m. If the discount rate used in arriving at the estimated fair value of customer relationship intangibles increased by 2%, this would result in a reduction in the acquisition date fair value of these assets of £0.5m. If the EBIT margin applied to the derive the forecast future cashflows before discounting were to increase by 10%, this would result in an increase to the acquisition date fair value of these assets by £0.7m. 97 Property, plant and equipment The Group engaged an external valuation expert to assess the fair value of certain items of property, plant and equipment acquired through business combinations, relating to the largest data centre of the Sungard transaction. The fair values of the property, plant and equipment involves estimation uncertainty due to the useful economic life applied to each category of asset. If the useful economic life was increased by one year, the depreciation charge in the current year would decrease by £0.6m. There is also estimation uncertainty related to the replacement cost and utilisation levels of the assets under the depreciated replacement cost method. The estimate of fair values of the identifiable assets acquired and the liabilities assumed as part of these transactions involved estimation uncertainty in finalising the purchase price allocation. As the amounts have now been finalised, the Directors do not consider this to be a major source of estimation uncertainty at the yearend, as it is not considered there will be a material reversal in future periods. 3 Financial risk management The objectives of the Group’s treasury activities are to manage financial risk, secure cost-effective funding where necessary and minimise adverse effects of fluctuations in the financial markets on the value of the Group’s financial assets and liabilities, on reported profitability and on cash flows of the Group. The Group’s principal financial instruments for fundraising are bank borrowings, overdraft facilities and loans. The Group has various other financial instruments such as cash, trade receivables and trade payables that arise directly from its operations. The Group’s activities expose it to a variety of financial risks: market risk (including foreign exchange, cash flow interest rate risk, and price risk), credit risk, and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. Risk management is carried out centrally under policies approved by the Board of Directors. The Board provides principles for overall risk management, as well as policies covering each specific risk area. a) Foreign exchange risk The Group mainly operates within the UK with foreign transactions with exchange counterparties denominated in foreign currencies. This is not a significant risk for the Group. from certain risk arising Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 3 Financial risk management (continued) b) Cash flow interest rate risk The Group receives interest on cash and cash equivalents and pays interest on its borrowings. Borrowings at variable rates expose the Group to cash flow interest rate risk. During the year the Group’s borrowings at variable rate were denominated in Pounds Sterling with interest linked to Sterling interest rates. its The Group analyses interest rate exposure on a dynamic basis. Various scenarios are simulated taking into consideration refinancing, renewal of existing positions, alternative financing and hedging. Based on these scenarios, the Group calculates the impact on profit or loss of a defined interest rate shift and manages its cash flow interest rate risk accordingly. Based on the simulations performed, the impact on post-tax profit and equity of a +/– 1% shift in the interest rate would 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. c) Price risk The Group is not exposed to significant commodity or security price risk. The Group has entered into contracts with energy brokers and has agreed own-use commodity prices for a significant proportion of its expected electricity volumes, which significantly reduces its exposure to price volatility. d) 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 and reviewed 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. Liquidity risk Management monitors rolling forecasts of the Group’s undrawn borrowing facility and cash and cash equivalents based on expected cash flow. The Group’s liquidity management policy involves projecting cash flows and considering the level of liquid assets necessary to meet these. 4 Capital risk management The Group’s objectives when managing capital are to safeguard the Group’s future growth and its ability to continue as a going concern in order to provide returns for shareholders and to maintain an optimal capital structure to reduce the cost of capital. The Group operates in the managed services sector which, generally, does not require substantial fixed asset investments. In order to maintain or adjust the capital structure the Group has previously both issued new shares and borrowed using bank facilities. The Group monitors capital on the basis of the ratio of net bank debt to adjusted EBITDA. Net debt is calculated as total bank borrowings (including ‘current and non-current borrowings’ as shown in the consolidated balance sheet) less cash and cash equivalents, and adjusted EBITDA is defined as earnings before interest, tax, depreciation, amortisation, exceptional costs and share-based payments. The Group’s strategy is to maintain the ongoing ratio at below 2.5x. The ratio was below this level throughout the year, and at 31 March 2023 was 1.8x (31 March 2022 – 0.0x). The bank facilities referred to in note 24 contain various covenants relating to EBITDA, interest cover, net debt and cash flow, which the Group monitors on a monthly basis. The Group adopts a risk-averse position with respect to borrowings and maintains headroom in its bank facilities to ensure that any unexpected situations do not create financial stress. Refer to note 1.1. A final dividend payment of 2.4p per share is expected to be paid on 19 January 2024, subject to approval at the Company’s AGM, to shareholders on the register at the close of business on 8 December 2023 with shares going ex-dividend on 7 December 2023. The last day for Dividend Reinvestment Plan elections is 27 December 2023. The Group grants share options to Directors and other selected employees. However, these do not have a significant impact on the Group’s capital structure. 5 Segment reporting IFRS 8 requires operating segments to be identified based on internal financial information reported to the chief operating decision-maker (CODM) for decision-making purposes. The Group considers that this role is performed by the main Board. The Board believes that the Group continues to comprise a single reporting segment, being the provision of managed services to customers. The CODM assesses profit performance principally through an adjusted EBITDA measure, as defined on page 15. Whilst the Board reviews the Group’s three revenue streams 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. Non-current assets held outside the UK are immaterial (31 March 2022: immaterial). 98 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 6 Revenue Revenue for the year ended 31 March 2023 was generated wholly from the UK and is analysed as follows: Recurring revenue Product revenue Services revenue Total revenue Year ended 31 March 2023 £000 Year ended 31 March 2022 £000 128,461 7,144 6,069 141,674 82,965 6,187 4,176 93,328 Revenue is analysed into the following categories: • Recurring revenue, which was higher at £128.5m (FY22: £83.0m). • Non-recurring product revenue, which was higher at £7.1m (FY22: £6.2m). • Non-recurring services revenue which was higher at £6.1m (FY22: £4.2m). The year on year increases noted are in part attributable to the impact of acquisitions in the period. See note 32. 6.1 Contract Balances The following table provides information about receivables, contract assets and contract liabilities from contracts with customers. Year ended 31 March 2023 £000 Year ended 31 March 2022 £000 Receivables, included in trade and other receivables, net of provisions Accrued income, included in trade and other receivables Deferred income, included in trade and other payables 20,205 4,568 (8,331) 10,228 2,626 (7,530) There were no material impairment losses recorded during the year or the prior year. £6.7m of deferred revenue at 31 March 2022 was recognised as revenue in FY23. 99 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 7 Operating profit The following costs are considered to be significant items within operating profit. Amortisation of acquired intangible assets Amortisation of intangible assets: owned Depreciation: owned assets Depreciation and Amortisation of ROU assets: Leased Share-based payments Net foreign exchange losses Expense in relation to short-term and low value leases not recognised under IFRS 16 Employee benefits expense, excluding share-based compensation Exceptional items (note 9) Other operating income is broken down as follows: Income from Transition Service Agreement Other income 8 Auditor’s remuneration Year ended 31 March 2023 £000 Year ended 31 March 2022 £000 8,183 590 4,636 10,617 1,256 11 - 33,223 8,149 66,665 6,498 475 2,745 4,578 1,181 74 27 21,670 1,629 38,877 Year ended 31 March 2023 £000 Year ended 31 March 2022 £000 88 - 88 100 3 103 Total fees payable by the Group during the year to KPMG LLP in respect of the audit and other services provided were as follows: Audit of these financial statements Audit of Subsidiaries (including overseas subsidiaries) Additional audit fees in relation to business combinations audit work Total audit Tax compliance services Tax advisory services Services relating to taxation Other non-audit services not covered above Total non-audit services Total fees 100 Year ended 31 March 2023 £000 Year ended 31 March 2022 £000 45 364 100 509 - - - 1 1 30 288 - 318 3 1 4 - 4 510 322 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 9 Exceptional items Included within operating expenditure: Employee restructuring Release of Insurance adviser provision including professional fees Lease modification Business sale process Acquisition related professional and legal fees Integration costs Historic share warrant exercise Costs relating to the settlement of an historical supplier dispute Impairment of intangible assets Cloud computing costs Year ended 31 March 2023 £000 Year ended 31 March 2022 £000 - - - - 695 5,965 - 809 - 680 8,149 159 (483) (119) 70 971 - 310 119 205 397 1,629 Acquisition and integration costs were incurred in relation to the purchase of certain business and assets relating to three data centres from Sungard Availability Services (UK) Limited (“Sungard)”, the consulting business from Sungard and 100% of the issued share capital of 4D Data Centres Limited during the year (note 32). The acquisition fees relate to legal and advisor fees and due diligence costs. The integration costs are those incurred in integrating the three businesses into the Group and include costs relating to the TSA (Transition Service Agreement) (£1.4m), migrating customers (£1.2m) and employee restructuring (£3.3m). There was also £0.1m of audit fees relating to the work completed on the acquisitions. Cash costs were £6.7m. Costs relating to the settlement of an historical supplier dispute were for crystallisation of the settlement amount of £0.6m and amounts charged by the Group’s legal advisors in this matter. Cash costs were £0.8m. Cloud computing costs relate to expenditure to achieve the original implementation scope of the Group’s major ERP implementation programme, and the continued remediation of the Group’s ERP system (Microsoft Dynamics 365) to resolve a number of implementation related process & system deficiencies that required correcting post initial implementation. FY23 is the final year that these costs will be incurred as exceptional. Future costs associated with the D365 system are developmental and will improve or enhance capability from the original scope of the project now that the original implementation scope has been substantially achieved. This was a cash cost in both years. 10 Finance costs Finance costs Interest payable on bank loans and overdrafts Interest payable on leases Amortisation of loan arrangement fees Other interest payable Year ended 31 March 2023 £000 Year ended 31 March 2022 £000 (1,827) (1,218) (291) (194) (3,530) (81) (990) - - (1,071) Interest payable on leases includes £1.2m (FY22: £0.8m) of interest on leases previously classified as operating leases under IAS17. Other interest payable relates to interest on contingent consideration and dilapidation provisions. 101 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 11 Employees The average monthly number of people (including Executive Directors) employed by the Group during the year was as follows: Operations Selling and distribution Administration Employee costs were: Wages and salaries Social security costs Share options granted to Directors and employees Pension costs Payments in lieu of notice and redundancy not included within exceptional items Payments in lieu of notice and redundancy included within exceptional items Year ended 31 March 2023 Number Year ended 31 March 2022 Number 429 83 76 588 346 79 61 486 Year ended 31 March 2023 £000 Year ended 31 March 2022 £000 27,978 3,251 1,257 1,263 277 453 34,479 18,682 1,969 1,181 848 12 159 22,851 The payments in lieu of notice and redundancy included within exceptional items are within the integration related costs. 11.1 Key management compensation Key management personnel are those persons having authority and responsibility for planning, controlling and directing the activities of the entity either directly, or indirectly. The following table details the compensation of key management personnel, being senior management that sit on the Operating Board of the Group along with exec and non-exec directors. Basic salary, allowances, fees and other employment expenses Bonus and other benefits Share based payments Pension costs Year ended 31 March 2023 £000 Year ended 31 March 2022 £000 1,667 123 601 91 2,482 1,878 306 593 63 2,840 102 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 11 Employees (continued) 11.2 Director’s remuneration The remuneration of the Directors in respect of the year was as follows: Basic Salary, allowances, and feesl Bonus Pension Share- based payments £000 £000 £000 £000 FY23 Total £000 FY22 Total £000 Executive Peter Brotherton1 David Senior2 Non-executive Ian Johnson (resigned 17 November 2021) Stephen Vaughan (resigned 28 April 2021) Alan Aubrey (appointed 21 July 2022) Jon Kempster (resigned 21 July 2022) Nick Bate Helena Feltham 368 200 - - 38 25 85 50 54 24 - - - - - - 16 11 3931 1042 831 339 - - - - - - - - - - - - - - 38 25 85 50 863 293 54 11 - 49 31 37 1 On 14 September 2022, Peter Brotherton exercised options over 379,267 ordinary shares of 0.1p each at a price of 103.5 pence per Ordinary Share resulting in a pre-tax gain of £392,541. 2 On 14 September 2022, David Senior exercised options over 100,000 ordinary shares of 0.1p each at a price of 103.5 pence per Ordinary Share resulting in a pre-tax gain of £103,500. 103 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 11 Employees (continued) 11.3 Director’s remuneration Details of share options in the Company held by the Directors during the year are as follows (audited): Exercise price (p) Balance, 31 March 2022 Granted Exercised Balance, 31 March 2023 Peter Brotherton David Senior (a) (b) (c) (d) (e) (a) (b) (c) (e) 0.1 0.1 0.1 99.9 0.1 0.1 0.1 0.1 0.1 (f) 96.1 379,267 242,915 554,326 18,023 - 1,194,531 100,000 129,555 312,296 - - - - - 621,250 621,250 - - - 333,334 18,736 (379,267) - - - - - 242,915 554,326 18,023 621,250 (379,267) 1,436,514 (100,000) - - - - 129,555 312,296 333,334 18,736 793,921 541,851 352,070 (100,000) (a) The options were granted on 28 June 2019 under the Company’s LTIP. The options vested post the release of the Group’s results for the year ended 31 March 2022 following the achievement of performance conditions related to the growth in share price and were exercised by the CEO and CFO on 14 September 2022. (b) The options were granted on 8 December 2020 under the Company’s LTIP. The options will vest post the release of the Group’s results for the year ended 31 March 2023 subject to the achievement of performance conditions related to the growth in share price. (c) The options were granted on 18 November 2021 under the Company’s LTIP. The options will vest three years from grant subject to absolute Total Shareholder Return (TSR) Targets. For awards up to 100% of salary, 25% will vest for TSR of 5% p.a. increasing pro-rata to 100% vesting for TSR of 10% p.a. For awards between 100% and 200% of salary, 0% will vest for TSR of 10% p.a. increasing pro-rata to 100% vesting for TSR of 15% p.a. (d) The options were granted on 23 December 2021 under the SAYE option plan under which employees contribute a monthly amount which is saved over three years to buy shares. The options are exercisable from 1 February 2025. There are no performance conditions. (e) The options were granted on 12 October 2022 under the Company’s LTIP. The options will vest three years from grant subject to absolute Total Shareholder Return (TSR) Targets. For awards up to 100% of salary, 25% will vest for TSR of 5% p.a. increasing pro-rata to 100% vesting for TSR of 10% p.a. For awards between 100% and 200% of salary, 0% will vest for TSR of 10% p.a. increasing pro-rata to 100% vesting for TSR of 15% p.a. (f) The options were granted on 26th August 2022 under the SAYE option plan under which employees contribute a monthly amount which is saved over 3 years to buy shares. The options are exercisable from 01 October 2025. There are no performance conditions. 104 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 12 Income tax expense Income tax UK current year tax charge Overseas current year tax charge Adjustment in respect of prior years Total income tax Deferred tax Current year Adjustment in respect of prior years Effect of changes in tax rates Total deferred tax Total tax credit in consolidated statement of comprehensive income Other Comprehensive Income items Deferred Tax Factors affecting the tax charge for the year (Loss)/profit before taxation Taxation at the average UK corporation tax rate of 19.0% (FY22: 19.0%) Tax effects of: -Expenses not allowable in determining taxable profit -Adjustment in respect of prior years -Non-taxable income -Share options -Fixed assets transferred in -Reversal of uncertain tax position -Prior year adjustment on provision -Tax rate changes -Super deduction adjustment -Other tax effects -Effect of overseas tax rates Tax credit for the year Year ended 31 March 2023 £000 Year ended 31 March 2022 £000 108 - (7) 101 (2,437) (31) (852) (3,320) (3,219) 1,739 32 (1,371) 400 (1,214) 196 (786) (1,804) (1,404) 47 58 (12,469) (2,369) 430 (38) (239) (172) - - - (503) (292) (90) 54 5,536 1,052 308 (1,175) (381) (32) (58) (323) (21) (786) - - 12 (3,219) (1,404) A reduction in the UK corporation tax rate from 19% to 17% (effective 1 April 2020) was substantively enacted on 6 September 2016. The March 2020 Budget announced that a rate of 19% would continue to apply with effect from 1 April 2020, and this change was substantively enacted on 17 March 2020. An increase in the UK corporation rate from 19% to 25% (effective 1 April 2023) was substantively enacted on 24 May 2021. The deferred tax asset at 31 March 2023 has been calculated based on these rates, reflecting the expected timing of reversal of the related temporary/timing differences (2022: 17%). 105 Annual Report and Accounts 2023Financial statements Notes to the consolidated financial statements for the year ended 31 March 2023 (continued) 13 Earnings per share (EPS) The calculation of basic and diluted EPS is based on the following earnings and number of shares. Earnings Statutory (loss)/earnings Tax credit Amortisation of acquired intangibles Share-based payments Exceptional items Adjusted earnings before tax Notional tax charge Adjusted earnings Weighted average number of ordinary shares In issue Held in treasury For basic EPS calculations Effect of potentially dilutive share options For diluted EPS calculations EPS Basic Adjusted Basic diluted Adjusted diluted Year ended 31 March 2023 £000 Year ended 31 March 2022 £000 (9,250) (3,219) 8,183 1,256 8,149 5,119 (973) 4,146 Number ‘000 156,992 (1,391) 155,601 3,678 159,279 Pence (5.94p) 2.66p (5.94p) 2.60p 6,940 (1,404) 6,498 1,181 1,629 14,844 (2,820) 12,024 Number ‘000 156,992 (420) 156,572 2,803 159,375 Pence 4.43p 7.68p 4.36p 7.54p In line with the Group’s policy, the notional tax charge above is calculated at a standard rate of 19% (FY22: 19%). 106 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 14 Dividends Final dividend for the year ended 31 March 2021 Interim dividend for the year ended 31 March 2022 Final dividend for the year ended 31 March 2022 Interim dividend for the year ended 31 March 2023 Year ended 31 March 2023 £000 Year ended 31 March 2022 £000 - - 3,719 1,874 5,593 3,749 1,878 - - 5,627 The Group paid an interim dividend for the year ended 31 March 2022 of 1.2p per ordinary share, with a total payment value of £1.9m. The Group paid a final dividend in respect of the year to 31 March 2022 of 2.4p per ordinary share, with a total payment value of £3.7m The Group paid an interim dividend for the year ended 31 March 2023 of 1.2p per ordinary share, with a total payment value of £1.9m. A final dividend payment of 2.4p per share is expected to be paid on 19 January 2024, subject to approval at the Company’s AGM, to shareholders on the register at the close of business on 8 December 2023 with shares going ex-dividend on 7 December 2023. The last day for Dividend Reinvestment Plan elections is 27 December 2023. 107 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 15 Intangible Assets Customer contracts and related relationships Trademarks and brands Software and licences £000 £000 £000 Goodwill £000 Total £000 42,084 62,284 - 10,332 - - 52,416 - 8,224 - - - 2,746 - - 65,030 - 15,100 - - 275 - 174 - - 449 - 200 - - 6,585 111,228 502 31 502 13,283 (1,548) (1,548) - - 5,570 123,465 869 - (135) (1) 869 23,524 (135) (1) 60,640 80,130 649 6,303 147,722 - - - - - - - 44,569 6,324 - 50,893 7,983 - 58,876 60,640 52,416 21,254 14,137 275 174 - 449 200 - 649 - - 5,104 475 (1,182) 4,397 590 (7) 49,948 6,973 (1,182) 55,739 8,773 (7) 4,980 64,505 1,323 1,173 83,217 67,726 Cost At 1 April 2021 Additions Additions on acquisition (note 32) Disposals Exchange difference At 31 March 2022 Additions Additions on acquisition (note 32) Disposals Exchange difference At 31 March 2023 Accumulated amortisation and impairment At 1 April 2021 Charged in year Disposals At 31 March 2022 Charged in year Disposals At 31 March 2023 Net book value At 31 March 2023 At 31 March 2022 Customer contracts have a weighted average remaining amortisation period of 6 years and 5 months (FY22: 4 years and 4 months). Software and licences include £0.6m (FY22 - £0.1m) of additions in relation to customer capital expenditure. 108 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 15 Intangible Assets (continued) Goodwill is allocated to the Group’s cash-generating units (“CGUs”) that are expected to benefit from that combination based on relative carrying values of other acquired intangible assets. The carrying amount of Goodwill is allocated to those CGUs as follows: IT Managed Service Security Services Year ended 31 March 2023 £000 Year ended 31 March 2022 £000 58,801 1,839 60,640 50,765 1,651 52,416 Goodwill is tested annually for impairment and, to confirm whether an impairment of the goodwill is necessary, management compares the carrying value to the value in use. Other intangible assets are tested for impairment whenever events or a change in circumstances indicate carrying values may no longer be recoverable. Consideration for any impacts of climate related risks to impairment is not deemed to affect the overall conclusions in the medium to long term. The value in use has been calculated using budgeted cash flow projections to the period of 31 March 2025, extrapolated for a further three years by an average annual revenue growth rate of 3.5% (FY22: 2.0%). A terminal value based on a perpetuity calculation using a 2.0% real growth rate was then added (FY22: 0.0% growth). In addition to revenue growth, the key assumptions used in the impairment testing were as follows: • Gross margin percentage increasing to 66% (FY22: 63%) • Operating costs increasing by 3.0% (FY22: 1.5%), which is lower than inflation as some costs have been fixed to FY25 • Pre-tax discount rate of 11.2% (FY22: 11.8%) (post tax rate of 10.84% (FY22: 7.2%)) estimated using a weighted average cost of capital, adjusted to reflect current market assessments of the time value of money and the risks specific to the Group; and • Terminal growth rate percentage is consistent with the market the entity operates in for real growth. A reasonably possible adverse movement in any of the above key assumptions made would not give rise to impairment. 109 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 16 Property, plant and equipment Leasehold improvements Office fixtures and fittings Vehicles and computer equipment Assets under construction £000 £000 £000 £000 7,803 1,363 527 11 - - 8,341 700 3,330 - - 107 27 (331) 16 1,182 1,787 6,725 - 4 21,659 1,630 - (25) - 23,264 2,838 1,665 (909) 4 - - - - - - 180 - - - Total £000 30,825 2,264 38 (356) 16 32,787 5,505 11,720 (909) 8 12,371 9,698 26,862 180 49,111 4,916 533 - - 5,449 1,107 - - 793 141 (316) 4 622 1,450 - - 19,282 2,071 (9) - 21,344 2,079 (71) - 6,556 2,072 23,352 - - - - - - - - - 24,991 2,745 (325) 4 27,415 4,636 (71) - 31,980 5,815 2,892 7,626 560 3,510 1,920 180 - 17,131 5,372 Cost At 1 April 2021 Additions Additions on acquisition (note 32) Disposals Exchange differences At 31 March 2022 Additions Additions on acquisition (note 32) Disposals Exchange differences At 31 March 2023 Accumulated depreciation At 1 April 2021 Charged in year On disposals Exchange differences At 31 March 2022 Charged in year On disposals Exchange differences At 31 March 2023 Net book value At 31 March 2023 At 31 March 2022 Vehicles and computer equipment includes additions of £2.6m (FY22: £1.0m) relating to customer capital expenditure. 110 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 17 Right of use assets Most of the Group’s right-of-use assets are associated with our leased property portfolio. Cost At 1 April 2021 Additions Remeasurement At 31 March 2022 Additions Additions on acquisition (note 32) Disposals Exchange differences At 31 March 2023 Accumulated depreciation At 1 April 2021 Charged in year Disposals At 31 March 2022 Charged in year Disposals At 31 March 2023 Net book value At 31 March 2023 At 31 March 2022 Land and buildings £000 Vehicles & computer equipment £000 25,506 2,947 (1,479) 26,974 36,189 3,911 (629) (1) 66,444 12,261 2,252 (893) 13,620 8,676 - 22,296 44,148 13,354 11,707 460 (231) 11,936 391 - - - 12,327 6,165 2,326 (239) 8,252 1,941 - 10,193 2,134 3,684 Total £000 37,213 3,407 (1,710) 38,910 36,580 3,911 (629) (1) 78,771 18,426 4,578 (1,132) 21,872 10,617 - 32,489 46,282 17,038 Of the £40.5m right of use assets acquired in the year, £nil was funded using leases that would have previously been classified as finance leases under IAS17 (FY22: £0.4m). Included in the net book value of land and buildings at 31 March 2023 is £9.8m right of use assets for dilapidations. 111 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 18 Deferred tax Certain deferred tax assets and liabilities have been offset on the face of the consolidated statement of financial position. The following is the analysis of the deferred tax balances (before offset) for financial reporting purposes: Deferred tax liabilities Deferred tax assets 18.1 Deferred tax liabilities Year ended 31 March 2023 Year ended 31 March 2022 £000 £000 (3,330) 4,406 1,076 (3,114) 7,113 3,999 Year ended 31 March 2023 Year ended 31 March 2022 £000 £000 Opening balance Recognised in the income statement Movements arising on acquisitions (note 32) Adjustment in relation to prior year Deferred tax liabilities relate to intangible assets from business acquisitions. 18.2 Deferred tax assets 3,114 (1,409) 1,625 - 3,330 Share- based payments £000 India £000 Tax losses £000 Property, plant and equipment Other timing differences £000 £000 Cost At 1 April 2021 Deferred tax acquired Recognised in income statement Recognised in other comprehensive income Adjustment in relation to prior year At 31 March 2022 Deferred tax acquired (note 32) Recognised in income statement Recognised in other comprehensive income Adjustment in relation to prior year At 31 March 2023 47 - - - - 47 - - - - 47 397 - 92 58 (26) 521 - 120 47 - 688 112 623 1,331 461 - (435) 1,980 - 1,742 - - 3,252 52 264 - (299) 3,269 (4,560) - - - 446 20 288 - 542 1,296 - (19) - (37) 3,722 (1,291) 1,240 4,406 3,362 (895) 686 (39) 3,114 Total £000 4,765 1,403 1,105 58 (218) 7,113 (4,560) 1,843 47 (37) Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 19 Inventories Goods for resale Year ended 31 March 2023 Year ended 31 March 2022 £000 3,716 £000 1,393 Goods for resale includes components required to deliver managed services to customers. The cost of inventories charged to cost of sales in the year totalled £6.0m (FY22: £4.7m). 20 Trade and other receivables Trade receivables Less: provision for impairment of trade receivables and credit notes Trade receivables – net Other receivables Prepayments Commission contract asset Accrued income Year ended 31 March 2023 Year ended 31 March 2022 £000 £000 21,456 (1,251) 20,205 2,363 9,180 2,938 4,568 39,254 11,112 (884) 10,228 737 6,434 2,098 2,626 22,123 The commission contract asset arose on the adoption of IFRS 15. For the year ended 31 March 2023 the impairment for this contract asset was immaterial (FY22: immaterial). Other receivables in FY23 relate to amounts due from the administrators for the acquisition of Sungard (note 32). There is £immaterial (FY22: £immaterial) expected credit loss against other receivables, see note 21.1. 21 Credit quality of financial assets The amounts of the maximum exposure to credit risk at the reporting date are as follows: Year ended 31 March 2023 Year ended 31 March 2022 £000 £000 20,205 2,363 1,366 23,934 10,228 737 1,804 12,769 Trade receivables Other receivables Cash and cash equivalents 113 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 21 Credit quality of financial assets (continued) 21.1 Credit quality of trade receivables The Directors monitor the quality of the receivables not impaired and believe them to be recoverable. The non-impaired receivables are fully performing and relate to independent customers with no history of default. The individually impaired receivables relate to receivables over 365 days, customers in financial difficulty, customer acceptance issues and cancelled contracts. The ageing analysis of trade receivables is as follows, with the exposure to credit risk and the expected credit loss in the current year: Year ended 31 March 2023 Weighted average loss rate Loss Allowance Credit impaired £000 18,450 2,212 557 283 194 (240) 21,456 (1,251) 20,205 0.5% 1.0% 2.0% 5.0% 10.0% 10.0% N/A (92) (22) (11) (14) (19) 24 (134) No No No No No No Year ended 31 March 2022 £000 8,736 1,997 452 80 19 (172) 11,112 (884) 10,228 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 Provision Net trade debtors As at 31 March 2023, trade receivables of £117k were provided for (31 March 2022: £85k). £325k has been provided for within the credit note provisions (31 March 2022: £799k). £809k has been provided for inaccurate billing (31 March 2022: £614k). No provision has been made against accrued income in the year ended 31 March 2023 (31 March 2022: £nil). Trade debtor days were 46 at 31 March 2023 compared to 36 at 31 March 2022. Trade debtor days are calculated as gross trade debtors divided by revenue (incl. VAT) multiplied by 365. 114 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 21 Credit quality of financial assets (continued) 21.1 Credit quality of trade receivables (continued) The provision is calculated by management on a specific basis based on their best estimate of recoverability considering the age and specific circumstances relating to the debtor. The maximum exposure to credit risk at the reporting date is the fair value of each class of receivable mentioned above. The Group does not hold any collateral as security. Movements on the Group bad debt and credit note provisions were as follows: Provision in relation to FY18 and earlier Provision in relation to FY19 Provision in relation to FY20 Provision in relation to FY21 Provision in relation to FY22 Provision in relation to FY23 Total Provision £000 £000 £000 £000 £000 £000 £000 At 1 April 2021 Creation of provision Utilisation of provision At 31 March 2022 Creation of provision Utilisation of provision At 31 March 2023 3 - - 3 - (3) - 141 - (116) 25 - (25) - 326 - (292) 34 - (34) - 634 - (344) 290 - (290) - - 832 (300) 532 1 (528) 5 - - - - 2,122 (876) 1,246 1,104 832 (1,052) 884 2,123 (1,756) 1,251 21.2 Credit quality of cash and cash equivalents The Group’s cash is held at accounts with Barclays Bank PLC and HSBC UK Bank PLC, both of which have a Standard and Poor’s rating of A. 22 Trade and other payables Trade payables Other payables Taxation and social security Accruals Deferred income Year ended 31 March 2023 Year ended 31 March 2022 £000 £000 16,520 1,892 5,076 11,759 8,331 43,578 8,910 1,130 2,433 4,050 7,530 24,053 Trade payable days were 42 at 31 March 2023 compared to 37 as at 31 March 2022. Trade payable days are calculated as trade payables divided by total purchases (cost of sales and operating expenditure) multiplied by 365. Of the deferred income balance of £7.5m at 31 March 2022, £6.7m has been recognised as revenue in the year ended 31 March 2023. 115 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 23 Contingent consideration Contingent consideration due on acquisitions within one year: - 7 Elements Limited - Sungard DCs Year ended 31 March 2023 Year ended 31 March 2022 £000 £000 450 2,540 2,990 422 - 422 Contingent consideration is based on the directors’ best estimate of future payments due at 31 March 2023 as detailed in note 32. This has been settled subsequent to the yearend as outlined in note 34. Contingent consideration is level 3 within the fair value hierarchy. 116 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 24 Borrowings Current Lease liabilities Term loans Bank loans Non-current Lease liabilities Term loans Bank loans Year ended 31 March 2023 Year ended 31 March 2022 £000 £000 10,804 475 - 11,279 29,400 20 33,631 63,051 4,086 508 - 4,594 13,359 496 - 13,855 At 31 March 2023, the Group was party to £87m of bank facilities with a maturity date of 25 April 2025. The facilities comprise a Revolving Credit Facility (“RCF”) of £80m (net £34m utilised at 31 March 2023) and a £7.0m Asset Financing Facility (“AFF”) (£2.3m utilised at 31 March 2023). Term loans constitute financing arrangements for services and include a supplier loan of £495k for an unsecured 3 year maintenance contract. The AFF is provided by Lombard. The RCF is provided by a new four bank group of NatWest, Barclays, Bank of Ireland and Silicon Valley Bank (now part of HSBC UK Group), with Lombard Technology Services Ltd providing the Asset Financing Facility. The borrowing cost of the facility is determined by the level of the Group’s leverage and has a borrowing cost of 175 basis points over SONIA at the Group’s current leverage levels. An arrangement fee of 75 basis points was payable upfront, in addition to a commitment fee on the undrawn portion. The Group is required to comply with financial covenants for adjusted leverage (net debt to adjusted EBITDA), cashflow cover (adjusted cashflow to debt service, where adjusted cashflow is defined as adjusted EBITDA less tax paid, dividend payments, IFRS16 lease repayments and cash capital expenditure) and provisions relating to guarantor coverage such that guarantors must exceed a prescribed threshold of the Group’s gross assets, revenue and Adjusted EBITDA. Covenants are tested quarterly each year. No security has been provided. The RCF is drawn in short to medium-term tranches of debt that are repayable within 12 months of draw-down. These tranches of debt can be rolled over provided certain conditions are met, including compliance with all loan terms. The Group considers that it is unlikely it would not be in compliance and therefore, be unable to exercise its right to roll over the debt. The Board therefore believe the Group has the ability and the intent to roll over the drawn RCF amounts when due and consequently has presented the RCF as a non-current liability. In addition to the financial covenants, the facility requires the Group to file audited financial accounts within 120 days of the yearend date alongside an audited compliance certificate, which the bank has extended for the current year. As noted in the basis of preparation, in March 2023, the Directors agreed with the bank amendments to the cash flow cover financial covenant to allow for several non-repeating acquisition related costs and to reset the covenant level to less stringent levels for the quarters ended March and June 2023 and quarters ending September and December 2023. There were no other material changes to the terms and conditions of the borrowings because of this amendment. Lease liabilities are comprised of secured and unsecured agreements. Secured lease liabilities of £1.8m and secured term loans are secured against assets included within ROU assets with a carrying value of £1.8m (FY22: £3.7m). 117 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 24 Borrowings (continued) 24.1 Reconciliation of net debt Revolving credit facility Drawdown on facility Repayment of facility Finance costs in relation to RCF (non-cash) Interest paid Loan arrangement fees paid (cash) Release of deferred arrangement fees (non-cash) Movement in revolving credit facility Opening balance Closing Balance Lease liabilities New leases entered into (non-cash) Leases acquired IFRS16 leases modifications (non-cash) Leases terminated (non-cash) Principal element of lease payments Interest element of lease payments Interest cost (cash) Movement in lease liabilities Opening balance Closing balance Term loans New loans (non-cash) Repayment of loans Finance costs in relation to term loans (non-cash) Interest paid Movement in term loans Opening balance Closing balance Cash Net debt All lines included above are cash unless otherwise stated. 118 Year ended 31 March 2023 Year ended 31 March 2022 £000 £000 55,500 (21,500) 1,803 (1,751) (713) 291 33,630 - 33,630 28,314 1,976 (629) - (6,901) 1,218 (1,218) 22,760 17,445 40,205 - (508) 24 (24) (508) 1,004 496 4,500 (4,500) 86 (86) - - - - - 2,675 - - (813) (3,745) 797 (797) (1,883) 19,328 17,445 - (487) 45 (45) (487) 1,491 1,004 1,366 (72,965) 1,804 (16,645) Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 24 Borrowings (continued) 24.2 Terms and repayment schedule RCF Term Loans Leases 24.3 Lease liabilities Currency GBP GBP GBP Nominal interest rate SONIA + 1.75% 1.6% - 2.0% 0.0% - 7.2% Year of maturity 2025 2023-2025 2023-2035 Present value as at 31 March 2023 Future lease payments as at 31 March 2023 Present value as at 31 March 2022 Future lease payments as at 31 March 2022 Finance charges Finance charges £000 £000 £000 £000 £000 Not later than 1 year After 1 year but not more than 5 years After more than 5 years 10,804 20,565 8,833 1,420 2,973 553 40,202 4,946 12,224 23,538 9,386 45,148 4,086 7,593 5,766 868 1,638 795 17,445 3,301 20,746 25 Liquidity risk The table below analyses the Group’s financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. These amounts disclosed in the table are the contracted undiscounted cash flows. Balances within 12 months equal their carrying balances as the impact of discounting is not significant. Less than 1 year 1 - 5 years More than 5 years £000 £000 £000 At 31 March 2023 Bank loans Leases Term loans Trade payables Other payables At 31 March 2022 Leases Term loans Trade payables Other payables 2,755 12,224 475 16,520 1,892 33,866 4,086 508 8,910 1,132 14,636 35,700 23,538 20 - - - 9,386 - - - 59,258 9,386 102,510 7,593 496 - - 8,089 5,766 - - - 5,766 17,445 1,004 8,910 1,132 28,491 The interest accrual for the future forecasted borrowings in each category is dependent on the expected level of funding required each month, with an applied interest rate of SONIA (forecast to be 5.5%) above the margin (which is a fixed percentage depending on the Group’s adjusted leverage in line with the facility agreement). 119 £000 4,954 9,231 6,561 Total £000 38,455 45,148 495 16,520 1,892 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 26 Provisions At 1 April 2021 Additional provisions created during the period Provisions acquired from business combination Released during the period Utilised during the period At 31 March 2022 Additional provisions created during the period Provisions acquired from business combination Released during the period Utilised during the period At 31 March 2023 FY23 Analysed as: Current Non-current FY22 Analysed as: Current Non-current Scheme fees provision Dilapidations provision Onerous service contract provision £000 £000 £000 Total provision £000 553 - - (527) (26) - - - - - - - - - - - - 2,695 1,189 - - (1) 3,883 8,426 692 - - 13,001 1,841 11,160 13,001 - 3,883 3,883 21 - 577 - (598) - - - - - - - - - - - - 3,269 1,189 577 (527) (625) 3,883 8,426 692 - - 13,001 1,841 11,160 13,001 - 3,883 3,883 The Scheme fees provision represented costs which were potentially repayable on adviser fees in relation to the historical FCA Investigation. This provision was released in FY22 as repayment is no longer considered probable. The dilapidations provision represents the estimated costs associated with returning certain leasehold properties to the original condition upon exiting the lease. Given there is estimation in determining the quantum of provisions to be recognised a third- party expert was engaged to determine appropriate estimates. This is not considered to be a critical estimate as it is not expected to be subject to material reversal in future periods given the specialist input used to inform the estimate, and the nature of the estimate. After initial measurement, any subsequent adjustments to the dilapidations provision will be recorded against the original amount included in right of use assets with a corresponding adjustment to future depreciation charges. The utilisation of the dilapidations provision will be in line with the end of the leasehold properties lease terms to which the provisions relate. The increase of £8.4m through additional provisions created have resulted from new leases being agreed on acquired leasehold properties in the year. The onerous service contract provision related to the costs associated with third party services arrangements no longer utilised by the business and service contracts with customers where the Group estimates the cost to fulfil the contract will exceed the benefit. 120 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 27 Share capital At 1 April 2021 New shares issues At 31 March 2022 New shares issued At 31 March 2023 Ordinary shares of 0.1p each Share premium Number £000 £000 156,165,710 826,272 156,991,982 - 156,991,982 156 1 157 - 157 73,267 - 73,267 - 73,267 The total shares held in treasury at 31 March 2023 was 728,722 at an average cost of £1.23 per share therefore, a value of £897,479 (31 March 2022: 2,170,203 shares at an average cost of £1.23p, for a total value of £2,672,777). The number of shares authorised is the same as the number of shares issued. Ordinary shareholders have the right to attend, vote and speak at meetings, receive dividends, and receive a return on assets in the case of a winding up. The common control reserve represents the difference between the net assets acquired and the fair value of consideration transferred on the acquisition of Redcentric Holdings Limited via demerger from Redstone plc in 2013. 28 Share-based payments At 31 March 2023, the Group had the following share-based payment arrangements in place: 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. Save As You Earn (SAYE) The Group operates a HMRC approved SAYE option plan under which it offers its UK based colleagues the opportunity to participate in a share purchase plan. To participate in the plan, the colleagues 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 colleagues are entitled to purchase shares using funds saved at a price 20% below the market price at grant date. Only colleagues 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. Colleagues 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. The Group recognised the following expense for its share-based payments: Equity-settled share-based charge on LTIP scheme Equity-settled share-based charge on SAYE plan National Insurance arising on share options 121 Year ended 31 March 2023 Year ended 31 March 2022 £000 861 182 213 1,256 £000 858 209 114 1,181 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 28 Share-based payments (continued) The fair value of the equity-settled share options granted is estimated as at the date of grant using a binomial model, taking into account the terms and conditions upon which the options were granted. The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements in, share options during the year. LTIP (number) SAYE (number) Total (number) WAEP (pence) Balance at 31 March 2021 Issued in the period Forfeited in the period Cancelled in the period Exercised in the year Lapsed in the year Balance at 31 March 2022 Issued in the period Forfeited in the period Cancelled in the period Exercised in the year Lapsed in the year 2,847,546 1,965,877 (295,851) 894,222 876,638 - - (366,395) (836,272) - 3,681,300 2,116,726 (159,379) (264,670) (1,080,567) - (5,219) (4,515) 1,394,731 562,199 - (338,974) (360,914) (48,832) 3,741,768 2,842,515 (295,851) (366,395) (841,491) (4,515) 5,076,031 2,678,925 (159,379) (603,644) (1,441,481) (48,832) Balance at 31 March 2023 4,293,410 1,208,210 5,501,620 22.1p 9.6p 0.1p 103.7p 0.7p 119.6p 26.1p 20.2p 0.1p 59.1p 15.9p 102.7p 22.3p The weighted average remaining contractual life for the share options outstanding at 31 March 2023 is 7 years and 6 months (31 March 2022: 6 years and 9 months). The range of exercise prices for options outstanding at the end of the year was 0.1p to 119.6p. Share options outstanding at the end of the year with approximate remaining average life are as follows: Exercise price 0.10 63.00 119.60 108.33 99.87 96.07 Number, year ended 31 March 2023 Life at 31 March 2023 Number, year ended 31 March 2022 Life at 31 March 2022 4,293,410 8 years 11 months 3,681,300 8 years 5 months - - 143,577 1 year 0 months 369,393 241,311 1 year 0 months 2 year 0 months 93,238 2 year 0 months 168,998 3 years 0 months 496,873 2 years 4 months 615,029 3 years 4 months 474,522 2 years 11 months - - 5,501,620 7 years 6 months 5,076,031 6 years, 9 months 122 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 28 Share-based payments (continued) The following table illustrates the status of the options outstanding at the end of the year: 31 March 2023 Number of options 31 March 2023 WAEP 31 March 2022 Number of options 31 March 2022 WAEP 25,000 4,268,410 1,208,210 5,501,620 0.1p 0.1p 101.4p 22.3p - 3,681,300 1,394,731 5,076,031 0.0p 0.1p 94.6p 26.1p Performance conditions satisfied Subject to performance conditions Save-As-You-Earn Outstanding at the end of the year 29 Capital commitments The Group had no contracted but not provided for capital commitments at 31 March 2023 (31 March 2022: £nil) included within trade and other payables. 30 Pensions The Group operates a defined contribution pension scheme for eligible employees. The charge for the year ended 31 March 2023 was £1.2m (FY22: £0.8m). At the year- end there was a pension creditor of £0.3m (31 March 2022: £0.2m). 31 Subsidiaries The undertakings whose results and financial position are consolidated within the Group financial statements at 31 March 2023 are as follows: Principal activity Country of incorporation % of ordinary share capital owned Held directly by Redcentric plc Redcentric Solutions Limited Managed Services England and Wales 100% Held indirectly Redcentric Solutions Private Limited Redcentric Support Services Private Limited Support services Support services India India Piksel Industry Solutions Limited Dormant England and Wales 7 Elements Limited Hotchilli Internet Limited Security services Scotland Dormant England and Wales 4D Data Centres Limited (acquired on 27 June 2022) Managed Services England and Wales 100% 100% 100% 100% 100% 100% All companies have a registered office of Central House, Beckwith Knowle, Harrogate HG3 1UG, except Redcentric Solutions Private Limited and Redcentric Support Services Private Limited which have a registered office at 8th Floor, My Home Twitza, Plot No. 30/A Sy No. 83/1, TSIIC Knowledge City, Raidurg, Hyderabad Rangareddy Telangana 500081 INDIA, and 7 Elements Limited which has a registered office of 4-5 Lochside Way, Edinburgh Park, Edinburgh, Scotland, EH12 9DT. 123 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 32 Acquisition of subsidiary Current year acquisitions 4D Data Centres On 27 June 2022, the Group’s trading subsidiary Redcentric Solutions Limited acquired 100% of the share capital of 4D Data Centres Limited (“4D”) for £10.1m consideration paid in cash. The business provides colocation, cloud and connectivity services to mid-market customers. The primary purpose of the business combination is to scale the Group’s existing revenues in this area with significant synergies expected as the acquisition is integrated into the Group. Management consider signing of the share purchase agreement (SPA) on the 27 June 2022 as the change of control and therefore, acquisition date for the transaction. The following table summarises the acquisition date fair value of each major class of consideration transferred: Cash Deferred consideration 1 True up payment (deferred) 2 £000s 9,842 162 119 10,123 1 The deferred consideration is a delayed R&D claim refund due from HMRC which is to be paid to the Shareholders on receipt. 2 The true up payment is the additional amount due following the update to fair values at the time of completion, when the original cash transfer was based on estimates. The Group incurred acquisition related costs of £0.2m on legal fees, due diligence costs and direct integration costs. These costs have been included in exceptional costs in note 9. The following table summarises the recognised amounts of assets and liabilities assumed as at the date of acquisition: Tangible fixed assets Customer relationships Brand Right of use assets Trade and other receivables Cash and cash equivalents Deferred tax Trade and other payables Deferred income IFRS 16 leases Provisions Corporation tax receivable Total identifiable net assets acquired Goodwill Total consideration Note 16 15 17 18 22 24 15 124 Fair value £000s 2,089 6,300 200 1,287 920 1,053 (1,787) (1,647) (764) (1,976) (692) 186 5,169 4,954 10,123 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 32 Acquisition of subsidiary (continued) The goodwill arising on acquisition represents the future income from new customers, the potential to cross-sell existing Group products to the existing 4D customer base, as well as the assembled workforce which increases the Group’s competence in key growth areas of the Security Services sector. The fair value of the acquired customer relationships is £6.3m. To estimate fair value of the customer relationships intangible asset, a multi-period excess earnings “MEEM” approach has been adopted, and this approach considers the present value of cash flows expected to be generated by the customer relationships, excluding any cash flows related to contributory assets. On 28 February 2023, the trade, assets and liabilities of 4D were hived in to the Group’s trading subsidiary Redcentric Solutions Limited. For the 8 months ended 28 February 2023, 4D contributed revenue of £5.3m and profits, before allocation of group overheads, share based payments and tax, of £1.1m to the Group’s results. Sungard Consulting On 7 June 2022, the Group’s trading subsidiary Redcentric Solutions Limited acquired the consulting business from Sungard Availability Services (UK) Limited (in administration) for £4.2m consideration paid in cash. The business provides services in respect of business continuity, cloud and infrastructure, cyber resilience, disaster recovery and hybrid cloud transformation services alongside the provision and operation of Cloud related services. Management consider signing of the Agreement for the sale of assets as the change of control and therefore, acquisition date for the transaction. No assets were acquired or liabilities assumed from the Consulting business transaction. Data Centres On 6 July 2022, the Group’s trading subsidiary Redcentric Solutions Limited acquired certain business and assets relating to three data centres “DCs” from Sungard Availability Services (UK) Limited (in administration) for initial consideration of £10.1m paid in cash and a cash prepayment of £3.4m for a payment made to the administrators in advance for a license to occupy on the three DCs, and contingent consideration with a maximum potential value of £19.0m depending on customer retention and certain performance criteria. As outlined in note 2.1, the DCs and Consulting acquisitions have been treated as a single transaction. The resulting change due to this treatment as a single transaction is that the goodwill from the acquisitions is considered in aggregate rather than separately. The following table summarises the acquisition date fair value of each major class of consideration transferred for the combined transaction: Cash Prepayment (paid in cash) Contingent consideration3 £000s 14,320 3,369 2,540 20,229 3 The contingent consideration is an additional amount based on an agreed sliding scale threshold of customers committing to long term contracts with the business post-acquisition, determined by the recurring monthly revenue value by customer and by each of the three data centres. This amount is the Board’s best estimate as at the acquisition date of the amount due as contingent consideration, discounted to present value. The Group incurred acquisition related costs of £0.3m on legal fees, due diligence costs and direct integration costs. These costs have been included in exceptional costs in note 9. 125 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 32 Acquisition of subsidiary (continued) The following table summarises the recognised amounts of assets and liabilities assumed as at the date of acquisition: Tangible fixed assets Customer relationships Right of use assets Prepayments Deferred tax Accruals Other creditors Total identifiable net assets acquired Goodwill Total consideration Note 16 15 17 18 15 Fair value £000s 9,630 8,800 2,624 745 (4,362) (185) (293) 16,959 3,270 20,229 The goodwill arising on acquisition represents the future income from new customers, the potential to cross-sell existing Group products to the existing Sungard customer base, which increases the Group’s competence in key growth areas of the Security Services sector. The fair value of the acquired customer relationships is £8.8m. To estimate fair value of the customer relationships intangible asset, a multi-period excess earnings “MEEM” approach has been adopted, and this approach considers the present value of cash flows expected to be generated by the customer relationships, excluding any cash flows related to contributory assets. The DCs earned revenue of £36.3m and profits, before allocation of group overheads, share based payments and tax, of £2.5m in the period since acquisition. The consulting business earned revenue of £0.6m and profits, before allocation of group overheads, share based payments and tax, of £0.2m in the period since acquisition. The net cash flow for the acquisitions were as follows: Cash paid for 4D Cash paid for Sungard, including prepayment Less: cash acquired Less: Piksel deferred consideration The Piksel deferred consideration was paid in April 2023 and related to the acquisition in FY22. £000s 10,123 17,689 (1,053) (153) 26,606 126 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 32 Acquisition of subsidiary (continued) Unaudited pro-forma full year information The following unaudited pro-forma summary presents the Group as if the business acquired during FY23 had been part of the Group since 1 April 2022. This includes the results of the acquired business, depreciation of the acquired assets and an amount of £8.2m relating to the amortisation of the acquired intangible assets recognised on acquisition. This information is presented purely for illustrative purposes and does not necessarily reflect the actual underlying results that would have occurred. Pro-forma year ended 31 March 2023 £000s 156,574 (9,954) Revenue Loss before tax Prior year acquisitions The following subsidiaries were acquired in the prior period. Piksel Industry Solutions Limited On 30 September 2021, the Group acquired 100% of the issued share capital of Piksel Industry Solutions Limited “Piksel” obtaining control at this date. The acquisition is in line with the Group’s strategy to grow its operations, both organically and through acquisitions. Piksel is a provider of IT modernisation and digital transformation services focussing primarily on the public cloud. Taking control of Piksel significantly enhances Redcentric’s service offerings in both cloud and security and provides a complementary customer base with excellent cross-sell opportunities. The following table summarises the acquisition date fair value of each major class of consideration transferred: Cash6 Novation of Intercompany loans7 Deferred consideration8 £000s 9,459 3,069 183 12,711 6 Of the total cash consideration, $750k (£549k) was held in Escrow for a period of 12 months after which time the balance was released to the vendor less any claims made by the Group to offset undisclosed liabilities 7 An intercompany receivable balance between Piksel and the seller was novated to the acquiring group company (Redcentric Solutions Limited) as part of the acquisition. 8 Deferred consideration is to offset against future costs incurred as part of the transitional services agreement between Piksel and the seller. 127 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 32 Acquisition of subsidiary (continued) The Group incurred acquisition-related costs of £0.9m on legal fees, due diligence costs and direct integration costs relating to systems migration etc. These costs were included in exceptional costs in FY22. The following table summarises the recognised amounts of assets and liabilities assumed as the date of acquisition: Tangible fixed assets Customer relationships Other intangible assets Trade and other receivables Cash and cash equivalents Intercompany loans Corporation tax receivable Deferred tax Trade and other payables Deferred income Payroll and social security creditors VAT liability Onerous contract provisions Total identifiable net assets acquired Goodwill Total consideration Fair value £000s 38 1,868 202 2,418 965 3,069 557 936 (2,940) (1,817) (345) (344) (577) 4,030 8,681 12,711 The goodwill arising on acquisition represented future income from new customers, the potential to cross-sell existing Group products to the established Piksel customer base as well and the assembled workforce which increases the Group’s competence in key growth areas of the managed IT services sector allowing the Group to provide additional services to its existing customer base, together with the benefits to the Group in merging the business with its existing infrastructure and the anticipated future operating synergies from the new combination. The fair value of the acquired customer relationships was £1.9m. To estimate the fair value of the customer relationships intangible asset, a multi-period excess earnings method “MEEM” approach has been adopted, this approach considers the present value of net cash flows expected to be generated by the customer relationships, by excluding any cash flows related to contributory assets. On 28 February 2022 the trade, assets and liabilities of Piksel were hived out to the Group’s trading subsidiary Redcentric Solutions Limited. For the 5 months ended 28 February 2022, Piksel contributed revenue of £4.9m and profits, before allocation of group overheads, share based payments and tax, of £0.3m to the Group’s results. 128 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 32 Acquisition of subsidiary (continued) 7 Elements Limited On 14 March 2022 the Group acquired 100% of the issued share capital on 7 Elements Limited “7 Elements” obtaining control at this date. 7 Elements is an industry leading provider of security testing, incident response management and bespoke security consultancy services. The acquisition significantly enhances the Group’s service portfolio with additional capacity within the increasingly important security market. The following table summarises the acquisition date fair value of each major class of consideration transferred: Cash9 Contingent consideration10 9 Of the cash consideration of £2.4m above, £0.13m was paid during FY23. 10 The final contingent consideration amount was £0.45m paid on 3 April 2023. £000s 2,409 422 2,831 129 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 32 Acquisition of subsidiary (continued) The Group incurred acquisition-related costs of £0.1m on legal fees and due diligence costs. These costs were included in exceptional costs in FY22. The following table summarises the recognised amounts of assets and liabilities assumed as the date of acquisition: Other intangible assets Customer relationships Trade and other receivables Cash & cash equivalents Trade and other payables Payroll and social security creditors Deferred Tax VAT liability Corporation tax liability Total identifiable net assets acquired Goodwill Total consideration Fair value £000s 3 878 168 465 (11) (1) (220) (50) (52) 1,180 1,651 2,831 The goodwill arising on acquisition represented future income from new customers, the potential to cross-sell existing group products to established 7 Elements customer base and the assembled workforce which increases the Group’s competence in key growth areas of the managed IT services sector. The fair value of the acquired customer relationships is £0.9m. To estimate the fair value of the customer relationships intangible asset, a multi-period excess earnings method “MEEM” approach has been adopted, this approach considers the present value of net cash flows expected to be generated by the customer relationships, by excluding any cash flows related to contributory assets. 7 Elements earned revenue of £0.1m and delivered profits, before allocation of group overheads, share-based payments and tax of £0.1m in the period since acquisition to 31 March 2022. 130 Annual Report and Accounts 2023Financial statementsNotes to the consolidated financial statements for the year ended 31 March 2023 (continued) 33 Related parties Directors’ emoluments are disclosed in the Annual Remuneration Report on page 70 and compensation of key management personnel is disclosed in note 11. There were no other transactions with related parties in the year to 31 March 2023. 34 Subsequent events Subsequent to the year end, the consideration for the Sungard acquisition was finalised. The amount of contingent consideration at the yearend was based on the expectations at the time of the conversion of short-term customer contracts into contracts with a term of 12 months or more from the date of the acquisition, which was determined to be £2.75m (discounted at yearend to £2.54m). The final position has now been crystallised on the anniversary date of the acquisition in line with the purchase agreement, resulting in a payment of £0.4m made in July 2023. As a result, an exceptional credit of £2.14m will be recognised in the statement of comprehensive income in FY24 as a fair value adjustment to contingent consideration. 131 Annual Report and Accounts 2023Financial statementsRedcentric plc Company Balance Sheet as at 31 March 2023 Fixed Assets Investments Current Assets Debtors Current liabilities Creditors – amounts falling due within one year Provisions Net current liabilities Net assets Capital and reserves Called up share capital Share premium account Share option reserve Own shares held in treasury Retained earnings: At the beginning of the year Profit for the year Other changes in retained earnings Total shareholders’ funds Note 31 March 2023 £’000 31 March 2022 £’000 2 3 4 5 105,096 105,096 104,051 104,051 406 406 (21,607) (16,242) - - (21,201) (15,836) 83,895 88,215 157 73,267 8,887 (898) 9,621 - (7,139) 2,482 83,895 157 73,267 7,843 (2,673) 629 14,633 (5,641) 9,621 88,215 The notes on pages 134 to 138 are an integral part of these financial statements. The financial statements of Redcentric Plc (Registration Number 08397584) on pages 132 to 133 were approved by the Board on 24 August 2023 and are signed on its behalf by: David Senior Chief Financial Officer 132 Annual Report and Accounts 2023Financial statementsCompany Statement of Changes in Equity for the year ended 31 March 2023 Called up Share Capital Share Premium £000 £000 Share option reserve £000 Own shares held in treasury Retained Earnings £000 £000 156 73,267 6,776 (32) 629 14,633 Balance at 1 April 2021 Profit for the period Transactions with owners Dividend paid to shareholders Issue of new shares Share option exercises Share buyback Share-based payments At 31 March 2022 Profit for the period Transactions with owners Dividend paid to shareholders Issue of new shares Share option exercises Share buyback Share-based payments At 31 March 2023 Total Equity £000 80,796 14,633 (5,627) (5,627) - (14) - - 1 11 (2,666) 1,067 - - (5,593) (5,593) (2,673) 9,621 88,215 - 1,775 (1,546) - - - - (898) 2,482 - 229 - 1,044 83,895 - - - 25 (2,666) - - - - - - 1 - - - - - - - - - 157 73,267 - - - - - - - - - - - - 157 73,267 - - - - - 1,067 7,843 - - - - - 1,044 8,887 133 Annual Report and Accounts 2023Financial statementsNotes to the Company Financial Statements for the year ended 31 March 2023 1 Accounting policies These separate financial statements of the Company are presented as required by the Companies Act 2006. The Company meets the definition of a qualifying entity under FRS 100 ‘Application of Financial Reporting Requirements’ issued by the Financial Reporting Council (FRC). Accordingly, these financial statements were prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework (“FRS 101”). In preparing these financial statements, the Company applies the recognition, measurement and disclosure requirements of UK-adopted international accounting standards (“Adopted IFRSs”), but makes amendments where necessary in order to comply with Companies Act 2006 and has set out below where advantage of the FRS 101 disclosure exemptions has been taken. These policies have all been applied consistently throughout the year unless otherwise stated. In these financial statements, the Company has applied the exemptions available under FRS 101 in respect of the following disclosures: • • • • • • • a cash flow statement and related notes; comparative period reconciliations for share capital, tangible fixed assets, intangible assets and investments; disclosures in respect of transactions with wholly owned subsidiaries; disclosures in respect of capital management; the effects of new but not yet effective IFRS; disclosures in respect of the compensation of key management personnel; and disclosures of transactions with a management entity that provides key management personnel services to the Company. As the consolidated financial statements of the 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 indefinite life intangible assets; • 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, unless otherwise stated, have been applied consistently to all periods presented in these financial statements. 1.1 Investments Investments in subsidiaries are carried at cost less impairment which is based on the fair value at acquisition. Investments are reviewed for impairment whenever events or changes in circumstances indicate the carrying values may not be recoverable. 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. 1.2 Income taxes The taxation expense charged in the statement of comprehensive income represents the sum of the current tax expense and the deferred tax expense. The current tax payable is based on the taxable profit for the year. Taxable profit differs from accounting profit as reported in the Group statement of comprehensive income because it excludes items of income or expense that are taxable or deductible 134 Annual Report and Accounts 2023Financial statementsNotes to the Company Financial Statements for the year ended 31 March 2023 (continued) 1.2 Income taxes (continued) in other years and it further excludes items that are never taxable or deductible. The liability for current tax is measured using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit and is accounted for using the balance sheet liability method. Deferred tax is provided for on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, with the following exceptions: • where the temporary difference arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss; • • in respect of taxable temporary differences associated with investments in subsidiaries, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future; and deferred income tax assets are recognised only to the extent that it is probable that taxable profits will be available against which deductible temporary differences carried forward tax credits or tax losses can be utilised. 1.3 Dividends Dividends payable to equity shareholders are included in the financial statements within ‘other creditors’ when a final dividend is approved by shareholders in a general meeting. Interim dividends to equity shareholders approved by the board during the financial year are not included in the financial statements until paid. Dividends receivable from the Company’s investments are recorded in the Company income statement once the dividend has been declared and approved by the Board. 1.4 Provisions Provisions are recognised when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. 1.5 Treasury shares Redcentric Plc shares held by the Company are deducted from equity as “treasury shares” and are recognised at cost. Consideration received for the sale of such shares is also recognised in equity, with any difference between the proceeds from sale and the original cost being taken to reserves. No gain or loss is recognised in the Income Statement on the purchase, sale, issue or cancellation of equity shares. 1.6 Share based payments The cost of equity-settled transactions with employees of the Group 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 in the subsidiary company for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied. At each balance sheet date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has expired and management’s best estimate of the achievement or otherwise of non-market conditions, number of 135 Annual Report and Accounts 2023Financial statementsNotes to the Company Financial Statements for the year ended 31 March 2023 (continued) 1.6 Share based payments (continued) equity instruments that will ultimately vest or in the case of an instrument subject to a market condition, be treated as vesting described above. The movement in the cumulative expense since the previous balance sheet date is recognised in the income statement, with a corresponding entry in equity. Where the terms of an equity-settled award are modified or a new award is designated as replacing a cancelled or settled award, the existing charge is recognised immediately. In addition, an expense is recognised over the remainder of the new vesting period for the incremental fair value of any modification, based on the difference between the fair value of the original award and the fair value of the modified award, both as measured on the date of the modification. No reduction is recognised if this difference is negative. Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. Any compensation paid up to the fair value of the award at the cancellation or settlement date is deducted from equity, with any excess over fair value being treated as an expense in the income statement. The costs of equity-settled transactions with group employees are settled by Redcentric Solutions Limited on behalf of the parent Company and added to the cost of the investment in the parent Company. The Company does not operate any cash settled share-based payment schemes. 1.7 Key judgements and sources of estimation uncertainty There were no critical accounting judgements that would have a material effect on the amounts recognised in the Company’s financial statements or key sources of estimation uncertainty at the balance sheet date that would have a significant risk of causing a material adjustment to the carrying value of assets and liabilities within the next financial year. Impairment reviews show significant headroom and there are no additional indicators to suggest that the Company’s investments should be impaired. 1.8 Parent company profit and loss account As permitted by Section 408 of the Companies Act 2006, the Parent Company has not presented its own profit and loss account. 2 Investments held as fixed assets Investments in subsidiaries Capital contribution related to share-based payments for subsidiaries Year ended 31 March 2023 Year ended 31 March 2022 £000 £000 96,062 9,034 96,062 7,989 105,096 104,051 All of the Company’s investments are unlisted. Details of subsidiary undertakings are included in note 31 of the Group financial statements. The Company’s investments have been tested for impairment and, to confirm whether an impairment is necessary, management compares the carrying value to the value in use. The value in use has been calculated using budgeted cash flow projections to the period of 31 March 2025, extrapolated for a further three years by an average annual revenue growth rate of 3.5% (FY22: 2.0%). A terminal value based on a perpetuity calculation using a 2.0% real growth rate was then added (FY22: 0.0% growth). 136 Annual Report and Accounts 2023Financial statementsNotes to the Company Financial Statements for the year ended 31 March 2023 (continued) 2 Investments held as fixed assets (continued) In addition to revenue growth, the key assumptions used in the impairment testing were as follows: • Gross margin percentage increasing to 66% (FY22: 63%) • Operating costs increasing by 3.0% (FY22: 1.5%), which is lower than inflation as some costs have been fixed to FY25 • Pre-tax discount rate of 11.2% (FY22: 11.8%) (post tax rate of 10.84% (FY22: 7.2%)) estimated using a weighted average cost of capital, adjusted to reflect current market assessments of the time value of money and the risks specific to the Group; and • Terminal growth rate percentage is consistent with the market the entity operates in for real growth. A reasonably possible adverse movement in any of the above key assumptions made would not give rise to impairment. 3 Debtors Year ended 31 March 2023 Year ended 31 March 2022 £000 £000 Deferred tax asset on tax losses 406 406 4 Creditors – amounts falling due within one year Amounts owed to subsidiaries Year ended 31 March 2023 Year ended 31 March 2022 £000 £000 21,607 16,242 Amounts due to Group undertakings are unsecured, interest-free and have no fixed payment terms. 137 Annual Report and Accounts 2023Financial statementsNotes to the Company Financial Statements for the year ended 31 March 2023 (continued) 5 Provisions At 1 April 2021 Additional provision created during the period Utilised during the period Released during the period At 31 March 2022 Additional provisions created during the period Utilised during the period Released during the period At 31 March 2023 Scheme Fees provision £000 554 - (26) (528) - - - - - The scheme fees provision represented costs repayable on adviser fees in relation to the historical FCA Investigation. The provision was released in FY22 as repayment is no longer considered probable. 6 Share capital During FY22 the Company purchased, and held in treasury, 2,170,203 of its ordinary share capital for total proceeds of £2,666,246. No such purchase has been made in FY23. During the year 1,441,481 treasury shares have been utilised for various share option exercises, leaving 728,722 shares held in treasury at 31 March 2023 (31 March 2022: 2,170,203). 7 Auditor’ remuneration The Company audit fee is £45,000 (FY22: £30,000). This fee was borne by another Group company. 8 Related parties The Company has taken exemption not to disclose transactions with entities wholly owned by the Group. Directors’ emoluments are disclosed in the Annual Report on Remuneration of the consolidated financial statements on page 70. There were no other transactions with related parties in the year to 31 March 2023. 138 Annual Report and Accounts 2023Financial statementsAnnual Report and Accounts 2023 Financial statements Directors and advisers Directors Executive Peter Brotherton – Chief Executive Officer David Senior – Chief Financial Officer Non-executive Nick Bate Alan Aubrey Company Secretary Nick Heron Company number 08397584 Registered Office Central House Beckwith Knowle Harrogate HG3 1UG Auditor KPMG LLP Quayside House 110 Quayside Newcastle upon Tyne Tyne and Wear NE1 3DX Nominated adviser and broker finnCap Limited 1 Bartholomew Close London EC1A 7BL Registrars Link Group Central Square 29 Wellington Street Leeds LS1 4DL Legal advisors to the Group Travers Smith 10 Snow Hill London EC1A 2AL Clarion Solicitors Elizabeth House 13-19 Queen Street Leeds LS1 2TW 139 Head office Central House Beckwith Knowle Harrogate HG3 1UG T 0800 983 2522 E sayhello@redcentricplc.com W www.redcentricplc.com 

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