SHEARWATER GROUP PLC
Company No. 05059457
ANNUAL REPORT AND
FINANCIAL STATEMENT
FOR THE YEAR ENDED 31 MARCH 2019
Contents page
Company Information ……………………………..…….1
Chairman’s Statement……………………………..…….2
Chief Executive Officer’s Review………………..……...4
Principal risks and uncertainties…………………..……11
Report of the Directors……………………..……………13
Corporate Governance Statement……………………..15
Statement of Directors Responsibilities………………18
Independent Auditors Report………………………….19
Consolidated Financial Statements…………………...25
Notes to the Consolidated Financial Statements…….29
Company Information
FOR THE YEAR ENDED 31 MARCH 2019
Directors
David Williams (Chairman)
Philip Higgins (Chief Executive Officer)
Paul McFadden (Chief Financial Officer)
Robin Southwell (Non-Executive Director)
Stephen Ball (Non-Executive Director)
Giles Willits (Non-Executive Director)
Registered Office
22 Great James Street
London
WC1N 3ES
Company Secretary
Paul McFadden
Company Number
05059457
Nominated Advisor
And Joint Broker
Cenkos Securities plc
6-8 Tokenhouse Yard
London
EC2R 7AS
Joint Broker
Auditors
Solicitors
Registrars
Joh. Berenberg, Gossler & Co. KG
60 Threadneedle Street
London
EC2R 8HP
BDO LLP
55 Baker Street
London
W1U 7EU
Mayer Brown International LLP
201 Bishopsgate
London
EC2M 3AF
Neville Registrars Limited
Neville House
Steelpark Road
Halesowen
West Midlands
B62 8HD
Company website and
social media links
www.shearwatergroup.com
www.linkedin.com/company/shearwater-group-plc/
1
Strategic Report
FOR THE YEAR ENDED 31 MARCH 2019
Chairman’s Statement
Overview
The financial year ended 31 March 2019 proved to be one of substantial progress for the Group despite some specific
challenges, which have now been addressed. We had a significant number of key strategic and operational successes,
which will stand us in excellent stead in the new financial year.
The highlights include the acquisition of Brookcourt Solutions in October 2018, which has transformed the Group and
materially outperformed since its acquisition, the organic growth delivered by SecurEnvoy, and the step up in revenue
at GeoLang. However, the financial performance of the Group overall was impacted by costs, now removed, which
were incurred in the pursuit of initiatives in certain areas of the business which did not generate the expected returns on
capital we require.
We believe strongly in our strategy and the magnitude of the opportunities we have in order to become a leading, UK
based operational and digital resilience group.
We remain highly ambitious, operating in a large, complex and rapidly growing market. We believe we are well on the
way to establishing a number of highly complementary, leading businesses and are now ideally positioned to improve
our financial performance in not only the current year, but also build value for the long term.
Financial highlights
Revenues increased by £17.3 million to £23.5 million (2018: £6.2m) reflecting only 5.5 months of contribution from
Brookcourt Solutions, and good organic growth at SecurEnvoy.
The Group reported an underlying EBITDA loss of £1.4 million (FY18: £0.8 million underlying EBITDA loss) as a result
of a number of initiatives, largely within Xcina, which have since been removed. However, Brookcourt Solutions
outperformed in the short time it has been part of the Group and SecurEnvoy and Xcina Consulting made positive
underlying contributions.
Operational highlights
In the last 18 months, good progress has been made on the acquisitions front and also on product innovation.
Alongside the transformational acquisition of Brookcourt Solutions, in April 2019 the Group also acquired certain assets
of Secarma, one of the UK’s leading cyber security testing solutions and services businesses, which was renamed
Pentest on acquisition. The acquisition significantly strengthened the Group's existing cyber security testing services
with world-leading "red teaming" capability and has provided for multiple cross selling opportunities, which are already
being realised.
Within the Software side of the business, considerable product development and innovation work has been undertaken
both within SecurEnvoy and GeoLang to advance the capability of our Identity and Access Management and Data
Security offerings. We are extremely excited about the potential for these businesses in the new financial year and
beyond, and the increased levels of cash generation and revenue visibility this will bring to the Group.
Board and our people
Over the course of the last financial year, it became clear to the Board that Shearwater would benefit from new executive
leadership. Phil Higgins, who has substantial industry expertise and experience growing and delivering value within a
fast-growing company environment, was appointed Chief Executive Officer on 12 April 2019.
Phil is ideally placed to drive the future growth of the business, having initially been appointed to the Board as an
Executive Director on 11 December 2018 following the acquisition of Brookcourt Solutions. Phil was the Chief Executive
Officer and co-founder of Brookcourt Solutions, which now forms the largest business within the Group.
His transition to this role has been very smooth, and under his stewardship we look forward to Shearwater capitalising
on the considerable opportunities for growth, which the business is experiencing.
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I would also like to take this opportunity to welcome Paul McFadden to our Board, as Chief Financial Officer. Paul has
been with the business since May 2018 and joined the Board as a Director in October 2018. Prior to this Paul was
Group Financial Controller at Wilmington plc.
Marcus Willett CB OBE also joined the Group’s Advisory Panel in January this year. He will work alongside Lord Reid
of Cardowan, the Advisory Panel’s Chairman, and we all will benefit greatly from Marcus’ 33-year career in GCHQ,
where he was most recently, deputy head of the organisation. We are now fortunate to have a Board and Advisory
Panel with a wide range of contacts to draw on as we move forward.
I would like to make a particular point of thanking our employees, both long standing and those that have joined from
recent acquisitions. Their continued hard work and professionalism is greatly appreciated. It is also important for me to
thank our loyal shareholders for their continued support.
Outlook
The market for leading operational and digital resilience solutions remains compelling and with Shearwater, we have a
unique blend of owned proprietary security technologies and solutions, which can help our customers protect, assure
and manage their data and information in the most demanding of environments.
We have started the new financial year with a new executive team and renewed vigour and optimism. Over the last few
months, the Group’s operational structure has been simplified and restructured to ensure we have the right people in
the right roles to allow us to operate more effectively. This in turn has facilitated intra-group collaboration and at present
a total of 80+ cross selling opportunities which are currently being reviewed and realised.
We are making great progress and have delivered our maiden quarter of profitable performance as a Group at an
underlying EBITDA level. This is a tremendous achievement across the business, delivered at a time of considerable
change, and as a result, we are set up for strong revenue growth, profitability and cash generation for the year as a
whole.
As we progress through the new financial year, our stakeholders can keep pace with the Group’s developing news and
successes through all our media channels including the RNS and RNS Reach news feeds, our corporate web site and
social media platforms.
Overall, after a strong Q1, the Group is trading in line with our expectations and with a material improvement in cash
generation, our cash balance as at 30 June 2019 is up 183% at £1.7 million.
We are looking forward with increased confidence in our ability to execute our strategy and deliver shareholder value.
David Williams
Chairman
30 July 2019
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Strategic Report
FOR THE YEAR ENDED 31 MARCH 2019
Chief Executive Officer’s Review
Strategic overview
With over 30 years IT industry experience and as Chief Executive Officer of the Group, I can clearly see how uniquely
Shearwater sits within our industry. A true British independent company operating in a world where we have an ever-
increasing market space with individual and corporate risk, governance and security threats being the norm.
We are committed to building Shearwater into an established and respected UK plc by providing our customers with
agile and innovative operational and digital resilience solutions.
Through the application of our “buy, focus, grow” strategy, we aim to identify investment and acquisition opportunities
where the target company has a leading product, solution, service or consulting capability whose potential can be
unlocked.
We are witnessing Shearwater at its infancy. A company that has strategic direction, and whose technologies and
services help companies and individuals reduce their risk footprint whilst improving their operational and digital
resilience.
The blend of our own proprietary security technologies alongside market leading solutions means the business has an
excellent opportunity to capture substantial market share through each of its businesses.
With very little client overlap we are now capitalising on the 80+ cross selling opportunities within the Group, seven of
which have already resulted in contract wins. Whilst this cross-sell opportunity is substantial, it isn’t just about driving
revenues for the Group – it’s about how we improve our customer’s overall service experience, helping to solve their
security needs and keeping their data and information assets safe and secure, whilst enhancing their ability to do
business.
Acquisitions growth will remain an important component to augment organic growth, and we will continue to evaluate
selective M&A opportunities which are profitable, organically fit with existing group companies and provide tangible
synergies as part of Shearwater.
Following the change of executive leadership which occurred in April 2019, I have led a review and subsequent
reorganisation of the Group in order to remove a number of initiatives which haven’t generated the requisite returns on
capital we demand in an appropriate timeframe. These initiatives, which substantially resided within Xcina have now
been removed, and as such, going forward, Xcina will largely comprise Xcina Consulting which itself remained profitable
in the period on an underlying basis.
In addition to this, we have also sought to remove duplicative back office functions across the Group by centralising
certain shared services including finance, HR, legal, IT and operations. This has enabled us to create a more efficient
operating structure and generate a number of cost savings, which have already started to be realised.
Whilst 2018/19 has been a challenging year on one hand, it has also been filled with a series of positive developments
across the Group which will underpin our drive to profitability and cash generation during the new financial year.
Delivering on these growth objectives, alongside the benefits of the reorganised and simplified Group, will support
Shearwater in achieving its goals for this year and beyond.
Market opportunity
The market opportunity for Shearwater is considerable. Industry reports estimate total addressable markets across our
businesses worth in excess of $36 billion globally, with tailwinds driving blended 12% plus compound annual growth
rates, which the Group is focused on exploiting. We believe we are uniquely positioned as one of the few true
independents left in our chosen markets, with an offering underpinned by patented technology, and market leading
services and solutions.
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We will continue to invest in technology and solution innovation to protect and enhance our key differentiators and seek
to drive further value from our largely untapped, substantial client base.
Through continued digitalisation and the rapidly growing interconnectivity of enterprises, functions, people and devices,
organisations face unprecedented levels of pressure in needing to evolve their business models so that they can digitally
engage effectively with all stakeholders and manage and protect their critical data and information assets. All of this is
occurring at a time when attacks are increasing, and the sophistication of threats is outpacing the capability and capacity
to respond.
As a result, organisations are having to rethink traditional approaches to data and information security and move beyond
standard protection measures aimed at meeting minimum levels of compliance. They now have to consider how
information security can be embedded within business processes and operations to manage, monitor and protect data
and information assets, while still competing effectively in an increasingly globalised and interconnected world.
We believe that developing this operational and digital resilience is key for all organisations irrespective of size. The
resilience of these systems is paramount as digital technologies have become increasingly interwoven and inseparable
from business processes that are operating with decreasing human oversight and interaction.
In this connected digital environment, the organisations’ failure of any single underlying point, whether through malicious
activity or human error, can cascade and have catastrophic effects across an organisations entire network.
Operational and digital resilience is therefore a foundation for any organisation that wants to compete effectively in an
increasingly interconnected world. It is an organisation’s ability to manage the interaction between technology, process
and people so that they remain operationally resilient, combined with peace of mind that their information assets and
critical infrastructure are protected, and they have the means to recover and rebound if things go wrong.
This presents an attractive market opportunity for those providers of digital resilience solutions which maintain trust
between users, provide assurance around the protection of critical information assets, and support operational
effectiveness.
Group overview
Shearwater is an award-winning operational resilience group that provides cyber security and managed security
services to help assure and secure businesses in a connected global economy. At present, we have:
400+ customers including FTSE350 multinational organisations, Fortune 500 companies, SMEs, charities and
Government organisations.
Approximately 120 employees across ten offices located in the US, UK and Europe ably serving our extensive
customer base.
Won over 22 industry awards and 2 Queen’s Awards for innovation and international trade.
10 technology patents granted with four patents pending, which help enhance the Group’s competitive position
in core markets through continued product and solution innovation.
Group companies holding relevant industry certifications including, ISO9001, 22301, 14001 and 27001, and
OHSAS 18001.
Our comprehensive cyber security solutions and services maintain trust between users, provide assurance around the
protection of information assets and critical infrastructure, and support organisations’ operational effectiveness.
This suite of capabilities has been developed to support an organisation’s operational and digital resilience. Specifically,
these include:
Identity and access management, and data security – the authentication of the individual enabling them to access
the organisational network, specific data and information assets, and the movement and use of that data and information
within and outside of the organisation;
5
Cyber security solutions and managed security services – the delivery of cyber security, networking technologies
and managed security services used to secure and protect organisations’ critical infrastructure; and
Security governance, risk and compliance – technology, operational and regulatory risk testing, assurance and
advisory services in support of an organisation’s operational and digital resilience.
We believe it is important to offer this holistic approach to security as an organisation’s resilience is ultimately about
managing the interaction between technology, process and people.
Corporate responsibility
There are a number of key stakeholders within the Group, and the Board recognises the importance of managing the
interactions with these stakeholders as a key driver of business performance.
The Group also operates several corporate responsibility policies on a group-wide basis, including Code of Business
Conduct, Anti-Bribery and Corruption and Whistleblowing. These policies, among others, set out the standards and
business ethics we require all our employees to comply with.
The following is a summary of corporate responsibility activities, which have been initiated in the new financial year.
Employee wellbeing and mindfulness - our employees are our greatest asset; therefore, we continue to work towards
enhancing the working environment across all our sites and help support them during times of trouble.
During the new financial year, we are introducing an Employee Assistance Programme (“EAP”) aimed at minimising
workplace risks and improving our employees' health and wellbeing. An EAP is an employee support system designed
to help our organisation deal with issues that could be affecting our employees home or work life, health and general
wellbeing.
This EAP provides a complete support network that offers expert advice and guidance 24/7. Confidential and
compassionate support is available to employees and their immediate family. We feel that in today’s fast paced digital
society and the pressure it brings, we need to be able to help our greatest asset as best we can.
Environment commitment - we are committed to a sustainable future and to improving the social, economic and
environmental wellbeing of the community.
Whilst some of our group companies have achieved ISO 14001, in the new financial year we will be pursuing more eco-
friendly methods in the delivery of our business. We will look at new initiatives that we can deploy that positively
contributes to the reduction in our carbon footprint and our impact on the planet.
We are determined to be part of the solution that contributes to a prosperous low-carbon future, one that uses IT
innovations not just to protect its employees, clients, data and operational assets but solutions that also benefits society’s
environmental footprint.
Giving back - part of our vision is to give back to the community and to address this I intend to establish our own
Employer Supported Volunteering (“ESV”) programme to structure our approach. In time, this will become part of our
fabric as a company.
Historically, employees have participated in volunteering and charitable events without the support of the Group. By
establishing a supported approach, we believe we will see an increase in employee participation and volunteering.
We will continue to support and raise the profile of each individual or group activity as well as encouraging employees
to look for ways they can assist their local community. We feel that this community and volunteering engagement is
good for society, and our employees have a sense of giving as well as the company.
Key performance indicators
The Board believe that revenue and underlying EBITDA are key metrics to monitor the performance of the Group, as
they provide a good basis to judge underlying performance and are recognised by the Group’s shareholders.
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Underlying EBITDA is defined as profit before tax, before one off exceptional items, impairment of intangible assets,
share based payment charges, finance charges, fair value adjustments to deferred consideration, depreciation and
amortisation, and a reconciliation from underlying EBITDA to loss before tax is detailed in note 2. Whilst the directors
recognise that this is not a standard UK GAAP performance measure they consider that this alternative performance
measure provides important additional information to the reader regarding the adjusted performance of the business
including trends, performance and position of the Group. The Board feel that this alternative measure enhances the
comparability of information between reporting periods by adjusting for exceptional or uncontrollable factors which affect
IFRS measures, to aid the understanding of the Group’s performance.
In addition, control of the bank and cash balances is a priority for the Group and these are budgeted and monitored
closely to ensure that the Group maintains adequate liquidity to meet all of its financial commitments as they arise.
Financial performance
The Group generated revenue of £23.5 million (2017/18: £6.2 million), which reflected almost 12 months of trading from
GeoLang and 5.5 months of trading from Brookcourt since acquisition respectively. The Group generated an underlying
EBITDA loss of £1.4 million (2017/18: £0.8 million EBITDA loss) which reflected strong performance from Brookcourt
and SecurEnvoy offset by disappointing performance from a number of initiatives within the wider Xcina business, which
have since been removed following the reorganisation in April 2019. At the period end, Group cash was £0.6 million
(2017/18: £2.5 million) reflecting continued investments made in portfolio companies which we will see the benefits of
in the new financial year.
The portfolio companies contributed £0.7 million of underlying EBITDA (2017/18: £1.1 million underlying EBITDA) which
included significant investment in Xcina growth initiatives, as well as investing in Group infrastructure which all Group
companies will be able to capitalise on moving forward. Brookcourt has added strong underlying performance since
acquisition and GeoLang has recorded its maiden revenues within this financial period.
After exceptional items of £2.7 million (2017/18: £1.0 million), amortisation of acquired intangible assets, impairment of
legacy intangible mining assets, depreciation, fair value adjustment on deferred consideration and share based
payments the Group made an operating loss of £6.7 million (2017/18: £2.9 million). Of the £2.7 million exceptional items,
£1.5 million related to the acquisition of Brookcourt Solutions, £0.2 million to the acquisition of GeoLang and £1.0 million
one off legal fees. Due to the volatility of the share based payments charge, which will vary year on year dependent on
the level of completed acquisitions, this is adjusted out in underlying EBITDA so as not to distort year on year trading
comparisons.
Please see note 2 which provides a reconciliation between loss before tax and underlying EBITDA loss.
Segmental review (including activities after the financial year end)
Software
Our software division encompasses our owned proprietary technology solutions which centre around identity and
access management, and data security. This includes the authentication of the individual enabling them to access
the organisational network, specific data and information assets, and the movement and use of that data and information
within and outside of the organisation.
The Group companies which currently form this division include:
SecurEnvoy, a provider of trusted identity and access management solutions to millions of users in real-time.
SecurEnvoy’s technology maintains trust between those users and ensures the protection of organisations’
critical data and infrastructure; and
GeoLang, a provider of data discovery and Data Loss Prevention solutions (“DLP”), services and technologies
used to discover, classify and protect sensitive data and information in the cloud and on premise.
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Financial performance
During the period, Software generated £3.9 million of revenue (2018: £3.4 million), representing 12 months of trading
from SecurEnvoy and 11.8 months of trading from GeoLang. Software contributed £0.5 million of EBITDA towards a
total Segment EBITDA of £0.7 million, reflecting strong performance at a SecurEnvoy level offset by an underlying
EBITDA loss at GeoLang. As GeoLang further grows its revenue in the current year it is expected to move to profitability.
Operational review
In April 2018, the Group acquired GeoLang. As an award-winning provider of data discovery and data loss prevention
software, the acquisition established the Group’s position within the rapidly growing DLP market and augmented
Shearwater’s GDPR and cyber security capability offering. The business is now revenue generating and has created
the Group a foothold within a US$1.1 billion market, growing at 19% per annum.
GeoLang’s maiden contract win followed shortly after acquisition, with the award of its first enterprise licence under the
G Cloud framework, an agreement between the UK Government and its cloud-based services suppliers. This
deployment enabled the customer to detect all Payment Card Industry ("PCI") and Personally Identifiable Information
("PII") held across endpoints and servers via GeoLang’s patented, keyword matching algorithm, which assisted in the
production of PCI and PII audit compliance reports and facilitated General Data Protection Regulation ("GDPR") “Subject
Access” and “Right to be Forgotten” requests.
Further contract wins followed in the period, notably with Alfresco, a leading international provider of Enterprise Content
Management and Business Process Management software solutions. GeoLang provides Alfresco with a GDPR and
PCI Compliance solution that enables them to discover and protect PCI and PII across its digital estate, including cloud
sync folders, endpoints, servers, email and Alfresco repositories.
Going forward, it is expected that GeoLang will continue to add new client names to their roster, with sales efforts
boosted by accessing the Group’s extensive customer base on a cross-sell basis. This is expected to result in GeoLang
making a profitable contribution to the overall Software division in the new financial year.
During the period, SecurEnvoy entered into an agreement with XenTegra, LLC to represent the business as a new
valued-added reseller channel partner in the US, bringing its channel partners in the region to over 15. SecurEnvoy
was also appointed by Citrix (NASDAQ: CTXS) as one of its first Premier Citrix Ready Partners for the fast-growing
Identity and Access Management sector. The Citrix Ready designation is awarded to third party partners that have
successfully met test criteria set by Citrix before enabling access to Citrix’s extensive customer base and network of
10,000 resellers.
Post the period end, SecurEnvoy also made significant progress with its previously announced product roadmap. This
included the launch of SecurHIVE, a new suite of security assurance and prevention solutions for organisations to
protect sensitive data, and ensure administration, compliance and governance. This broadens SecurEnvoy’s offering
into endpoint security, a top priority for Chief Information Security Officers today.
Most recently, SecurEnvoy developed and launched its new data security product, Multi-Factor Authentication (“MFA”)-
as-a-Service. This new subscription-based product is a core component of SecurEnvoy’s recently launched
SecurIdentity™ cloud platform, which provides cloud hosted Identity and Access Management (“IAM”) solutions used
by organisations to protect their critical data and infrastructure.
The business is expected to continue its journey of transition from the provision of MFA through to much broader Identity
and Access Management solutions, encompassing not only MFA but also Privileged Access Management, DLP and
Cloud Access Security Broker. This will enable SecurEnvoy’s current and future customers to benefit from a total data
security solution (available on premise and in the cloud), which will protect their data and information assets, without
the need to transact with multiple vendors, thus enhancing their overall security environment posture.
Services
Our Services division encompasses our services and solutions businesses which centre around cyber security
solutions and managed security services and security governance, risk and compliance. These businesses
deliver cyber security, networking technologies and managed security services used to secure and protect
organisations’ critical infrastructure, and technology, operational and regulatory risk testing, assurance and advisory
services in support of an organisation’s operational and digital resilience.
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The Group companies which currently form this division include:
Brookcourt Solutions, a provider of cyber security, network monitoring technologies and managed security
services to secure and protect an organisation’s critical infrastructure;
Xcina, a provider of technology, operational and regulatory risk assurance and advisory services in support of
resilience and risk management;
Pentest, a provider of next generation penetration testing, red team and offensive security consultancy services,
designed to uncover IT security vulnerabilities, support remediation efforts and increase the digital resilience of
businesses.
Financial performance
During the period, Services generated £19.6 million of revenue (2018: £2.9 million), representing 12 months of trading
from Xcina and approximately 5.5 months of trading from Brookcourt Solutions. Services contributed £0.3 million of
EBITDA towards a total Segment EBITDA of £0.7 million, reflecting the excellent post acquisition performance of
Brookcourt Solutions and positive underlying contribution from Xcina Consulting, which in part has offset
underperformance across other Xcina business areas, which have since been removed.
On a standalone basis, Xcina Consulting delivered £4.2 million of revenue for the twelve months ended 31 March 2019,
generating £0.2 million of underlying EBITDA, compared to £2.4 million of revenue and an underlying loss of £0.1 million
for the pre-acquisition period.
On a pro forma basis, Brookcourt Solutions generated £29.2 million of revenue for the twelve-month period ended 31
March 2019, and £3.4 million of underlying EBITDA, of which only 5.5 months of trading was reflected in the Group’s
results for period ended 31 March 2019.
Operational review
In October 2018, Shearwater completed its largest acquisition to date through the acquisition of Brookcourt Solutions.
As a specialist provider of cyber security and network solutions within complex, advanced threat landscapes, the
acquisition was transformational for the Group.
In particular, it substantially broadened Shearwater’s cyber security solutions and services capability, facilitated access
to a complementary, large enterprise client base, and has created a strong platform to drive organic and acquisitions
growth, within a fragmented cyber security services and solutions market.
The Board is delighted with the performance of Brookcourt Solutions since joining Shearwater, and the opportunities to
introduce other Shearwater Group companies to Brookcourt Solutions’ extensive, large corporate client base.
Since joining the Group, Brookcourt Solutions has benefited from being part of a dynamic, forward thinking plc. Over
the course of the last 15 months Brookcourt Solutions has won 24 new corporate relationships, which include some of
the world’s largest telecommunications, ICT and retail companies, alongside substantial renewals and new work with
existing clients within the telecommunications and financial services sectors.
Xcina Consulting won over 18 new customers in the period, generating incremental revenues of £0.9 million in addition
to existing client revenues. In December 2018, the Group paid the final earn out consideration owed to Newable
Consulting of £0.02 million, which was settled through the issuance of 612,017 ordinary shares of the Company.
Xcina Consulting also became a ‘Platinum Member’ to the British Standards Institution (“BSI”) Associate Consultant
Programme. Xcina Consulting’s membership strengthens our existing relationship with the BSI and demonstrates our
expertise in helping clients attain BSI certifications, including ISO27001, 22301, 20000, 9001 and 27018.
Post the period end, in April 2019, Pentest joined the Group. Established in 2001, Pentest is a leading provider of cyber
security testing services and solutions. The business' first-generation cyber security testing services assess how
attackers can exploit and penetrate weaknesses in operating systems, applications or services. In addition, Pentest
provides advance threat analytics and monitoring, and tailored "red teaming" operations through its highly experienced
cyber security and ethical hacking specialists, which can simulate an attack on a customers' network environment to
test its ability to withstand an attack.
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The Pentest team have already been working across the Group providing security testing services to existing customers
of Brookcourt Solutions and Xcina, in addition to their own long-standing customer base.
We expect that the reorganised Xcina business (largely comprised of Xcina Consulting), will make a material contribution
to the Services division at an underlying EBITDA level, alongside nearly 12 months of contribution from Pentest. Once
aggregated with trading from Brookcourt Solutions, the Services division will become the largest division of the Group
at a revenue and underlying EBITDA level.
Organic growth in the new financial year will continue to be driven by new customer wins and a push to cross sell cyber
security solutions and services to existing Group customers, supported by revised intra-group incentivisation structures.
On the M&A front, it is anticipated that further acquisition opportunities, if realised, will bolt into our existing Services
division capability, providing complementary customer bases and / or a broadening of our service and solutions offering.
Financial position
Cash and cash equivalents decreased by £1.9 million to £0.6 million at 31 March 2019 primarily reflecting investments
made in infrastructure that will allow the business to scale in the future as well as one off exceptional costs that will not
be repeated going forward.
In the new financial year, it is expected that the Group will generate positive cash flow as a result of a full year contribution
of operating cash flow from Brookcourt Solutions (along with other Group companies) and the non-recurring nature of
one off exceptional items incurred in the prior period.
Intangible assets (including goodwill) increased by £31.7 million to £52.4 million at 31 March 2019 reflecting £33.4
million from the acquisitions made in the year and £0.6 million from computer software additions, of which £0.2 million
is internal development. This is offset by amortisation of £1.3 million and a £1.0 million impairment charge for legacy
mining assets.
Property, plant and equipment increase reflects £0.2 million of acquired tangible fixed assets plus £0.1 million of other
additions. This is offset by depreciation of £0.1 million.
Trade and other receivables increased by £14.3 million to £16.2 million at 31 March 2019 reflecting acquisitions which
contributed £13.9 million as at year-end. Higher trading activity from SecurEnvoy in the last three months has further
increased the balance.
Trade and other payables increased by £15.6 million to £17.4 million at 31 March 2019. Acquisitions accounted for
£10.4 million of the increase as at year end. This included £1.3 million utilisation of debt finance facility which was settled
in full in April 2019. Also included within the balance is £1.1 million of deferred income. Other material balances include
£3.0 million (excluding interest) of deferred completion cash owing to the former shareholders of Brookcourt Solutions
which is payable as a result of the working capital and cash completion mechanism contained in the share purchase
agreement.
Share capital increased during the year by £9.4 million to £19.0 million which includes £4.9 million from the placing and
open offer plus £4.5 million acquisition consideration on a nominal basis.
The Group is exposed to foreign exchange risks, liquidity and capital risks and credit risks. Details are included within
note 20.
Philip Higgins
Chief Executive Officer
30 July 2019
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Strategic Report
FOR THE YEAR ENDED 31 MARCH 2019
Principal risks and uncertainties
The Group has established a risk management process for identifying, assessing and mitigating the Company’s principal
risks and uncertainties. Individual portfolio companies consider material strategic, operational and financial risks every
three months at their quarterly business reviews. Those risks are considered by the Company’s executive leadership
team and are assessed at monthly operational board meetings and where it is considered appropriate to do so, included
on the Group’s risk register and allocated to a member of the Company’s executive leadership team who is then
responsible for monitoring that risk and developing suitable mitigation actions. The Company’s risk register is
considered by the Board on a quarterly basis, with ad hoc reviews conducted as required.
The Company’s activities are carried out in the UK, Europe, and the US. Accordingly, the principal risks and
uncertainties are considered as follows:
1. Cyber security attacks
Going forward as a publicly traded provider of digital resilience solutions, the Group is a high profile target for third
parties wishing to gain unauthorised access to the Group’s networks, or to bypass or breach its products. Any breach
of the Group’s networks or products, whether through a deliberate hack or unintentional event, may cause significant
business disruption to the Group or its customers and result in the Group incurring the costs of remedying any breach.
Furthermore, the Group’s reputation may be damaged, leading to a loss of customer, industry and investor confidence.
In addressing this risk, the Group has established a secure network infrastructure, supported by its own in house team
of information security and cyber security specialists, who are able to monitor, identify and respond to any incident, and
if required, recover any data or information. With regards to the Group’s owned software products, each is subjected to
third party testing as part of the ongoing development process both prior to launch and also whilst the product is being
used by the Group’s customers. Where new threats emerge, product updates are made available and communicated
to the Group’s customers so that they are able to maintain continuity of protection.
2. Intellectual property
The Company’s commercial success will depend upon in part, its ability to use its intellectual property, and any other
intellectual property acquired or internally developed. In particular, this includes patents and know-how. Whilst the
Company seeks to protect its intellectual property through the filing of patent applications where permissible, as well as
entering into confidentiality obligations within employment contracts to protect the Company from the release of
information relating to its know-how and other measures to protect the confidentiality of its know-how and trade secrets,
this does not provide any assurances that a third party will not infringe upon the Company’s intellectual property, release
confidential information about it or claim technology which is registered to the Company. Furthermore, where the
Company is exploiting one of its patent-protected technologies or products, these may infringe or may be alleged to
infringe existing patents or patents that may be granted in the future which may result in costly litigation and could result
in the Company having to pay substantial damages or limit the Company’s ability to commercialise its products. As a
result, the Company may become party to, or threatened with, future adversarial proceedings or litigation regarding
patents with respect to its products and technology, or may itself commit significant resource in the protection of its own
intellectual property. In addressing this risk, the Group utilises specialist external support and expert advice from its
legal counsel and patent attorneys, whom help capture and document the Group’s intellectual property, and where
appropriate, manage the patent creation, approval and renewal process.
3. Technology
The markets in which the Company operates (and plans to operate) are characterised by rapid technological
development, changes in customer requirements and preferences, frequent new product and service launches
incorporating new technologies, and the emergence of new industry standards and practices that could render the
Company’s existing technology and products obsolete. If the Company is unable to anticipate and respond to
technological changes and customer preferences in a timely and cost-effective manner, it is possible that existing
customers and prospective customers may turn to competitor offerings. In addressing this risk, the Group has a number
of Chief Technical Officers across its group companies, whom are able to work together to continue to improve the
Group’s products and to develop and market new products that keep pace with technological change and the threats
11
that the Group’s customers face. In addition, most recently Dr. Debbie Garside was appointed to the role of Chief
Innovation Scientist for the Group.
4. Key Contracts
In line with other industry participants, the Group relies on certain key customers for a material proportion of its revenue.
Whilst the Group benefits from high customer retention levels, there can be no guarantees that all or any customers will
continue their relationship with the Group beyond the existing contractual period currently in place. Certain customers
have the right to terminate their contractual arrangements with the Group or discontinue using the Group’s services
without notice or on short notice. If the Group was to lose one or more of its major customer contracts, the resultant loss
of sales could adversely affect the Enlarged Group’s business, financial condition, results or future operations.
5. Recruitment and retention of key personnel
The Group’s success depends upon its ability to attract and recruit, retain and incentivise highly skilled employees
across all areas of the business. If the Group is unable to retain or successfully attract and recruit key employees across
all and any areas of the business, it could delay or prevent the implementation of its strategy. The Board recognises
this risk and as a result have a Group-wide people strategy which encompasses among other things, culture, training
and development, capability and competence assessments, succession planning and reward and recognition structures,
to help attract and appropriately incentivise key personnel.
6. Regulation
In response to the increased frequency and severity of data breaches, new industry regulation and government
legislation has been introduced in order to compel companies to enhance their information and cyber security measures.
As a result of the continued and evolving cyber threats faced by companies, industry regulation, and in turn legislation
may be amended, adapted and enhanced at relatively short notice, which will create a new set of data protection
requirements for companies, which information and cyber security product and service vendors will need to address
with their products. If the Group is unable to provide products or services to its customers which enable them to meet
the changing regulatory or legislative requirements laid down by industry or government, then its current or prospective
customers may turn to competitor offerings. In addressing this risk, the Group has appointed a Data Protection Officer,
who is responsible for ensuring the Group’s continued compliance with the new data protection requirements which
have most recently come into force. Furthermore, based upon the collective experience of the Board and the Group’s
Advisory Panel, the Group is well placed to monitor and process industry or legislative developments which can impact
its portfolio companies.
7. EU membership
On 23 June 2016, the UK electorate voted to discontinue its membership of the EU. Until further details are known
regarding the terms on which the UK will exit, the Directors are not able to assess the impact on the Group, or what
impact the wider regulatory and legal consequences of the UK leaving the EU would be on the Group. Any updates from
the UK Government are assessed by the Directors and the impact is discussed as a Board. The Directors have
discussed the potential impact to the Group and in particularly to its working relationship with its German entity and EU
clients and believe that due to the autonomy given to the local entity, the business is currently well protected based on
the current status of the leave negotiations.
On behalf of the Board
Philip Higgins
Chief Executive Officer
30 July 2019
12
Report of the Directors
FOR THE YEAR ENDED 31 MARCH 2019
The Directors present their annual report together with the audited financial statements for the year ended 31 March
2019.
Dividends
The Directors do not recommend the payment of a dividend for the year (2018/17: £nil).
Results
Results of the year and financial position are detailed on pages 25 to 52.
Strategic report
A review of the business, future developments and the principal risks and uncertainties facing the Company are included
within the Strategic and Business Review of Activities on pages 2 to 12.
Directors
The Directors of the Company who held office during the year are as follows:
Name of Director
D Williams
P Higgins
P McFadden
M Stevens
R Southwell
S Ball
G Willits
Chairman
Director; Appointed on 11 December 2018
Director; Appointed on 17 October 2018
Director; Resigned on 12 April 2019
Non-Executive Director
Non-Executive Director
Non-Executive Director
Directors’ interests in shares and share options
The Directors’ who held office during the year had the following interests, including family interests, in the ordinary
shares of the Company as follows:
P Higgins
D Williams
M Stevens
R Southwell
S Ball
G Willits
P McFadden
Number of shares held at 31
March 2019
212,916,667
130,667,416
11,944,400
11,250,000
11,944,400
6,771,739
171,500
Number of shares held at
31 March 2018
-
119,833,994
11,250,000
11,250,000
11,250,000
6,250,000
-
The Directors’ interests in the share options of the Company as at 31 March 2019 were as follows:
P McFadden
Number of options at 31
March 2019
875,000
Exercise price
4.0p
Date of grant
07/05/18
First date of exercise
07/05/19
Final date of
exercise
30/09/23
The remuneration of Directors during the year is disclosed in note 6.
13
Directors’ indemnities
The Company currently has in place, and had for the year ended 31 March 2019, Directors and Officers liability insurance
for the benefit of all Directors of the Company.
Going concern
The Financial Statements have been prepared on the going concern basis, following the Directors’ review of the
Company’s operations, current financial position and cash flow forecasts and future financing requirements. The
Directors are satisfied that sufficient cash resources are available to meet financial commitments as they arise and for
at least twelve months from the date of signing the Financial Statements. Further disclosure is provided in note 1 of the
Financial Statements.
Events after the reporting date
Details of this are included in the notes to the financial statements per note 23 of the financial statements.
Research and development activities
Due to the everchanging competitive market the Group operates within, it actively supports the continued research and
development of our software (SaaS) services to ensure that the Group remains at the forefront of the markets we serve.
Where specific internal development cost meets the required criteria under IAS 38 these amounts have been capitalised
at the cost incurred.
Political donations
No political donations were made during the financial year (2018: nil).
Financial instruments
Details of the use of financial instruments by the Company are contained in note 20 of the Financial Statements. The
financial risk management policies and objectives are also set out in detail in note 20.
Statement as to disclosure of information to auditors
The Directors who held office at the date of approval of these financial statements have confirmed, as far as they are
aware, that there is no relevant audit information of which the auditors are unaware. Each of the Directors has confirmed
that they have taken all 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.
Auditor
BDO LLP have provided audit services to the Group for over 5 years. Following the end of this financial year, it was felt
prudent in light of the Group’s growing size and complexity to re-tender the external audit work to ensure the Group is
getting the best service and value for money. The outcome of the tender will be notified to shareholders prior to the
AGM.
Annual General Meeting
The Company proposes to convene the Annual General Meeting for 11a.m on 25 September 2019 at the offices of
Mayer Brown International LLP, 201 Bishopsgate, London EC2M 3AF. Notice of the Annual General Meeting will be
circulated shortly to Shareholders.
On behalf of the Board
David Williams, Chairman, 30 July 2019
14
Corporate Governance Statement
FOR THE YEAR ENDED 31 MARCH 2019
The board of directors of the Company (the "Board") adopted the Quoted Companies Alliance ("QCA") Corporate
Governance Code (the "QCA Code") on 27 September 2018 in line with the London Stock Exchange’s recent changes
to the AIM Rules. Under AIM Rule 26, all AIM-quoted companies are required to adopt and comply with a recognised
corporate governance code. The Board believe that the QCA Code is most appropriate for the size, scale and complexity
of the Company. How the Company complies with the QCA Code and where the Board believe that a departure from
the QCA Code
link:
https://shearwatergroup.com/investor-overview/
the Company’s website under
is provided on
is warranted,
following
the
Details of the Group’s current corporate governance practices are set out on page 16. A statement of the Directors’
responsibilities in respect of the financial statements is set out on page 18.
Below is a brief description of the role of the Board and its committees, including a statement regarding the Company’s
system of internal financial control.
The Board of Directors
The following is a list of the full names, positions and ages of the current members of the Board:
The business address of each Director is 22 Great James Street, London, WC1N 3ES.
David Jeffreys Williams (Chairman) Age 67
David has a reputation for building companies in the public and private sectors and has chaired a large number of these,
both in an executive and non-executive capacity. In developing these companies he has raised in excess of £1 billion
of capital to support organic and acquisition growth strategies. He was formerly chairman of Entertainment One Ltd.
(LSE: ETO) and Oxford Biodynamics Plc (AIM: OBD). He is also a founder and non-executive director of Breedon
Group plc (AIM: BREE). David serves as the chairman of the Remuneration Committee and Nomination Committee and
is a member of the Audit Committee.
Philip Leslie Higgins (Chief Executive Officer) Age 53
Phil has over thirty years’ industry experience during which time he has been instrumental in the delivery of next
generation technology solutions to many leading global FTSE 100 and FTSE 250 companies. Following a six-year
secondment to the US as International Business Director for Info Products Europe (now SCC), Phil returned to the UK
market in 2001. After a brief spell at NSC Global and three years at Repton (now CDW), he co-founded Brookcourt
Solutions in 2005. In December 2018, Phil joined the Board of Shearwater as an Executive Director, and in April 2019
was appointed as Chief Executive Officer of Shearwater Group.
Paul John McFadden (Chief Financial Officer) Age 37
Paul has over ten years’ experience in senior finance positions within market leading digital information services, training
and events businesses, creating and leading scalable finance functions within both a private and listed environment.
Most recently, Paul was responsible for creating and leading a scalable shared service centre at Wilmington plc as the
business grew substantially organically and via acquisitions in a five-year period.
Robin Simon Southwell OBE (Non-Executive Director) Age 59
Robin has over 35 years’ experience of working in the aerospace and defence industry, including roles as chief executive
officer of Airbus UK and Airtanker Ltd, as well as senior positions at BAE Systems, which included running their
operations in Australasia and establishing the company’s asset management organisation. Robin is Chairman of Linley
Furniture, a Fellow of the Royal Aeronautical Society, an Ambassador of the RAF Museums, has been appointed as a
DTI Business Ambassador by the UK Government and received his OBE in 1997 for services to exports. Robin serves
as a member of the Remuneration Committee.
15
Stephen Robert Ball (Non-Executive Director) Age 65
Stephen has over 35 years’ experience of working in senior roles in the technology, defence, information security and
communications industries. Stephen was formerly chief executive officer of Lockheed Martin UK until his retirement in
2016. Prior to this, he was managing director of the company’s operations in Ampthill, Bedfordshire. Before joining
Lockheed Martin, Stephen spent 21 years with HM Government Communications Centre (HMGCC), latterly as chief
executive officer, working on specialist development and the manufacture of security and communications equipment.
Stephen serves as a member of the Nomination and Audit Committees.
Giles Kirkley Willits (Non-Executive Director) Age 52
Giles has over twenty years’ experience in senior leadership and financial roles and is currently the chief financial officer
of IG Design Group plc (AIM: IGR). Prior to this, Giles was also chief financial officer of FTSE 250 listed Entertainment
One Ltd. (LSE: ETO), having worked with Entertainment One Ltd. initially as non-executive director, before assuming
the chief financial officer role in 2007. During his time at Entertainment One Ltd. the market capitalisation grew to in
excess of £1 billion. Giles was formerly director of group finance of J Sainsbury plc and Woolworths Group plc, and
currently serves as the Chairman of the Company’s Audit Committee.
Advisory Panel
The Group’s Advisory Panel is chaired by Rt Hon. the Lord Reid of Cardowan. The purpose of the Advisory Panel is to
track developments in the digital resilience sector as well as supporting the Group in accessing growth opportunities via
the network of contacts of each member of the Advisory Panel. The Advisory Panel will meet at least four times a year,
with additional ad hoc meetings held with various Directors as required.
Lord Reid joined the Group as Chairman of its Advisory Panel in January 2017. Lord Reid has had an illustrious career
in UK Government, serving in numerous UK cabinet positions, including Home Secretary and Secretary of State for
Defence. He now sits in the House of Lords and is Executive Chairman of the Institute for Strategy, Resilience and
Security at University College London.
In April 2019, Marcus Willett CB OBE joined the Advisory Panel. Marcus was formerly the Deputy Head of GCHQ having
served 33 years with the organisation. He was also GCHQ’s first Cyber Director and has established and led major UK
Cyber Programmes. Marcus has held posts across the wider UK intelligence and security community and is currently
the Senior Advisor for Cyber at the International Institute for Strategic Studies, a world leading authority on global
security, political risk and military conflict.
Corporate Governance
The Directors recognise the importance of sound corporate governance and the Company complies with the principles
and minimum disclosures of the QCA Code.
The main features of the Existing Group’s corporate governance arrangements are:
The Board intends to meet at least six times per year for formal Board meetings. It will approve financial statements,
dividends and significant changes in accounting practices and key commercial matters, such as decisions to be
taken on whether to take forward or to cancel a material collaboration project or commercial agreement. There is a
formal schedule of matters reserved for decision by the Board in place.
Currently, the Board includes three Non-Executive Directors who are considered by the Directors to be independent
for the purposes of the QCA Code, Robin Southwell, Stephen Ball and Giles Willits. Robin joined the Board on 10
October 2016 and prior to this had no association with the Company. Stephen joined the Board on 24 October 2016
and prior to this had no association with the Company. Giles joined the Board on 9 December 2016 and prior to this
had no association with the Company. Accordingly, the Directors consider that Robin, Stephen and Giles satisfy the
independence criteria based on the judgement of the Board, with Stephen appointed the senior independent Non-
Executive Director of the Company.
Internal Financial Control
The Board is responsible for establishing and maintaining the Company’s system of internal financial controls. Internal
financial control systems are designed to meet the particular needs of the Company and the risk to which it is exposed,
and by its very nature can provide reasonable, but not absolute, assurance against material misstatement or loss. During
16
the period, the Directors enhanced the Group’s finance function with a number of new hires, including the appointment
of a Chief Financial Officer, whom is responsible for the day to day management of all finance aspects of the business.
As part of this process, the Directors have also implemented a more formal system of internal financial control, which
has developed as the Group has scaled with the acquisitions it has made in the period. The Directors have reviewed
the effectiveness of the procedures presently in place and consider that they are appropriate to the nature and scale of
the operations of the Company. The Directors will continue to reassess internal financial controls as the Company
expands further.
Board Committees
Audit Committee
The Audit Committee’s principal functions include ensuring that the appropriate accounting systems and financial
controls are in place, monitoring the integrity of the financial statements of the Company, reviewing the effectiveness of
the Company’s accounting and internal control systems, reviewing reports from the Group’s auditors relating to the
Company’s accounting and internal controls, and reviewing the interim and annual results and reports to Shareholders,
in all cases having due regard to the interests of Shareholders. The Audit Committee meets at least three times a year,
with regard to the reporting and audit cycle. Giles Willits has recent and relevant financial experience through his role
as CFO of other UK listed companies and acts as Chairman. David Williams and Stephen Ball are the other members
of the Audit Committee.
Remuneration Committee
The Remuneration Committee is responsible for determining and agreeing with the Board the framework for the
remuneration packages for Directors. The Remuneration Committee considers all aspects of the Executive Directors’
remuneration, including pensions, bonus arrangements, benefits, incentive payments and share option awards, and the
policy for, and scope of any termination payments. The remuneration of the Non-Executive Directors is a matter for the
Board. The Remuneration Committee meets at least twice a year and at such other times as may be deemed necessary.
No Director may be involved in discussions relating to their own remuneration. David Williams acts as Chairman of the
Remuneration Committee and Robin Southwell is the other member of the Remuneration Committee.
Nomination Committee
The Nomination Committee is responsible for reviewing the structure, size and composition of the Board based upon
the skills, knowledge and experience required to ensure the Board operates effectively. The Nomination Committee is
expected to meet when necessary to do so. The Nomination Committee also identifies and nominates suitable
candidates to join the Board when vacancies arise and makes recommendations to the Board for the re-appointment of
any Non-Executive Directors. David Williams acts as Chairman of the Nomination Committee with Stephen Ball as the
other member of the Nomination Committee.
17
Statement of Directors’ Responsibilities
FOR THE YEAR ENDED 31 MARCH 2019
The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with
applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors
have elected to prepare the Group financial statements in accordance with International Financial Reporting Standards
(‘IFRS’) as adopted by the European Union. The Parent Company financial statements have been prepared in
accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the
Companies Act 2006. 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 Company and of the profit or loss of
the Group and Company for the year ended 31 March 2019. The Directors are also required to prepare financial
statements in accordance with the rules of the London Stock Exchange for companies trading securities on AIM.
In preparing these financial statements, the Directors are required to:
select suitable accounting policies and then apply them consistently;
make judgements and accounting estimates that are reasonable and prudent;
state whether they have been prepared in accordance with IFRSs as adopted by the European Union, subject
to any material departures disclosed and explained in the financial statements; and
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group
will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the
Company’s transactions and disclose with reasonable accuracy at any time the financial position of the company and
enable them to ensure that the financial statements comply with the requirements of the Companies Act 2006. They are
also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
Website publication
The Directors are responsible for ensuring the Annual Report and the Financial Statements are made available on a
website. Financial statements are published on the Company’s website in accordance with legislation in the United
Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other
jurisdictions. The maintenance and integrity of the Company’s website is the responsibility of the Directors. The
Directors’ responsibility also extends to the ongoing integrity of the financial statements contained therein.
The Group’s Financial Statements can be accessed using the following link; www.shearwatergroup.com/results-and-
presentations/
18
Independent auditor’s report to the members of Shearwater Group Plc
Opinion
We have audited the financial statements of Shearwater Group Plc (the ‘Parent Company’) and its subsidiaries (the
‘Group’) for the year ended 31 March 2019 which comprise the Consolidated Statement of Comprehensive Income, the
Consolidated Statement of Group and Company Financial Position, the Consolidated Statement of Changes in Group
and Company Equity, the Consolidated Group and Company Cash Flow Statement and notes to the financial
statements, including a summary of significant accounting policies.
The financial reporting framework that has been applied in the preparation of the financial statements is applicable law
and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the Parent
Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.
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 2019 and of the Group’s loss for the year then ended;
the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the
European Union ;
the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by
the European Union and as applied in accordance with the provisions of the Companies Act 2006; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law.
Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the
financial statements section of our report. We are independent of the Group and the Parent Company in accordance
with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s
Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with
these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our opinion.
Conclusions relating to going concern
We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to
you where:
•
•
the Directors’ use of the going concern basis of accounting in the preparation of the financial statements is not
appropriate; or
the Directors have not disclosed in the financial statements any identified material uncertainties that may cast
significant doubt about the Group’s or the Parent Company’s ability to continue to adopt the going concern
basis of accounting for a period of at least twelve months from the date when the financial statements are
authorised for issue.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the
financial statements of the current period and include the most significant assessed risks of material misstatement
(whether or not due to fraud) we identified, including those which had the greatest effect on: the overall audit strategy,
the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were
addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and
we do not provide a separate opinion on these matters.
19
Key Audit Matter
Accounting for the acquisition of
GeoLang Holdings Limited and
Brook Court Solutions Limited
As explained in note 1e and 9 of the
financial statements, on 4 April 2018
the Group acquired the entire issued
share capital of GeoLang Holdings
Limited and on 17 October 2018, the
Group acquired the entire issued share
capital of Brookcourt Solutions Limited.
We focused on these transactions
because they are material to the
consolidated financial statements and
because the Directors made
judgements, estimates and
assumptions in the identification and
valuation of the intangible assets
acquired and related disclosures.
Goodwill and Intangible assets
impairment assessment
Refer to note 10, 1e and 1j.
Determining if an impairment charge is
required for Goodwill and Intangible
assets involves significant judgements
about the future results and cash flows
of the business, including forecast
growth in future revenues and
operating profit margins, as well as
determining an appropriate discount
factor and long term growth rate.
We therefore focused on these areas
and the judgements applied to future
forecasts.
How we addressed the Key Audit Matter in our
audit
Our audit procedures included:
Assessing the appropriateness of the accounting
treatments adopted and challenging the directors’
assessment of the fair values of the assets acquired
and the liabilities assumed with reference to the two
Purchase Price Allocation reports ("PPA") provided by
management. We used BDO’s valuation specialists to
evaluate the results of management’s procedures and
PPA’s to determine the fair value of the intangible
assets
involved:
- evaluation of completeness and existence of the
intangible
recognised;
assets
- assessment of the valuation methodologies applied
and the key assumptions made by management, such
as discount and growth rates compared to our
independently
range;
- benchmarking the assumptions used with similar
transactions
and
- performing sensitivity analysis to understand the
extent to which changes in key assumptions i.e.
growth and discount rates may give rise to a materially
different valuation for the intangible assets.
calculated
acquired.
sector;
This
the
in
We tested the corroborating evidence, namely the
sale and purchase agreements, cash proceeds paid
and share issue documentation.
We assessed the sufficiency and reasonableness of
the disclosures relating to the acquisition taking into
account the requirement of the accounting standards.
We noted no exceptions through performing these
procedures.
Our audit procedures involved:
We
checked management’s
impairment
assessment for each cash generating unit (CGU),
including the discounted cash flow analysis. As
part of this, we challenged the key assumptions,
including the growth rate and discount rates
applied. This included consultation with internal
valuations experts on the appropriate use of key
assumptions.
Based on external evidence examined i.e. industry
growth rates, inflation and UK GDP growth rates,
we performed sensitivity testing on revenue growth
impairment
and discount rates used
assessment.
the
in
Compared the discounted cash flow analysis to the
historical performance and the actual post year-
end results of each CGU.
We found that the assumptions used were reasonable.
No impairment was identified from the work performed.
20
Our audit procedures included:
Testing a sample of revenue transactions recorded
throughout the year from the revenue listing by
agreeing to contract terms. We ensured that the
transaction price was appropriately allocated to
each performance obligation and checked whether
revenue was correctly recognised at a point in time
or over time.
Reviewing a sample of sales transactions before
and after year end to ensure that they were
accounted for in the correct period and accrued for
appropriately by agreeing to supporting evidence.
A sample of accrued revenue balances as at year
end were agreed to post year end invoices issued
up to 30 April 2019.
To ensure IFRS 15 has been adopted appropriately,
our testing included:
In addition to testing detailed above, a review of the
revenue recognition policy for the Group in light of
the requirements of IFRS 15.
A review of the requirements of the IFRS 15 and to
ensure that the disclosure requirements have been
met.
As a result of the procedures above we did not find any
material errors in relation to the recognition of revenue.
Revenue recognition and adoption
of IFRS 15
The Group’s revenue recognition
policy and adoption of IFRS 15 can be
found in note 1f of the financial
statements.
We consider a significant risk of
material misstatement may arise from
the incentive to overstate revenue for
the current period due to market
expectations and the loss generated.
Further, since EBITDA is
management’s main key performance
indicator (“KPI”), this increases the
incentive to overstate revenue.
Therefore, the key audit matter is the
existence of revenue throughout the
financial year.
In addition, this is the first year that
IFRS 15 – Revenue from Contracts
with Customers is applicable for the
Group. There are key judgments
involved in determining performance
obligations within a contract, allocating
transaction price to each performance
obligation and determining whether to
recognise revenue at a point in time or
over time. The Group reviewed the
potential impact of IFRS 15 in the
previous financial period and found
that its revenue recognition policies
were in line with IFRS 15 which has
been adopted in the current year.
Hence the adoption of IFRS 15 had no
material impact.
The key audit matter also relates to the
IFRS 15 disclosures to be made in the
financial statements.
Our application of materiality
We apply the concept of materiality in planning and performing our audit and evaluating the effect of misstatement.
We consider materiality to be the magnitude by which misstatements, including omissions, could influence the
economic decisions of reasonable users that are taken on the basis of the financial statements.
In order to reduce to an appropriately low level the probability that any misstatements exceed materiality, we use a
lower materiality, performance materiality, to determine the extent of testing needed. Importantly, misstatement below
these levels will not necessarily be evaluated as immaterial as we also take account of the nature of the identified
misstatements, and the particular circumstances of their occurrence when evaluating their effect on the financial
statements as a whole.
We agreed with the audit committee that we would report to the committee all individual audit differences identified
during the course of our Group audit in excess of £18,590 (2018: £9,700). We also agreed to report differences below
these thresholds that, in our view, warranted reporting on qualitative grounds.
21
Group Overall Materiality
£371,000 (2018: £194,000)
Group Performance Materiality
£278,250 (2018: £145,500)
Basis for Determining (Group and Parent)
Ration
ale for benchmark applied (Group and Parent)
Group - 7% of Group loss before tax (2018: 7% of Group
loss before tax). The above materiality is based on initial
calculations performed at the planning stage of our audit.
Based on the final results we could have used a higher
materiality but decided to keep the materiality calculated
at planning stage.
Parent – 1.75% of total expenses (2018: 1.5% of total
expenses)
Group - Given the Group has undergone a complete restructuring
from mining to digital resilience solutions, it was expected that
the Group will remain loss making for the current year and be
profitable next year as they establish themselves and build up a
portfolio of profitable companies. The entity commenced trading
part way through the prior year. This is the first full year that the
Group has traded, and therefore shareholder value and focus has
been determined to be on the current year loss as a measure for
shareholders in assessing the performance of the Group.
Parent – The Company is not generating any revenues and has
incurred significant start up and acquisition related expenses in
the current and prior year. As a result, total expenses is a more
appropriate benchmark for the parent.
Parent Company Overall Materiality
£90,000 (2018: £40,000)
Parent Company Performance Materiality
£67,500 (2018: £30,000)
Performance materiality was set at 75% (2018 – 75%) of the above materiality figures. 75% is based on our assessment
of overall control environment.
Component Materiality
Component materiality is established when performing audits on complete financial information of subsidiaries within
the Group, where the subsidiary is considered significant to the Group.
We determined component materiality as follows:
Range of component materiality
6% to 59% of Group materiality
An overview of the scope of our audit
Our Group audit was scoped by obtaining an understanding of the Group and its environment, including the Group’s
system of internal control and assessing the risks of material misstatement in the financial statements at the Group
level.
22
In determining the scope of our audit we considered the level of work to be performed at each component in order to
ensure sufficient assurance was gained to allow us to express an opinion on the financial statements of the Group as a
whole. We tailored the extent of the work to be performed by us at each component based on our assessment of the
risk of material misstatement at each component. We identified nine centrally controlled components, of which three
significant components, have been audited for Group reporting purposes. All the significant components are UK based
and were audited by us.
For four components not considered significant, we performed specific scope procedures based on their relative size,
risks in the business and our knowledge of those entities appropriate to respond to the risk of material misstatement.
Review procedures were performed by us for the remaining two foreign components not considered significant to the
Group.
Two entities have been deemed to be dormant companies, having met the relevant criteria. Consequently, no audit
procedures were planned for these entities.
Other information
The Directors are responsible for the other information. The other information comprises the information included in the
financial statements, other than the financial statements and our auditor’s report thereon. Our opinion on the financial
statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we
do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing
so, consider whether the other information is materially inconsistent with the financial statements or our knowledge
obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or
apparent material misstatements, we are required to determine whether there is a material misstatement in the financial
statements or a material misstatement of the other information. If, based on the work we have performed, we conclude
that there is a material misstatement of this other information, we are required to report that fact. We have nothing to
report in this regard.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of the audit:
•
•
the information given in the Strategic and business review of activities report and the Directors’ report for the
financial year for which the financial statements are prepared is consistent with the financial statements; and
the Strategic and business review of activities report and the Directors’ report have been prepared in
accordance with applicable legal requirements.
Matters on which we are required to report by exception
In the light of the knowledge and understanding of the Group and the Parent Company and its environment obtained in
the course of the audit, we have not identified material misstatements in the Strategic and business review of activities
report or the Directors’ report.
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us
to report to you if, in our opinion:
•
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.
Responsibilities of Directors
As explained more fully in the Statement of Directors Responsibilities set out on page 18, the Directors are responsible
for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such
internal control as the Directors determine is necessary to enable the preparation of financial statements that are free
from material misstatement, whether due to fraud or error.
23
In preparing the financial statements, the Directors are responsible for assessing the Group’s and the Parent Company’s
ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going
concern basis of accounting unless the Directors either intend to liquidate the Group or the Parent Company or to cease
operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with
ISAs (UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these
financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting
Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
Use of our report
This report is made solely to the Parent 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 Parent 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 Parent Company and the Parent
Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Nicole Martin (Senior Statutory Auditor)
For and on behalf of BDO LLP, Statutory Auditor
London
30 July 2019
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).
24
Consolidated statement of Group comprehensive income
for the year ended 31 March 2019
Revenue
Cost of sales
Gross profit
Administrative expenses
Operating loss
Finance cost
Finance income
Loss before tax
Income tax credit /(charge)
Loss for the year and attributable to equity holders of the
Company
Operating loss analysed as:
Underlying EBITDA
Amortisation of acquired intangibles
Depreciation of fixed assets
Share-based payments
Impairment of intangible assets
Exceptional items
Fair value adjustment to deferred consideration
Finance cost
Finance income
Loss before tax
Other comprehensive income
Items that may be reclassified to profit and loss:
Change in financial assets at fair value through OCI
Exchange differences on translation of foreign operations
Total comprehensive loss for the year
Note
3
7
2
4
4
4
4
4
4
2018/19
£ (000)
23,452
(16,617)
6,835
(13,551)
(6,716)
(164)
-
(6,880)
1,020
2017/18
£ (000)
6,240
(2,604)
3,636
(6,520)
(2,884)
-
2
(2,882)
(3)
(5,860)
(2,885)
(1,394)
(1,325)
(69)
(331)
(1,005)
(2,729)
137
(164)
-
(6,880)
(837)
(647)
(14)
(366)
-
(1,020)
-
-
2
(2,882)
(18)
20
(5,858)
(67)
-
(2,952)
Loss per share
Basic and diluted (pence per share)
8
(0.42)
(0.31)
The results above are derived from continuing operations.
The notes on pages 29 to 52 are an integral part of these consolidated financial statements.
25
Consolidated statement of Group and Company financial position
as at 31 March 2019
Group
2019
£ (000)
2018 (restated)
£ (000)
Company
2019
£ (000)
2018
£ (000)
Note
10
11
12
13
14
16
15
16
17
18
Assets
Non-current assets
Intangible assets (restated)
Investments in subsidiaries
Financial assets at fair value through
OCI
Property, plant and equipment
Amounts owed by subsidiary
undertaking
Total non-current assets
Current Assets
Trade and other receivables
Deferred tax asset
Cash and cash equivalents
Total current assets
Total assets
Liabilities
Current liabilities
Trade and other payables
Total current liabilities
Non-current liabilities
Amounts owed to subsidiary
undertaking
Deferred tax (restated)
Deferred consideration
Total non-current liabilities
Total liabilities
Net assets
Capital and reserves
Share capital
Share premium
Available for sale reserve
Other reserves
Translation reserve
Accumulated losses
Equity attributable to owners of the
Company
Total equity and liabilities
52,389
-
33
248
-
52,670
16,220
665
597
17,482
70,152
17,389
17,389
-
3,203
206
3,409
20,798
20,669
-
51
76
-
20,796
1,949
-
2,493
4,442
25,238
1,755
1,755
-
1,340
-
1,340
3,095
-
58,667
33
17
-
58,717
4,554
-
1
4,555
63,272
13,713
13,713
-
2
206
208
986
20,221
51
18
1,662
22,938
47
-
540
587
23,525
597
597
646
-
-
646
13,921
1,243
49,354
22,143
49,351
22,282
19,040
34,578
18
19,123
20
(23,425)
49,354
70,152
9,644
22,446
36
7,127
-
(17,110)
22,143
25,238
19,040
34,578
18
19,123
-
(23,408)
49,351
63,272
9,644
22,446
36
7,127
-
(16,971)
22,282
23,525
The company has taken advantage of the exemption allowed under section 408 of the Companies Act 2006 and has not
presented its own statement of comprehensive income in these financial statements. The loss for the financial year for the parent
Company was £6.4 million (2018: £2.7 million).
The notes on pages 29 to 52 are an integral part of these consolidated financial statements. The financial statements on pages
25 to 52 were approved and authorised for issue by the Board and signed on their behalf on 30 July 2019.
The prior year includes a restatement which reduces deferred tax liability and goodwill by £0.5m each. For more details please
refer to note 16.
P Higgins, Chief Executive Officer
30 July 2019
Registered number: 05059457
26
Consolidated statement of changes in Group and
Company equity
for the year ended 31 March 2019
Group
At 1 April 2017
Loss for the year
Other comprehensive loss for the year
Total comprehensive loss for the year
Share
capital
(Note 18)
£ (000)
5,353
-
-
-
Share
premium
(restated)
£ (000)
15,962
-
-
-
Other
reserve
(restated)
£ (000)
39
-
-
-
FVTOCI
£ (000)
103
-
(67)
(67)
Translation
reserve
£ (000)
-
-
-
-
Total
Accumulated
losses
Equity
£ (000) £ (000)
7,481
(2,885)
(67)
(2,952)
(13,976)
(2,885)
-
(2,885)
Contributions by and distributions to owners
Issue of share capital
Merger relief reserve (restated)
Share issue costs
Share based payments
At 31 March 2018 (restated)
Loss for the year
Other comprehensive loss for the year
Total comprehensive loss for the year
Contributions by and distributions to owners
Issue of share capital
Merger relief reserve
Share issue costs
Share based payments
4,291
-
-
-
9,644
-
-
-
9,396
-
-
-
6,765
-
(281)
-
22,446
-
-
-
12,658
-
(526)
-
-
-
-
-
36
-
(18)
(18)
-
-
-
-
At 31 March 2019
19,040
34,578
18
-
6,726
-
362
7,127
-
-
-
-
11,665
-
331
19,123
-
-
-
-
-
-
20
20
-
-
-
-
- 11,056
6,726
-
(530)
(249)
-
362
(17,110) 22,143
(5,860)
2
(5,858)
(5,860)
-
(5,860)
- 22,054
- 11,665
(981)
331
(455)
-
20
(23,425) 49,354
Share
capital
(Note 18)
£ (000)
Share
premium
(restated)
£ (000)
5,353
15,957
Company
At 1 April 2017
Loss for the year
Other comprehensive loss for the year
Total comprehensive loss for the year
Contributions by and distributions to owners
Issue of share capital
Merger relief reserve (restated)
Share issue costs
Share based payments
At 31 March 2018 (restated)
Loss for the year
Other comprehensive loss for the year
Total comprehensive loss for the year
-
-
-
4,291
-
-
-
9,644
-
-
-
Contributions by and distributions to owners
Issue of share capital
Merger relief reserve
Share issue costs
Share based payments
At 31 March 2019
9,396
-
-
-
19,040
-
-
-
6,770
-
(281)
-
22,446
-
-
-
12,658
-
(526)
-
34,578
Other
reserve
(restated)
£ (000)
FVTOCI
£ (000)
Translation
reserve
£ (000)
Total
Accumulated
losses
Equity
£ (000) £ (000)
103
-
(67)
(67)
-
-
-
-
36
-
(18)
(18)
-
-
-
-
18
39
-
-
-
-
6,726
-
362
7,127
-
-
-
-
11,665
-
331
19,123
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(13,976)
7,476
(2,746)
(2,746)
-
(2,746)
(67)
(2,813)
- 11,061
6,726
-
(530)
(249)
362
-
(16,971) 22,282
(5,982)
-
(5,982)
(18)
(5,982)
(6,000)
- 22,054
- 11,665
(981)
(455)
-
331
(23,408) 49,351
A restatement has been made for merger relief as the company meets the criteria to realise which was not disclosed in the prior
year. This has resulted in a reduction of £6.7 million to Share premium reserve and an increase of £6.7 million to other reserves.
The notes on pages 29 and 52 are an integral part of these consolidated financial statements.
27
Consolidated Group and Company
Cash Flow Statement
for the year ended 31 March 2019
Note
4
4
4
4
4
13
10
Cash flows from operating activities
Loss for the year
Adjustments for:
Amortisation of acquired intangible assets
Depreciation of property, plant and machinery
Share-based payment charge
Impairment of intangible assets
Fair value adjustment of deferred consideration
Finance income
Finance cost
Income tax
Cash flow from operating activities before
changes in working capital
(Increase)/decrease in trade and other receivables
Increase/(decrease) in trade and other payables
Cash used in operations
Net foreign exchange movements
Finance cost paid
Tax paid
Net cash used in operating activities
Investing activities
Acquisition of subsidiaries, net of cash acquired
Purchase of property, plant and machinery
Purchase of software
Interest received
Gold exploration payments
Net cash used in investing activities
Financing activities
Proceeds from issue of share capital
Expenses paid in connection with share issues
Net cash generated by financing activities
Group
2018/19
£ (000)
2017/18
£ (000)
Company
2018/19
£ (000)
2017/18
£ (000)
(5,860)
(2,885)
(5,982)
(2,746)
1,325
69
331
1,005
(137)
-
164
(1,020)
(4,123)
(4,396)
5,119
(3,400)
1
(10)
(52)
(3,461)
(14,264)
(81)
(619)
-
(19)
(14,983)
647
14
366
-
-
(2)
-
3
(1,857)
(1,412)
457
(2,812)
(19)
-
(280)
(3,111)
(9,839)
(72)
(19)
2
(50)
(9,978)
-
7
331
1,005
(137)
-
135
2
(4,639)
(585)
6,075
851
-
-
-
851
-
4
366
-
-
(2)
-
-
(2,378)
39
(1,149)
(3,488)
-
-
-
(3,488)
(17,911)
(6)
-
-
(19)
(17,936)
(11,466)
(20)
-
1
(50)
(11,535)
17,527
(981)
16,546
9,020
(530)
8,490
17,527
(981)
16,546
9,020
(530)
8,490
Net decrease in cash and cash equivalents
(1,898)
(4,599)
(539)
(6,533)
Foreign exchange movement on cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the
period
2
2,493
19
7,073
597
2,493
-
540
1
-
7,073
540
The notes on pages 29 to 52 are an integral part of these consolidated financial statements.
28
Notes to the Consolidated Financial Statements
General Information
The Group is a public limited company incorporated and domiciled in the UK. The address of its registered office is 22 Great James
Street, London, WC1N 3ES.
The Group is listed on the Alternative Investment Market (‘AIM’) on the London Stock Exchange. The Group provides digital resilience
solutions to a range of end user markets.
1. Statement of accounting policies
The significant accounting policies applied in preparing the financial statements are outlined below. These policies have been
consistently applied for all the years presented, unless otherwise stated.
a) Basis of preparation
The Consolidated and Company financial statements have been prepared in accordance with International Financial Reporting
Standards (‘IFRS’), including International Accounting Standards (‘IAS’) and interpretations (‘IFRS ICs’) issued by the International
Accounting Standards Board (‘IASB’) and its Committees, and as adopted in the EU, and in accordance with the Companies Act
2006 as applicable to Companies using IFRS.
The Consolidated financial statements have been prepared under the historic cost convention, except for certain financial instruments
that have been measured at fair value. The Consolidated financial statements are presented in Sterling, the functional currency of
Shearwater Group plc, the Parent Company. All values are rounded to the nearest thousand pounds (£’000s) except where otherwise
indicated.
b) Going concern
After making enquiries, the directors have a reasonable expectation that the Company and the Group have adequate resources to
continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing
these consolidated financial statements. The Group is forecast to become profitable and cash generative in fiscal year March 2020.
c) Critical accounting judgements estimates and assumptions
The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the
amounts reported for income and expenses during the year and that affect the amounts reported for assets and liabilities at the
reporting date.
Business Combinations
Management make judgments, estimates and assumptions in assessing the fair value of the net assets acquired on a business
combination, in identifying and measuring intangible assets arising on a business combination, and in determining the fair value of
the consideration. If the consideration includes an element of contingent consideration, the final amount of which is dependent on the
future performance of the business, management assess the fair value of that contingent consideration based on their reasonable
expectations of future performance. In determining the fair value of intangible assets acquired key assumptions used include expected
future cashflows, growth rates, and the weighted average cost of capital. Further information can be found in note 9.
Impairment of goodwill, intangible assets and investment in subsidiaries
Management make judgements, estimates and assumptions in supporting the fair value of goodwill, intangible assets and investments
in subsidiaries. The Group carry out annual impairment reviews to support the fair value of these assets. In doing so management
will estimate future growth rates, weighted average cost of capital and terminal values.
d) Basis of consolidation
The group’s consolidated financial statements incorporate the results and net assets of Shearwater Group plc and all its subsidiary
undertakings made up to 31 March each year. Subsidiaries are all entities over which the group has control (see note 11). 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. Where necessary, adjustments are made to the
financial statements of subsidiaries to bring the accounting policies used into line with those used by the group. All inter-group
transactions, balances, income and expenses are eliminated on consolidation.
29
1. Statement of accounting policies continued
e) Business combinations and goodwill
Business combinations are accounted for using the acquisition accounting method. This involves recognising identifiable assets
(including previously unrecognised intangible assets) and liabilities of the acquired business at fair value. Any excess of the cost of
the business combination over the Group’s interest in the net fair value of the identifiable assets and liabilities is recognised in the
consolidated statement of financial position as goodwill and is not amortised. To the extent that the net fair value of the acquired
entity’s identifiable assets and liabilities is greater than the cost of the investment, a gain is recognised immediately in the consolidated
statement of comprehensive income.
After initial recognition, goodwill is stated at cost less any accumulated impairment losses, with the carrying value being reviewed for
impairment at least annually and whenever events or changes in circumstances indicate that the carrying value may be impaired.
Goodwill assets considered significant in comparison to the Group’s total carrying amount of such assets have been allocated to
cash-generating units or groups of cash-generating units. Where the recoverable amount of the cash-generating unit is less than its
carrying amount including goodwill, an impairment loss is recognised in the consolidated statement of comprehensive income.
Acquisition costs are recognised in the consolidated statement of comprehensive income as incurred.
f) Revenue
During the year, as required by IFRS, a new accounting standard – IFRS 15 “Revenue form Contracts with Customers” has been
adopted using fully retrospective approach.
Revenue with customers is evaluated based on the five-step model under IFRS 15 ‘Revenue from Contracts with Customers’: (1)
identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price;
(4) allocate the transaction price to separate performance obligations; and (5) recognise revenues when (or as) each performance
obligation is satisfied.
Details of the material performance obligations for both our software and services businesses are detailed below:
Software licences whereby the customer buys a software that it sets up and maintains on its premises is recognised fully at the point
the licence key / access has been granted to the client. The Group sells the majority of its services through channels and distributors
who are responsible for providing 1st and 2nd line support to the client.
Provision for services is broken into two main areas;
1) Sale of third-party hardware, software and warranties:
a) Where the contract entails only one performance obligation to provide software or hardware, revenue is recognised in
full at a point in time upon delivery of the product to the end client. This delivery will either be in the form of the
physical delivery of a product or the e-mailing of access codes to the client for them to access third party software or
warranties; and
b) Where a contract to supply external hardware, software and/or warranties also include an element of ongoing internal
support, multiple performance obligations are identified and an allocation of the total contract value is allocated to each
performance obligation based on the standalone costs of each performance obligation. The respective costs of each
performance obligations are traceable to supplier invoice and applying the fixed margins, standalone selling prices are
determined. Internal support is recognised equally over the period of time detailed in the contract.
2) Sale of consultancy services:
Consultancy services are provided on a range of topics including data protection, project management, governance and
compliance. Client contracts stipulate a number of consultancy days that make up the contracted consideration and the
group has an enforceable right to payment for work completed to date. Consultancy days generally comprise of field work
and (where required) report writing and delivery which are considered to be of equal value to the client. Revenue is
recognised over time based on the number of consultancy days provided within the period compared to the total in the
contract.
Revenue recognised in the statement of comprehensive income but not yet invoiced is held on the statement of financial position
within accrued income. Revenue invoiced but not yet recognised in the statement of comprehensive income is held on the statement
of financial position within deferred revenue.
The Group reviewed the potential impact of IFRS 15 in the previous financial period and found that it’s revenue recognition policies
were in line with IFRS 15 which has been adopted in the current year. Additionally, as Group has acquired its revenue generating
components within last and current financial year, there is no impact on the opening position and therefore no adjustment has been
made.
30
1. Statement of accounting policies continued
g) Segmental reporting
For internal reporting and management purposes, the Group is organised into two reportable segments based on the types of
products and services from which each segment derives its revenue – software and services. The Group’s operating segments are
identified on the basis of internal reports that are regularly reviewed by the chief operating decision maker in order to allocate
resources to the segment and to assess its performance.
The directors consider that the acquisitions of Brookcourt and GeoLang meet the aggregation criteria under IFRS 8 as they share
similar economic characteristics in terms of the nature of the products and services provided.
h) Exceptional items
The group’s statement of comprehensive income separately identifies exceptional items. Such items are those that in the Directors’
judgement are one-off in nature and need to be disclosed separately by virtue of their size and incidence. In determining whether an
item or transaction should be classified as an exceptional item, the Directors’ consider quantitative as well as qualitative factors such
as the frequency, predictability of occurrence and significance. This is consistent with the way that financial performance is measured
by management and reported to the Board. Exceptional items may not be comparable to similarly titled measures used by other
companies. Disclosing adjusted items separately provides additional understanding of the performance of the Group.
i) Current and deferred income tax
The charge for taxation is based on the profit or loss for the year and takes into account deferred tax. Deferred tax is the tax expected
to be payable or recoverable on temporary differences between the carrying amounts of assets and liabilities in the financial
statements and the corresponding tax based in the computation of taxable profit or loss and is accounted for using the balance sheet
method.
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date
in the countries where the Group’s subsidiaries operate and generate taxable income. Management periodically evaluate positions
taken in tax returns with respect to situations where applicable tax regulation is subject to interpretation. It establishes provisions
where appropriate on the basis of amounts expected to be paid to the tax authorities.
Deferred tax assets are only recognised to the extent that it is probable that future taxable profit will be available in the foreseeable
future against which the temporary differences can be utilised.
Deferred income tax assets and liabilities are measured at the rates that are expected to apply when the related asset is realised, or
liability settled, based on tax rates and laws enacted or substantively enacted at the reporting date.
Intangible assets
j)
Intangible assets are carried at cost less accumulated amortisation and accumulated impairment losses. Intangible assets acquired
as part of a business combination are recognised outside goodwill if the assets are separable or arises from contractual or other legal
rights and their fair value can be measured reliably. Material expenditure on internally developed intangible assets is taken to the
consolidated statement of financial position if it satisfies the 6 step criteria required under IAS 38.
Intangible assets with a finite life have no residual value and are amortised over their expected useful lives as follows:
Computer software
3-5 years straight line basis
Customer relationships
1-15 years straight line basis
Software
Tradenames
10 years straight line basis
10 years straight line basis
The amortisation expense on intangible assets with finite lives is recognised in the statement of comprehensive income within
administrative expenses. The amortisation period and the amortisation method for intangible assets with finite useful lives are
reviewed at least annually.
The carrying value of intangible assets is reviewed for impairment whenever events or changes in circumstances indicate the carrying
value may not be recoverable.
k) Property, plant and machinery
Property, plant and equipment is stated at historical cost less accumulated depreciation. Cost includes the original purchase price of
the asset plus any costs of bringing the asset to its working condition for its intended use. Depreciation is provided at the following
annual rates, on a straight-line basis, in order to write down each asset to its residual value over its estimated useful life.
The assets residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.
31
1. Statement of accounting policies continued
Plant and machinery
Office equipment
20-33 per cent per annum
25 per cent per annum
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised, as adjusted
items if significant, within the statement of comprehensive income.
l)
Investments in subsidiaries
Fixed asset investments, which all relate to investments in subsidiaries, are stated at cost less provision for any impairment in value.
m) Financial instruments
Shearwater’s financial assets and financial liabilities are recognised in the Group’s balance sheet when the Group becomes a party
to the contractual provisions of the instrument.
Financial assets
Trade and other receivables are measured at amortised cost less a provision for doubtful debts, determined as set out below in
“impairment of financial assets”. Any write-down of these assets is expensed to statement of comprehensive income.
Equity investments not qualifying as subsidiaries, associates or jointly controlled entities are measured at fair value through other
comprehensive income (FVOCI), with fair value changes recognised in other comprehensive income (OCI) and dividends recognised
in profit or loss.
Impairment of financial assets
The impairment model under IFRS 9 reflects expected credit losses, as opposed to only incurred credit losses under IAS 39. Under
the impairment approach in IFRS 9, it is not necessary for a credit event to have occurred before credit losses are recognised.
Instead, the Group always accounts for expected credit losses and changes in those expected credit losses. The amount of expected
credit losses are updated at each reporting date.
The new impairment model only applies to the Group’s financial assets that are debt instruments measured at amortised costs or
FVOCI as well as the Group’s contract assets and issued financial guarantee contracts. The Group has applied the simplified
approach to recognise lifetime expected credit losses for its trade receivables, finance lease receivables and contracts assets as
required or permitted by IFRS 9.
Expected credit losses are calculated with reference to average loss rates incurred in the three most recent reporting periods. The
Group’s average combined loss rate is 0.1%. This percentage rate is then applied to current receivable balances using a probability
risk spread as follows:
80% of debt not yet due (i.e. the Group’s average combined loss rate of 0.1% is discounted by 20%, meaning a 0.08%
provision would be made to debt not yet due);
85% of debt that is <30 days overdue;
90% of debt that is 30-60 days overdue;
95% of debt that is 60-90 days overdue; and
100% of debt that is >90 days overdue.
Management have performed the calculation to ascertain the expected credit loss which works out to £4,880 which management
believe is immaterial and has not been recognised in the Financial Statements. The Group has a record of minimal bad debts with
less than £0.01 million being written off in the past 3 years.
A calculation for expected credit loss has been recognised in relation to the Company’s inter-group receivables. This is made up of
a specific provision for expected credit default plus a general provision which is based upon a 0.5% provision per-annum for each
year the receivable is expected to remain outstanding.
The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers
the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. On derecognition of a
financial asset measured at amortised cost, the difference between the asset’s carrying amount and the sum of the consideration
received and receivable is recognised in statement of comprehensive income
32
1. Statement of accounting policies continued
Financial liabilities
Trade and other payables
Financial liabilities within trade and other payables are initially recognised at fair value, which is usually the invoiced amount. They
are subsequently carried at amortised cost using the effective interest method (if the time value of money is significant).
The Group derecognises financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or they expire.
The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable, including
any non-cash assets transferred or liabilities assumed, is recognised in the statement of comprehensive income.
n) Share-based payments
In order to calculate the charge for share-based payments as required by IFRS 2, the Group makes estimates principally relating to
assumptions used in its option-pricing model as set out in note 19.
The cost of equity-settled transactions with employees, and transactions with suppliers where fair value cannot be estimated reliably,
is measured with reference to the fair value of the equity instrument. The fair value of equity-settled instrument is determined at the
date of grant, taking into account market-based vesting conditions. The fair value is determined using an option pricing model.
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 reporting 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, the number of equity instruments
that will likely vest, or in the case of an instrument subject to market condition, be treated as vesting as described above. The
movement in cumulative expense since the previous reporting date is recognised in the statement of comprehensive income, with
the corresponding entry in equity.
o) Operating leases
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating
leases. Rentals incurred in respect of operating leases (net of any incentives received from the lessor) are charged to the Statement
of comprehensive income on a straight-line basis over the period of the lease.
p) New standards and interpretations not applied
The following new standard, amendments and interpretations have not been adopted in the current year.
International Financial Reporting
Standards (IFRS/IAS)
IFRS 16
Leases
Effective date
1 January 2019
To be adopted by the Group
1 April 2019
IFRS 16 comes into effect for accounting periods beginning on or after 1 January 2019. And replaces IAS 17 Leases. The Group will
adopt IFRS 16 from 1 April 2019. For lessees, the new standard requires leases to be recognised on the balance sheet as a right-to-
use asset (representing the right to use the leased item) and a liability, representing the obligation to make future lease payments.
Under IFRS 16, the operating lease expense will be replaced with a depreciation charge for the right-of-use asset and interest
expense on the lease liability.
The Group plans on adopting the modified retrospective approach. The estimated impact to profit before tax for the 2020 financial
year is an increase of approximately £0.01 million. Non-current assets are expected to increase by £0.3 million and gross liabilities
are expected to increase by £0.3 million. The Group has elected not to recognise right of use assets and lease liabilities for short-
term leases or low-value assets and will continue to expense the lease payments associated with these leases on a straight-line
basis over the term of the lease.
2. Measure of profit
To provide Shareholders with a better understanding of the trading performance of the Group, underlying EBITDA has been calculated
as loss before tax after adding back the following items, which can distort the underlying performance of the Group:
Amortisation of acquired intangibles
Depreciation
Share-based payments
Exceptional items
Impairment of intangible assets
Finance cost and Finance income
Fair value adjustment to deferred consideration
33
2. Measure of profit continued
Underlying EBITDA reconciles to loss before tax as follows:
Loss before tax
Amortisation of acquired intangibles
Depreciation of fixed assets
Share-based payments
Impairment of intangible assets
Exceptional items
Fair value adjustment to deferred consideration
Finance cost
Finance income
Underlying EBITDA
3. Segmental information
2018/19
£ (000)
(6,880)
1,325
69
331
1,005
2,729
(137)
164
-
(1,394)
2017/18
£ (000)
(2,882)
647
14
366
-
1,020
-
-
(2)
(837)
In accordance with IFRS 8, the Group’s operating segments are based on the operating results reviewed by the Board, which
represents the chief operating decision maker. The Group reports its results in two segments as this accurately reflects the way the
Group is managed.
The Group is organised into two reportable segments based on the types of products and services from which each segment derives
its revenue – software and services.
Segment information for the 12 months ended 31 March 2019 is presented below and excludes intersegment revenue as they are
not material, and assets as the Directors do not review assets and liabilities on a segmental basis.
Revenue
Segment underlying EBITDA
Group costs
Underlying EBITDA
Amortisation of acquired intangibles
Depreciation
Share-based payments
Impairment of intangible assets
Exceptional items
Fair value adjustment to deferred
consideration
Finance income
Finance cost
Loss before tax
Software
2018/19
£ (000)
Services
2018/19
£ (000)
3,880
468
19,572
266
Total
2018/19
£ (000)
23,452
734
(2,128)
(1,394)
(1,325)
(69)
(331)
(1,005)
(2,729)
137
-
(164)
(6,880)
Software
2017/18
£ (000)
Services
2017/18
£ (000)
Total
2017/18
£ (000)
3,372
1,668
2,868
(575)
6,240
1,093
(1,930)
(837)
(647)
(14)
(366)
-
(1,020)
-
2
-
(2,882)
The majority (89%) of the Group’s revenue is derived within the United Kingdom. 7% of revenues come from Europe,
3% North America and 1% rest of the world.
Two customers within the Group each make up more than 10% of the Group’s revenue. These two customers
contribute £8.2 million and £3.2 million respectively. In the prior year no one customer made up more than 10% of
total Group revenues.
Contract assets of £0.3 million (2018: £0.6 million) and contract liabilities of £1.1 million (2018: nil) were held at the
year end.
The table below details the movements during the year:
34
3. Segmental information continued
At 1 April
Acquired on acquisition
Transfers in the period from contract assets to trade
receivables
Amounts included in contract liabilities that was recognised
as revenue during the period
Excess of revenue recognised over amounts billed in the
period
Amounts billed in advance but not recognised as revenue
during the period
At 31 March
4. Operating loss
Operating loss is stated after charging:
Contract assets
Contract Liabilities
2019
2018
2019
2018
£ (000)
610
-
(610)
-
300
-
300
£ (000)
-
-
£ (000)
-
600
£ (000)
-
-
-
-
610
-
610
-
(600)
-
1,146
1,146
-
-
-
-
-
Depreciation of fixed assets
Amortisation of acquired intangibles
Operating lease expense
External auditors’ remuneration:
- Audit fee for annual audit of the Group and Company financial statements
- Audit fee for annual audit of the Subsidiary financial statements
- Other taxation and compliance services
Share based payments
Impairment of intangible assets
Exceptional items
Fair value adjustment of deferred consideration
2018/19
£ (000)
2017/18
£ (000)
69
1,325
519
41
95
-
331
1,005
2,729
(137)
14
647
211
43
12
5
366
-
1,020
-
Exceptional items relate to acquisition costs for Brookcourt Solutions Limited (£1.5m) and GeoLang Holdings Limited (£0.2m), and
one off legal costs (£1.0m) .
5. Staff costs
Total staff cost within the Group comprise of all Directors and employee costs for the financial year. The Group totals below include
12 months of staff costs for GeoLang Holdings Limited (acquired April 2018) and 5.5 months of staff costs for Brookcourt Solutions
Limited (acquired October 2018).
Wages and salaries
Social security costs
Pension costs
Share-based payments
Group
2018/19
£ (000)
2017/18
£ (000)
Company
2018/19
£ (000)
2017/18
£ (000)
6,155
733
283
331
7,502
2,638
295
69
366
3,368
654
80
15
331
1,080
700
87
21
366
1,174
The weighted average monthly number of employees, including Directors employed by the Group and Company during the year
was:
35
5. Staff costs continued
Administration
Production
Sales and marketing
Group
Company
2018/19
20
40
42
102
2017/18
11
8
22
41
2018/19
7
-
-
7
2017/18
7
-
-
7
66. Key management personnel and Directors compensation
The remuneration of key management personnel during the year was as follows:
Wages and salaries
Social security costs
Pension costs
Share-based payments
The remuneration of Directors during the year was as follows:
2018/19
£ (000)
2017/18
£ (000)
486
60
6
180
732
472
44
2
193
711
Year ended 31 March 2019
Executive Directors
M Stevens (resigned 12 April 2019)
P McFadden
P Higgins
Non-Executive Directors
D Williams
S Ball
R Southwell
G Willits
Total
salary and
fees
£ (000)
231
54
33
51
25
25
26
445
Bonus
£ (000)
Subtotal
£ (000)
Pension
£ (000)
Total
£ (000)
-
17
9
-
-
-
15
41
231
71
42
51
25
25
41
486
1
5
-
-
-
-
-
6
232
76
42
51
25
25
41
492
A one-off bonus was paid to G Willits to cover the cost to exercise share options previously granted. The options were exercised on
18 June 2018 resulting in a gain on exercise of £26,087.
Year ended 31 March 2018
Executive Directors
M Stevens
C Eadie (resigned 29 September 2017)
Non-Executive Directors
D Williams
S Ball
R Southwell
G Willits
S Finlay (resigned 13 April 2017)
Total
salary and
fees
£ (000)
229
26
50
25
25
8
1
364
Bonus
£ (000)
Subtotal
£ (000)
Pension
£ (000)
Total
£ (000)
108
-
-
-
-
-
-
108
337
26
50
25
25
8
1
472
2
-
-
-
-
-
-
2
339
26
50
25
25
8
1
474
The highest paid Director received remuneration (excluding share-based payments) totalling £232,000 (2017/18: £339,446).
Directors’ interests in shares and share options are disclosed in the Directors’ report. In 2019 and 2018, key management personnel
are considered to comprise of the Directors.
36
7. Taxation
Current tax:
UK corporation tax at current rates on UK losses for the year
Foreign tax
Total current tax (credit)
Deferred tax asset not recognised
Deferred tax liability movement in the period
Income tax (credit) / charge
Reconciliation of taxation:
Loss before tax
Loss multiplied by the average rate of corporation tax in the year of 19% (2018: 19%)
Tax effects of:
Depreciation and amortisation in excess of capital allowance
Expenses not deductible for tax purposes
Foreign tax rate differences
Enhanced R&D relief
Fair value adjustment to deferred consideration
Deferred tax asset not recognised
Income tax (credit) / charge
2018/19
£ (000)
2017/18
£ (000)
(1,159)
(1,159)
18
(1,141)
494
(373)
(1,020)
(6,880)
(1,307)
(194)
12
1
-
(26)
494
(1,020)
(465)
(465)
3
(462)
465
-
3
(2,882)
(548)
(2)
131
(1)
(42)
-
465
3
On 23 November 2016 it was announced that the UK corporation tax rate will be reduced from 19% to 17% from 1 April 2020.
The Group has gross tax losses and temporary timing differences of £1.6 million (2017/18: £0.5 million) of which a deferred tax asset
£0.7 million (2017/18: Nil) has been recognised based on expected utilisation in the next twelve months.
8. Loss per share
Basic loss per share is calculated by dividing the loss attributable to the ordinary shareholders by the weighted average number of
ordinary shares outstanding during the period.
For diluted loss per share, the weighted average number of shares in issue is not adjusted to assume conversion of all the potential
dilutive ordinary shares. The potential dilutive shares are anti-dilutive for the twelve months ended 31 March 2019 and the twelve
months ended 31 March 2018 as the Group is loss making.
At the reporting date, there were 31,498,074 (2018: 18,815,074) potentially dilutive ordinary shares. Dilutive potential ordinary shares
relate to share options.
The calculation of the basic and diluted loss per share from total operations attributable to Shareholders is based on the following
data:
Net loss from total operations
Loss for the purposes of basic and diluted loss per share being net
loss attributable to Shareholders
Number of
shares
Weighted average number of ordinary shares for the purpose of basic
and diluted loss per share
Loss per share
Basic and
diluted
2018/19
£ (000)
(5,860)
No
2017/18
£ (000)
(2,885)
No
1,407,483,914
Pence
917,725,525
Pence
(0.42)
(0.31)
37
9. Acquisitions
Brookcourt Solutions Limited
On 17 October 2018, the Group acquired the entire issued share capital of Brookcourt Solutions Limited (“Brookcourt”), a multi-award
winning, UK-based cyber security solutions company, focusing on the provision of secure networking and cyber security solutions to
corporate and public sector organisations. The rationale for the acquisition is in line with the Group’s strategy to acquire
complimentary digital resilience solutions businesses to enhance the Group’s service offering.
Details of the fair value of identifiable assets and liabilities acquired, purchase consideration and goodwill are follows:
Property, plant and equipment
Tradename
Non-contractual customer relationships
Inventories
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Deferred tax liabilities
Total net assets
Fair value of consideration paid:
Cash
Shares in Shearwater Group plc
Deferred cash consideration
Total consideration
Goodwill (note 10)
Book value
£ (000)
160
-
-
190
10,184
4,417
(7,045)
(27)
7,879
Adjustment
£ (000)
-
6,826
4,282
(190)
1,120
(1,095)
(577)
(2,000)
8,366
Fair value
£ (000)
160
6,826
4,282
-
11,304
3,322
(7,622)
(2,027)
16,245
£ (000)
18,485
15,360
3,000
36,845
20,600
Adjustments in the table above include; £6.8 million and £4.3 million for the creation of intangible assets for the tradename and
customer relationships. Inventories have been written down by £0.2 million. Trade and other receivables of £1.1 million represent a
£3.0 million loan advanced to Shearwater Group plc less £1.9 million of loans advanced to the Directors of Brookcourt plus £0.02
million addition to prepayments for services that have not yet been recognised. Cash and cash equivalent reduction of £1.1 million
represents the net cash paid to the parent on acquisition. Trade and other payables of £0.6 million reflects deferred revenue at
acquisition.
The cash portion of consideration of £21.5 million reflects £6.4 million of cash and cash equivalents which were acquired on a £ for
£ basis as part of the transaction which includes the £3.4 million as detailed in the table above plus £3.0m loan which is repayable to
the ex-owners which is detailed in note 15.
The goodwill recognised will not be deductible for tax purposes.
Acquisition costs of £2.0 million arose as a result of the transaction. £0.5 million of these acquisition costs related to the issuance of
new equity and has been charged to retained earnings in line with merger relief rules. The remaining £1.5 million has been recognised
as part of administration expenses in the statement of comprehensive income for the twelve-month period to 31 March 2019 within
exceptional items.
Since the acquisition date, Brookcourt has contributed £15.2 million to group revenues and £2.8 million to group underlying EBITDA
and profit before tax. If the acquisition had occurred on 1 April 2018, Brookcourt’s contribution to group revenue would have been
£29.2 million and its contribution to group underlying EBITDA for the period would have been £3.4 million and £3.3 million profit
before tax.
On acquisition, Brookcourt held trade receivables with a book and fair value of £8.2 million. The Group is confident that the full amount
will be ultimately received.
GeoLang Holdings Limited
On 4 April 2018, the Group acquired the entire issued share capital of GeoLang Holdings Limited (“GeoLang”), an award-winning
UK-based provider of Data Loss Prevention (“DLP”) enterprise software. The rationale for the acquisition is in line with the Group’s
strategy to acquire complimentary digital resilience solutions businesses to enhance the Group’s service offering.
Details of the fair value of identifiable assets and liabilities acquired, purchase consideration and goodwill are follows:
38
9. Acquisitions continued
Computer software
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Deferred tax liabilities
Total net assets
Fair value of consideration paid:
Repayment of indebtedness
Shares in Shearwater Group plc
Holdback consideration shares
Total consideration
Goodwill (note 10)
Book value
£ (000)
-
115
15
(483)
-
(353)
Adjustment
£ (000)
1,220
-
310
148
(207)
1,471
Fair value
£ (000)
1,220
115
325
(335)
(207)
1,118
£ (000)
457
800
343
1,600
482
Adjustments in the table above include; £1.2 million for the creation of intangible assets for computer software. Cash and cash
equivalents of £0.3 million represents funds transferred into the company on acquisition to settle remaining indebtedness.
Remaining indebtedness was settled in full in the financial year. Trade and other payables include £0.1 million which was related to
indebtedness settled at the date of acquisition.
The goodwill recognised will not be deductible for tax purposes.
Acquisition costs of £0.2 million arose as a result of the transaction. This has been recognised as part of administration expenses in
the statement of comprehensive income for the twelve-month period to 31 March 2019 within exceptional items.
Since the acquisition date, GeoLang has contributed £0.1 million to group revenues and made an underlying EBITDA loss and loss
before tax of £0.5 million. Revenue, underlying EBITDA loss and loss before tax are the same on a pro-forma basis owing to GeoLang
being acquired four days into the financial year.
An additional 12,960,179 holdback consideration shares will be issued on 4 April 2020 on the basis that no warranties within the
sale and purchase agreement have been breached.
On the 13 June 2019, the Group issued 14,388,567 ordinary shares of the Group to the GeoLang sellers. These additional
consideration shares were issued pursuant to the acquisition of GeoLang Holdings Limited announced on 4 April 2018, under which
certain provisions were triggered by the share price performance criteria set out in the sale and purchase agreement which were
considered unlikely at the point of acquisition and as such were not recognised on acquisition.
Newable Consulting
Following the acquisition of Newable Consulting on 26 July 2017 on the 7 December 2018 the Group issued 612,017 new ordinary
shares of 1p to the previous owners to settle the deferred consideration element of the acquisition at an issue price of £0.0343.
39
10. Intangible assets
Group
Cost
At 1 April 2017
Recognised on acquisition
Additions
At 31 March 2018
Recognised on acquisition
Additions
At 31 March 2019
Accumulated amortisation
At 1 April 2017
Amortisation for the year
At 31 March 2018
Amortisation for the year
Impairments
At 31 March 2019
Net book amount
At 31 March 2019
At 31 March 2018
At 31 March 2017
Company
Cost
At 1 April 2017
Additions
At 31 March 2018
Additions
At 31 March 2019
Accumulated amortisation
At 1 April 2017
Amortisation for the year
At 31 March 2018
Amortisation for the year
Impairments
At 31 March 2019
Net book amount
At 31 March 2019
At 31 March 2018
At 31 March 2017
Goodwill
£ (000)
Customer
relationships
£ (000)
Softwares Tradenames
£ (000)
£ (000)
Gold
exploration
£ (000)
-
12,449
-
12,449
21,117
-
33,566
-
-
-
-
-
-
33,566
12,449
-
-
4,260
-
4,260
4,284
-
8,544
-
324
324
493
-
817
7,727
3,936
-
-
3,602
19
3,621
1,220
584
5,425
-
323
323
513
-
836
4,589
3,298
-
-
-
-
-
6,826
-
6,826
-
-
-
319
-
319
6,507
-
-
935
-
51
986
-
19
1,005
-
-
-
-
1,005
1,005
-
986
935
Total
£ (000)
935
20,311
70
21,316
33,447
603
55,366
-
647
647
1,325
1,005
2,977
52,389
20,669
935
Gold
exploration
£ (000)
935
51
986
19
1,005
-
-
-
-
1,005
1,005
-
986
935
The Group has impaired £1.0 million of their legacy Gold exploration rights during financial year to 31 March 2019 as a result of
delays in obtaining licences which has delayed the process of identifying a potential buyer.
The Group tests goodwill annually for impairment. The recoverable amount of goodwill is determined as the higher of the value in
use calculation or fair value less cost of disposal for each cash generating unit (‘CGU’). The value in use calculations use pre-tax
cash flow projections based on financial budgets and forecasts approved by the Board covering a three-year period. These pre-tax
cash flows beyond the three-year period are extrapolated using estimated long-term growth rates. Following the acquisitions of
Brookcourt and GeoLang, the Group has four separate cash generating units (‘CGU’). For all four cash generating units a weighted
average cost of capital of 15% and a terminal value, based on a long term growth rate of 2 to 2.5% calculated on year 5 cashflow
has been used when testing goodwill. Sensitivity
40
10. Intangible assets continued
analysis has been performed adjusting where long-term forecast revenues have been adjusted by 5%, weighted average cost of
capital increased by 1% and the terminal value reduced to 2% and in each case no impairment has arisen.
In the case of both Brookcourt and GeoLang, goodwill arising from the acquisition consists largely of the future revenue opportunities
of the service offerings not yet realised, expertise within the acquired workforces as well as intra-group synergies and economies of
scale as a result of utilisation of the Group’s shared services function. None of the goodwill is expected to be deductible for income
tax purposes.
11. Investments in subsidiaries
Company
Investments in subsidiaries at 1 April 2017
Additions
Investments in subsidiaries at 31 March 2018
Additions
Investments in subsidiaries at 31 March 2019
Total
£ (000)
-
20,221
20,221
38,446
58,667
The following table gives brief details of the entities controlled and included in the consolidated financial statements of the Group at
31 March 2019. Subsidiaries marked (*) are directly owned by Shearwater Group plc, all other subsidiaries are indirectly owned.
Name of company
Shearwater Subco Limited*
SecurEnvoy Limited*
Xcina Limited
Xcina Consulting Limited
SecurEnvoy, Inc.
SecurEnvoy GmbH
GeoLang Holdings Limited*
GeoLang Limited
Xcina Enterprise Limited
Brookcourt Solutions Limited*
country of
incorporation or
residence
England and Wales
England and Wales
England and Wales
England and Wales
USA
Germany
England and Wales
England and Wales
England and Wales
England and Wales
Registered address
22 Great James Street, London, WC1N 3ES
22 Great James Street, London, WC1N 3ES
22 Great James Street, London, WC1N 3ES
22 Great James Street, London, WC1N 3ES
1209 Orange Street, Wilmington, Delaware
Freibadstr. 30, 81543, Munchen
22 Great James Street, London, WC1N 3ES
22 Great James Street, London, WC1N 3ES
22 Great James Street, London, WC1N 3ES
22 Great James Street, London, WC1N 3ES
Percentage
owned
100
100
100
100
100
100
100
100
100
100
The Group have conducted impairment reviews for each of the above entities and have satisfied themselves that no impairment is
necessary.
12. Financial assets at fair value through OCI
Group and
Company
Cost
At 1 April 2017
Fair value loss
At 31 March 2018
Fair value loss
At 31 March 2019
Total
£ (000)
118
(67)
51
(18)
33
On 4 November 2014, the Group received 715,000 ordinary shares in Plymouth Minerals Limited (ASX: INF previously PLH) listed
on the Australian Securities Exchange as the deferred payment of €50,000 (£42,000) worth of shares under the Morille project share
purchase agreement, as final consideration for the acquisition of the project. The share price on 31 March 2019 was AUS $0.084
(2018: AUS $0.13) resulting in an impairment of £18,416 (2018: impairment of £66,776).
41
13. Property, plant and machinery
Group
Cost
At 1 April 2017
Recognised on acquisition
Additions
At 31 March 2018
Recognised on acquisition
Additions
At 31 March 2019
Accumulated depreciation
At 1 April 2017
Charge for the period
At 31 March 2018
Charge for the period
At 31 March 2019
Net book amount
At 31 March 2019
At 31 March 2018
At 31 March 2017
Total
£ (000)
2
16
72
90
160
81
331
-
14
14
69
83
248
76
2
Depreciation of property, plant and equipment is charged to administrative expenses within the statement of comprehensive income.
Company
Cost
At 1 April 2017
Additions
At 31 March 2018
Additions
At 31 March 2019
Accumulated depreciation
At 1 April 2017
Charge for the period
At 31 March 2018
Charge for the period
At 31 March 2019
Net book amount
At 31 March 2019
At 31 March 2018
At 31 March 2017
42
Total
£ (000)
2
20
22
6
28
-
4
4
7
11
17
18
2
14. Trade and other receivables
Trade receivables
Amounts owed by Group companies
Provision for expected credit losses
Accrued income
Prepayments and other receivables
VAT recoverable
Corporation tax
Group
Company
2019
£ (000)
13,204
-
-
300
2,017
379
320
16,220
2018
£ (000)
1,012
-
-
610
205
122
-
1,949
2019
£ (000)
91
4,245
(322)
94
134
312
-
4,554
Other receivables include a £4,000 Directors loan which was repaid on 15 April 2019. The loan was interest free.
Amounts owed by Group companies are interest free and repayable on demand.
As required by IAS 39 the aging analysis of overdue trade receivables at 31 March 2018 is as follows:
Up to 3 months overdue
3 to 6 months overdue
2018
£ (000)
-
-
-
-
47
-
-
47
2018
£ (000)
205
6
211
The Company’s trade receivable balance at 31 March 2019 is all current.
As at 31 March 2018 trade receivables of £211,121 were past due but not impaired. They relate to the customers with no default
history. No debtor balances have been impaired.
The movement for the provision in expected credit losses is stated below:
At 1 April
Movement in expected credit loss provision
At 31 March
15. Trade and other payables
Trade payables
Amounts owed to Group companies
Loans
Accruals and other payables
Other taxation and social security
Deferred income
Corporation tax
2019
£ (000)
-
322
322
2018
£ (000)
164
-
-
282
151
-
-
597
Group
Company
2019
£ (000)
7,451
-
4,407
2,933
1,452
1,146
-
17,389
2018
£ (000)
632
-
67
766
279
-
11
1,755
2019
£ (000)
1,140
8,108
3,136
1,291
38
-
-
13,713
Amounts owed to Group companies are interest free.
Loan balances include £3.0 million of delayed completion cash which is repayable to the previous shareholders of Brookcourt
Solutions Limited in October 2019 with the option to extend to April 2020. Interest is accrued on this loan at a rate of 10% per annum.
At year end £0.1m accrued interest is included to leave a liability of £3.1 million. The Group utilises a £2.0 million debt finance facility
that allows it to recognise receipts from it’s trade receivables book to fund future growth which has a short term working capital
requirement. At year end the £1.3 million was utilised. This was settled in full on 16 April 2019.
43
16. Deferred tax
Non-current liabilities
Liability at 1 April
Deferred tax (credit) / charge in the statement of comprehensive income
Acquisition of subsidiaries
Total deferred tax
Group
Company
2019
£ (000)
2018
£ (000)
2019
£ (000)
2018
£ (000)
1,340
(373)
2,236
3,203
-
-
1,340
1,340
-
2
-
2
-
-
-
-
Deferred tax arising on acquisition includes £0.2 million for GeoLang Holdings Limited and £2.0 million for Brookcourt Solutions
Limited which has arisen as part of the PPA exercise to identify intangible assets (the acquisitions generated the £1.3 million
balance in the comparative year.
Management have noted an error relating to prior year deferred tax liability to the sum of £0.5m. As a result, prior year financial
statements have been restated with the deferred tax liability reduced by £0.5 million and goodwill arising on the acquisition of
SecurEnvoy Limited reduced by £0.5 million.
Current assets
Deferred tax asset on losses carried forward
Total deferred tax asset
Group
Company
2019
2018
2019
2018
£ (000)
£ (000)
£ (000)
£ (000)
665
665
-
-
-
-
-
-
As detailed in last year’s financial statements the Group is expected to generate it’s first taxable profits in the financial year to 31
March 2020. A deferred tax asset has subsequently been recognised at 31 March 2019 for the Directors’ estimate of tax losses and
other temporary timing differences expected to be utilised during the next financial year.
17. Long term deferred consideration
Liability at 1 April
Holdback consideration shares
Group
Company
2019
£ (000)
-
206
206
2018
£ (000)
-
-
-
2019
£ (000)
-
206
206
2018
£ (000)
-
-
-
The above balance represents holdback consideration shares for the acquisition of GeoLang Holdings Limited. This consideration
will be settled by issue of 12,960,179 ordinary shares in April 2020 pending expiry of the warranty claims period under the GeoLang
share purchase agreement.
18. Share capital
In thousands of shares
In issue at 1 April
Options exercised during the year
Share issue as part of acquisition consideration
Share issue for deferred consideration
Share placing and open offer
Allotted, called up and fully paid
Ordinary shares of £0.01 each
The following issues of shares were undertaken in the twelve-month period ended 31 March 2019:
44
Ordinary shares
2019
964,359
1,093
451,039
612
486,862
1,903,965
2018
535,250
-
203,621
-
225,488
964,359
2019
£ (000)
2018
£ (000)
19,040
9,644
18. Share capital continued
On 4 April 2018, 30,205,571 new ordinary shares of 1p were issued to the shareholders of GeoLang Holdings Limited at a price of
£0.04 per share to satisfy the share consideration as part of the acquisition, which wasn’t subject to holdback for the duration of the
warranty claims period. The fair value per share on acquisition was £0.0265.
On 16 October 2018, 463,000,000 new ordinary shares of 1p were issued to new and existing investors at a placing price of £0.036
per share raising gross cash proceeds of £16.7 million. In addition, a further 23,861,564 new ordinary shares of 1p were issued to
existing shareholders by way of an open offer at a price of £0.036 per share raising gross cash proceeds of £0.9 million. The £17.6
million aggregated gross cash proceeds were used to part satisfy the £15.15 million of net cash consideration paid to the shareholders
of Brookcourt, which was acquired by the Group on 17 October 2018 plus certain acquisition costs. The fair value per share on
acquisition was £0.0365.
On the same day, a further 420,833,333 new ordinary shares of 1p were issued to the shareholders of Brookcourt at a price of £0.036
per share to satisfy the share consideration as part of the acquisition.
On 7 December 2018, 612,017 new ordinary shares of 1p were issued to the previous owners of Newable Consulting at a price of
£0.0343 to settle the remaining deferred consideration following the achievement of certain performance criteria as per the asset
purchase agreement.
On 18 June 2018, Giles Willits exercised 521,739 options following which the Company issued an allotted 521,739 new ordinary
shares of 1p to him.
During the year a further 571,428 options were exercised by an advisor to the Group.
Other reserves included:
Share premium
This comprises of the amount subscribed for share capital in excess of the nominal value less any transaction costs incurred in raising
equity.
Available for sale reserves
This comprises of gains/losses arising on financial assets classified as available for sale. A fair value loss was recognised in the year
relating to Plymouth Minerals (see note 12).
Other reserves
These comprise of amounts expenses in relation to the share incentive scheme (see note 19) and merger relief from shares issued
as consideration to acquisitions.
19. Share based payments
Share options
Subsidiary incentive scheme
Group
2018/19
£ (000)
139
200
339
2017/18
£ (000)
166
200
366
45
19. Share based payments continued
Share options
The following options over ordinary shares remained outstanding at 31 March 2019:
options at
1 April
2018
Options
issued
during the
year
Options lapsed
during the year
Options
exercised
during
the year
Options at
31 March
2019
Exercise
price
Date of
grant
first date of
exercise
Final date
of
exercise
Options' -
Directors
G Willits
P McFadden
Employees:
Employees
Employees
Employees
Employees
Employees
Employees
Employees
Employees
Employees
Non-employees
Other
Other
521,739
0
0
875,000
0
0
521,739
0
0
875,000
6,950,000
1,500,000
4,557,692
500,000
1,928,500
0
0
0
0
2,000,000
857,143
0
0
0
0
0
2,750,000
8,277,778
4,444,444
1,250,000
0
0
1,446,671
1,500,000
105,769
393,680
375,000
0
0
0
0
0
0
0
0
0
0
0
0
0
5,503,329
0
4,451,923
106,320
1,553,500
2,750,000
8,277,778
4,444,444
1,250,000
0
0
0
571,428
2,000,000
285,715
1.0p
4.0p
4.0p
4.0p
4.0p
4.0p
4.0p
4.0p
3.6p
3.6p
1.6p
1.0p
1.0p
09/12/2016
07/05/2018
09/12/2017 30/06/2018
07/05/2019 30/09/2023
09/05/2017
28/09/2017
13/11/2017
08/01/2018
01/03/2018
04/04/2018
17/10/2018
17/10/2018
01/03/2019
09/05/2018 08/05/2022
28/09/2018 27/09/2022
13/11/2018 12/11/2022
08/01/2019 07/01/2023
01/03/2019 28/02/2023
04/04/2019 03/04/2023
31/03/2019 30/09/2021
31/03/2019 30/04/2024
01/03/2020 01/07/2024
03/10/2016
27/02/2017
03/10/2016 03/10/2021
27/02/2018 31/03/2020
Total
18,815,074 17,597,222
3,821,120
1,093,167
31,498,009
The following options over ordinary shares remained outstanding at 31 March 2018:
options at
1 April
2017
Options
issued
during the
year
Options lapsed
during the year
Options
exercised
during
the year
Options at
31 March
2018
Exercise
price
Date of
grant
first date of
exercise
Final date
of
exercise
Options' -
Directors
G Willits
Employees:
Employees
Employees
Employees
Employees
Employees
Non-employees
521,739
0
0
0
0
0
0
6,950,000
1,500,000
4,557,692
500,000
1,928,500
Other
Other
Total
2,000,000
857,143
0
0
3,378,882 15,436,192
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
521,739
1.0p
09/12/2016
09/12/2017 30/06/2018
6,950,000
1,500,000
4,557,692
500,000
1,928,500
2,000,000
857,143
18,815,074
4.0p
4.0p
4.0p
4.0p
4.0p
1.0p
1.0p
09/05/2017
09/05/2018 08/05/2022
28/09/2017
28/09/2018 27/09/2022
13/11/2017
13/11/2018 12/11/2022
08/01/2018
08/01/2019 07/01/2023
01/03/2018
01/03/2019 28/02/2023
03/10/2016
03/10/2016 03/10/2021
27/02/2017
27/02/2018 31/03/2020
The following illustrates the number and weighted average exercise price (WAEP) of, and movements in, share options during the
year.
Outstanding at the beginning of year
Issued
Lapsed during the year
Outstanding at 31 March
Exercised during the year ended 31 March
Exercisable at 31 March
46
2018/19
Number
18,815,074
17,597,222
3,821,120
31,498,009
1,093,167
4,579,269
WAEP
Pence
3.4
3.5
4.0
3.5
1.0
2.7
2017/18
Number
3,378,882
15,436,192
-
18,815,074
-
3,378,882
WAEP
Pence
0.6
4.0
-
3.4
-
0.6
19. Share based payments continued
The share-based payment charge for options granted to Employees and Directors has been calculated using the Black-Scholes
Model and using the following parameters:
Share price at grant date
Exercise price
Expected option life (year)
Expected volatility (%)
Expected dividends
Risk-free interest rate (%)
Option fair value
2018/19
1.6p to 4.3p
1.0p to 4.0p
1 years to 6.0 years
10.6% to 40%
0%
0.79% to 1.53%
0.0p to 2.9p
2017/18
1.9p to 7.4p
1.0p to 4.0p
0 years to 6.0 years
10.6% to 80.0%
0%
0.79% to 3.00%
1.4p to 7.36p
The expense is recognised for share-based payments in respect of Employees, directors and consultant services received during the
year ended 31 March 2019 was £139k (2017/18: £166k).
This represented £139k in respect of share options and £nil in respect of share-based compensation (2017/18: £88k in respect of
share options and £78k in respect of share-based compensation).
The expected volatility of the original share plan utilised a volatility rate of 80% to reflect the lack of established assets on the
Group’s balance sheet. As the Group has grown, new scheme options shares issued prior to April 2018 (bar those issued to the
SecurEnvoy participants) have been issued utilising the 5-year volatility rate for the AIM all share index. All new scheme option
shares issued from April 2018 onwards have been issued utilising a 40% volatility rate, which is in line with other market
participants operating in the software and IT sectors.
Options held by Directors are disclosed in the Directors Report on pages 13 to 14.
The market price of shares as at 31 March 2019 was 1.59p (2017/18: 2.78p). The range during the financial year was 1.375p to 6.2p.
At the date of signing the financial statements the share price was 1.98p.
The weighted average remaining contractual life of options outstanding at the end of the year was 4 years 8 months (2017: 4 years
and 5 months).
Subsidiary incentive scheme
On 29 September 2016, the Group established a share incentive scheme for certain Directors and consultants to the Group, via the
Group’s subsidiary, Shearwater Subco Limited (the “subsidiary”), in order to align the interests of the scheme participants directly
with those of shareholders.
Pursuant to the subsidiary incentive scheme, the subsidiary issued 160,000 “B” ordinary shares of £0.000001 in the capital of the
subsidiary (“incentive shares”) on 18 January 2017 at a price of £0.032 per share. Subject to the growth and vesting conditions both
being satisfied, participants may elect to sell their respective B shares to the Group and the Group shall acquire those B shares in
consideration for cash or by the issue of new ordinary shares at the Group’s discretion. The Group’s intention is to settle these through
the issue of new ordinary shares in the Group.
The value of the incentive shares is discussed below. Neither of the growth or vesting conditions were satisfied during the year and
none of the incentive shares were forfeited or expired during the year. The subsidiary incentive scheme is now closed and the
Directors do not anticipate making any further grants under the scheme.
Growth conditions
The growth condition is that the compound annual growth of the Group’s equity value must be at least 12.5% per annum. The growth
condition takes into account the new shares issued, dividends and capital returned to shareholders.
Vesting conditions
The incentive shares are subject to a vesting period which ends on 29 September 2019 and can be extended to 29 September 2021
if the growth condition has not been met. The participants can exercise its right to require the Group to purchase its incentive shares
at any time up to 29 September 2021.
Value
Subject to the provisions detailed above, the incentive shares can be sold to the Group for an aggregate value equivalent to 16% of
the increase in market capitalisation of all ordinary shares of the Group issued up to the date of sale, allowing for any dividends and
other capital movements.
Directors Incentive Shares
The incentive shares issued to Directors are shown in the table below:
47
19. Share based payments continued
Participation
in increase in
shareholder
value
7.5%
3.0%
3.5%
Nominal value
of incentive
shares
£0.000001
£0.000001
£0.000001
Number of
incentive
shares 1 April
2018
75,000
30,000
35,000
Number of
incentive
shares 31
March 2019
75,000
65,000
0
Number of
Shearwater
Group plc
shares issued
0
0
0
Share based
payment charge
£93,544
£74,972
£6,100
Issue price
£0.032
£0.032
£0.032
M Stevens
D Williams
G Willits
A further 20,000 incentive shares were subscribed for by non-employees.
Valuation of incentive shares
The share-based payment charge for the incentive shares has been calculated using a binomial valuation model at the grant date.
The fair value amounted to £937,623 which has been recognised over the period to 29 September 2021. In the current year £199,560
(2018: £199,560) has been recognised as an expense in the statement of comprehensive income in respect of incentive shares. All
160,000 incentive scheme shares were subscribed for by participants at unrestricted market value.
20.Financial instruments
The Group uses financial instruments, other than derivatives, comprising cash at bank and various items such as trade and other
receivables and trade and other payables that arise directly from its operations. The main purpose of these financial instruments is to
raise finance for the Group’s operations.
The Group’s financial assets and liabilities at 31 March 2018 are presented in accordance with IAS 39. Under IFRS 9 the loans and
receivables category of financial asset is renamed financial assets at amortised cost, and the available for sale category of financial
asset is renamed fair value through other comprehensive income “FVOCI”.
The Group’s financial assets and liabilities at 31 March 2019, as defined under IFRS 9, are as follows. The fair values of financial
assets and liabilities recorded at amortised costs are considered to approximate their book value.
Financial assets
Cash and cash equivalents
Trade and other receivables
Equity investments
Total financial assets
Financial liabilities
Trade and other payables
Loans
Deferred consideration
Total financial liabilities
Amortised cost (loans
and receivables)
2018
£ (000)
2019
£ (000)
Fair value through other
comprehensive income
(available for sale)
2018
2019
£ (000)
£ (000)
597
13,512
-
14,109
2,493
1,632
-
4,125
-
-
33
33
-
-
51
51
Amortised cost
2019
£ (000)
10,384
4,407
343
15,134
2018
£ (000)
1,186
-
67
1,253
General objectives, policies and processes
The Board has overall responsibility for the determination of the Group’s risk management objectives and policies and, whilst retaining
ultimate responsibility for them, it has delegated the authority for designing and operating processes that ensure the effective
implementation of the objectives and policies to the Group’s Finance function. The Board receives monthly reports through which it
reviews the effectiveness of the processes put in place and the appropriateness of the objectives and policies it sets.
The overall objective of the Board is to set policies that seek to reduce risk as far as possible without unduly affecting the Group’s
competitiveness and flexibility.
48
20. Financial instruments continued
The Group is exposed to financial risks in respect of:
Foreign currency;
Interest rates;
Capital risk;
Credit risk; and
Liquidity risk.
A description of each risk, together with the policy for managing risk, is given below.
Capital risk
The Group manages its capital to ensure that the company and its subsidiaries will be able to continue as going concerns while
maximising the return to stakeholders through the optimisation of equity and debt balances.
The capital structure of the Group consists of cash and cash equivalents, borrowings, equity, comprising issued capital, reserves and
accumulated losses as disclosed in the consolidated statement of changes in equity on page 25.
The Board of directors reviews the capital structure on a regular basis. As part of this review, the committee considers the cost of
capital and the risks associated with each class of capital, against the purpose for which it is intended.
The Group utilise a debt finance facility to fund further growth which has short term working capital requirements. Debt is also secured
to support the on-going operations and future growth of the Group.
Market risk
Market risk arises from the Group's use of interest bearing, tradable and foreign currency financial instruments. It is the risk that the
fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates (currency risk),
interest rates (interest rate risk), or other market factors (other price risk).
Foreign currency risk
The Group is exposed to foreign currency risk on sales and purchases which are denominated in a currency other than sterling.
Exposures to exchange rates are predominantly denominated US dollars ($) and Euros (€). The Group seeks to reduce foreign
exchange exposures arising from transactions in various currencies through a policy of matching, as far as possible, receipts and
payments across the Group in each individual currency. Following the acquisition of Brookcourt the Group exposure to foreign
currency risk has changed due to it having a number of clients and suppliers outside of the United Kingdom who trade in non-sterling
denominations. The Group does not currently use derivatives to hedge translation exposures arising on the consolidation of its
overseas operations.
As of 31 March the Group’s net exposure to foreign exchange risk was as follows:
Net foreign currency financial assets /
(liabilities)
Trade receivables
Trade payables
Cash and cash equivalents
Total net exposure
USD
2019
2018
EUR
2019
2018
£ (000)
345
(6,117)
116
(5,656)
£ (000)
£ (000)
£ (000)
34
(15)
181
200
2,493
(2)
140
2,631
135
(34)
840
941
The effect of a 10% strengthening of the US dollar ($) against sterling (£) at the reporting date on the US dollar ($) denominated trade
receivables, payables and cash and cash equivalents carried at that date would, all other variables held constant, have resulted in
an increase of the pre-tax loss in the year and a decrease in net assets of £0.5 million. A 10% weakening in the exchange rate would,
on the same basis, have decreased the pre-tax loss in the year and increased net assets by £0.4 million.
The effect of a 10% strengthening of the euro (€) against sterling (£) at the reporting date on the euro (€) denominated trade
receivables, payables and cash and cash equivalents carried at that date would, all other variables held constant, have resulted in a
reduction of the pre-tax loss in the year and an increase in net assets of £0.3 million. A 10% weakening in the exchange rate would,
on the same basis, have increased the pre-tax loss in the year and decreased net assets by £0.2 million.
49
20. Financial instruments continued
Interest rate risk
The Group has minimal cash flow interest rate risk as it has no external borrowings at variable interest rates.
Other market price risk
The Group holds an equity investment in Plymouth Minerals Limited (ASX: INF) listed on the Australian Securities Exchange which
it received in relation to the legacy mining operations. The directors believe that the exposure to market price risk from this asset is
acceptable in the Group's circumstances.
The effect of a 10% increase in the value of the equity investments held at the reporting date would, all other variables held constant,
have resulted in an increase in the fair value through other comprehensive income reserve and net assets of £0.003 million (2018:
£0.004 million. A 10% decrease in their value would, on the same basis, have decreased the fair value through other comprehensive
income reserve and net assets by the same amount.
Liquidity risk
The Group manages liquidity risk by maintaining adequate cash reserves and credit facilities, by continuously monitoring forecast
and actual cash flows, and by matching the maturity profiles of financial assets and liabilities wherever possible. There has been no
change to the Group’s exposure to liquidity risks or the manner in which these risks are managed and measured during the year.
Further details are provided in the Strategic Report.
The liquidity risk of each Group entity is managed centrally by the Group’s finance function. Each entity has a predefined facility
based on the budget which is set and approved by the Board in advance, which provides detail of each entities cash requirements.
Any additional expenditure over budget requires sign off by the Board. A rolling 12-month cashflow forecast is reviewed by
management on a monthly basis and cash balances are reviewed daily.
The Group has a £153,900 credit facility with its bank in the form of corporate credit cards. The balance outstanding is automatically
paid off in full on a monthly basis. At year end only £27,903 was utilised. Brookcourt Solutions, one of the Group’s wholly owned
subsidiaries also has an invoice discounting facility with a limit of £2 million. At the year end, £1.3 million was utilised.
The maturity profile of the financial liabilities is summarised below. The table has been drawn up based on the undiscounted cash
flows of financial liabilities based on the earliest date on which the Group can be required to pay.
As at 31 March 2019
Trade and other payables
Loans and borrowings
Total
As at 31 March 2018
Trade and other payables
Total
Credit risk
Up to 3
months
£ (000)
Between 3 and
12 months
£ (000)
Between 1 and
2 years
£ (000)
Between 2 and
5 years
£ (000)
Over 5 years
£ (000)
9,791
1,271
11,062
593
3,136
3,729
-
-
-
-
-
-
-
-
-
Up to 3
months
£ (000)
Between 3 and
12 months
£ (000)
Between 1 and
2 years
£ (000)
Between 2 and
5 years
£ (000)
Over 5 years
£ (000)
1,006
1,006
6
6
-
-
-
-
-
-
The group’s principal financial assets are trade receivables and bank balances. The Group is consequently exposed to the risk that
its customers cannot meet their obligations as they fall due. The Group policy is that the lines of business assess the creditworthiness
and financial strength of customers at inception and on an ongoing basis. The Group also reviews the credit rating of its banks and
financial institutions.
Ongoing review of the financial condition of trade and other receivables is performed. Further details are in note 14. The carrying
amount of financial assets recorded in the financial statements represents the Group’s maximum exposure to credit risk. Whilst the
acquisition of Brookcourt has changed Group’s exposure to credit risk due to the size of it’s trade receivables the Brookcourt has a
track record of minimal bad debt owing to the type of clients it contracts with as well as effective due-diligence when issuing debt to
its clients.
50
20. Financial instruments continued
For company, the credit risk mainly relates to the risk that amounts owed by the Group companies are not recoverable. Directors’
believe that sufficient expected credit loss provision has been made against the exposure.
21. Financial Commitments
The total of future minimum lease payments under non-cancellable operating leases are as follows:
Land and buildings
- One year
- Between two and five years
Acquisition costs
- One year
22. Related party transactions
Group
2018/19
£ (000)
379
326
705
Group
2018/19
£ (000)
-
-
2017/18
£ (000)
199
-
199
2017/18
£ (000)
105
105
Company
2018/19
£ (000)
112
-
112
Company
2018/19
£ (000)
-
-
2017/18
£ (000)
199
-
199
2017/18
£ (000)
105
105
On 16 October 2018, David Williams, Michael Stevens and Stephen Ball subscribed for new ordinary shares of 1p at a placing price
of £0.036 as part of the placing through which gross proceeds were raised to part satisfy the cash consideration paid to the
shareholders of Brookcourt. David Williams subscribed for ordinary shares at a value of £0.3 million and the other fore mentioned
Directors subscribed for ordinary shares at a total value of £0.1 million in aggregate. This constituted a related party transaction under
the AIM Rules for Companies. Giles Willits, who was an independent director for those purposes at the time of the transaction,
considered, having consulted with Cenkos Securities, that the terms of the Directors subscription were fair and reasonable insofar as
the shareholders of the Group are concerned.
Related party transaction taking place after 31 March 2019 are disclosed in events after the reporting date note below. (note 22).
The Company made recharges totalling £1,378,432 (2017/18: £1,212,957) to it’s fellow group undertakings in respect of management
services and recharges: SecurEnvoy £576,175 (2017/18: £548,990), Xcina Consulting £314,368 (2017/18: £287,543), Xcina Limited
£472,247 (2018: £401,107), GeoLang Limited £15,642 (2018: Nil).
Amounts due from (+) and to (-) subsidiary undertakings by the Company are set out below:
Shearwater Subco Limited £ (5,120)
SecurEnvoy Limited £ (2,175,369)
Xcina Consulting Limited £ 877,679
Xcina Limited £ 2,976,321
GeoLang Limited £390,642
Brookcourt Solutions Limited £ (5,927,704)
No dividends were made to the Company in either years by subsidiary undertakings.
There were no other related party transactions for the Group during the period.
23. Events after the reporting period
On 9 April 2019, the Group acquired the entire share capital of Pentest Newco Limited (“Pentest”), a newly incorporated company
which contained certain intangible assets of Secarma Limited (“Secarma”), one of the UK’s leading cyber security testing companies.
The consideration for the acquisition was £7.4 million, which was settled through the issuance of 292,292,565 ordinary shares of the
Group at an issue price of 2.3 pence per ordinary share to the Secarma shareholders (representing £6.7 million of consideration) and
an unsecured loan note of £0.7 million. The loan note is to be repaid to the Seller in tranches on the first and third anniversary of
completion of the acquisition. The unsecured loan note will attract interest of 6 per cent. per annum. The acquisition brings an
51
23. Events after the reporting period
additional service that complements existing businesses within the Group and is in line with the acquisition criteria of the group. This
acquisition meets the requirements of IFRS 3 Business Combinations.
On the 12 April 2019, the Group announced that its then Group Chief Executive Officer, Michael Stevens, had agreed to step down
from the Board and leave the business with immediate effect. Phil Higgins, the Group’s then Executive Director, and founder of
Brookcourt Solutions, was appointed Group Chief Executive with immediate effect.
On the 12 June 2019, the Group announced that it had appointed Berenberg as joint broker to the Company, to work alongside
Cenkos Securities, the Group’s current nominated advisor and broker.
On the 13 June 2019, the Group issued 14,388,567 ordinary shares of the Group to the GeoLang sellers. These additional
consideration shares were issued pursuant to the acquisition of GeoLang Holdings Limited announced on 4 April 2018, under which
certain provisions were triggered by the share price performance criteria set out in the sale and purchase agreement which were
considered unlikely at the point of acquisition.
52